O'Reilly Auto Parts 2008 Annual Report Download - page 56

PG.54 O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition of CSK, the Company recorded $4.1 million of exit costs associated with the planned closure of 33 CSK
stores and assumed CSK’s existing closed stores liabilities of $3.0 million related to 127 locations that were closed prior to the Company’s
acquisition of CSK. e estimates of exit costs associated with planned closures of CSK stores are preliminary and subject to adjustment.
Following is a summary of store closure reserves at December 31, 2008, and 2007:
(In thousands) December 31, 2008 December 31, 2007
Balance at January 1: $ 1,841 $ 2,264
CSK liabilities assumed, as of July 11, 2008 2,984 --
Planned CSK closures 4,141 --
Additions and accretion 764 380
Payments (2,591) (776)
Revisions to estimates 235 (27)
Balance at December 31: $ 7,374 $ 1,841
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On July 24, 2008, October 14, 2008, and November 24, 2008, the Company entered into interest rate swap transactions with BBT, BA and
SunTrust to mitigate cash ow risk associated with the oating interest rate based on the one month LIBOR rate on an aggregate of $450 million
of the debt outstanding under the ABL Credit Agreement, dated as of July 11, 2008. e swap transactions have been designated as cash ow
hedges with interest payments designed to oset the interest payments for borrowings under the ABL Credit Agreement that correspond
to notional amounts of the swaps. In accordance with FASB No. 133, Accounting for Derivative Instruments and Hedging Activities, the
fair value of the Company’s outstanding hedges are recorded as a liability in the accompanying consolidated balance sheets at December 31,
2008. Changes in fair market value are recorded in other comprehensive income (loss), and any changes resulting from ineectiveness of the
hedge transactions would be recorded in current earnings. e Company’s hedging instruments have been deemed to be highly eective as of
December 31, 2008. e fair value of the swap transactions at December 31, 2008, was a payable of $18.8 million ($11.5 million net of tax). e
net amount is included as a component of other comprehensive loss.
NOTE 9 – FAIR VALUE MEASUREMENTS
e Company adopted SFAS No. 157 at the beginning of its 2008 scal year. SFAS No. 157 claries the denition of fair value, describes the
method used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure
requirements. is statement applies whenever other accounting pronouncements require or permit fair value measurements.
e fair value hierarchy established under SFAS No. 157 prioritizes the inputs used to measure fair value. e hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to
unobservable inputs (level 3 measurement). e three levels of the fair value hierarchy dened by SFAS No. 157 are as follows:
LEVEL 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in
which transactions for the asset or liability occur in sucient frequency and volume to provide pricing information on an ongoing basis.
LEVEL 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable
as of the reporting date. Level 2 includes those nancial instruments that are valued using models or other valuation methodologies. ese
models are primarily industry-standard models that consider various assumptions, including time value, volatility factors, and current market
and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable
levels at which transactions are executed in the marketplace.
LEVEL 3 – Pricing inputs include signicant inputs that are generally less observable from objective sources. ese inputs may be used with
internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
e fair value of the interest rate swap transactions are based on the discounted net present value of the swap using third party quotes (level 2).
Changes in fair market value are recorded in other comprehensive income (loss), and changes resulting from ineectiveness are recorded in
current earnings.