O'Reilly Auto Parts 2012 Annual Report Download - page 51

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• Closed Property Reserves – We maintain reserves for closed stores and other properties that are no longer utilized in current
operations. We accrue 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. We estimate sublease income and future cash flows based on our experience and knowledge of the market in which the
closed property is located, our previous efforts to dispose of similar assets and existing economic conditions. Adjustments to
closed property reserves are made to reflect changes in estimated sublease income or actual exit costs from original estimates.
Adjustments are made for changes in estimates in the period in which the changes become known. If closed property reserves
were changed 10% from our estimated reserves 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.
• Legal Reserves – We maintain reserves for expenses associated with litigation for which O’Reilly is currently involved. We are
currently involved in litigation incidental to the ordinary conduct of our business. We resolved the governmental investigations
and litigation that were being conducted against CSK and certain of CSK’s former employees for alleged conduct relating to
periods prior to the acquisition date. As a result of the acquisition, we incurred legal fees and costs related to such investigations,
litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed liability in our allocation of the
purchase price of CSK. Management, with the assistance of outside legal counsel, must make estimates of potential legal
obligations and possible liabilities arising from such litigation and records reserves for these expenditures. If legal reserves were
changed 10% from our estimated reserves at December 31, 2012, the financial impact would have been approximately $2 million
or 0.2% of pretax income for the year ended December 31, 2012.
• Taxes – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax
years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax
regulations by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. Changes in our
tax liability may occur in the future as our assessments change based on the progress of tax examinations in various jurisdictions
and/or changes in tax regulations. In management’s opinion, adequate provisions for income taxes have been made for all years
presented. The estimates of our potential tax liabilities contain uncertainties because management must use judgment to estimate
the exposures associated with our various tax positions and actual results could differ from our estimates. Alternatively, we could
have applied assumptions regarding the eventual outcome of the resolution of open tax positions that could differ from our current
estimates but that would still be reasonable given the nature of a particular position. While our estimates are subject to the
uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities have historically not been
materially different from actual results except in instances where we have reversed liabilities that were recorded for periods that
were subsequently closed with the applicable taxing authority.
INFLATION AND SEASONALITY
For the last three fiscal years, we have been successful, in many cases, in reducing the effects of merchandise cost increases
principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and
selective forward buying. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have
typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not
believe our operations have been materially, adversely affected by inflation.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While
we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in
the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
QUARTERLY RESULTS
The following table sets forth certain quarterly unaudited operating data for fiscal 2012 and 2011. The unaudited quarterly
information includes all adjustments which management considers necessary for a fair presentation of the information shown. The
unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related notes
included elsewhere in this annual report, and the other financial information included therein.