O'Reilly Auto Parts 2010 Annual Report Download - page 70

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4.875% Senior Notes issuance were used to repay all of the Company’s outstanding borrowings under its existing secured credit
facility, pay fees associated with the issuance and for general corporate purposes. Concurrent with the issuance of the 2011 4.875%
Senior Notes, the Company entered into a credit agreement for a $750 million unsecured revolving credit facility (“Revolver”)
arranged by Bank of America, N.A. (“BA”) and Barclays Capital (“Barclays”), which replaced the previous secured credit facility
entered into on July 11, 2008, and matures in January of 2016. Concurrent with the retirement of the Company’s previous secured
credit facility on January 14, 2011, all remaining debt issuance costs related to the previous secured credit facility were expensed. See
Note 4 for further information concerning the 2011 4.875% Senior Notes and Revolver.
NOTE 2— BUSINESS COMBINATION
On July 11, 2008, the Company completed the acquisition of CSK, one of the largest specialty retailers of auto parts and accessories in
the Western United States and one of the largest such retailers in the United States, based on store count at the date of acquisition.
The results of CSK’s operations have been included in the Company’s consolidated financial statements since the acquisition date.
At the date of the acquisition, CSK had 1,342 stores in 22 states, operating under four brand names: Checker Auto Parts, Schuck’s
Auto Supply, Kragen Auto Parts and Murray’s Discount Auto Parts. As of December 31, 2010, we have converted all CSK stores to
O’Reilly systems, merged 41 CSK stores with existing O’Reilly locations, closed 17 CSK stores and opened five new stores in CSK
historical markets.
Purchase price allocation:
The final purchase price for CSK was comprised of the following amounts (in thousands):
O’Reilly stock exchanged for CSK shares $ 459,308
Cash payment to CSK shareholders 42,253
CSK shares purchased by O’Reilly prior to merger 21,724
Fair value of options and unvested restricted stock exchanged 7,736
Direct costs of the acquisition 11,227
Total purchase price $ 542,248
The acquisition was accounted for under the purchase method of accounting with O’Reilly Automotive, Inc. as the acquiring entity in
accordance with the Statement of Financial Accounting Standard No. 141, Business Combinations. Accordingly, the consideration
paid by the Company to complete the acquisition was allocated to the assets acquired and liabilities assumed based upon their
estimated fair values as of the date of the acquisition. The allocation of purchase price was based upon certain external valuations and
other analyses, including the review of legal reserves (see Note 14).
The final purchase price allocation was as follows (in thousands):
Final Purchase
Price Allocation as
of June 30, 2009
Inventory $ 539,827
Other current assets 84,959
Property and equipment 124,208
Goodwill 694,987
Deferred income taxes 160,943
Other intangible assets 65,270
Other assets 6,270
Total assets acquired $ 1,676,464
Senior credit facility $ 343,921
Term loan facility 86,700
Capital lease obligations 16,486
Other current liabilities 501,470
6 ¾% senior exchangeable notes 103,920
Other liabilities 81,719
Total liabilities assumed $ 1,134,216
Net assets acquired $ 542,248
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Estimated fair values of intangible assets acquired as of the date of acquisition were as follows (in thousands):
Intangible assets
Weighted-Average
Useful Lives
(in years)
Trademarks and trade names $ 13,000 1.4
Favorable property leases 52,270 10.7
Total intangible assets $ 65,270
The estimated values of operating leases with unfavorable terms compared with current market conditions totaled approximately $49.7
million. These liabilities had an estimated weighted-average useful life of approximately 7.7 years and are included in “Other
liabilities”. Favorable and unfavorable lease assets and liabilities are being amortized to selling, general and administrative expense
over their expected lives, which approximates the period of time that the favorable or unfavorable lease terms will be in effect.
Trademarks and trade names have useful lives of one to three years and were amortized coinciding with the conversions of CSK store
brands to the O’Reilly branded locations.
The final allocation of the purchase price included $54 million of accrued liabilities for estimated costs to exit certain activities of
CSK, including $14.8 million of exit costs associated with the planned closure of 51 CSK stores, $3.7 million of assumed liabilities
related to CSK’s existing closed stores for 127 locations that were closed prior to the Company’s acquisition of CSK, $26.6 million of
employee separation costs, and $8.9 million of exit costs associated with the planned closure of other administrative offices and
certain distribution facilities.
The CSK senior credit facility and term loan facility required repayment upon merger or acquisition and the entire amounts
outstanding under both facilities were repaid by the Company on the July 11, 2008, acquisition date. The excess of the final purchase
price over the estimated fair values of tangible and identifiable intangible assets acquired and liabilities assumed was recorded as
goodwill. Goodwill in the amount of $695 million was recorded in the final purchase price allocations and is not amortizable for tax
purposes.
The premium that the Company paid in excess of fair value of the net assets acquired was based on the Company’s desire to rapidly
obtain scale in attractive west coast markets and to take advantage of opportunities to enhance operating results through increased
buying power for inventory, increased advertising optimization, reduced redundancy in administrative expenses, returns on
incremental capital investments, and improved overall operating effectiveness.
NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is reviewed annually on December 31 for impairment, or more frequently if events or changes in business conditions
indicate that impairment may exist. Goodwill is not amortizable for financial statement purposes. During the year ended December
31, 2010, the Company recorded a decrease in goodwill of approximately $0.3 million, due to adjustments to the purchase price
allocations related to small acquisitions and adjustments to the provision for income taxes relating to the exercise of stock options
acquired in the CSK acquisition (see Note 2). The Company did not record any goodwill impairment for the year ended December 31,
2010. For the years ended December 31, 2010, 2009 and 2008, the Company recorded amortization expense of $8.5 million, $14.1
million, and $9.2 million, respectively, related to amortizable intangible assets, which are included in “Other assets” on the
accompanying Consolidated Balance Sheets. The components of the Company’s amortizable and unamortizable intangible assets
were as follows as of December 31, 2010 and 2009 (in thousands):
Cost Accumulated Amortization
December 31,
2010
December 31,
2009
December 31,
2010
December 31,
2009
Amortizable intangible assets:
Favorable leases $ 52,010 $ 52,010 $ 18,329 $ 11,383
Trade names and trademarks 13,000 13,000 13,000 11,588
Other 579 481 309 201
Total amortizable intangible assets $ 65,589 $ 65,491 $ 31,638 $ 23,172
Unamortizable intangible assets:
Goodwill $ 743,975 $ 744,313
Total unamortizable intangible assets $ 743,975 $ 744,313
FORM 10-K