O'Reilly Auto Parts 2009 Annual Report Download - page 51

37
the extent that our estimates do not accurately reflect the actual unrecorded inventory shrinkage, we could potentially experience a
material impact to our inventory balances. We have historically been able to provide a timely and accurate measurement of shrink
and have not experienced material adjustments to our estimates. If unrecorded shrink were changed 10% from the estimate that
we recorded based on our historical experience at December 31, 2009, the financial impact would have been approximately $1.2
million or 0.3% of pretax income for the year ended December 31, 2009.
• Valuation of Long-Lived Assets and Goodwill - We evaluate the carrying value of long-lived assets whenever events or changes
in circumstances indicate that a potential impairment has occurred. As part of the evaluation, we review performance at the store
level to identify any stores with current period operating losses that should be considered for impairment. A potential impairment
has occurred if the projected future undiscounted cash flows realized from the best possible use of the asset are less than the
carrying value of the asset. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly
resulting from the use of that asset in operations. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets.
Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows
and determining the ultimate useful lives and fair values of the assets. Actual results could differ from these estimates, which could
materially impact our impairment assessment.
We review goodwill and other intangible assets for impairment annually on December 31, or when events or changes in
circumstances indicate the carrying value of these assets might exceed their current fair values. We have not historically recorded
an impairment to our goodwill or intangible assets. The process of evaluating goodwill for impairment involves the determination
of the fair value of our Company using the market approach. Inherent in such fair value determinations are certain judgments and
estimates, including estimates which incorporate assumptions marketplace participants would use in making their estimates of fair
value. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, we will
adjust the carrying value of these assets in the period in which the impairment occurs, however, we do not believe there has been
any change of events or circumstances that would indicate that a reevaluation of goodwill or other intangible assets is required as
of December 31, 2009, nor do we believe goodwill or any other intangible assets are at risk of failing impairment testing. If the
price of O’Reilly stock, which was a primary input used to determine the Company’s market capitalization during step one of
goodwill impairment testing, changed by 10% from the value used during testing, the results and our conclusions would not have
changed and no further steps would have been required.
• Closed Property Reserves – We maintain reserves for closed stores and other properties that are no longer utilized in current
operations. We accrue for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present
value of the remaining noncancelable lease payments, contractual occupancy costs and lease termination fees after the closing
date, net of estimated sublease income. The closed property lease liabilities are expected to be paid over the remaining lease
terms. We estimate sublease income and future cash flows based on our experience and knowledge of the market in which the
closed property is located, our previous efforts to dispose of similar assets and existing economic conditions. Adjustments to
closed property reserves are made to reflect changes in estimated sublease income or actual exit costs from original estimates.
Adjustments are made for changes in estimates in the period in which the changes become known. If closed property reserves
were changed 10% from our estimated reserves at December 31, 2009, the financial impact would have been approximately $2.3
million or 0.5% of pretax income for the year ended December 31, 2009.
• Legal Reserves – We maintain reserves for expenses associated with litigation for which O’Reilly is currently involved. We are
currently involved in litigation incidental to the ordinary conduct of our business as well as resolving the governmental
investigations that are being conducted against CSK and litigation commenced against its former employees for alleged conduct
relating to periods prior to the acquisition date. As a result of the acquisition, we expect to continue to incur ongoing legal fees
related to such investigations, litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed
liability in our allocation of the purchase price of CSK, which was finalized on June 30, 2009. Management, with the assistance of
outside legal counsel, must make estimates of potential legal obligations and possible liabilities arising from such litigation and
records reserves for these expenditures. If legal reserves were changed 10% from our estimated reserves at December 31, 2009,
the financial impact would have been approximately $2.4 million or 0.5% of pretax income for the year ended December 31,
2009.
INFLATION AND SEASONALITY
For the last three fiscal years, we have been successful, in many cases, in reducing the effects of merchandise cost increases principally
by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective
forward buying. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have typically
been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe our
operations have been materially, adversely affected by inflation.