O'Reilly Auto Parts 2008 Annual Report Download - page 31

O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT PG.29
MAN AGEMENT ’S DISCUS SION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OF F BAL ANCE SHEE T A R R ANGEME N T S
We have utilized various nancial instruments from time to time as sources of cash when such instruments provided a cost eective alternative
to our existing sources of cash. We do not believe, however, that we are dependent on the availability of these instruments to fund our working
capital requirements or our growth plans.
On December 29, 2000, we entered into a sale-leaseback transaction with an unrelated party. Under the terms of the transaction, we sold 90
properties, including land, buildings and improvements, which generated $52.3 million of cash. e lease, which is being accounted for as an
operating lease, provides for an initial lease term of 21 years and may be extended for one initial ten-year period and two additional successive
periods of ve years each. e resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent
expense during the initial term will be approximately $5.5 million annually.
In August 2001, we entered into a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain aliates of the Company). e
transaction involved the sale and leaseback of nine O’Reilly Auto Parts stores and generated approximately $5.6 million of cash. e transaction
did not result in a material gain or loss. e lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with
three ve-year renewal options.
On September 28, 2007, we completed a second amended and restated master agreement to our $49 million Synthetic Operating Lease
Facility with a group of nancial institutions. e terms of such lease facility provided for an initial lease period of seven years, a residual value
guarantee of approximately $39.7 million at December 31, 2007 and purchase options on the properties. On July 11, 2008, we, in connection
with the acquisition of CSK, purchased all the properties included in our Synthetic Operating Lease Facility for $49.3 million, thus terminating
the facility. e purchase was funded through borrowings under the ABL Credit Facility.
We issue stand-by letters of credit provided by a $200 million sub limit under the ABL Credit Facility that reduce our available borrowings.
ese letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies.
Substantially all of the outstanding letters of credit have a one-year term from the date of issuance. Letters of credit totaling $55.6 million and
$28.6 million were outstanding at December 31, 2008 and 2007, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
e preparation of our nancial statements in accordance with accounting policies generally accepted in the United States (“GAAP”) requires
the application of certain estimates and judgments by management. Management bases its assumptions, estimates, and adjustments on
historical experience, current trends and other factors believed to be relevant at the time the consolidated nancial statements are prepared.
Management believes that the following policies are critical due to the inherent uncertainty of these matters and the complex and subjective
judgments required to establish these estimates. Management continues to review these critical accounting policies and estimates to ensure that
the consolidated nancial statements are presented fairly in accordance with GAAP. However, actual results could dier from our assumptions
and estimates and such dierences could be material.
VENDOR CONCESSIONS – We receive concessions from our vendors through a variety of programs and arrangements, including co-operative
advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising allowances that are
incremental to our advertising program, specic to a product or event and identiable for accounting purposes, are reported as a reduction
of advertising expense in the period in which the advertising occurred. All other material vendor concessions are recognized as a reduction
to the cost of inventory. Amounts receivable from vendors also include amounts due to us relating to vendor purchases and product returns.
Management regularly reviews amounts receivable from vendors and assesses the need for a reserve for uncollectible amounts based on our
evaluation of our vendors’ nancial position and corresponding ability to meet their nancial obligations. Based on our historical results and
current assessment, we have not recorded a reserve for uncollectible amounts in our consolidated nancial statements, and we do not believe
there is a reasonable likelihood that our ability to collect these amounts will dier from our expectations. e eventual ability of our vendors to
pay us the obliged amounts could dier from our assumptions and estimates, and we may be exposed to losses or gains that could be material.