O'Reilly Auto Parts 2014 Annual Report Download - page 40

FORM 10-K
33
the Base Rate, in each case based upon the better of the ratings assigned to our debt by Moody's Investor Service, Inc. and Standard & Poor's Rating
Services, subject to limited exceptions. Swing line loans made under the Revolving Credit Facility bear interest at the Base Rate plus the applicable
margin described above. In addition, we pay a facility fee on the aggregate amount of the commitments in an amount equal to a percentage of such
commitments, varying from 0.125% to 0.250% per annum based upon the better of the ratings assigned to our debt by Moody's Investor Service,
Inc. and Standard & Poor's Rating Services, subject to limited exceptions. Based on our credit ratings at December 31, 2014, our margin for Base
Rate loans was 0.000%, our margin for Eurodollar Rate loans was 0.975% and our facility fee was 0.150%. As of December 31, 2014, we had no
outstanding borrowings under our Revolving Credit Facility. Based upon our current credit ratings, our current margin for Base Rate loans is
0.000%, our margin for Eurodollar Rate loans is 0.875% and our facility fee is 0.125%
(2) The minimum lease payments above do not include certain tax, insurance and maintenance costs, which are also required contractual obligations
under our operating leases but are generally not fixed and can fluctuate from year to year. These expenses historically average approximately 20%
of the corresponding lease payments.
(3) We use various self-insurance mechanisms to provide for potential liabilities from workers' compensation, vehicle and general liability, and employee
health care benefits. The self-insurance reserves above are at the undiscounted obligation amount. The self-insurance reserves liabilities are
recorded on our Consolidated Balance Sheets at our estimate of their net present value and do not have scheduled maturities; however, we can
estimate the timing of future payments based upon historical patterns.
(4) The projected obligation related to future payments under the Company's nonqualified deferred compensation plan, the timing of which cannot be
estimated. See Note 9 "Share-Based Compensation and Benefit Plans" to the Consolidated Financial Statements for further information on the
Company's compensation plans.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which
we have an obligation to the entity that is not recorded in our consolidated financial statements. We historically utilized various off-
balance sheet financial instruments, including sale-leaseback and synthetic lease transactions, but we have not entered into any such
transactions for over five years and do not plan to utilize off-balance sheet arrangements in the future to fund our working capital
requirements, operations or growth plans.
We issue stand-by letters of credit provided by a $200 million sub limit under the Revolving Credit Facility that reduce our available
borrowings under the Revolving Credit Facility. Those letters of credit are issued primarily to satisfy the requirements of workers
compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term
from the date of issuance. Letters of credit totaling $48 million and $52 million were outstanding at December 31, 2014 and 2013,
respectively.
Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely
to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or
capital resources. See "Contractual Obligations" and Note 10 "Commitments" to the Consolidated Financial Statements for information
on our operating leases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by
management. Management bases its assumptions, estimates, and adjustments on historical experience, current trends and other factors
believed to be relevant at the time the consolidated financial statements are prepared. Management believes that the following policies
are critical due to the inherent uncertainty of these matters and the complex and subjective judgments required in establishing these
estimates. Management continues to review these critical accounting policies and estimates to ensure that the consolidated financial
statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates and
such differences could be material.
• Inventory Obsolescence and Shrink – Inventory, which consists of automotive hard parts, maintenance items, accessories and
tools, is stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of obsolescence
of our inventory is minimal. The products that we sell generally have applications in our markets for a relatively long period of time
in conjunction with the corresponding vehicle population. We have developed sophisticated systems for monitoring the life cycle
of a given product and, accordingly, have historically been very successful in adjusting the volume of our inventory in conjunction
with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory through a charge to cost of sales
in the isolated instances where we believe that the market value of a product line is lower than our recorded cost. This reserve is
based on our assumptions about the marketability of our existing inventory and is subject to uncertainty to the extent that we must
estimate, at a given point in time, the market value of inventory that will be sold in future periods. Ultimately, our projections could
differ from actual results and could result in a material impact to our stated inventory balances. We have historically not had to
materially adjust our obsolescence reserves due to the factors discussed above and do not anticipate that we will experience material
changes in our estimates in the future.