O'Reilly Auto Parts 2012 Annual Report Download - page 66

FORM 10-k
56
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to SG&A as
incurred. Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are
included as a component of “Cost of goods sold, including warehouse and distribution expenses” on the accompanying Consolidated
Statements of Income as incurred.
Interest expense:
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates
incurred on long-term borrowings. Total interest costs capitalized for the years ended December 31, 2012, 2011 and 2010, were $6.1
million, $4.7 million and $5.1 million, respectively.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs including debt
registration fees, accounting and legal fees and underwriter and book runner fees. These debt issuance costs have been deferred and
are being amortized over the term of the corresponding debt issue and the amortization expense is included as a component of
“Interest expense” in the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $10.1 million and
$9.0 million, net of amortization, as of December 31, 2012 and 2011, respectively, of which $1.5 million and $1.3 million were
included within “Other current assets” on the accompanying Consolidated Balance Sheets as of December 31, 2012 and 2011, with the
remainder included within “Other assets” on the accompanying Consolidated Balance Sheets as of December 31, 2012 and 2011. All
unamortized debt issuance costs related to the Company’s asset-based revolving credit facility (“ABL Credit Facility”) were expensed
in January of 2011, in conjunction with the issuance of the Company’s $500 million unsecured 4.875% Senior Notes due 2021 (the
“4.875% Senior Notes due 2021”) and subsequent repayment and retirement of the ABL Credit Facility. See Note 4 for further
information concerning debt issuance costs associated with the issuances of or amendments to long-term debt instruments.
Income taxes:
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on differences between the GAAP basis and tax basis of assets and liabilities using
enacted tax rules and rates currently scheduled to be in effect for the year in which the differences are expected to reverse. Tax carry
forwards are also recognized in deferred tax assets and liabilities under this method. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period of the enactment date. The Company would record a valuation allowance
against deferred tax assets to the extent it is more likely than not the amount will not be realized, based upon evidence available at the
time of the determination and any change in the valuation allowance is recorded in the period of a change in such determination. The
Company did not establish a valuation allowance for deferred tax assets as of December 31, 2012 and 2011, as it was considered more
likely than not that deferred tax assets were realizable through a combination of future taxable income, the realization of deferred tax
liabilities and tax planning strategies. The Company regularly reviews its 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 the Company’s tax liability may occur in the
future as its 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 the
Company’s potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated
with the Company’s various tax positions and actual results could differ from estimates.
Earnings per share:
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during
the fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding
plus, where applicable, the common stock equivalents associated with the potential impact of dilutive stock options or conversion of
convertible debt. Certain common stock equivalents that could potentially dilute basic earnings per share in the future, were not
included in the fully diluted computation because they would have been antidilutive. Generally, stock options are antidilutive and
excluded from the earnings per share calculation when the exercise price exceeds the market price of the common shares. See Note 15
for further information concerning these common stock equivalents.
New accounting pronouncements:
In February of 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02,
"Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ( “ASU 2013-02”). Under ASU 2013-02, an
entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (“AOCI”)
by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant
amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be
reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net
income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02
does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The
Company plans to adopt this guidance beginning with its first quarter ended March 31, 2013; the application of this guidance affects
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