O'Reilly Auto Parts 2011 Annual Report Download - page 63

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Inventory:
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market.
Inventory also includes capitalized costs related to procurement, warehousing and distribution centers (―DC‖). Cost has been
determined using the last-in, first-out (―LIFO‖) method, which more accurately matches costs with related revenues. The replacement
cost of inventory was $2.04 billion and $2.05 billion as of December 31, 2011 and 2010, respectively.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method generally over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of
the assets. The lease term includes renewal options determined by management at lease inception for which failure to renew options
would result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included as a component of
―Other income (expense)‖ in the Company’s Consolidated Statements of Income. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
The following table identifies the types of property and equipment included in the accompanying consolidated financial statements as
of December 31, 2011 and 2010 (in thousands, except useful lives):
Land $ 462,790 $ 392,600
Buildings and building improvements 15 – 39 years 1,012,709 921,929
Leasehold improvements 3 – 25 years 395,274 370,018
Furniture, fixtures and equipment 3 – 20 years 906,257 777,485
Vehicles 5 – 10 years 206,685 182,942
Construction in progress 43,281 60,460
Total property and equipment 3,026,996 2,705,434
Less: accumulated depreciation and amortization 933,229 775,339
Net property and equipment $ 2,093,767 $ 1,930,095
December 31,
2010
Original
Useful Lives
December 31,
2011
The gross value of capital lease assets included in the ―Vehicles‖ amounts of the above table was $8.6 million and $9.6 million at
December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the Company recorded accumulated amortization on
these capital lease assets in the amounts of $7.9 million and $7.5 million, respectively, all of which was included in ―accumulated
depreciation and amortization‖ in the above table.
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates
incurred on long-term borrowings. Total interest costs capitalized for the years ended December 31, 2011, 2010 and 2009, were $4.7
million, $5.1 million and $6.7 million, respectively.
Notes receivable:
The Company had notes receivable from vendors and other third parties amounting to $15.0 million and $22.2 million at December
31, 2011 and 2010, respectively. The notes receivable, which bear interest at rates ranging from 0% to 10%, are due in varying
amounts through March of 2019. Interest income on notes receivable is recorded in accordance with the note terms to the extent that
such amounts are expected to be collected. The Company regularly reviews its notes receivable for collectability and assesses the
need for a reserve for uncollectable amounts based on an evaluation of the Company’s borrowers’ financial positions and
corresponding abilities to meet financial obligations. Management does not believe there is a reasonable likelihood that the Company
will be unable to collect the notes receivable and the Company did not record a reserve for uncollectable notes receivable in the
consolidated financial statements at December 31, 2011 or 2010.
Goodwill and other intangible assets:
The accompanying Consolidated Balance Sheets at December 31, 2011 and 2010, include goodwill and other intangible assets
recorded as the result of acquisitions. The Company reviews goodwill for impairment annually on November 30, or when events or
changes in circumstances indicate the carrying value of these assets might exceed their current fair values, rather than systematically
amortizing goodwill against earnings. During 2011 and 2010, the goodwill impairment test included a quantitative assessment, which
compared the fair value of a reporting unit to its carrying amount, including goodwill. The Company operates as a single reporting
unit, and the Company determined that its fair value exceeded its carrying value, including goodwill, at December 31, 2011 and 2010;
as such, no goodwill impairment adjustment was required at December 31, 2011 and 2010.
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for Team
Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of
certain Team Member health care benefit liabilities, the Company obtains third-party insurance coverage to limit its exposure. The
FORM 10-K