O'Reilly Auto Parts 2014 Annual Report Download - page 56

FORM 10-K
49
Cost of goods sold and selling, general and administrative expenses:
The following table illustrates the primary costs classified in each major expense category:
Cost of goods sold, including warehouse and distribution
expenses Selling, general and administrative expenses
Total cost of merchandise sold, including: Payroll and benefit costs for store and corporate Team Members
Freight expenses associated with acquiring merchandise
and with moving merchandise inventories from the
Company's distribution centers to the stores
Occupancy costs of store and corporate facilities
Defective merchandise and warranty costs Depreciation and amortization related to store and corporate
assets
Supplier allowances and incentives, including: Vehicle expenses for store delivery services
Allowances that are not reimbursements for specific,
incremental and identifiable costs
Self-insurance costs
Cash discounts on payments to suppliers Closed store expenses
Costs associated with the Company's supply chain, including: Other administrative costs, including:
Payroll and benefit costs Accounting, legal and other professional services
Warehouse occupancy costs Bad debt, banking and credit card fees
Transportation costs Supplies
Depreciation Travel
Inventory shrinkage Advertising costs
Operating leases:
The Company recognizes rent expense on a straight-line basis over the lease terms of its stores, DCs and corporate offices. Generally,
the lease term for stores and corporate offices is the base lease term and the lease term for DCs includes the base lease term plus certain
renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in a significant
economic penalty. The Company's policy is to amortize leasehold improvements associated with the Company's operating leases over
the lesser of the lease term or the estimated economic life of those assets.
Advertising expenses:
Advertising expense consists primarily of expenses related to the Company's integrated marketing program, which includes television,
radio, direct mail and newspaper distribution, in-store and online promotions, and sports and event sponsorships. The Company expenses
advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its suppliers.
Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the advertising program, specific
to the product or event and identifiable for accounting purposes, included as a component of "Selling, general and administrative
expenses" ("SG&A") on the accompanying Consolidated Statements of Income amounted to $79.0 million, $78.3 million and $74.8
million for the years ended December 31, 2014, 2013 and 2012, respectively.
Share-based compensation and benefit plans:
The Company sponsors employee share-based benefit plans and employee and director share-based compensation plans. The Company
recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the
date of the grant, award or issuance. Share-based plans include stock option awards issued under the Company's employee incentive
plans, director stock plan, stock issued through the Company's employee stock purchase plan and stock awarded to employees and directors
through other compensation plans. See Note 9 for further information concerning these plans.
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to SG&A as incurred.
Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are included as a
component of "Cost of goods sold, including warehouse and distribution expenses" on the accompanying Consolidated Statements of
Income as incurred.
Interest expense:
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates incurred
on its long-term borrowings. Total interest costs capitalized for the years ended December 31, 2014, 2013 and 2012, were $11.5 million,
$10.6 million and $6.1 million, respectively.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs including debt registration
fees, accounting and legal fees and underwriter and book runner fees. These debt issuance costs have been deferred and are being