O'Reilly Auto Parts 2013 Annual Report Download - page 73

FORM 10-K
67
of their senior notes at a price equal to 101% of the principal amount of the notes being repurchased, plus accrued and unpaid interest,
if any, to but not including the repurchase date (see Note 5).
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for the 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 to this obligation.
NOTE 14 – LEGAL MATTERS
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 in pending litigation matters. Although the Company
cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate,
these matters, taking into account applicable insurance and reserves, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows in a particular quarter or annual period.
In addition, O’Reilly was involved in resolving governmental investigations that were being conducted against CSK and CSK’s former
officers and other litigation, prior to its acquisition by O’Reilly, as described below.
As previously reported, the governmental investigations of CSK regarding its legacy pre-acquisition accounting practices have concluded.
All criminal charges against former employees of CSK related to its legacy pre-acquisition accounting practices, as well as the civil
litigation filed against CSK’s former Chief Executive Officer by the SEC, have concluded.
Under Delaware law, the charter documents of the CSK entities, and certain indemnification agreements, CSK may have certain
indemnification obligations. As a result of the CSK acquisition, O’Reilly has incurred legal fees and costs related to these potential
indemnification obligations arising from the litigation commenced by the Department of Justice and SEC against CSK’s former employees.
Whether those legal fees and costs are covered by CSK’s insurance is subject to uncertainty, and, given its complexity and scope, the
final outcome cannot be predicted at this time. O’Reilly has a remaining reserve, with respect to the indemnification obligations of $13.4
million at December 31, 2013, which relates to the payment of those legal fees and costs already incurred. It is possible that in a particular
quarter or annual period the Company’s results of operations and cash flows could be materially affected by resolution of such matter,
depending, in part, upon the results of operations or cash flows for such period. However, at this time, management believes that the
ultimate outcome of this matter, after consideration of applicable reserves, should not have a material adverse effect on the Company’s
consolidated financial condition, results of operations or cash flows.
NOTE 15 – RELATED PARTIES
The Company leases certain land and buildings related to 77 of its O'Reilly Auto Parts stores and one of its bulk facilities under fifteen-
or twenty-year operating lease agreements with entities in which certain of the Company’s affiliated directors, members of an affiliated
director’s immediate family or certain of the Company’s executive officers, are affiliated. Generally, these lease agreements provide for
renewal options for an additional five years at the option of the Company and the lease agreements are periodically modified to further
extend the lease term for specific stores under the agreements. Lease payments under these operating leases totaled $4.4 million, $4.4
million and $4.2 million during the years ended December 31, 2013, 2012 and 2011, respectively. We believe that the lease agreements
with the affiliated entities are on terms comparable to those obtainable from third parties. See Note 6 for further information on the
Company's operating leases.
NOTE 16 – INCOME TAXES
Deferred income tax assets and liabilities:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.