O'Reilly Auto Parts 2011 Annual Report Download - page 65

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included within ―Other current liabilities‖. On a quarterly basis, the Company measured the effectiveness of the derivative financial
instruments by comparing the present value of the cumulative change in the expected future interest to be paid or received on the
variable leg of the instruments against the expected future interest payments on the corresponding variable rate debt. In addition, the
Company compared the critical terms, including notional amounts, underlying indices and reset dates of the derivative financial
instruments with the respective variable rate debt to ensure all terms agreed. Any ineffectiveness was reclassified from ―Accumulated
other comprehensive loss‖ on the accompanying Consolidated Balance Sheets to ―Interest expense‖ on the accompanying
Consolidated Statements of Income. See Note 7 for further information concerning these derivative instruments accounted for as
hedges.
Share repurchases:
On January 11, 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company
may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer
at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market
conditions. All shares repurchased under the share repurchase program are retired and recorded under the par value method on the
accompanying Consolidated Balance Sheets. See Note 9 for further information concerning the Company’s share repurchase
program.
Revenue recognition:
Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional service
providers, also referred to as ―commercial sales,‖ are recorded upon same-day delivery of the merchandise to the customer, generally
at the customer’s place of business. Wholesale sales to other retailers, also referred to as ―jobber sales,‖ are recorded upon shipment
of the merchandise from a regional distribution center (―DC‖) with same-day delivery to the jobber customer's location. Internet retail
sales are recorded when the merchandise is shipped or when the merchandise is picked up in a store. All sales are recorded net of
estimated allowances, discounts and taxes.
Cost of goods sold and selling, general and administrative expenses:
The following table illustrates the primary costs classified in each major expense category:
Total cost of merchandise sold, including: Payroll and benefit costs for store and corporate Team Members
Freight expenses associated with acquiring
merchandise and with moving merchandise inventories
from the Company's distribution centers to the stores
Occupancy costs of store and corporate facilities
Defective merchandise and warranty costs Depreciation and amortization related to store and corporate assets
Vehicle expenses for store delivery services
Allowances that are not reimbursements for specific,
incremental and identifiable costs
Self-insurance costs
Cash discounts on payments to vendors Closed store expenses
Costs associated with the Company's supply chain, including: Other administrative costs, including:
Payroll and benefit costs Accounting, legal and other professional services
Warehouse occupancy costs Bad debt, banking and credit card fees
Transportation costs Supplies
Depreciation Travel
Inventory shrinkage Advertising costs
Cost of goods sold, including warehouse and
distribution expenses
Selling, general and administrative expenses
Vendor allowances and incentives, including:
Operating leases:
The Company recognizes rent expense on a straight-line basis over the lease terms of its stores and DCs. Generally, the lease term for
stores is the base lease term and the lease term for DCs includes the base lease term plus certain renewal option periods for which
renewal is reasonably assured and failure to exercise the renewal option would result in a significant economic penalty. The
Company’s policy is to amortize leasehold improvements associated with the Company’s operating leases over the lesser of the lease
term or the estimated economic life of those assets.
Advertising expenses:
Advertising expense consists primarily of expenses related to the Company’s integrated marketing program, which includes television,
radio, direct mail and newspaper distribution, in-store and online promotions, and sports and event sponsorships. The Company
expenses advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its
vendors. Advertising expense included as a component of ―Selling, general and administrative expenses‖ (―SG&A‖) on the
FORM 10-K