O'Reilly Auto Parts 2014 Annual Report Download - page 55

FORM 10-K
48
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, 2014 and 2013 (in thousands):
December 31,
2014 2013
Self-insurance reserves (undiscounted) $ 132,879 $ 126,715
Self-insurance reserves (discounted) 123,276 116,062
The current portion of the Company's discounted self-insurance reserves totaled $64.9 million and $57.7 million as of December 31,
2014 and 2013, respectively. The remainder was included within "Other liabilities" on the accompanying Consolidated Balance Sheets
as of December 31, 2014 and 2013.
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 suppliers. Certain suppliers 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 supplier 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 7 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 11 for further information concerning these legal matters.
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 8 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
merchandise is shipped or when the merchandise is picked up in a store. All sales are recorded net of estimated returns allowances,
discounts and taxes.