O'Reilly Auto Parts 2012 Annual Report Download - page 30

FORM 10-k
20
Of the 24 DCs that we operated at December 31, 2012, 15 were owned and nine were leased. The leased facilities typically require a
fixed base rent, payment of certain tax, insurance and maintenance expense and have an original term of, at a minimum, 20 years,
subject to one five-year renewal at our option. One of our bulk facilities is leased from an entity owned by an affiliated director’s
immediate family. This lease requires payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses and
an original term of 15 years, subject to three five-year renewals at our option. We believe that this lease agreement with the affiliated
entity is on terms comparable to those obtainable from third parties.
Of the 3,976 stores that we operated at December 31, 2012, 1,359 stores were owned, 2,540 stores were leased from unaffiliated
parties and 77 stores were leased from entities in which certain of our affiliated directors, members of our affiliated director’s
immediate family, or our executive officers, are affiliated. Leases with unaffiliated parties generally provide for payment of a fixed
base rent, payment of certain tax, insurance and maintenance expenses and an original term of, at a minimum, 10 years, subject to one
or more renewals at our option. We have entered into separate master lease agreements with each of the affiliated entities for the
occupancy of the stores covered thereby. Such master lease agreements with two of the eight affiliated entities have been modified to
extend the term of the lease agreement for specific stores. The master lease agreements or modifications thereto expire on dates
ranging from March 31, 2013, to September 30, 2031. We believe that the lease agreements with the affiliated entities are on terms
comparable to those obtainable from third parties.
We believe that our present facilities are in good condition, are adequately insured and are adequate for the conduct of our current
operations. The store servicing capability of our 24 existing DCs is approximately 4,425 stores, providing a growth capacity of more
than 400 stores, which will increase by 300 stores with the completion of our Lakeland, Florida, DC, which is scheduled to open in the
first quarter of 2014 and provide distribution system support for store growth into southern Florida. We believe the growth capacity in
our 24 existing DCs, along with the additional capacity of our new Lakeland, Florida, DC will provide us with the DC infrastructure
needed for near-term expansion. However, as we expand our geographic footprint, we will continue to evaluate our existing
distribution system infrastructure and will adjust our distribution system capacity as needed to support our future growth.
Item 3. Legal Proceedings
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company records
reserves for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably
estimate the probable loss. The Company reserves for an estimate of material legal costs to be incurred in pending litigation matters.
Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently
believe that, in the aggregate, these matters, taking into account applicable insurance and reserves, will have a material adverse effect
on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.
In addition, O’Reilly was involved in resolving governmental investigations that were being conducted against CSK and CSK’s
former officers and other litigation, prior to its acquisition by O’Reilly, as described below.
As previously reported, the governmental investigations of CSK regarding its legacy pre-acquisition accounting practices have
concluded. All criminal charges against former employees of CSK related to its legacy pre-acquisition accounting practices, as well
as the civil litigation filed against CSK’s former Chief Executive Officer by the Securities and Exchange Commission (the “SEC”),
have concluded.
Under Delaware law, the charter documents of the CSK entities and certain indemnification agreements, CSK may have certain
indemnification obligations. As a result of the CSK acquisition, O’Reilly has incurred legal fees and costs related to these potential
indemnification obligations arising from the litigation commenced by the Department of Justice and SEC against CSK’s former
employees. Whether those legal fees and costs are covered by CSK’s insurance is subject to uncertainty, and, given its complexity
and scope, the final outcome cannot be predicted at this time. O’Reilly has a remaining reserve, with respect to the indemnification
obligations of $13.7 million at December 31, 2012, which relates to the payment of those legal fees and costs already incurred. It is
possible that in a particular quarter or annual period the Company’s results of operations and cash flows could be materially affected
by resolution of such matter, depending, in part, upon the results of operations or cash flows for such period. However, at this time,
management believes that the ultimate outcome of this matter, after consideration of applicable reserves, should not have a material
adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.