O'Reilly Auto Parts 2010 Annual Report Download - page 77

Download and view the complete annual report

Please find page 77 of the 2010 O'Reilly Auto Parts annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 107

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107

66
The tables below represent the effect the Company’s derivative financial instruments had on its condensed consolidated financial
statements as of December 31, 2010 and 2009 (in thousands):
Fair Value of Derivative,
Recorded as Payable
Fair Value of Derivative, Tax
Effect
Amount of Loss Recognized in
Accumulated Other
Comprehensive Loss on
Derivative, net of tax
Derivative Designated
as Hedging Instrument
December
31, 2010
December
31, 2009
December
31, 2010
December
31, 2009
December
31, 2010
December
31, 2009
Interest rate swap
contracts $ 4,845 $ 13,053 $ 1,875 $ 5,091 $ 2,970 $ 7,962
Location and Amount of Loss Recognized in Income on Derivative
(Ineffective Portion)
Derivative Designated as
Hedging Instrument
Year ended Year ended
December 31, 2010 December 31, 2009
Interest rate swap contracts Interest expense $ 65 Interest expense $ -
Location of and Amount Recorded as Payable to Counterparties
Derivative Designated
as Hedging Instrument December 31, 2010 December 31, 2009
Interest rate swap
contracts Other current liabilities $ 4,845 Other current liabilities $ 4,140
Interest rate swap
contracts Other liabilities - Other liabilities 8,913
All of the interest rate swap transactions that existed as of December 31, 2010, for a total notional amount of $250 million, were
terminated at the Company’s request on January 14, 2011, concurrent with the retirement of the Credit Facility and the issuance of its
2011 4.875% Senior Notes (see Note 4).
NOTE 9—FAIR VALUE MEASUREMENTS
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial
instruments. The 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). The Company uses the income and
market approaches to determine the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth
below:
• Level 1 – Observable inputs that reflect quoted prices in active markets.
• Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable.
• Level 3 – Unobservable inputs in which little or no market data exists, there requiring the Company to develop its own
assumptions.
6¾% Exchangeable Senior Notes:
As discussed in Note 4, the 6¾% Exchangeable Senior Notes were retired during 2010 and no amounts were outstanding at December
31, 2010. The carrying amount of the Company’s 6¾% Exchangeable Senior Notes at December 31, 2009, was included in “Current
portion of long-term debt” on the accompanying Consolidated Balance Sheets.
The estimated fair value at December 31, 2009, of the Company’s 6¾% Exchangeable Senior Notes, which was determined by
reference to quoted market prices (Level 1), is included in the table below (in thousands):
December 31, 2010 December 31, 2009
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated Fair
Value
Obligations under 6¾% senior exchangeable notes $ - $ - $ 100,718 $ 119,273
67
Interest rate swap contracts:
The fair values of the Company’s outstanding interest rate swap contracts (see Note 4) are included in “Other current liabilities” and
“Other liabilities” on the accompanying Consolidated Balance Sheets. The fair value of the interest rate swap contracts 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 ineffectiveness are recorded in current earnings.
The fair value of the Company’s interest rate contracts is included in the tables below (in thousands):
December 31, 2010
Quoted Prices in Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable Inputs
Total
(Level 1) (Level 2) (Level 3)
Derivative contracts $ - $ (4,845) $ - $(4,845)
December 31, 2009
Quoted Prices in Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable Inputs
Total
(Level 1) (Level 2) (Level 3)
Derivative contracts $ - $ (13,053) $ - $(13,053)
Asset-based revolving credit facility:
The Company has determined that the estimated fair value of its Credit Facility (see Note 4) approximates the carrying amount of
$356.0 million and $678.8 million at December 31, 2010, and December 31, 2009, respectively, which are included in “Long-term
debt, less current portion” on the accompanying Consolidated Balance Sheets. These valuations were determined by consulting
investment bankers, the Company’s observations of the value tendered by counterparties moving into and out of the facility and an
analysis of the changes in credit spreads for comparable companies in the industry (Level 2).
NOTE 10—ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized holding gains on available-for-sale securities, consisting of the Company’s investment in CSK common stock prior to the
Company’s completion of the acquisition of CSK (see Note 2), as well as unrealized losses from interest rate swaps that qualify as
cash flow hedges, are included in “Accumulated other comprehensive loss” on the accompanying Consolidated Balance Sheets. The
adjustment to “Accumulated other comprehensive loss” for the year ended December 31, 2010, totaled $8.2 million with a
corresponding tax liability of $3.2 million resulting in a net of tax effect of $5.0 million. The adjustment to “Accumulated other
comprehensive loss” for the year ended December 31, 2009, totaled $5.8 million with a corresponding tax liability of $2.3 million
resulting in a net of tax effect of $3.6 million. During the year ended December 31, 2010, $0.1 million was reclassified from
“Accumulated other comprehensive loss” into earnings due to the ineffectiveness of an interest rate swap contract which was
terminated on September 16, 2010 (see Note 8). Changes in “Accumulated other comprehensive loss”, net of tax, for the years ended
December 31, 2010, 2009 and 2008, consisted of the following (in thousands):
Unrealized
Gains (Losses)
on Securities
Unrealized
Losses on Cash
Flow Hedges
Accumulated Other
Comprehensive Loss
Balance at December 31, 2007 $ (6,800) $ - $ (6,800)
Period change 6,800 (11,513) (4,713)
Balance at December 31, 2008 - (11,513) (11,513)
Period change - 3,551 3,551
Balance at December 31, 2009 - (7,962) (7,962)
Period change - 4,992 4,992
Balance at December 31, 2010 $ - $ (2,970) $ (2,970)
Comprehensive income for the years ended December 31, 2010, 2009 and 2008, was $424.4 million, $311.0 million and $181.5
million, respectively.
NOTE 11—SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS
The Company recognizes share-based compensation expense based on the fair value of the grants, awards or shares at the time of the
grant, award or issuance. Share-based payments include stock option awards issued under the Company’s employee stock option plan
FORM 10-K