O'Reilly Auto Parts 2008 Annual Report Download - page 47

O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT PG.45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LITIGATION RESERVES
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. e Company records reserves for
litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate of the probable loss.
e Company reserves for an estimate of material legal costs to be incurred on pending litigation matters. Although we cannot ascertain the
amount of liability that we may incur from any of these matters, we do not currently believe that, in the aggregate, these matters will have a
material adverse eect on our consolidated nancial position, results or operations or cash ows. In addition, O’Reilly is involved in resolving
legacy governmental investigations that were being conducted against CSK prior to the acquisition. Further detail regarding such matters is
described in Note 14.
CLOSED STORE LIABILITIES
e Company maintains reserves for closed stores and other properties that are no longer being utilized in current operations and accounts for
these costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. e Company provides for these
liabilities using a credit-adjusted discount rate to calculate the present value of the remaining noncancelable lease payments, occupancy costs
and lease termination fees aer the close date, net of estimated sublease income. In conjunction with the acquisition of CSK, the Company’s
reserves include purchase accounting liabilities related to acquired properties that are no longer being utilized in the acquired business and the
Company’s planned exit activities. See Note 7 for further information concerning these liabilities.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average outstanding common shares. Diluted earnings per share is based on the weighted-
average outstanding shares adjusted for the eect of common stock equivalents. Common stock equivalents that could potentially dilute
basic earnings per share in the future that were not included in the fully diluted computation because they would have been antidilutive were
5,184,000, 1,613,000 and 448,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, accounts
receivable and notes receivable.
e Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Concentrations of credit
risk with respect to these receivables are limited because the Company’s customer base consists of a large number of smaller customers, thus
spreading the credit risk. e Company controls credit risk through credit approvals, credit limits and monitoring procedures. Generally, the
Company does not require security when credit is granted to customers. Credit losses are provided for in the Company’s consolidated nancial
statements and consistently have been within management’s expectations.
e Company has entered into various derivative nancial instruments to mitigate the risk of interest rate uctuations on its variable rate
long-term debt. If the market interest rate on the Company’s net derivative positions with counterparties exceeds a specied threshold, the
counterparty is required to transfer cash in excess of the threshold to the Company. Conversely, if the market value of the net derivative
positions falls below a specied threshold, the Company is required to transfer cash below the threshold to the counterparty. e Company
is exposed to credit loss in the event of nonperformance by counterparties on derivative contracts used in these hedging activities. e
counterparties to the Company’s derivative contracts are major nancial institutions and the Company has not experienced nonperformance by
any of its counterparties.
e carrying value of the Company’s non-derivative nancial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and long-term debt and excluding the 6¾% exchangeable notes, as reported in the accompanying consolidated balance
sheets, approximates fair value. e carrying value of the Company’s derivative nancial instruments have been adjusted to fair value in the
accompanying consolidated balance sheets.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157,
Fair Value Measurements (“SFAS No. 157”), which denes fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. e provisions of SFAS No. 157 for nancial assets and liabilities, as well as any other assets and liabilities that
are carried at fair value on a recurring basis in nancial statements, are eective for nancial statements issued for scal years beginning aer
November 15, 2007 (scal year 2008 for us). FASB Sta Position FAS 157-2, Eective Date of FASB Statement No. 157, delayed the eective date
of SFAS No. 157 for most nonnancial assets and nonnancial liabilities until scal years beginning aer November 15, 2008 (scal year 2009
for us). e implementation of SFAS No. 157 for nancial assets and nancial liabilities, eective January 1, 2008, did not have a material impact
on the Company’s consolidated nancial position, results of operations or cash ows. e Company does not anticipate the adoption of SFAS
No. 157 for nonnancial assets will have a material impact on its consolidated nancial position, results of operations or cash ows.