O'Reilly Auto Parts 2012 Annual Report Download - page 49

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any such transactions for over five years and do not plan to utilize off-balance sheet arrangements in the future to fund our working
capital requirements, operations or growth plans.
We issue stand-by letters of credit provided by a $200 million sub limit under the Revolving Credit Facility that reduce our available
borrowings under the Revolving Credit Facility. Those letters of credit are issued primarily to satisfy the requirements of workers
compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term
from the date of issuance. Letters of credit totaling $57 million and $60 million were outstanding at December 31, 2012 and 2011,
respectively.
Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably
likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital
expenditures or capital resources. See “Contractual Obligations” and Note 11 “Commitments” to the Consolidated Financial
Statements for information on our operating leases.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by
management. Management bases its assumptions, estimates, and adjustments on historical experience, current trends and other factors
believed to be relevant at the time the consolidated financial statements are prepared. Management believes that the following policies
are critical due to the inherent uncertainty of these matters and the complex and subjective judgments required to establish these
estimates. Management continues to review these critical accounting policies and estimates to ensure that the consolidated financial
statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates
and such differences could be material.
• Inventory Obsolescence and Shrink – Inventory, which consists of automotive hard parts, maintenance items, accessories and
tools, is stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of
obsolescence of our inventory is minimal. The products that we sell generally have applications in our markets for a relatively
long period of time in conjunction with the corresponding vehicle population. We have developed sophisticated systems for
monitoring the life cycle of a given product and, accordingly, have historically been very successful in adjusting the volume of
our inventory in conjunction with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory
through a charge to cost of sales in the isolated instances where we believe that the market value of a product line is lower than
our recorded cost. This reserve is based on our assumptions about the marketability of our existing inventory and is subject to
uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be sold in future
periods. Ultimately, our projections could differ from actual results and could result in a material impact to our stated inventory
balances. We have historically not had to materially adjust our obsolescence reserves due to the factors discussed above and do
not anticipate that we will experience material changes in our estimates in the future.
We also record a reserve to reduce the carrying value of our perpetual inventory to account for quantities in our perpetual records
above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our
extensive and frequent cycle counting programs and periodic, full physical inventories at our stores and DCs. To 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 changed 10% from the estimate that we
recorded based on our historical experience at December 31, 2012, the financial impact would have been approximately $1
million or 0.1% of pretax income for the year ended December 31, 2012.
• Accounts Receivable – We provide credit to our commercial customers in the ordinary course of business. We estimate the
allowance for doubtful accounts on these receivables based on historical loss ratios and other relevant factors. Actual results have
consistently been within management’s expectations, and we do not believe there is a reasonable likelihood that there will be a
material change in the future that will require a significant change in the assumptions or estimates we use to calculate our
allowance for doubtful accounts. However, if actual results differ from our estimates, we may be exposed to losses or gains. If
the allowance for doubtful accounts were changed 10% from our estimated allowance at December 31, 2012, the financial impact
would have been approximately $1 million or 0.1% of pretax income for the year ended December 31, 2012.
• Valuation of Long-Lived Assets and Goodwill - We evaluate the carrying value of long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. 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