O'Reilly Auto Parts 2012 Annual Report Download - page 50

FORM 10-k
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the asset exceeds the fair value of the assets. Our impairment analyses contain estimates due to the inherently judgmental nature
of forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual
results could differ from these estimates, which could materially impact our impairment assessment.
We review goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the
carrying value of these assets might exceed their current fair values. We have not historically recorded an impairment to
goodwill. The process of evaluating goodwill for impairment involves the determination of the fair value of our Company using
the market approach. Inherent in such fair value determinations are certain judgments and estimates, including estimates which
incorporate assumptions marketplace participants would use in making their estimates of fair value. In the future, if events or
market conditions affect the estimated fair value to the extent that an asset is impaired, we will adjust the carrying value of these
assets in the period in which the impairment occurs, however, we do not believe there has been any change of events or
circumstances that would indicate that a reevaluation of goodwill is required as of December 31, 2012, nor do we believe
goodwill is at risk of failing impairment testing. If the price of O’Reilly stock, which was a primary input used to determine our
market capitalization during step one of goodwill impairment testing, changed by 10% from the value used during testing, the
results and our conclusions would not have changed and no further steps would have been required.
• Vendor Concessions – We receive concessions from our vendors through a variety of programs and arrangements, including co-
operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising
allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting
purposes, are reported as a reduction of advertising expense in the period in which the advertising occurred. All other material
vendor concessions are recognized as a reduction to the cost of inventory. Amounts receivable from vendors also include
amounts due to us relating to vendor purchases and product returns. Management regularly reviews amounts receivable from
vendors and assesses the need for a reserve for uncollectible amounts based on our evaluation of our vendors’ financial position
and corresponding ability to meet their financial obligations. Based on our historical results and current assessment, we have not
recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not believe there is a reasonable
likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability of our vendors to pay us
the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or gains that could be
material.
• Warranty Reserves – We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited
lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of our vendors. Certain vendors
provide upfront allowances to us in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we
bear the risk of loss associated with the cost of warranty claims. Differences between vendor allowances received in lieu of
warranty obligations and estimated warranty expense are recorded as an adjustment to cost of sales. Estimated warranty costs,
which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. Our
historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims
has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims.
If warranty reserves were changed 10% from our estimated reserves at December 31, 2012, the financial impact would have been
approximately $3 million or 0.3% of pretax income for the year ended December 31, 2012.
• Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities
from workers’ compensation, general liability, vehicle liability, property loss, and Team Member health care benefits. With the
exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial
litigation and certain regulatory matters, we obtain third-party insurance coverage to limit our exposure for any individual
workers’ compensation, general liability, vehicle liability or property loss claim. When estimating our self-insurance liabilities,
we consider a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, and
growth patterns and exposure forecasts. The assumptions made by management as they relate to each of these factors represent
our judgment as to the most probable cumulative impact of each factor to our future obligations. Our calculation of self-insurance
liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but
not yet reported as of the balance sheet date and the application of alternative assumptions could result in a different estimate of
these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may result in
material losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize
liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates
based on this additional information. These liabilities are recorded at our estimate of their net present value, using a credit-
adjusted discount rate. These liabilities do not have scheduled maturities, but we can estimate the timing of future payments
based upon historical patterns. We could apply alternative assumptions regarding the timing of payments or the applicable
discount rate that could result in materially different estimates of the net present value of the liabilities. If self-insurance reserves
were changed 10% from our estimated reserves at December 31, 2012, the financial impact would have been approximately $11
million or 1.2% of pretax income for the year ended December 31, 2012.
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