O'Reilly Auto Parts 2014 Annual Report Download - page 42

FORM 10-K
35
a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, and growth patterns
and exposure forecasts. The assumptions made by management as they relate to each of these factors represent our judgment as to
the most probable cumulative impact of each factor to our future obligations. Our calculation of self-insurance liabilities requires
management to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not yet reported as of
the balance sheet date and the application of alternative assumptions could result in a different estimate of these liabilities. Actual
claim activity or development may vary from our assumptions and estimates, which may result in material losses or gains. As we
obtain additional information that affects the assumptions and estimates we used to recognize liabilities for claims incurred in prior
accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on this additional information. These
liabilities are recorded at our estimate of their net present value, using a credit-adjusted discount rate. These liabilities do not have
scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We could apply alternative
assumptions regarding the timing of payments or the applicable discount rate that could result in materially different estimates of
the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves at December 31,
2014, the financial impact would have been approximately $12 million or 1.0% of pretax income for the year ended December 31,
2014.
• Legal Reserves – We maintain reserves for expenses associated with litigation for which O'Reilly is currently involved. We are
currently involved in litigation incidental to the ordinary conduct of our business. We resolved the governmental investigations and
litigation that were being conducted against CSK Auto Corporation ("CSK") and certain of CSK's former employees for alleged
conduct relating to periods prior to the 2008 acquisition date. As a result of the acquisition, we incurred legal fees and costs related
to such investigations, litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed liability in
our allocation of the purchase price of CSK. Management, with the assistance of outside legal counsel, must make estimates of
potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures. If legal
reserves were changed 10% from our estimated reserves at December 31, 2014, the financial impact would have been approximately
$2 million or 0.2% of pretax income for the year ended December 31, 2014.
• Taxes – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax
years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations
by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. Changes in our tax liability may
occur in the future as our assessments change based on the progress of tax examinations in various jurisdictions and/or changes in
tax regulations. In management's opinion, adequate provisions for income taxes have been made for all years presented. The estimates
of our potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated
with our various tax positions and actual results could differ from our estimates. Alternatively, we could have applied assumptions
regarding the eventual outcome of the resolution of open tax positions that could differ from our current estimates but that would
still be reasonable given the nature of a particular position. While our estimates are subject to the uncertainty noted in the preceding
discussion, our initial estimates of our potential tax liabilities have historically not been materially different from actual results except
in instances where we have reversed liabilities that were recorded for periods that were subsequently closed with the applicable
taxing authority.
INFLATION AND SEASONALITY
For the last three fiscal years, we have generally been successful in reducing the effects of merchandise cost increases principally by
taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward
buying. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have typically been able
to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had
a material adverse effect on our operations.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While
we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the
second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
QUARTERLY RESULTS
The following table sets forth certain quarterly unaudited operating data for fiscal 2014 and 2013. The unaudited quarterly information
includes all adjustments which management considers necessary for a fair presentation of the information shown. The unaudited operating
data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in
this annual report, and the other financial information included therein.