Item 8. Financial Statements and Supplementary Data

144K characters. Original on sec.gov · Markdown

Item 8. Financial Statements and Supplementary Data

Index


Management’s Report on Internal Control Over Financial Reporting			41
Certifications			41
Reports of Independent Registered Public Accounting Firm			42
Consolidated Statements of Income			44
Consolidated Statements of Comprehensive Income			44
Consolidated Balance Sheets			45
Consolidated Statements of Cash Flows			46
Consolidated Statements of Stockholders’ Deficit			47
Notes to Consolidated Financial Statements			48

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes, among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for processing transactions and properly trained staff. Mechanisms are in place to monitor the effectiveness of our internal control over financial reporting, including regular testing performed by the Company’s internal audit team. Actions are taken to correct deficiencies as they are identified. Our procedures for financial reporting include the active involvement of senior management, our Audit Committee and a staff of highly qualified financial and legal professionals.

Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting as of August 26, 2017, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework.

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of August 26, 2017.

Our independent registered public accounting firm, Ernst & Young LLP, audited the effectiveness of our internal control over financial reporting. Ernst & Young LLP’s attestation report on the Company’s internal control over financial reporting as of August 26, 2017 is included in this Annual Report on Form 10-K.


/s/ WILLIAM C. RHODES, III
William C. Rhodes, III
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)

/s/ WILLIAM T. GILES
William T. Giles
Chief Financial Officer and Executive
Vice President – Finance and Information
Technology
(Principal Financial Officer)

Certifications

Compliance with NYSE Corporate Governance Listing Standards

On January 4, 2017, the Company submitted to the New York Stock Exchange the Annual CEO Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

Rule 13a-14(a) Certifications of Principal Executive Officer and Principal Financial Officer

The Company has filed, as exhibits to its Annual Report on Form 10-K for the fiscal year ended August 26, 2017, the certifications of its Principal Executive Officer and Principal Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of AutoZone, Inc.

We have audited AutoZone, Inc.’s internal control over financial reporting as of August 26, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the “COSO criteria”). AutoZone, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on AutoZone, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, AutoZone, Inc. maintained, in all material respects, effective internal control over financial reporting as of August 26, 2017, based on the COSO criteria**.**

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AutoZone, Inc. as of August 26, 2017 and August 27, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended August 26, 2017 of AutoZone, Inc. and our report dated October 25, 2017 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

Memphis, Tennessee

October 25, 2017

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of AutoZone, Inc.

We have audited the accompanying consolidated balance sheets of AutoZone, Inc. as of August 26, 2017 and August 27, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended August 26, 2017. These financial statements are the responsibility of AutoZone, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AutoZone, Inc. as of August 26, 2017 and August 27, 2016 and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 26, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AutoZone, Inc.’s internal control over financial reporting as of August 26, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report dated October 25, 2017 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

Memphis, Tennessee

October 25, 2017

Consolidated Statements of Income


	Year Ended
(in thousands, except per share data)	August 26, 2017 (52 weeks)		August 27, 2016 (52 weeks)		August 29, 2015 (52 weeks)
Net sales	$	10,888,676	$	10,635,676	$	10,187,340
Cost of sales, including warehouse and delivery expenses		5,149,056		5,026,940		4,860,309

Gross profit		5,739,620		5,608,736		5,327,031
Operating, selling, general and administrative expenses		3,659,551		3,548,341		3,373,980

Operating profit		2,080,069		2,060,395		1,953,051
Interest expense, net		154,580		147,681		150,439

Income before income taxes		1,925,489		1,912,714		1,802,612
Income tax expense		644,620		671,707		642,371

Net income	$	1,280,869	$	1,241,007	$	1,160,241

Weighted average shares for basic earnings per share		28,430		29,889		31,560
Effect of dilutive stock equivalents		635		599		646

Weighted average shares for diluted earnings per share		29,065		30,488		32,206
Basic earnings per share	$	45.05	$	41.52	$	36.76

Diluted earnings per share	$	44.07	$	40.70	$	36.03

See Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income


	Year Ended
(in thousands)	August 26, 2017 (52 weeks)			August 27, 2016 (52 weeks)			August 29, 2015 (52 weeks)
Net income	$	1,280,869		$	1,241,007		$	1,160,241
Other comprehensive income (loss):
Pension liability adjustments, net of taxes(1)		16,514			(18,095	)		(6,975	)
Foreign currency translation adjustments		35,198			(39,524	)		(113,652	)
Unrealized (losses) gains on marketable securities, net of taxes(2)		(131	)		146			(102	)
Net derivative activity, net of taxes(3)		1,391			(538	)		114

Total other comprehensive income (loss)		52,972			(58,011	)		(120,615	)

Comprehensive income	$	1,333,841		$	1,182,996		$	1,039,626

(1)	Pension liability adjustments are presented net of taxes of $10,542 in 2017, $11,394 in 2016 and $4,638 in 2015

(2)	Unrealized (losses) gains on marketable securities are presented net of taxes of $69 in 2017, $79 in 2016 and $55 in 2015

(3)	Net derivative activities are presented net of taxes of $814 in 2017, $315 in 2016 and $68 in 2015

See Notes to Consolidated Financial Statements.

Consolidated Balance Sheets


(in thousands)	August 26, 2017			August 27, 2016
Assets
Current assets:
Cash and cash equivalents	$	293,270		$	189,734
Accounts receivable		280,733			287,680
Merchandise inventories		3,882,086			3,631,916
Other current assets		155,166			130,243

Total current assets		4,611,255			4,239,573
Property and equipment:
Land		1,056,187			998,460
Buildings and improvements		3,423,056			3,169,575
Equipment		1,704,653			1,550,792
Leasehold improvements		470,998			434,615
Construction in progress		218,299			176,673

		6,873,193			6,330,115
Less: Accumulated depreciation and amortization		2,842,175			2,596,861

		4,031,018			3,733,254
Goodwill		391,887			391,887
Deferred income taxes		35,308			36,855
Other long-term assets		190,313			198,218

		617,508			626,960

	$	9,259,781		$	8,599,787

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	4,168,940		$	4,095,854
Accrued expenses and other		563,350			551,625
Income taxes payable		34,011			42,841

Total current liabilities		4,766,301			4,690,320
Long-term debt		5,081,238			4,924,119
Deferred income taxes		371,111			284,500
Other long-term liabilities		469,508			488,386
Commitments and contingencies		—			—
Stockholders’ deficit:
Preferred stock, authorized 1,000 shares; no shares issued		—			—
Common stock, par value $.01 per share, authorized 200,000 shares; 28,735 shares issued and 27,833 shares outstanding in 2017 and 30,329 shares issued and 29,118 shares outstanding in 2016		287			303
Additional paid-in capital		1,086,671			1,054,647
Retained deficit		(1,642,387	)		(1,602,186	)
Accumulated other comprehensive loss		(254,557	)		(307,529	)
Treasury stock, at cost		(618,391	)		(932,773	)

Total stockholders’ deficit		(1,428,377	)		(1,787,538	)

	$	9,259,781		$	8,599,787

See Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows


	Year Ended
(in thousands)	August 26, 2017 (52 weeks)			August 27, 2016 (52 weeks)			August 29, 2015 (52 weeks)
Cash flows from operating activities:
Net income	$	1,280,869		$	1,241,007		$	1,160,241
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment and intangibles		323,051			297,397			269,919
Amortization of debt origination fees		8,369			7,980			6,230
Deferred income taxes		74,902			45,019			35,971
Share-based compensation expense		38,244			39,825			40,995
Pension plan contributions		(17,761	)		(52,721	)		—
Changes in operating assets and liabilities:
Accounts receivable		7,795			(41,447	)		(36,466	)
Merchandise inventories		(236,807	)		(227,518	)		(266,776	)
Accounts payable and accrued expenses		82,614			271,198			291,520
Income taxes payable		(3,659	)		50,122			74,487
Other, net		12,995			10,198			(3,103	)

Net cash provided by operating activities		1,570,612			1,641,060			1,573,018
Cash flows from investing activities:
Capital expenditures		(553,832	)		(488,791	)		(480,579	)
Acquisition of business, net of cash		—			—			(75,744	)
Purchase of intangibles		—			(10,000	)		(10,000	)
Purchase of marketable securities		(85,711	)		(130,170	)		(49,740	)
Proceeds from sale of marketable securities		82,993			120,472			46,411
Proceeds from disposal of capital assets and other, net		2,951			2,654			1,741

Net cash used in investing activities		(553,599	)		(505,835	)		(567,911	)
Cash flows from financing activities:
Net (payments) proceeds of commercial paper		(42,400	)		149,900			153,800
Proceeds from issuance of debt		600,000			650,000			650,000
Repayment of debt		(400,000	)		(500,000	)		(500,000	)
Net proceeds from sale of common stock		54,686			80,289			66,717
Purchase of treasury stock		(1,071,649	)		(1,452,462	)		(1,271,416	)
Payments of capital lease obligations		(47,604	)		(36,320	)		(34,986	)
Other, net		(7,362	)		(7,935	)		(8,712	)

Net cash used in financing activities		(914,329	)		(1,116,528	)		(944,597	)
Effect of exchange rate changes on cash		852			(4,272	)		(9,686	)

Net increase in cash and cash equivalents		103,536			14,425			50,824
Cash and cash equivalents at beginning of year		189,734			175,309			124,485

Cash and cash equivalents at end of year	$	293,270		$	189,734		$	175,309

Supplemental cash flow information:
Interest paid, net of interest cost capitalized	$	135,331		$	136,731		$	137,630

Income taxes paid	$	579,925		$	582,384		$	539,152

Assets acquired through capital lease	$	84,011		$	94,052		$	71,047

See Notes to Consolidated Financial Statements.

Consolidated Statements of Stockholders’ Deficit


(in thousands)	Common Shares Issued			Common Stock			Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance at August 30, 2014		33,858		$	339		$	843,504		$	(1,529,123	)	$	(128,903	)	$	(807,674	)	$	(1,621,857	)
Net income											1,160,241									1,160,241
Total other comprehensive loss														(120,615	)					(120,615	)
Purchase of 2,010 shares of treasury stock																	(1,271,416	)		(1,271,416	)
Retirement of treasury shares		(2,125	)		(21	)		(57,403	)		(1,049,856	)					1,107,280			—
Issuance of common stock under stock options and stock purchase plans		365			3			66,714												66,717
Share-based compensation expense								37,645												37,645
Income tax benefit from exercise of stock options								47,895												47,895

Balance at August 29, 2015		32,098			321			938,355			(1,418,738	)		(249,518	)		(971,810	)		(1,701,390	)
Net income											1,241,007									1,241,007
Total other comprehensive loss														(58,011	)					(58,011	)
Purchase of 1,903 shares of treasury stock																	(1,452,462	)		(1,452,462	)
Retirement of treasury shares		(2,132	)		(21	)		(67,023	)		(1,424,455	)					1,491,499			—
Issuance of common stock under stock options and stock purchase plans		363			3			80,286												80,289
Share-based compensation expense								39,298												39,298
Income tax benefit from exercise of stock options								63,731												63,731

Balance at August 27, 2016		30,329			303			1,054,647			(1,602,186	)		(307,529	)		(932,773	)		(1,787,538	)
Net income											1,280,869									1,280,869
Total other comprehensive income														52,972						52,972
Purchase of 1,495 shares of treasury stock																	(1,071,649	)		(1,071,649	)
Retirement of treasury shares		(1,804	)		(18	)		(64,943	)		(1,321,070	)					1,386,031			—
Issuance of common stock under stock options and stock purchase plans		210			2			54,684												54,686
Share-based compensation expense								42,283												42,283

Balance at August 26, 2017		28,735		$	287		$	1,086,671		$	(1,642,387	)	$	(254,557	)	$	(618,391	)	$	(1,428,377	)

See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

Note A – Significant Accounting Policies

Business: AutoZone, Inc. and its wholly owned subsidiaries (“AutoZone” or the “Company”) are principally a retailer and distributor of automotive replacement parts and accessories. At the end of fiscal 2017, the Company operated 5,465 AutoZone stores in the United States, including Puerto Rico; 524 stores in Mexico; 14 stores in Brazil; and 26 Interamerican Motor Corporation (“IMC”) branches. Each AutoZone store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. At the end of fiscal 2017, 4,592 of the domestic AutoZone stores had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. The company also had commercial programs in AutoZone stores in Mexico and Brazil. IMC branches carry an extensive line of original equipment quality import replacement parts. The Company also sells the ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com. Additionally, the Company sells automotive hard parts, maintenance items, accessories, and non-automotive products through www.autozone.com, and accessories, performance and replacement parts through www.autoanything.com, and its commercial customers can make purchases through www.autozonepro.com and www.imcparts.net. The Company does not derive revenue from automotive repair or installation services.

Fiscal Year: The Company’s fiscal year consists of 52 or 53 weeks ending on the last Saturday in August. Fiscal 2017, fiscal 2016 and fiscal 2015 represented 52 weeks.

Basis of Presentation: The consolidated financial statements include the accounts of AutoZone, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the prior years’ Consolidated Statements of Cash Flows to conform to the current year’s presentation due to the adoption of the new accounting guidance for share-based payments.

Use of Estimates: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements. Actual results could differ from those estimates.

Cash and Cash Equivalents: Cash equivalents consist of investments with original maturities of 90 days or less at the date of purchase. Cash equivalents include proceeds due from credit and debit card transactions with settlement terms of less than five days. Credit and debit card receivables included within cash and cash equivalents were $48.3 million at August 26, 2017 and $46.8 million at August 27, 2016.

Cash balances are held in various locations around the world. Cash and cash equivalents of $148.4 million and $78.1 million were held outside of the U.S. as of August 26, 2017, and August 27, 2016, respectively, and were generally utilized to support liquidity needs in foreign operations. The Company intends to continue to permanently reinvest the cash held outside of the U.S. in its foreign operations.

Accounts Receivable: Accounts receivable consists of receivables from commercial customers and vendors, and are presented net of an allowance for uncollectible accounts. AutoZone routinely grants credit to certain of its commercial customers. The risk of credit loss in its trade receivables is substantially mitigated by the Company’s credit evaluation process, short collection terms and sales to a large number of customers, as well as the low dollar value per transaction for most of its sales. Allowances for potential credit losses are determined based on historical experience and current evaluation of the composition of accounts receivable. Historically, credit losses have been within management’s expectations and the balance of the allowance for uncollectible accounts was $5.9 million at August 26, 2017, and $7.4 million at August 27, 2016.

Merchandise Inventories: Inventories are stated at the lower of cost or market. Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is to not write up inventory in excess of replacement cost. The difference between LIFO cost and replacement cost, which will be reduced upon experiencing price inflation on the Company’s merchandise purchases, was $414.9 million at August 26, 2017, and $364.1 million at August 27, 2016.

Marketable Securities: The Company invests a portion of its assets held by the Company’s wholly owned insurance captive in marketable debt securities and classifies them as available-for-sale. The Company includes these securities within the Other current assets and Other long-term assets captions in the accompanying Consolidated Balance Sheets and records the amounts at fair market value, which is determined using quoted market prices at the end of the reporting period. A discussion of marketable securities is included in “Note E – Fair Value Measurements” and “Note F – Marketable Securities.”

Property and Equipment: Property and equipment is stated at cost. Depreciation and amortization are computed principally using the straight-line method over the following estimated useful lives: buildings, 40 to 50 years; building improvements, 5 to 15 years; equipment, 3 to 10 years; and leasehold improvements, over the shorter of the asset’s estimated useful life or the remaining lease term, which includes any reasonably assured renewal periods. Depreciation and amortization include amortization of assets under capital lease.

Impairment of Long-Lived Assets: The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of the assets exceeds the fair value of the assets. There were no material impairment losses recorded in the three years ended August 26, 2017.

Goodwill: The cost in excess of fair value of identifiable net assets of businesses acquired is recorded as goodwill. Goodwill has not been amortized since fiscal 2001, but an analysis is performed at least annually to compare the fair value of the reporting unit to the carrying amount to determine if any impairment exists. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. Refer to “Note N – Goodwill and Intangibles” for additional disclosures regarding the Company’s goodwill and impairment assessment.

Intangible Assets: Intangible assets consist of assets from the acquisitions of IMC and AutoAnything and assets purchased relating to ALLDATA operations, and include technology, non-compete agreements, customer relationships and trade names. Amortizing intangible assets are amortized over periods ranging from 3 to 10 years. Trade names are non-amortizing intangibles as their lives are indefinite. These non-amortizing assets are reviewed at least annually for impairment by comparing the carrying amount to fair value. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. Refer to “Note N – Goodwill and Intangibles” for additional disclosures regarding the Company’s intangible assets and impairment assessment.

Derivative Instruments and Hedging Activities: AutoZone is exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, the Company uses various derivative instruments to reduce such risks. To date, based upon the Company’s current level of foreign operations, no derivative instruments have been utilized to reduce foreign exchange rate risk. All of the Company’s hedging activities are governed by guidelines that are authorized by AutoZone’s Board of Directors (the “Board”). Further, the Company does not buy or sell derivative instruments for trading purposes.

AutoZone’s financial market risk results primarily from changes in interest rates. At times, AutoZone reduces its exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and forward-starting interest rate swaps.

All of the Company’s interest rate hedge instruments are designated as cash flow hedges. Refer to “Note H – Derivative Financial Instruments” for additional disclosures regarding the Company’s derivative instruments and hedging activities. Cash flows related to these instruments designated as qualifying hedges are reflected in the accompanying Consolidated Statements of Cash Flows in the same categories as the cash flows from the items being hedged. Accordingly, cash flows relating to the settlement of interest rate derivatives hedging the forecasted issuance of debt have been reflected upon settlement as a component of financing cash flows. The resulting gain

or loss from such settlement is deferred to Accumulated other comprehensive loss and reclassified to interest expense over the term of the underlying debt. This reclassification of the deferred gains and losses impacts the interest expense recognized on the underlying debt that was hedged and is therefore reflected as a component of operating cash flows in periods subsequent to settlement.

Foreign Currency: The Company accounts for its Mexican, Brazilian, Canadian, European, Chinese and British operations using the Mexican peso, Brazilian real, Canadian dollar, euro, Chinese yuan renminbi and British pound as the functional currencies, respectively, and converts its financial statements from these currencies to U.S. dollars. The cumulative loss on currency translation is recorded as a component of Accumulated other comprehensive loss (see “Note G – Accumulated Other Comprehensive Loss”).

Self-Insurance Reserves: The Company retains a significant portion of the risks associated with workers’ compensation, employee health, general, products liability, property and vehicle insurance. Through various methods, which include analyses of historical trends and utilization of actuaries, the Company estimates the costs of these risks. The costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. Estimates are based on calculations that consider historical lag and claim development factors. The long-term portions of these liabilities are recorded at the Company’s estimate of their net present value.

Deferred Rent: The Company recognizes rent expense on a straight-line basis over the course of the lease term, which includes any reasonably assured renewal periods, beginning on the date the Company takes physical possession of the property (see “Note O – Leases”). Differences between this calculated expense and cash payments are recorded as a liability within the Accrued expenses and other and Other long-term liabilities captions in the accompanying Consolidated Balance Sheets, based on the terms of the lease. Deferred rent approximated $130.2 million as of August 26, 2017, and $121.7 million as of August 27, 2016.

Financial Instruments: The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in “Note I – Financing,” marketable securities is included in “Note F – Marketable Securities,” and derivatives is included in “Note H – Derivative Financial Instruments.”

Income Taxes: The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our effective tax rate is based on income by tax jurisdiction, statutory rates, and tax saving initiatives available to the Company in the various jurisdictions in which we operate.

The Company recognizes liabilities for uncertain income 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 the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company must determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.

The Company classifies interest related to income tax liabilities, and if applicable, penalties, as a component of Income tax expense. The income tax liabilities and accrued interest and penalties that are expected to be payable within one year of the balance sheet date are presented within the Accrued expenses and other caption in the accompanying Consolidated Balance Sheets. The remaining portion of the income tax liabilities and accrued interest and penalties are presented within the Other long-term liabilities caption in the accompanying Consolidated Balance Sheets because payment of cash is not anticipated within one year of the balance sheet date. Refer to “Note D – Income Taxes” for additional disclosures regarding the Company’s income taxes.

Sales and Use Taxes: Governmental authorities assess sales and use taxes on the sale of goods and services. The Company excludes taxes collected from customers in its reported sales results; such amounts are included within the Accrued expenses and other caption until remitted to the taxing authorities.

Dividends: The Company currently does not pay a dividend on its common stock. The ability to pay dividends is subject to limitations imposed by Nevada law. Under Nevada law, any future payment of dividends would be dependent upon the Company’s financial condition, capital requirements, earnings and cash flow.

Revenue Recognition: The Company recognizes sales at the time the sale is made and the product is delivered to the customer. Revenue from sales are presented net of allowances for estimated sales returns, which are based on historical return rates.

A portion of the Company’s transactions include the sale of auto parts that contain a core component. The core component represents the recyclable portion of the auto part. Customers are not charged for the core component of the new part if a used core is returned at the point of sale of the new part; otherwise the Company charges customers a specified amount for the core component. The Company refunds that same amount upon the customer returning a used core to the store at a later date. The Company does not recognize sales or cost of sales for the core component of these transactions when a used part is returned or expected to be returned from the customer.

Vendor Allowances and Advertising Costs: The Company receives various payments and allowances from its vendors through a variety of programs and arrangements. Monies received from vendors include rebates, allowances and promotional funds. The amounts to be received are subject to the terms of the vendor agreements, which generally do not state an expiration date, but are subject to ongoing negotiations that may be impacted in the future based on changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise.

Rebates and other miscellaneous incentives are earned based on purchases or product sales and are accrued ratably over the purchase or sale of the related product. These monies are generally recorded as a reduction of merchandise inventories and are recognized as a reduction to cost of sales as the related inventories are sold.

For arrangements that provide for reimbursement of specific, incremental, identifiable costs incurred by the Company in selling the vendors’ products, the vendor funds are recorded as a reduction to Operating, selling, general and administrative expenses in the period in which the specific costs were incurred.

The Company expenses advertising costs as incurred. Advertising expense, net of vendor promotional funds, was $93.1 million in fiscal 2017, $98.3 million in fiscal 2016, and $98.0 million in fiscal 2015. Vendor promotional funds, which reduced advertising expense, amounted to $28.3 million in fiscal 2017, $21.4 million in fiscal 2016, and $22.0 million in fiscal 2015.

Cost of Sales and Operating, Selling, General and Administrative Expenses: The following illustrates the primary costs classified in each major expense category:

Cost of Sales

	•		Total cost of merchandise sold, including:

	•		Freight expenses associated with moving merchandise inventories from the Company’s vendors to the distribution centers;

	•		Vendor allowances that are not reimbursements for specific, incremental and identifiable costs

	•		Costs associated with operating the Company’s supply chain, including payroll and benefit costs, warehouse occupancy costs, transportation costs and depreciation; and

	•		Inventory shrinkage

Operating, Selling, General and Administrative Expenses

	•		Payroll and benefit costs for store, field leadership and store support employees;

	•		Occupancy costs of store and store support facilities;

	•		Depreciation and amortization related to store and store support assets;

	•		Transportation costs associated with field leadership, commercial sales force and hub deliveries;

	•		Advertising;

	•		Self insurance costs; and

	•		Other administrative costs, such as credit card transaction fees, legal costs, supplies, and travel and lodging

Warranty Costs: The Company or the vendors supplying its products provides the Company’s customers limited warranties on certain products that range from 30 days to lifetime. In most cases, the Company’s vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate. These obligations, which are often funded by vendor allowances, are recorded within the Accrued expenses and other caption in the Consolidated Balance Sheets. For vendor allowances that are in excess of the related estimated warranty expense for the vendor’s products, the excess is recorded in inventory and recognized as a reduction to cost of sales as the related inventory is sold.

Shipping and Handling Costs: The Company does not generally charge customers separately for shipping and handling. Substantially all the costs the Company incurs to ship products to our stores are included in cost of sales.

Pre-opening Expenses: Pre-opening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred.

Earnings per Share: Basic earnings per share is based on the weighted average outstanding common shares. Diluted earnings per share is based on the weighted average outstanding common shares adjusted for the effect of common stock equivalents, which are primarily stock options. There were 620,915 stock options excluded from the diluted earnings per share calculation because they would have been anti-dilutive as of August 26, 2017. There were 329,900 stock options excluded for the year ended August 27, 2016, and 778 stock options excluded for the year ended August 29, 2015, because they would have been anti-dilutive.

Share-Based Payments: Share-based payments include stock option grants and certain other transactions under the Company’s stock plans. The Company recognizes compensation expense for its share-based payments over the requisite service period based on the fair value of the awards. See “Note B – Share-Based Payments” for further discussion.

Risk and Uncertainties: In fiscal 2017, one class of similar products accounted for approximately 11 percent of the Company’s total revenues, and one vendor supplied approximately 11 percent of the Company’s total purchases. No other class of similar products accounted for 10 percent or more of total revenues, and no other individual vendor provided more than 10 percent of total purchases.

Recently Adopted Accounting Pronouncements:

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. ASU 2016-09 simplifies several aspects of accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted this standard on August 28, 2016. The Company has applied the amendment requiring recognition of excess tax deficiencies and tax benefits in the income statement prospectively. The adoption of the new standard increased earnings per share for the year ended August 26, 2017 by $0.81, driven by a lower effective tax rate of 162 basis points (a $1.08 benefit to earnings per share), partially offset by a change to the dilutive outstanding shares calculation (a $0.27 reduction to earnings per share). The Company has applied the amendment relating to the presentation of the excess tax benefits on the Consolidated Statements of Cash Flows retrospectively, resulting in the reclassification of $63.7 million and $47.9 million of excess tax benefits from cash flows from financing activities to cash flows from operating activities for the years ended August 27, 2016 and August 29, 2015, respectively. The Company will continue to estimate forfeitures of share-based awards.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption. Early adoption is permitted. The Company early adopted ASU 2017-04 in the fourth quarter of fiscal 2017, and it had no material impact on the consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 2015-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to perform two steps. Management must first evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern (Step 1). If management concludes that substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt (Step 2). Management must perform a going concern evaluation to assess whether it is probable that both management’s plans will be effectively implemented and those plans will mitigate the relevant conditions and events within one year after the financial statements are issued (or available to be issued, when applicable). The Company adopted ASU 2014-15 in fiscal 2017, concluding no significant conditions or events are present to raise substantial doubt about the Company’s ability to continue as a going concern.

Recently Issued Accounting Pronouncements:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under ASU 2014-09, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This update will be effective for the Company at the beginning of its fiscal 2019 year. The Company established a cross-functional implementation team to evaluate and identify the impact of ASU 2014-09 on the Company’s financial position, results of operations and cash flows. The Company is currently in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard. The Company is considering the possible implications of the new standard on the Company’s revenue streams at each of the business units, the application of the Company’s loyalty programs and all applicable financial statement disclosures required by the new guidance. At this time, the team has not completed its full analysis or means of adoption for the new guidance; however, the Company does not expect the adoption of the new standard to have a material impact on its consolidated financial condition, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. This update will be effective for the Company beginning with its fiscal 2020 first quarter. The Company established a cross-

functional implementation team to evaluate and identify the impact of ASU 2016-02 on the Company’s financial position, results of operations and cash flows. The Company is currently in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard. The Company is considering the possible implications of the new standard on determining the valuation of new and existing leases, procedural and operational changes that may be necessary to comply with the provisions of the accounting update and all applicable financial statement disclosures required by the new guidance. At this time, the team has not completed its full analysis and is unable to quantify the impact; however, the Company believes the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on the Company’s consolidated balance sheets.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update). ASU 2016-11 rescinds certain SEC Staff Observer comments under Topic 605, Revenue Recognition and Topic 932, Extractive Activities-Oil and Gas. This guidance clarifies that the registrants should not rely on the rescinded SEC Staff Observer comments upon adoption of ASU 2014-09. The Company does not expect ASU 2016-11 to have a material impact on its consolidated financial statements. This update will be effective for the Company at the beginning of its fiscal 2019 year.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. ASU 2016-16 requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. The guidance must be applied using the modified retrospective basis. The Company does not expect the provisions of ASU 2016-16 to have a material impact on its financial statements. This update will be effective for the Company at the beginning of fiscal 2019.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU 2016-20 provides correction or improvement to the guidance previously issued in ASU 2014-09, Revenue from Contracts with Customers. Under ASU 2014-09, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of evaluating the impact of the provisions of the ASUs on its consolidated financial statements. This update will be effective for the Company at the beginning of its fiscal 2019 year.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires a prospective adoption. Early adoption is permitted. The Company does not expect the provisions of ASU 2017-01 to have a material impact on its consolidated financial statements. This update will be effective for the Company beginning with its fiscal 2019 first quarter.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires an employer to separate the service cost component from other components of net benefit cost. It also provides specific guidance on the presentation of the service cost component and other components of net benefit in the income statement; only the service cost component of net benefit cost is eligible for capitalization. The Company is in the process of evaluating the effects of the provisions of ASU 2017-07 on its consolidated financial statements. This update will be effective for the Company beginning with its fiscal 2019 first quarter.

Note B – Share-Based Payments

Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $38.2 million for fiscal 2017, $39.8 million for fiscal 2016, and $41.0 million for fiscal 2015. As of August 26, 2017, share-based compensation expense for unvested awards not yet recognized in earnings is $37.9 million and will be recognized over a weighted average period of 1.98 years. As a result of the adoption of the new accounting guidance for share-based payments, cash flows related to tax deductions in excess of recognized

compensation cost are classified as operating cash flows for each period presented. Retrospective application of the cash flow presentation resulted in increases to both net cash provided by operations and net cash required for financing activities of $63.7 million and $47.9 million for fiscal 2016 and 2015, respectively.

On December 15, 2010, the Company’s stockholders approved the 2011 Equity Incentive Award Plan (the “2011 Plan”), allowing the Company to provide equity-based compensation to non-employee directors and employees for their service to AutoZone or its subsidiaries or affiliates. Prior to the Company’s adoption of the 2011 Plan, equity-based compensation was provided to employees under the 2006 Stock Option Plan and to non-employee directors under the 2003 Director Compensation Plan (the “2003 Comp Plan”) and the 2003 Director Stock Option Plan (the “2003 Option Plan”).

During fiscal 2016, the Company’s stockholders approved the Amended and Restated AutoZone, Inc. 2011 Equity Incentive Award Plan (the “Amended 2011 Equity Plan”). The Amended 2011 Equity Plan imposes a maximum limit on the compensation, measured as the sum of any cash compensation and the aggregate grant date fair value of awards granted under the Amended 2011 Equity Plan, which may be paid to non-employee directors for such service during any calendar year. The Amended 2011 Equity Plan also applies a ten-year term on the Amended 2011 Equity Plan through December 16, 2025 and extends the Company’s ability to grant incentive stock options through October 7, 2025.

The Company grants options to purchase common stock to certain of its employees under its plan at prices equal to the market value of the stock on the date of grant. Options have a term of 10 years or 10 years and one day from grant date. Employee options generally vest in equal annual installments on the first, second, third and fourth anniversaries of the grant date and generally have 30 or 90 days after the service relationship ends, or one year after death, to exercise all vested options. The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date.

In addition to the 2011 Plan, on December 15, 2010, the Company adopted the 2011 Director Compensation Program (the “2011 Program”), which stated that non-employee directors would receive their compensation in awards of restricted stock units under the 2011 Plan. Under the 2011 Program, restricted stock units are granted the first day of each calendar quarter. The number of restricted stock units granted each quarter is determined by dividing one-fourth of the amount of the annual retainer by the fair market value of the shares of common stock as of the grant date. The restricted stock units are fully vested on the date they are issued and are paid in shares of the Company’s common stock subsequent to the non-employee director ceasing to be a member of the Board.

The 2011 Program replaced the 2003 Comp Plan and the 2003 Option Plan. Under the 2003 Comp Plan, non-employee directors could receive no more than one-half of their director fees immediately in cash, and the remainder of the fees was required to be taken in common stock or stock appreciation rights. The director had the option to elect to receive up to 100% of the fees in stock or defer all or part of the fees in units with value equivalent to the value of shares of common stock as of the grant date. At August 26, 2017, the Company had $9.5 million accrued related to 17,990 outstanding units issued under the 2003 Comp Plan and prior plans, and there was $13.6 million accrued related to 17,990 outstanding units issued as of August 27, 2016. No additional shares of stock or units will be issued in future years under the 2003 Comp Plan.

Under the 2003 Option Plan, each non-employee director received an option grant on January 1 of each year, and each new non-employee director received an option to purchase 3,000 shares upon election to the Board, plus a portion of the annual directors’ option grant prorated for the portion of the year actually served. These stock option grants were made at the fair market value as of the grant date and generally vested three years from the grant date. There were 19,000 and 24,000 outstanding options under the 2003 Option Plan as of August 26, 2017 and August 27, 2016, respectively. No additional shares of stock will be issued in future years under the 2003 Option Plan.

During the second quarter of fiscal 2014, the Company adopted the 2014 Director Compensation Program (the “Program”), which states that non-employee directors will receive their compensation in awards of restricted stock units under the 2011 Equity Incentive Award Plan, with an option for a certain portion of a director’s compensation to be paid in cash at the non-employee director’s election. The Program replaces the 2011 Director Compensation Program. Under the Program, restricted stock units are granted January 1 of each year (the “Grant

Date”). The number of restricted stock units is determined by dividing the amount of the annual retainer by the fair market value of the shares of common stock as of the Grant Date. The restricted stock units are fully vested on January 1 of each year and are paid in shares of the Company’s common stock on the earlier to occur of the fifth anniversary of the Grant Date or the date the non-employee director ceases to be a member of the Board (“Separation from Service”). Non-employee directors may elect to defer receipt of the restricted stock units until their Separation from Service. The cash portion of the award, if elected, is paid ratably over the remaining calendar quarters.

The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The following table presents the weighted average for key assumptions used in determining the fair value of options granted and the related share-based compensation expense:


	Year Ended
	August 26, 2017		August 27, 2016		August 29, 2015
Expected price volatility		18%		18%		20%
Risk-free interest rates		1.2%		1.5%		1.4%
Weighted average expected lives (in years)		5.1		5.1		5.1
Forfeiture rate		10%		10%		9%
Dividend yield		0%		0%		0%

The following methodologies were applied in developing the assumptions used in determining the fair value of options granted:

Expected price volatility – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate the volatility assumption as it is management’s belief that this is the best indicator of future volatility. The Company calculates daily market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.

Risk-free interest rate – This is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected lives – This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Options granted have a maximum term of ten years or ten years and one day. An increase in the expected life will increase compensation expense.

Forfeiture rate – This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This estimate is based on historical experience at the time of valuation and reduces expense ratably over the vesting period. An increase in the forfeiture rate will decrease compensation expense. This estimate is evaluated periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Dividend yield – The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.

The weighted average grant date fair value per share of options granted was $139.80 during fiscal 2017, $156.20 during fiscal 2016, and $106.27 during fiscal 2015. The intrinsic value of options exercised was $93.9 million in fiscal 2017, $178.0 million in fiscal 2016, and $154.8 million in fiscal 2015. The total fair value of options vested was $34.7 million in fiscal 2017, $32.2 million in fiscal 2016, and $30.6 million in fiscal 2015.

The Company generally issues new shares when options are exercised. The following table summarizes information about stock option activity for the year ended August 26, 2017:


	Number of Shares			Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding – August 27, 2016		1,759,408		$	428.72
Granted		290,805			744.80
Exercised		(207,069	)		263.02
Cancelled		(45,089	)		657.78

Outstanding – August 26, 2017		1,798,055			493.18		6.17	$	199,752

Exercisable		1,041,933			362.38		4.76		189,790

Expected to vest		680,510			673.42		8.10		8,966

Available for future grants		898,992

The Company recognized $1.8 million in expense related to the discount on the selling of shares to employees and executives under various share purchase plans in fiscal 2017, $2.0 million in fiscal 2016 and $2.1 million in fiscal 2015. The Sixth Amended and Restated AutoZone, Inc. Employee Stock Purchase Plan (the “Employee Plan”), which is qualified under Section 423 of the Internal Revenue Code, permits all eligible employees to purchase AutoZone’s common stock at 85% of the lower of the market price of the common stock on the first day or last day of each calendar quarter through payroll deductions. Maximum permitted annual purchases are $15,000 per employee or 10 percent of compensation, whichever is less. Under the Employee Plan, 14,205 shares were sold to employees in fiscal 2017, 12,662 shares were sold to employees in fiscal 2016, and 14,222 shares were sold to employees in fiscal 2015. The Company repurchased 12,455 shares at market value in fiscal 2017, 12,460 shares in fiscal 2016 and 15,594 shares in fiscal 2015 from employees electing to sell their stock. Issuances of shares under the Employee Plan are netted against repurchases and such repurchases are not included in share repurchases disclosed in “Note K – Stock Repurchase Program.” At August 26, 2017, 178,300 shares of common stock were reserved for future issuance under the Employee Plan.

Once executives have reached the maximum purchases under the Employee Plan, the Fifth Amended and Restated Executive Stock Purchase Plan (the “Executive Plan”) permits all eligible executives to purchase AutoZone’s common stock up to 25 percent of his or her annual salary and bonus. Purchases under the Executive Plan were 1,865 shares in fiscal 2017, 1,943 shares in fiscal 2016 and 2,229 shares in fiscal 2015. At August 26, 2017, 239,888 shares of common stock were reserved for future issuance under the Executive Plan.

Note C – Accrued Expenses and Other

Accrued expenses and other consisted of the following:


(in thousands)	August 26, 2017		August 27, 2016
Accrued compensation, related payroll taxes and benefits	$	181,591	$	180,012
Property, sales, and other taxes		98,829		95,293
Medical and casualty insurance claims (current portion)		84,756		78,458
Capital lease obligations		48,134		44,834
Accrued interest		41,047		34,179
Accrued gift cards		24,192		24,129
Accrued sales and warranty returns		19,520		19,527
Other		65,281		75,193

	$	563,350	$	551,625

The Company retains a significant portion of the insurance risks associated with workers’ compensation, employee health, general, products liability, property and vehicle insurance. A portion of these self-insured losses is managed through a wholly owned insurance captive. The Company maintains certain levels for stop-loss coverage for each self-insured plan in order to limit its liability for large claims. The limits are per claim and are $1.5 million for workers’ compensation, $2.0 million for vehicles, $21.5 million for property, $0.7 million for employee health, and $1.0 million for general and products liability.

Note D – Income Taxes

The components of income from continuing operations before income taxes are as follows:


	Year Ended
(in thousands)	August 26, 2017		August 27, 2016		August 29, 2015
Domestic	$	1,737,401	$	1,737,727	$	1,676,640
International		188,088		174,987		125,972

	$	1,925,489	$	1,912,714	$	1,802,612

The provision for income tax expense consisted of the following:


	Year Ended
(in thousands)	August 26, 2017			August 27, 2016			August 29, 2015
Current:
Federal	$	487,492		$	534,621		$	522,073
State		31,733			39,223			41,921
International		50,493			52,844			42,406

		569,718			626,688			606,400
Deferred:
Federal		72,208			48,509			38,299
State		7,769			9,453			941
International		(5,075	)		(12,943	)		(3,269	)

		74,902			45,019			35,971

Income tax expense	$	644,620		$	671,707		$	642,371

A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35% to income before income taxes is as follows:


	Year Ended
(in thousands)	August 26, 2017			August 27, 2016			August 29, 2015
Federal tax at statutory U.S. income tax rate		35.0%			35.0%			35.0%
State income taxes, net		1.3%			1.6%			1.5%
Other		(2.8%	)		(1.5%	)		(0.9%	)

Effective tax rate		33.5%			35.1%			35.6%

Significant components of the Company’s deferred tax assets and liabilities were as follows:


(in thousands)	August 26, 2017			August 27, 2016
Deferred tax assets:
Net operating loss and credit carryforwards	$	48,062		$	50,859
Accrued benefits		96,664			93,212
Other		56,052			68,600

Total deferred tax assets		200,778			212,671
Less: Valuation allowances		(13,501	)		(13,338	)

Net deferred tax asset		187,277			199,333
Deferred tax liabilities:
Property and equipment		(117,580	)		(93,943	)
Inventory		(333,422	)		(315,563	)
Prepaid Expenses		(60,920	)		(27,395	)
Other		(11,158	)		(10,077	)

Total deferred tax liabilities		(523,080	)		(446,978	)

Net deferred tax liability	$	(335,803	)	$	(247,645	)

Deferred taxes are not provided for temporary differences of approximately $712.6 million at August 26, 2017, and $572.0 million at August 27, 2016, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. If a deferred tax liability associated with these undistributed earnings had been recorded it would have been approximately $37.5 million and $35.0 million at August 26, 2017 and August 27, 2016, respectively.

At August 26, 2017 and August 27, 2016, the Company had deferred tax assets of $30.8 million and $25.2 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $198.2 million and $122.0 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2018 through 2037. At August 26, 2017 and August 27, 2016, the Company had deferred tax assets for income tax credit carryforwards of $17.2 million and $25.7 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2023 through 2027.

At August 26, 2017 and August 27, 2016, the Company had a valuation allowance of $13.5 million and $13.3 million, respectively, on deferred tax assets associated with NOL and tax credit carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. Management believes it is more likely than not that the remaining deferred tax assets will be fully realized.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


(in thousands)	August 26, 2017			August 27, 2016
Beginning balance	$	27,726		$	28,434
Additions based on tax positions related to the current year		7,089			7,172
Additions for tax positions of prior years		278			95
Reductions for tax positions of prior years		(6,954	)		(2,405	)
Reductions due to settlements		(1,964	)		(858	)
Reductions due to statute of limitations		(3,974	)		(4,712	)

Ending balance	$	22,201		$	27,726

Included in the August 26, 2017 and the August 27, 2016 balances are $9.9 million and $15.5 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate.

The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. The Company had $1.2 million and $2.8 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 26, 2017 and August 27, 2016, respectively.

The Company files U.S. federal, U.S. state and local, and international income tax returns. With few exceptions, the Company is no longer subject to state and local or Non-U.S. examinations by tax authorities for fiscal year 2013 and prior. The Company is typically engaged in various tax examinations at any given time by U.S. federal, U.S. state and local, and Non-U.S. taxing jurisidictions. As of August 26, 2017, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $2.3 million over the next twelve months as a result of tax audit settlements. While the Company believes that it has adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.

Note E – Fair Value Measurements

The Company has adopted ASC Topic 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure requirements about fair value measurements. This standard defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a framework for measuring fair value by creating a hierarchy of valuation inputs used to measure fair value, and although it does not require additional fair value measurements, it applies to other accounting pronouncements that require or permit fair value measurements.

The hierarchy prioritizes the inputs into three broad levels:

Level 1 inputs — unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs — inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

Level 3 inputs — unobservable inputs for the asset or liability.

Financial Assets & Liabilities Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities measured at fair value on a recurring basis were as follows:


	August 26, 2017
(in thousands)	Level 1		Level 2		Level 3		Fair Value
Other current assets	$	18,453	$	120	$	—	$	18,573
Other long-term assets		53,319		28,981		—		82,300

	$	71,772	$	29,101	$	—	$	100,873


	August 27, 2016
(in thousands)	Level 1		Level 2		Level 3		Fair Value
Other current assets	$	7,326	$	—	$	—	$	7,326
Other long-term assets		65,350		25,675		—		91,025

	$	72,676	$	25,675	$	—	$	98,351

At August 26, 2017, the fair value measurement amounts for assets and liabilities recorded in the accompanying Consolidated Balance Sheet consisted of short-term marketable securities of $18.6 million, which are included within Other current assets and long-term marketable securities of $82.3 million, which are included in Other long-term assets. The Company’s marketable securities are typically valued at the closing price in the principal active market as of the last business day of the quarter or through the use of other market inputs relating to the securities, including benchmark yields and reported trades.

A discussion on how the Company’s cash flow hedges are valued is included in “Note H – Derivative Financial Instruments,” while the fair value of the Company’s pension plan assets are disclosed in “Note L – Pension and Savings Plans.”

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

Non-financial assets are required to be measured at fair value on a non-recurring basis in certain circumstances, including the event of impairment. The assets could include assets acquired in an acquisition as well as property, plant and equipment that are determined to be impaired. During fiscal 2017 and fiscal 2016, the Company did not have any significant non-financial assets measured at fair value on a non-recurring basis in periods subsequent to initial recognition.

Financial Instruments not Recognized at Fair Value

The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. The fair value of the Company’s debt is disclosed in “Note I – Financing.”

Note F – Marketable Securities

The Company’s basis for determining the cost of a security sold is the “Specific Identification Model.” Unrealized gains (losses) on marketable securities are recorded in Accumulated other comprehensive loss. The Company’s available-for-sale marketable securities consisted of the following:


	August 26, 2017
(in thousands)	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate securities	$	39,917	$	73	$	(13	)	$	39,977
Government bonds		31,076		49		(74	)		31,051
Mortgage-backed securities		4,850		2		(42	)		4,810
Asset-backed securities and other		25,042		28		(35	)		25,035

	$	100,885	$	152	$	(164	)	$	100,873


	August 27, 2016
(in thousands)	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate securities	$	37,789	$	198	$	(6	)	$	37,981
Government bonds		33,497		24		(35	)		33,486
Mortgage-backed securities		6,865		18		(29	)		6,854
Asset-backed securities and other		20,015		26		(11	)		20,030

	$	98,166	$	266	$	(81	)	$	98,351

The debt securities held at August 26, 2017, had effective maturities ranging from less than one year to approximately three years. The Company did not realize any material gains or losses on its marketable securities during fiscal 2017, 2016 or 2015.

The Company holds 51 securities that are in an unrealized loss position of approximately $164 thousand at August 26, 2017. The Company has the intent and ability to hold these investments until recovery of fair value or maturity, and does not deem the investments to be impaired on an other than temporary basis. In evaluating

whether the securities are deemed to be impaired on an other than temporary basis, the Company considers factors such as the duration and severity of the loss position, the credit worthiness of the investee, the term to maturity and its intent and ability to hold the investments until maturity or until recovery of fair value.

Included above in total marketable securities are $85.4 million and $61.8 million of marketable securities transferred by the Company’s insurance captive to a trust account to secure its obligations to an insurance company related to future workers’ compensation and casualty losses as of August 26, 2017 and August 27, 2016, respectively.

Note G – Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss includes certain adjustments to pension liabilities, foreign currency translation adjustments, certain activity for interest rate swaps and treasury rate locks that qualify as cash flow hedges and unrealized gains (losses) on available-for-sale securities. Changes in Accumulated other comprehensive loss consisted of the following:


(in thousands)	Pension Liability			Foreign Currency(3)			Net Unrealized Gain (Loss) on Securities			Derivatives			Total
Balance at August 29, 2015	$	(70,795	)	$	(171,488	)	$	(26	)	$	(7,209	)	$	(249,518	)
Other comprehensive (loss) income before reclassifications		(24,542	)		(39,524	)		206			(2,687	)		(66,547	)
Amounts reclassified from Accumulated other comprehensive loss(1)		6,447	(2)		—			(60	)(4)		2,149	(5)		8,536

Balance at August 27, 2016		(88,890	)		(211,012	)		120			(7,747	)		(307,529	)
Other comprehensive (loss) income before reclassifications		8,046			35,198			(60	)		—			43,184
Amounts reclassified from Accumulated other comprehensive loss(1)		8,468	(2)		—			(71	)(4)		1,391	(5)		9,788

Balance at August 26, 2017	$	(72,376	)	$	(175,814	)	$	(11	)	$	(6,356	)	$	(254,557	)

(1)	Amounts in parentheses indicate debits to Accumulated other comprehensive loss.

(2)	Represents amortization of pension liability adjustments, net of taxes of $5,406 in fiscal 2017 and $4,059 in fiscal 2016, which is recorded in Operating, selling, general and administrative expenses on the Consolidated Statements of Income. See “Note L – Pension and Savings Plans” for further discussion.

(3)	Foreign currency is not shown net of additional U.S. tax as earnings of non-U.S. subsidiaries are intended to be permanently reinvested.

(4)	Represents realized losses on marketable securities, net of taxes of $38 in fiscal 2017 and $33 in fiscal 2016, which is recorded in Operating, selling, general, and administrative expenses on the Consolidated Statements of Income. See “Note F – Marketable Securities” for further discussion.

(5)	Represents gains and losses on derivatives, net of taxes of $814 in fiscal 2017 and $315 in fiscal 2016, which is recorded in Interest expense, net, on the Consolidated Statements of Income. See “Note H – Derivative Financial Instruments” for further discussion.

The 2017 pension actuarial gain of $8.0 million and the 2016 pension actuarial loss of $24.5 million include amounts not yet reflected in periodic pension costs primarily driven by changes in the discount rate.

Note H – Derivative Financial Instruments

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, Derivatives and Hedging, the effective portion of a financial instrument’s change in fair value is recorded in Accumulated other comprehensive loss for derivatives that qualify as cash flow hedges and any ineffective portion of an instrument’s change in fair value is recognized in earnings.

At August 26, 2017, the Company had $10.1 million recorded in Accumulated other comprehensive loss related to net realized losses associated with terminated interest rate swap and treasury rate lock derivatives which were designated as hedging instruments. Net losses are amortized into Interest expense over the remaining life of the associated debt. During the fiscal year ended August 26, 2017, the Company reclassified $2.2 million of net losses from Accumulated other comprehensive loss to Interest expense. In the fiscal year ended August 27, 2016, the Company reclassified $1.8 million of net losses from Accumulated other comprehensive loss to Interest expense. The Company expects to reclassify $2.2 million of net losses from Accumulated other comprehensive loss to Interest expense over the next 12 months.

Note I – Financing

The Company’s debt consisted of the following:


(in thousands)	August 26, 2017		August 27, 2016
1.300% Senior Notes due January 2017, effective interest rate of 1.43%	$	—	$	400,000
7.125% Senior Notes due August 2018, effective interest rate of 7.28%		250,000		250,000
1.625% Senior Notes due April 2019, effective interest rate of 1.77%		250,000		250,000
4.000% Senior Notes due November 2020, effective interest rate of 4.43%		500,000		500,000
2.500% Senior Notes due April 2021, effective interest rate of 2.62%		250,000		250,000
3.700% Senior Notes due April 2022, effective interest rate of 3.85%		500,000		500,000
2.875% Senior Notes due January 2023, effective interest rate of 3.21%		300,000		300,000
3.125% Senior Notes due July 2023, effective interest rate of 3.26%		500,000		500,000
3.250% Senior Notes due April 2025, effective interest rate 3.36%		400,000		400,000
3.125% Senior Notes due April 2026, effective interest rate of 3.28%		400,000		400,000
3.750% Senior Notes due June 2027, effective interest rate of 3.83%		600,000		—
Commercial paper, weighted average interest rate of 1.44% and 0.72% at August 26, 2017 and August 27, 2016, respectively		1,155,100		1,197,500

Total debt before discounts and debt issuance costs		5,105,100		4,947,500
Less: Discounts and debt issuance costs		23,862		23,381

Long-term debt	$	5,081,238	$	4,924,119

As of August 26, 2017, the commercial paper borrowings and the $250 million 7.125% Senior Notes due August 2018 are classified as long-term in the accompanying Consolidated Balance Sheets as the Company has the ability and intent to refinance on a long-term basis through available capacity in its revolving credit facilities. As of August 26, 2017, the Company had $1.997 billion of availability under its $2.0 billion revolving credit facilities, which would allow it to replace these short-term obligations with long-term financing facilities.

On November 18, 2016, the Company amended and restated its existing Multi-Year revolving credit facility (the “New Multi-Year Revolving Credit Agreement”) by increasing the committed credit amount from $1.25 billion to $1.6 billion, extending the expiration date by two years and renegotiating other terms and conditions. This credit facility is available to primarily support commercial paper borrowings, letters of credit and other short-term unsecured bank loans. The capacity of the credit facility may be increased to $2.1 billion prior to the maturity date at the Company’s election and subject to bank credit capacity and approval, and may include up to $200 million in letters of credit. Under the revolving credit facility, the Company may borrow funds consisting of Eurodollar

loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the revolving credit facility, depending upon the Company’s senior, unsecured, (non-credit enhanced) long-term debt rating. Interest accrues on base rate loans as defined in the credit facility. The Company also has the option to borrow funds under the terms of a swingline loan subfacility. The revolving credit facility expires on November 18, 2021, but the Company may, by notice to the administrative agent, make up to two requests to extend the termination date for an additional period of one year. The first such request must be made no earlier than 60 days, and no later than 45 days, prior to November 18, 2017, while the second request must be made no earlier than 60 days, and no later than 45 days, prior to November 18, 2018.

On November 18, 2016, the Company amended and restated its existing 364-Day revolving credit facility (the “New 364-Day Credit Agreement”) by decreasing the committed credit amount from $500 million to $400 million, extending the expiration date by one year and renegotiating other terms and conditions. The credit facility is available to primarily support commercial paper borrowings and other short-term unsecured bank loans. Under the credit facility, the Company may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable margin, as defined in the revolving credit facility, depending upon the Company’s senior, unsecured, (non-credit enhanced) long-term debt rating. Interest accrues on base rate loans as defined in the credit facility. The New 364-Day Credit Agreement expires on November 17, 2017, but the Company may request an extension of the termination date for 364 days no later than 45 days prior to November 17, 2017, subject to bank approval. In addition, at least 15 days prior to November 17, 2017, the Company has the right to convert the credit facility to a term loan for up to one year from the termination date, subject to a 1% penalty.

The revolving credit facility agreements require that the Company’s consolidated interest coverage ratio as of the last day of each quarter shall be no less than 2.5:1. This ratio is defined as the ratio of (i) consolidated earnings before interest, taxes and rents to (ii) consolidated interest expense plus consolidated rents. The Company’s consolidated interest coverage ratio as of August 26, 2017 was 6.0:1.

As of August 26, 2017, the Company had no outstanding borrowings under each of the revolving credit facilities, and $3.3 million of outstanding letters of credit under the New Multi-Year Revolving Credit Agreement.

The Company also maintains a letter of credit facility that allows it to request the participating bank to issue letters of credit on its behalf up to an aggregate amount of $75 million. The letter of credit facility is in addition to the letters of credit that may be issued under the New Multi-Year Revolving Credit Agreement. As of August 26, 2017, the Company had $74.9 million in letters of credit outstanding under the letter of credit facility.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, the Company had $10.4 million in letters of credit outstanding as of August 26, 2017. These letters of credit have various maturity dates and were issued on an uncommitted basis.

On April 18, 2017, the Company issued $600 million in 3.750% Senior Notes due June 2027 under its shelf registration statement filed with the SEC on April 15, 2015 (the “2015 Shelf Registration”). The 2015 Shelf Registration allows the Company to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new location openings, stock repurchases and acquisitions. Proceeds from the debt issuance were used for general corporate purposes.

On April 21, 2016, the Company issued $400 million in 3.125% Senior Notes due April 2026 and $250 million in 1.625% Senior Notes due April 2019 under its 2015 Shelf Registration. Proceeds from the debt issuances were used for general corporate purposes.

On April 29, 2015, we issued $400 million in 3.250% Senior Notes due April 2025 and $250 million in 2.500% Notes due April 2021 under the 2015 Shelf Registration. Proceeds from the debt issuances were used to repay a portion of the outstanding commercial paper borrowings, which were used to repay the $500 million in 5.750% Senior Notes due in January 2015, and for general corporate purposes.

All senior notes are subject to an interest rate adjustment if the debt ratings assigned to the senior notes are downgraded (as defined in the agreements). Further, the senior notes contain a provision that repayment of the senior notes may be accelerated if the Company experiences a change in control (as defined in the agreements).

The Company’s borrowings under its senior notes contain minimal covenants, primarily restrictions on liens. Under its revolving credit facilities, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances. All of the repayment obligations under its borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs.

As of August 26, 2017, the Company was in compliance with all covenants related to its borrowing arrangements. All of the Company’s debt is unsecured. Scheduled maturities of debt are as follows:


(in thousands)	Scheduled Maturities
2018	$	1,405,100
2019		250,000
2020		—
2021		750,000
2022		500,000
Thereafter		2,200,000

Subtotal		5,105,100
Discount and debt issuance costs		23,862

Total Debt	$	5,081,238

The fair value of the Company’s debt was estimated at $5.171 billion as of August 26, 2017, and $5.117 billion as of August 27, 2016, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same terms (Level 2). Such fair value is greater than the carrying value of debt by $90.3 million at August 26, 2017 and $192.7 million at August 27, 2016, which reflect their face amount, adjusted for any unamortized debt issuance costs and discounts.

Note J – Interest Expense

Net interest expense consisted of the following:


	Year Ended
(in thousands)	August 26, 2017			August 27, 2016			August 29, 2015
Interest expense	$	159,329		$	150,961		$	153,007
Interest income		(3,502	)		(2,371	)		(1,605	)
Capitalized interest		(1,247	)		(909	)		(963	)

	$	154,580		$	147,681		$	150,439

Note K – Stock Repurchase Program

During 1998, the Company announced a program permitting the Company to repurchase a portion of its outstanding shares not to exceed a dollar maximum established by the Board. The program was last amended on March 21, 2017 to increase the repurchase authorization to $18.65 billion from $17.9 billion. From January 1998 to August 26, 2017, the Company has repurchased a total of 142.3 million shares at an aggregate cost of $17.826 billion.

The Company’s share repurchase activity consisted of the following:


	Year Ended
(in thousands)	August 26, 2017		August 27, 2016		August 29, 2015
Amount	$	1,071,649	$	1,452,462	$	1,271,416
Shares		1,495		1,903		2,010

During fiscal year 2017, the Company retired 1.8 million shares of treasury stock which had previously been repurchased under the Company’s share repurchase program. The retirement increased Retained deficit by $1.321 billion and decreased Additional paid-in capital by $64.9 million. During the comparable prior year period, the Company retired 2.1 million shares of treasury stock, which increased Retained deficit by $1.424 billion and decreased Additional paid-in capital by $67.0 million.

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 benefit cost 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 benefit cost 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 benefit cost 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 may 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 were fully liquidated during fiscal 2016. 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 26, 2017
	Fair		Asset Allocation						Fair Value Hierarchy
(in thousands)	Value		Actual			Target			Level 1		Level 2		Level 3
U.S. equities	$	50,125		15.8	%		17.0	%	$	—	$	50,125	$	—
International equities		33,696		10.7			11.0			—		33,696		—
Emerging equities		19,027		6.0			6.0			—		19,027		—
High yield securities		17,063		5.4			6.0			—		17,063		—
Alternative investments		—		—			—			—		—		—
Fixed income securities		178,650		56.5			60.0			—		178,650		—
Cash and cash equivalents		17,706		5.6			—			—		17,706		—

	$	316,267		100.0	%		100.0	%	$	—	$	316,267	$	—


August 27, 2016
	Fair		Asset Allocation						Fair Value Hierarchy
(in thousands)	Value		Actual			Target			Level 1		Level 2		Level 3
U.S. equities	$	66,008		22.9	%		26.0	%	$	—	$	66,008	$	—
International equities		42,023		14.5			17.0			—		42,023		—
Emerging equities		22,848		7.9			8.5			—		22,848		—
High yield securities		21,445		7.4			8.5			—		21,445		—
Alternative investments		—		—			—			—		—		—
Fixed income securities		99,336		34.3			40.0			—		99,336		—
Cash and cash equivalents		37,726		13.0			—			—		37,726		—

	$	289,386		100.0	%		100.0	%	$	—	$	289,386	$	—

The asset allocations in the charts above include $17.5 million and $48.0 million in cash contributions made in the last month prior to the balance sheet date of August 26, 2017, and August 27, 2016, respectively. Subsequent to August 26, 2017, and August 27, 2016, these cash contributions were allocated to the pension plan investments in accordance with the targeted asset allocation.

In January 2017, 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 7.0% for the year ended August 26, 2017 to 6.0% for the year ending August 25, 2018.

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


(in thousands)	August 26, 2017			August 27, 2016
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	328,511		$	296,123
Interest cost		10,335			11,272
Actuarial (gains) losses		(8,746	)		39,842
Benefits paid		(15,376	)		(18,726	)

Benefit obligations at end of year	$	314,724		$	328,511

Change in Plan Assets:
Fair value of plan assets at beginning of year	$	289,386		$	238,755
Actual return on plan assets		24,496			16,636
Employer contributions		17,761			52,721
Benefits paid		(15,376	)		(18,726	)

Fair value of plan assets at end of year	$	316,267		$	289,386

Amount Recognized in the Statement of Financial Position:
Current liabilities	$	(283	)	$	(276	)
Long-term assets		8,686			—
Long-term liabilities		(6,860	)		(38,849	)

Net amount recognized	$	1,543		$	(39,125	)

Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic Benefit Cost:
Net actuarial loss	$	(118,889	)	$	(145,948	)

Accumulated other comprehensive loss	$	(118,889	)	$	(145,948	)

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	$	(10,736	)	$	(13,874	)

Amount recognized	$	(10,736	)	$	(13,874	)

Net periodic benefit expense consisted of the following:


	Year Ended
(in thousands)	August 26, 2017			August 27, 2016			August 29, 2015
Interest cost	$	10,335		$	11,272		$	12,338
Expected return on plan assets		(20,056	)		(16,512	)		(16,281	)
Recognized net actuarial losses		13,873			10,506			8,941

Net periodic benefit expense	$	4,152		$	5,266		$	4,998

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


	Year Ended
	August 26, 2017			August 27, 2016			August 29, 2015
Discount rate to determine benefit obligation		3.86	%		3.72	%		4.50	%
Discount rate to determine net interest cost		3.21	%		3.90	%		4.28	%
Expected long-term rate of return on plan assets		7.00	%		7.00	%		7.00	%

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 to determine the projected benefit obligation 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.

During fiscal 2016, the Company changed the method used to estimate the interest cost component of net periodic benefit cost. Previously, the Company estimated interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The Company elected to utilize a spot rate approach by applying specific spot rates along the yield curve to calculate interest costs instead of a single weighted-average discount rate. This calculation is believed to be more refined under the applicable accounting standard. The impact of this change to net periodic benefit cost was a reduction of $1.8 million in fiscal 2016. The Company accounted for this change as a change in accounting estimate and accounted for it prospectively.

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 $17.8 million to the plans in fiscal 2017, $52.7 million to the plans in fiscal 2016 and $17.1 million to the plans in fiscal 2015. The Company expects to contribute approximately $20.3 million to the plans in fiscal 2018; 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 or through other plans initiated by management.

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
2018	$	13,608
2019		13,139
2020		13,817
2021		14,538
2022		14,917
2023 – 2027		79,742

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 $21.0 million in fiscal 2017, $19.7 million in fiscal 2016, and $17.7 million in fiscal 2015.

Note M – Acquisition

Effective September 27, 2014, the Company acquired the outstanding stock of Interamerican Motor Corporation (“IMC”), the second largest distributor of quality import replacement parts in the United States, for $75.7 million, net of cash. IMC specializes in parts coverage for European and Asian cars. With this acquisition, the Company continues to grow its share in the aftermarket import car parts market. The results of operations from IMC have been included in the Company’s Auto Parts Locations business activities since the date of acquisition.

Note N – Goodwill and Intangibles

The changes in the carrying amount of goodwill are as follows:


(in thousands)	Auto Parts Locations		Other		Total
Net balance as of August 29, 2015	$	326,703	$	65,184	$	391,887
Goodwill added through acquisition		—		—		—
Goodwill adjustments		—		—		—

Net balance as of August 27, 2016		326,703		65,184		391,887
Goodwill added through acquisition		—		—		—
Goodwill adjustments		—		—		—

Net balance as of August 26, 2017	$	326,703	$	65,184	$	391,887

The Company performs its annual goodwill and intangibles impairment test in the fourth quarter of each fiscal year. In the fourth quarter of fiscal 2017 and 2016, the Company concluded that its goodwill was not impaired. Total accumulated goodwill impairment for both August 26, 2017 and August 27, 2016 is $18.3 million.

The carrying amounts of intangible assets are included in Other long-term assets as follows:


	August 26, 2017
(in thousands)	Estimated Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Technology		3-5 years	$	10,570	$	(9,994	)	$	576
Noncompete agreements		5 years		1,300		(1,223	)		77
Customer relationships		3-10 years		49,676		(24,730	)		24,946

			$	61,546	$	(35,947	)		25,599

Non-amortizing intangible asset:
Trade names									26,900

Total intangible assets other than goodwill								$	52,499


	August 27, 2016
(in thousands)	Estimated Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Technology		3-5 years	$	10,570	$	(7,988	)	$	2,582
Noncompete agreements		5 years		1,300		(963	)		337
Customer relationships		3-10 years		49,676		(18,514	)		31,162

			$	61,546	$	(27,465	)		34,081

Non-amortizing intangible asset:
Trade names									26,900

Total intangible assets other than goodwill								$	60,981

During fiscal 2014, the Company purchased $30.2 million of intangible assets relating to the rights to certain customer relationships and technology assets relating to its ALLDATA operations. Additionally, during fiscal 2016 and 2015, the Company made an installment payment of $10 million in each year related to certain customer relationships purchased during 2014 relating to its ALLDATA operations.

As part of its annual impairment test, the Company evaluates the AutoAnything and IMC trade names for impairment in the fourth quarter of each fiscal year. In the fourth quarter of fiscal 2017 and 2016, the Company concluded that AutoAnything’s and IMC’s trade names were not impaired. Trade names at August 26, 2017 and August 27, 2016 reflect a total accumulated impairment of $4.1 million.

Amortization expense of intangible assets for the years ended August 26, 2017 and August 27, 2016 was $8.5 million and $8.7 million, respectively.

Total future amortization expense for intangible assets that have finite lives, based on the existing intangible assets and their current estimated useful lives as of August 26, 2017, is estimated as follows:


(in thousands)	Total
2018	$	6,855
2019		6,203
2020		6,203
2021		3,474
2022		2,030
Thereafter		834

	$	25,599

Note O – Leases

The Company leases some of its retail stores, distribution centers, facilities, land and equipment, including vehicles. Other than vehicle leases, most of the leases are operating leases, which include renewal options made at the Company’s election and provisions for percentage rent based on sales. Rental expense was $302.9 million in fiscal 2017, $280.5 million in fiscal 2016, and $269.5 million in fiscal 2015. Percentage rentals were insignificant.

The Company records rent for all operating leases on a straight-line basis over the lease term, including any reasonably assured renewal periods and the period of time prior to the lease term that the Company is in possession of the leased space for the purpose of installing leasehold improvements. Differences between recorded rent expense and cash payments are recorded as a liability in Accrued expenses and other and Other long-term liabilities in the accompanying Consolidated Balance Sheets, based on the terms of the lease. The deferred rent approximated $130.2 million on August 26, 2017, and $121.7 million on August 27, 2016.

The Company has a fleet of vehicles used for delivery to its commercial customers and stores and travel for members of field management. The majority of these vehicles are held under capital leases. At August 26, 2017, the Company had capital lease assets of $152.0 million, net of accumulated amortization of $70.2 million, and capital lease obligations of $150.5 million, of which $48.1 million is classified as Accrued expenses and other as it represents the current portion of these obligations. At August 27, 2016, the Company had capital lease assets of $148.5 million, net of accumulated amortization of $59.5 million, and capital lease obligations of $147.3 million, of which $44.8 million is classified as Accrued expenses and other as it represents the current portion of these obligations.

Future minimum annual rental commitments under non-cancelable operating leases and capital leases were as follows at the end of fiscal 2017:


(in thousands)	Operating Leases		Capital Leases
2018	$	293,826	$	48,134
2019		284,523		49,808
2020		262,782		36,610
2021		237,241		21,217
2022		213,399		3,307
Thereafter		861,409		—

Total minimum payments required	$	2,153,180		159,076

Less: Interest				(8,620	)

Present value of minimum capital lease payments			$	150,456

Note P – Commitments and Contingencies

Construction commitments, primarily for new stores and new distribution centers, totaled approximately $69.9 million at August 26, 2017.

The Company had $88.6 million in outstanding standby letters of credit and $28.8 million in surety bonds as of August 26, 2017, which all have expiration periods of less than one year. A substantial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to cover reimbursement obligations to our workers’ compensation carriers. There are no additional contingent liabilities associated with these instruments as the underlying liabilities are already reflected in the consolidated balance sheet. The standby letters of credit and surety bonds arrangements have automatic renewal clauses.

Note Q – Litigation

In July 2014, the Company received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial offices in the state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste. The Company received notice that the District Attorney will seek injunctive and monetary relief. The Company is cooperating fully with the request and cannot predict the ultimate outcome of these efforts, although the Company has accrued all amounts it believes to be probable and reasonably estimable. The Company does not believe the ultimate resolution of this matter will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

In April 2016, the Company received a letter from the California Air Resources Board seeking payment for alleged violations of the California Health and Safety Code related to the sale of certain aftermarket emission parts in the State of California. The Company does not believe that any resolution of the matter will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

The Company is involved in various other legal proceedings incidental to the conduct of its business, including, but not limited to, several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices. The Company does not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Company’s financial condition, results of operations or cash flows.

Note R – Segment Reporting

Four of the Company’s operating segments (Domestic Auto Parts, Mexico, Brazil, and IMC) are aggregated as one reportable segment: Auto Parts Locations. The criteria the Company used to identify the reportable segment are primarily the nature of the products the Company sells and the operating results that are regularly reviewed by the Company’s chief operating decision maker to make decisions about the resources to be allocated to the business units and to assess performance. The accounting policies of the Company’s reportable segment are the same as those described in Note A.

The Auto Parts Locations segment is a retailer and distributor of automotive parts and accessories through the Company’s 6,029 locations in the United States, Puerto Rico, Mexico and Brazil. Each location carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

The Other category reflects business activities of three operating segments that are not separately reportable due to the materiality of these operating segments. The operating segments include ALLDATA, which produces, sells and maintains diagnostic and repair information software used in the automotive repair industry; E-commerce, which includes direct sales to customers through www.autozone.com; and AutoAnything, which includes direct sales to customers through www.autoanything.com.

The Company evaluates its reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. The following table shows segment results for the following fiscal years:


	Year Ended
(in thousands)	August 26, 2017			August 27, 2016			August 29, 2015
Net Sales:
Auto Parts Locations	$	10,523,272		$	10,261,112		$	9,824,876
Other		365,404			374,564			362,464

Total	$	10,888,676		$	10,635,676		$	10,187,340

Segment Profit:
Auto Parts Locations	$	5,544,494		$	5,410,477		$	5,132,624
Other		195,126			198,259			194,407

Gross profit		5,739,620			5,608,736			5,327,031
Operating, selling, general and administrative expenses		(3,659,551	)		(3,548,341	)		(3,373,980	)
Interest expense, net		(154,580	)		(147,681	)		(150,439	)

Income before income taxes	$	1,925,489		$	1,912,714		$	1,802,612

Segment Assets:
Auto Parts Locations	$	8,964,371		$	8,351,883		$	7,883,720
Other		295,410			247,904			218,629

Total	$	9,259,781		$	8,599,787		$	8,102,349

Capital Expenditures:
Auto Parts Locations	$	533,304		$	470,631		$	464,246
Other		20,528			18,160			16,333

Total	$	553,832		$	488,791		$	480,579

Auto Parts Locations Sales by Product Grouping:
Failure	$	5,100,702		$	4,913,423		$	4,650,271
Maintenance items		3,774,386			3,721,240			3,618,779
Discretionary		1,648,184			1,626,449			1,555,826

Auto Parts Locations net sales	$	10,523,272		$	10,261,112		$	9,824,876

Note S – Quarterly Summary (1)

(Unaudited)


	Twelve Weeks Ended						Sixteen Weeks Ended
(in thousands, except per share data)	November 19, 2016		February 11, 2017		May 6, 2017		August 26, 2017(2)
Net sales	$	2,467,845	$	2,289,219	$	2,619,007	$	3,512,605
Gross profit		1,301,542		1,205,536		1,378,418		1,854,125
Operating profit		458,902		383,969		529,570		707,628
Income before income taxes		425,596		349,771		493,895		656,227
Net income(3)		278,125		237,145		331,700		433,899
Basic earnings per share(3)		9.61		8.28		11.70		15.52
Diluted earnings per share(3)		9.36		8.08		11.44		15.27

	Twelve Weeks Ended						Sixteen Weeks Ended
(in thousands, except per share data)	November 21, 2015		February 13, 2016		May 7, 2016		August 27, 2016(2)
Net sales	$	2,386,043	$	2,257,192	$	2,593,672	$	3,398,769
Gross profit		1,252,934		1,190,596		1,370,458		1,794,748
Operating profit		437,995		382,660		536,374		703,366
Income before income taxes		402,985		349,828		502,323		657,577
Net income		258,112		228,613		327,515		426,768
Basic earnings per share		8.46		7.58		10.99		14.58
Diluted earnings per share		8.29		7.43		10.77		14.30

(1)	The sum of quarterly amounts may not equal the annual amounts reported due to rounding. In addition, the earnings per share amounts are computed independently for each quarter while the full year is based on the annual weighted average shares outstanding.

(2)	The fourth quarter for fiscal 2017 and fiscal 2016 are based on a 16-week period. All other quarters presented are based on a 12-week period.

(3)

As discussed in Note A, the Company adopted the new accounting guidance for shared-based payments on August 28, 2016. These amounts include the impact of the adoption. For the twelve week period ended November 19, 2016, this increased net income by $3.1 million, basic earnings per share by $0.11 and diluted earnings per share by $0.03. For the twelve week period ended February 11, 2017, this increased net income by $12.5 million, basic earnings per share by $0.43 and diluted earnings per share by $0.37. For the twelve week period ended May 6, 2017, this increased net income by $11.4 million, basic earnings per share by $0.40 and diluted earnings per share by $0.32. For the sixteen week period ended August 26, 2017, this increased net income by $4.1 million, basic earnings per share by $0.15 and diluted earnings per share by $0.09. Prior period net income, basic earnings per share and diluted earnings per share amounts were not restated.

Note T – Subsequent Event

(Unaudited)

Subsequent to August 26, 2017, several storms made landfall and have resulted in extensive damage and flooding in Texas, Florida, Louisiana and Puerto Rico. The damage to the Company’s stores in Texas, Florida and Louisiana did not have a material impact on its consolidated financial statements. A full assessment of the extent of the damage to stores in Puerto Rico is expected to be completed in the weeks ahead. Currently, there is uncertainty as to the magnitude of the losses associated with this event and whether such losses would have a material effect on the Company’s consolidated financial statements.

Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Item 8. Financial Statements and Supplementary Data

Item 8. Financial Statements and Supplementary Data

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents