O'Reilly Auto Parts 2013 Annual Report Download - page 58

FORM 10-K
52
merchandise inventory purchases have increased, this has resulted in improved acquisition costs from its suppliers and the corresponding
price deflation exhausted the Company's LIFO reserve balance during the year ended December 31, 2013. The Company's policy is not
to write up the value of its inventory in excess of its replacement cost. Accordingly, the Company's merchandise inventory is effectively
being recorded at replacement cost as of December 31, 2013. The replacement cost of inventory was $2.38 billion and $2.31 billion as
of December 31, 2013 and 2012, respectively. LIFO costs exceeded replacement costs by $21.6 million at December 31, 2013.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method generally over the estimated useful
lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets.
The lease term includes renewal options determined by management at lease inception for which failure to execute renewal options would
result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included as a component of “Other income
(expense)” in the Company’s Consolidated Statements of Income. The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
Notes receivable:
The Company had notes receivable from vendors and other third parties amounting to $17.2 million and $9.5 million at December 31,
2013 and 2012, respectively. The notes receivable, which bear interest at rates ranging from 0% to 10%, are due in varying amounts
through March of 2019. Interest income on notes receivable is recorded in accordance with the note terms to the extent that such amounts
are expected to be collected. The Company regularly reviews its notes receivable for collectability and assesses the need for a reserve
for uncollectable amounts based on an evaluation of the Company’s borrowers’ financial positions and corresponding abilities to meet
financial obligations. Management does not believe there is a reasonable likelihood that the Company will be unable to collect the notes
receivable and the Company did not record a reserve for uncollectable notes receivable in the consolidated financial statements as of
December 31, 2013 or 2012.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at December 31, 2013 and 2012, include goodwill and other intangible assets recorded
as the result of acquisitions. The Company reviews 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, rather than systematically amortizing
goodwill against earnings. During 2013 and 2012, the goodwill impairment test included a quantitative assessment, which compared the
fair value of the reporting unit to its carrying amount, including goodwill. The Company operates as a single reporting unit, and the
Company determined that its fair value exceeded its carrying value, including goodwill, as of December 31, 2013 and 2012; as such, no
goodwill impairment adjustment was required as of December 31, 2013 and 2012. Finite-lived intangibles are carried at cost. Amortization
is calculated using the straight-line method, generally over the estimated useful lives of the intangibles.
Impairment of long-lived assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future
cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than
the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of
the assets exceeds the fair value of the assets. The Company has not historically recorded any material impairment to its long-lived assets
and the Company did not record an impairment to its long-lived assets during the year ended December 31, 2013 or 2012.
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for Team Member health
care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member
health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the
Company obtains third-party insurance coverage to limit its exposure. The Company estimates its self-insurance liabilities by considering
a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and
exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value, using a credit-adjusted discount
rate.
The following table identifies the components of the Company’s self-insurance reserves as of December 31, 2013 and 2012 (in thousands):
December 31,
2013 2012
Self-insurance reserves (undiscounted) $ 126,715 $ 122,866
Self-insurance reserves (discounted) $ 116,062 $ 111,840