O'Reilly Auto Parts 2010 Annual Report Download - page 75

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based upon the ratings assigned to the Company’s debt by Moody’s and S&P. The Revolver replaced the previous $1.2 billion Credit
Facility entered into on July 11, 2008. At the time of closing, the Company did not have any borrowings outstanding under the
Revolver.
The Revolver contains certain debt covenants, which include limitations on total outstanding borrowings, a minimum fixed charge
coverage ratio of 2.0 times from the closing through December 31, 2012, 2.25 times through December 31, 2014 and 2.5 times
through maturity and a maximum adjusted consolidated leverage ratio of 3.0 times through maturity. The consolidated leverage ratio
includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and stock option compensation expense to
adjusted debt. Adjusted debt includes outstanding debt, outstanding standby letters of credit, six times rent expense and excludes any
premium or discount recorded in conjunction with the issuance of long-term debt. As of January 14, 2011, the Company complied
with all covenants related to the borrowing arrangements.
NOTE 5—RELATED PARTIES
The Company leases certain land and buildings related to 48 of its O'Reilly Auto Parts stores under fifteen-year operating lease
agreements with New O'Reilly Investment Company LP and New O'Reilly Real Estate Company LP, entities in which certain
shareholders and directors of the Company are partners. Generally, these lease agreements provide for renewal options for an
additional five years at the option of the Company and the lease agreements are periodically modified to further extend the lease term
for specific stores under the agreement. Additionally, the Company leases certain land and buildings related to 21 of its O’Reilly Auto
Parts stores under fifteen-year operating lease agreements with O’Reilly-Wooten, 2001 LLP, an entity in which certain shareholders
and directors of the Company are partners. Generally, these lease agreements provide for renewal options for two additional five-year
terms at the option of the Company (see Note 6). Lease payments under these operating leases totaled $4.0 million, $3.7 million and
$3.5 million in 2010, 2009 and 2008, respectively.
NOTE 6—COMMITMENTS
Lease commitments:
The Company leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases.
Most of these leases include renewal options and some include options to purchase and/or provisions for percentage rent based on
sales or incremental step increase provisions. At December 31, 2010, future minimum lease payments under all of the Company’s
operating leases for each of the next five years and in the aggregate are as follows (in thousands):
Related Non-related
Total Parties Parties
2011 $ 3,873 $ 216,068 $ 219,941
2012 3,858 199,723 203,581
2013 3,785 173,740 177,525
2014 2,444 150,016 152,460
2015 1,716 121,932 123,648
Thereafter 7,129 623,273 630,402
Total $ 22,805 $ 1,484,752 $ 1,507,557
Rental expense incurred for all non-cancellable operating leases totaled $226.9 million, $229.1 million and $132.3 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
Other commitments:
The Company had construction commitments, which totaled approximately $64.8 million, at December 31, 2010.
NOTE 7—EXIT ACTIVITIES
The Company maintains reserves for closed stores and other properties that are no longer utilized in current operations, as well as
reserves for employee separation liabilities. Reserves for closed stores and other properties include stores and other properties
acquired in the CSK acquisition (see Note 2). Employee separation liabilities represent costs for anticipated payments, including
payments required under various pre-existing employment arrangements with acquired CSK employees, which existed at the time of
the acquisition, relating to the planned involuntary termination of employees performing overlapping or duplicative functions.
The Company accrues for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present value
of the remaining non-cancelable 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, which
currently extend through April of 2023. The Company estimates sublease income and future cash flows based on the Company’s
experience and knowledge of the market in which the closed property is located, previous efforts to dispose of similar assets and
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existing economic conditions. Adjustments to closed property reserves are made to reflect changes in estimated sublease income or
actual contracted exit costs, which vary from original estimates. Adjustments are made for material changes in estimates in the period
in which the changes become known.
The following is a summary of closure reserves for stores, administrative office and distribution facilities and reserves for employee
separation costs at December 31, 2010 and 2009 (in thousands):
Store Closure
Liabilities
Administrative Office
and Distribution
Facilities Closure
Liabilities
Employee
Separation
Liabilities
Balance at January 1, 2009: $ 7,374 $ 4,127 $ 25,079
Planned CSK exit activities 10,646 4,739 (996)
Additions and accretion 995 291 -
Payments (3,759) (1,375) (22,003)
Revisions to estimates 521 (129) -
Balance at December 31, 2009: 15,777 7,653 2,080
Additions and accretion 902 446 -
Payments (3,121) (2,330) (1,519)
Revisions to estimates 413 (161) 595
Balance at December 31, 2010: $ 13,971 $ 5,608 $ 1,156
The revisions to estimates in closure reserves for stores and administrative office and distribution facilities included changes in the
estimates of sublease agreements, changes in assumptions of various store and office closure activities, and changes in assumed
leasing arrangements since the acquisition of CSK. The cumulative amount incurred in closure reserves for stores from the inception
of the exit activity through December 31, 2010, was $23.4 million. The cumulative amount incurred in administrative office and
distribution facilities from the inception of the exit activity through December 31, 2010, was $9.3 million. The balance of both these
reserves is included in “Other current liabilities” and “Other liabilities” on the accompanying Consolidated Balance Sheets based upon
the dates when the reserves are expected to be settled. The revisions to estimates in the reserves for employee separation liabilities
include additional severance and incentive compensation accrued for employees of CSK. The cumulative amount incurred in
employee separation liabilities from the inception of the exit activity through December 31, 2010, was $29.4 million, the balance of
which is included in “Accrued payroll” on the accompanying Consolidated Balance Sheets.
NOTE 8—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Interest rate risk management:
As discussed in Note 4, on each of July 24, 2008, October 14, 2008, and January 21, 2010, the Company entered into interest rate
swap transactions with BBT, BA, SunTrust and/or Barclays to mitigate cash flow risk associated with the floating interest rate based
on the one month LIBOR rate on an aggregate of $450 million of the debt outstanding under the Credit Facility, dated as of July 11,
2008. The interest rate swap transaction the Company entered into with BBT on July 24, 2008, for $100 million, matured on August
1, 2010, bringing the total notional amount of swapped debt to $350 million as of that date. The interest rate swap transaction that the
Company entered into with BBT on October 14, 2008, for $25 million and was scheduled to mature on October 17, 2010, was
terminated at the Company’s request on September 16, 2010, reducing the total notional amount of swapped debt to $325 million as of
that date.
The interest rate swap transactions the Company entered into with BBT, BA and/or SunTrust on October 14, 2008, totaling
$75 million, matured on October 17, 2010, bringing the total notional amount of swapped debt to $250 million as of December 31,
2010. The swap transactions have been designated as cash flow hedges with interest payments designed to offset the interest
payments for borrowings under the Credit Facility that correspond to the notional amounts of the swaps. The fair values of the
Company’s outstanding hedges are recorded as a liability in the accompanying Consolidated Balance Sheets at December 31, 2010
and 2009. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative instrument is
recorded as a component of “Accumulated other comprehensive loss” and any ineffectiveness is recognized in earnings in the period
of ineffectiveness. The change in the fair value of the $25 million interest rate swap contract, which was terminated by the Company
on September 16, 2010, was deemed to be ineffective as of the termination date. The Company recognized $0.1 million in “Interest
expense” for the year ended December 31, 2010, as a result of the hedge ineffectiveness. As of December 31, 2010, the Company’s
remaining hedging instruments have been deemed to be highly effective.
FORM 10-K