O'Reilly Auto Parts 2011 Annual Report Download - page 73

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63
NOTE 7—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Historically, the Company entered into interest rate swap contracts with various counterparties to mitigate cash flow risk associated
with floating interest rates on outstanding borrowings under its ABL Credit Facility. The fair values of the Company’s outstanding
hedges were recorded as liabilities in the accompanying Consolidated Balance Sheets at December 31, 2010. The effective portion of
the change in fair values of the Company’s cash flow hedges was recorded as a component of ―Accumulated other comprehensive
loss‖ in the accompanying Consolidated Balance Sheets at December 31, 2010; any ineffectiveness was recognized in ―Other income
(expense)‖ in the accompanying Consolidated Statements of Income in the period of ineffectiveness. The interest rate swap contracts
were designated as cash flow hedges with interest payments designed to offset the interest payments for borrowings under the ABL
Credit Facility that corresponded with the notional amounts of the swaps. On January 14, 2011, the ABL Credit Facility was retired
concurrent with the issuance of the Company’s 4.875% Senior Notes due 2021 and all interest rate swap contracts were terminated at
the Company’s request. The Company recognized a charge of $4.2 million related to the termination of the interest rate swap
contracts, which was included as a component of ―Other income (expense)‖ in the accompanying Consolidated Statements of Income
for the year ended December 31, 2011. As of December 31, 2011, the Company did not hold any instruments that qualified as cash
flow hedge derivatives. During 2010, one interest rate swap contract was terminated at the Company’s request and was deemed to be
ineffective as of the termination date. The Company recognized $0.1 million in ―Other income (expense)‖ on the accompanying
Consolidated Statements of Income for the year ended December 31, 2010, as a result of this hedge ineffectiveness.
The table below outlines the effects the Company’s derivative financial instruments had on its Consolidated Balance Sheets as of
December 31, 2011 and 2010 (in thousands):
Derivatives Designated as
Hedging Instruments
December 31,
2011
December 31,
2010
December 31,
2011
December 31,
2010
December 31,
2011
December 31,
2010
Interest rate swap
contracts
$ - $4,845 $ - $1,875 $ - $2,970
Fair Value of Derivative, Recorded
as Payable to Counterparties in
"Other current liabilities"
Fair Value of Derivative, Tax
Effect
Amount of Loss Recognized in
Accumulated Other
Comprehensive Loss on
Derivative, net of tax
The table below outlines the effects the Company’s derivative financial instruments had on its Consolidated Statements of Income for
the years ended December 31, 2011, 2010 and 2009 (in thousands):
NOTE 8—WARRANTIES
The Company provides warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime
warranties. Estimated warranty costs are based on the historical failure rate of each individual product line and are recorded as
obligations. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate
cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the
variation of the cost of individual claims. The Company’s product warranty liabilities are included in ―Other liabilities‖ on the
accompanying Consolidated Balance Sheets as of December 31, 2011 and 2010.
The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31,
2011 and 2010 (in thousands):
2011 2010
Balance at January 1, $ 22,429 $ 19,637
Warranty claims (46,779) (44,791)
Warranty accruals 45,992 47,583
Balance December 31, $ 21,642 $ 22,429
Classification
Interest rate swap contracts Other income (expense) $(4,237) $(65) $ --
2009
Year ended December 31,
Location and Amount of Loss Recognized in Income on Derivatives
Derivatives Designated as
Hedging Instruments
2011
2010
FORM 10-K