O'Reilly Auto Parts 2008 Annual Report Download - page 32

PG.30 O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT
MAN AGEMENT ’S DISCUS SION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 employee health care benets. With the exception of employee
health care benet liabilities, which are limited by the design of these plans, 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 ination, and growth patterns
and exposure forecasts. e 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 dierent 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 aects the assumptions
and estimates we used to recognize liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reect
the revised estimates based on this additional information. e long-term portions of these liabilities are recorded at our estimate of their
net present value. ese 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
dierent estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves
at December 31, 2008, the nancial impact would have been approximately $8.6 million or 2.8% of pretax income for the year ended
December 31, 2008.
ACCOUNTS RECEIVABLE – Management estimates the allowance for doubtful accounts based on historical loss ratios and other relevant factors.
Actual results have consistently been within management’s expectations, and we do not believe there is a reasonable likelihood that there will
be a material change in the future that will require a signicant change in the assumptions or estimates we use to calculate our allowance for
doubtful accounts. However, if actual results dier from our estimates, we may be exposed to losses or gains. If the allowance for doubtful
accounts were changed 30% from our estimated allowance at December 31, 2008, the nancial impact would have been approximately $1.4
million or 0.4% of pretax income for the year ended December 31, 2008.
TAXES – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. ese 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.
e amount of such liabilities is based on various factors, such as diering 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. e 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 dier from our
estimates. Alternatively, we could have applied assumptions regarding the eventual outcome of the resolution of open tax positions that could
dier from our current estimates but that would still be reasonable given the nature of a particular position. Our judgment regarding the most
likely outcome of uncertain tax positions has historically resulted in an estimate of our tax liability that is greater than actual results. 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 dierent 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. e accounting for our tax reserves changed with the adoption of Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109” (“FIN 48”) on January 1, 2007.
INVENTORY OBSOLESCENCE AND SHRINK – Inventory, which consists of automotive hard parts, maintenance items, accessories and tools is
stated at the lower of cost or market. e extended nature of the life cycle of our products is such that the risk of obsolescence of our inventory
is minimal. e products that we sell generally have applications in our markets for a relatively long period of time in conjunction with the
corresponding vehicle population. We have developed sophisticated systems for monitoring the life cycle of a given product and, accordingly,
have historically been very successful in adjusting the volume of our inventory in conjunction with a decrease in demand. We do record
a reserve to reduce the carrying value of our inventory through a charge to cost of sales in the isolated instances where we believe that the
market value of a product line is lower than our recorded cost. is reserve is based on our assumptions about the marketability of our existing
inventory and is subject to uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be
sold in future periods. Ultimately, our projections could dier from actual results and could result in a material impact to our stated inventory
balances. We have historically not had to materially adjust our obsolescence reserves due to the factors discussed above and do not anticipate
that we will experience material changes in our estimates in the future.