O'Reilly Auto Parts 2012 Annual Report Download - page 72

FORM 10-k
62
overlapping or duplicative functions. The Company completed all restructuring activities related to these employee separation
liabilities during 2012, and the reserve had no remaining balance as of December 31, 2012.
Revisions to estimates for employee separation liabilities included changes in assumptions surrounding the timing required to
consolidate certain duplicative administration functions from the inception of the exit activities. Revisions to estimates and additions
or accretions to employee separation liabilities are included in “Selling, general and administrative expenses” on the accompanying
Consolidated Statements of Income for the years ended December 31, 2011 and 2010.
The cumulative amount incurred for employee separation liabilities from the inception of the exit activity through December 31, 2012,
was $29.4 million.
NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Historically, the Company entered into interest rate swap contracts with various counterparties to mitigate cash flow risk associated
with floating interest rates on outstanding borrowings under its ABL Credit Facility. The fair values of the Company’s outstanding
hedges were recorded as liabilities, the effective portion of the change in fair values of the Company’s cash flow hedges was recorded
as a component of “Accumulated other comprehensive loss”, and any ineffectiveness was recognized in “Other income (expense)” in
the accompanying Consolidated Statements of Income in the period of ineffectiveness. The interest rate swap contracts were
designated as cash flow hedges with interest payments designed to offset the interest payments for borrowings under the ABL Credit
Facility that corresponded with the notional amounts of the swaps. In January of 2011, the ABL Credit Facility was retired concurrent
with the issuance of the Company’s 4.875% Senior Notes due 2021 and all interest rate swap contracts were terminated at the
Company’s request. The Company recognized a charge of $4.2 million related to the termination of the interest rate swap contracts,
which was included as a component of “Other income (expense)” in the accompanying Consolidated Statements of Income for the
year ended December 31, 2011. During 2010, one interest rate swap contract was terminated at the Company’s request and was
deemed to be ineffective as of the termination date. The Company recognized $0.1 million in “Other income (expense)” on the
accompanying Consolidated Statements of Income for the year ended December 31, 2010, as a result of this hedge ineffectiveness. As
of December 31, 2012, the Company did not hold any instruments that qualified as cash flow hedge derivatives.
The table below outlines the effects the Company’s derivative financial instruments had on its Consolidated Statements of Income for
the years ended December 31, 2012, 2011 and 2010 (in thousands):
Location and Amount of Loss Recognized in Income on Derivatives
Derivatives Designated as Hedging
Instruments For the Year Ended December 31,
Classification 2012 2011 2010
Interest rate swap contracts Other income (expense) $ - $ (4,237) $ (65)
NOTE 8 – WARRANTIES
The Company provides warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime
warranties. Estimated warranty costs are based on the historical failure rate of each individual product line and are recorded as
obligations. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate
cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the
variation of the cost of individual claims. The Company’s product warranty liabilities are included in “Other current liabilities” on the
accompanying Consolidated Balance Sheets as of December 31, 2012 and 2011.
The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31,
2012 and 2011 (in thousands):
2012 2011
Balance at January 1, $ 21,642 $ 22,429
Warranty claims (50,009) (46,779)
Warranty accruals 56,368 45,992
Balance at December 31, $ 28,001 $ 21,642
NOTE 9 – SHARE REPURCHASE PROGRAM
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may,
from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market