O'Reilly Auto Parts 2013 Annual Report Download - page 59

FORM 10-K
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The current portion of the Company’s discounted self-insurance reserves totaled $57.7 million and $54.2 million as of December 31,
2013 and 2012, respectively. The remainder was included within “Other liabilities” on the accompanying Consolidated Balance Sheets
as of December 31, 2013 and 2012.
Warranties:
The Company offers warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties.
The risk of loss arising from warranty claims is typically the obligation of the Company’s vendors. Certain vendors provide upfront
allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears
the risk of loss associated with the cost of warranty claims. Differences between vendor allowances received by the Company 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. 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. See Note 9 for further information concerning the Company’s aggregate product warranty liability.
Litigation reserves:
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company records reserves
for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable
loss. The Company reserves for an estimate of material legal costs to be incurred on pending litigation matters. Although the Company
cannot ascertain the total amount of liability that it may incur from any of these matters, the Company does not currently believe that in
the aggregate, taking into account applicable insurance coverage, these matters will have a material adverse effect on its consolidated
financial position, results of operations or cash flows. In addition, O’Reilly was involved in resolving legacy governmental investigations
and litigation commenced by the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) against CSK
Automotive Corporation (“CSK”) and certain former CSK employees arising out of alleged conduct relating to periods prior to the
Company’s acquisition of CSK in 2008; as a result, O’Reilly incurred legal fees and costs related to potential indemnification obligations.
See Note 14 for further information concerning these legal matters.
Closed property liabilities:
The Company maintains reserves for closed stores and other properties that are no longer being utilized in current operations. The
Company provides for these liabilities using a credit-adjusted discount rate to calculate the present value of the remaining non-cancelable
lease payments, occupancy costs and lease termination fees after the close date, net of estimated sublease income. In conjunction with
the acquisition of CSK, the Company’s reserves include purchase accounting liabilities related to acquired properties that were no longer
being utilized in the acquired business as well as the Company’s planned exit activities. See Note 7 for further information concerning
these closed property liabilities.
Derivative instruments and hedging activities:
The Company’s accounting policies for derivative financial instruments are based on whether the instruments meet the criteria for
designation as cash flow or fair value hedges. The criteria for designating a derivative as a hedge include the assessment of the instrument’s
effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction and the probability that the underlying
transaction will occur. A designated hedge of the exposure to variability in the future cash flows of an asset or a liability qualifies as a
cash flow hedge. A designated hedge of the exposure to changes in fair value of an asset or a liability qualifies as a fair value hedge. For
derivatives with cash flow hedge accounting designation, the Company would recognize the after-tax gain or loss from the effective
portion of the hedge as a component of “Accumulated other comprehensive loss” and would reclassify it into earnings in the same period
or periods in which the hedged transaction affects earnings, and within the same income statement line item as the impact of the hedged
transaction. For derivatives with fair value hedge accounting designation, the Company would recognize gains or losses from the change
in fair value of these derivatives, as well as the offsetting change in the fair value of the underlying hedged item, in earnings. As of
December 31, 2013 and 2012, the Company did not hold any instruments that qualified as cash flow or fair value hedge derivatives.
Share repurchases:
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 conditions.
All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying
Consolidated Balance Sheets. See Note 10 for further information concerning the Company’s share repurchase program.
Revenue recognition:
Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional service provider
customers, also referred to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at
the customer’s place of business. Wholesale sales to other retailers, also referred to as “jobber sales,” are recorded upon shipment of the
merchandise from a regional DC with same-day delivery to the jobber customer's location. Internet retail sales are recorded when the