O'Reilly Auto Parts 2011 Annual Report Download - page 50

40
vendors and assesses the need for a reserve for uncollectible amounts based on our evaluation of our vendors’ financial position
and corresponding ability to meet their financial obligations. Based on our historical results and current assessment, we have not
recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not believe there is a reasonable
likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability of our vendors to pay us
the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or gains that could be
material.
Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities
from workers’ compensation, general liability, vehicle liability, property loss, and Team Member health care benefits. With the
exception of certain Team Member health care benefit liabilities, we obtain third-party insurance coverage to limit our exposure
for any individual workers’ compensation, general liability, vehicle liability or property loss claim. When estimating our self-
insurance liabilities, we consider a number of factors, including historical claims experience and trend-lines, projected medical
and legal inflation, and growth patterns and exposure forecasts. The assumptions made by management as they relate to each of
these factors represent our judgment as to the most probable cumulative impact of each factor to our future obligations. Our
calculation of self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported
claims and claims incurred but not yet reported as of the balance sheet date and the application of alternative assumptions could
result in a different estimate of these liabilities. Actual claim activity or development may vary from our assumptions and
estimates, which may result in material losses or gains. As we obtain additional information that affects the assumptions and
estimates we used to recognize liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to
reflect the revised estimates based on this additional information. These liabilities are recorded at our estimate of their net present
value. These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical
patterns. We could apply alternative assumptions regarding the timing of payments or the applicable discount rate that could
result in materially different estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from
our estimated reserves at December 31, 2011, the financial impact would have been approximately $11 million or 1.3% of pretax
income for the year ended December 31, 2011.
Closed Property Reserves – We maintain reserves for closed stores and other properties that are no longer utilized in current
operations. We accrue for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present
value of the remaining non-cancelable lease payments, contractual occupancy costs and lease termination fees after the closing
date, net of estimated sublease income. The closed property lease liabilities are expected to be paid over the remaining lease
terms. We estimate sublease income and future cash flows based on our experience and knowledge of the market in which the
closed property is located, our previous efforts to dispose of similar assets and existing economic conditions. Adjustments to
closed property reserves are made to reflect changes in estimated sublease income or actual exit costs from original estimates.
Adjustments are made for changes in estimates in the period in which the changes become known. If closed property reserves
were changed 10% from our estimated reserves at December 31, 2011, the financial impact would have been approximately $1
million or 0.2% of pretax income for the year ended December 31, 2011.
Legal Reserves – We maintain reserves for expenses associated with litigation for which O’Reilly is currently involved. We are
currently involved in litigation incidental to the ordinary conduct of our business as well as resolving the governmental
investigations and litigation that are being conducted against certain of CSK’s former employees for alleged conduct relating to
periods prior to the acquisition date. As a result of the acquisition, we expect to continue to incur ongoing legal fees related to
such investigations, litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed liability in our
allocation of the purchase price of CSK. Management, with the assistance of outside legal counsel, must make estimates of
potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures. If legal
reserves were changed 10% from our estimated reserves at December 31, 2011, the financial impact would have been
approximately $2 million or 0.2% of pretax income for the year ended December 31, 2011.
Taxes – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax
years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax
regulations by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. Changes in our
tax liability may occur in the future as our assessments change based on the progress of tax examinations in various jurisdictions
and/or changes in tax regulations. In management’s opinion, adequate provisions for income taxes have been made for all years
presented. The estimates of our potential tax liabilities contain uncertainties because management must use judgment to estimate
the exposures associated with our various tax positions and actual results could differ from our estimates. Alternatively, we could
have applied assumptions regarding the eventual outcome of the resolution of open tax positions that could differ from our current
estimates but that would still be reasonable given the nature of a particular position. While our estimates are subject to the
uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities have historically not been
materially different from actual results except in instances where we have reversed liabilities that were recorded for periods that
were subsequently closed with the applicable taxing authority.
•
•
•
•
FORM 10-K