Advance Auto Parts 2006 Annual Report Download - page 92

ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 30, 2006, December 31, 2005 and January 1, 2005
(in thousands, except per share data)
defends against these claims, the Company may enter into discussions regarding settlement of these and other
lawsuits, and may enter into settlement agreements, if it believes settlement is in the best interests of the Company’s
shareholders. The Company believes that most of these claims are at least partially covered by insurance. Based on
discovery to date, the Company does not believe the cases currently pending will have a material adverse effect on
the Company’s operating results, financial position or liquidity. However, if the Company was to incur an adverse
verdict in one or more of these claims and was ordered to pay damages that were not covered by insurance, these
claims could have a material adverse affect on its operating results, financial position and liquidity. If the number of
claims filed against the Company or any of its subsidiaries alleging injury as a result of exposure to asbestos-
containing products increases substantially, the costs associated with concluding these claims, including damages
resulting from any adverse verdicts, could have a material adverse effect on its operating results, financial position
or liquidity in future periods.
The Company is involved in various types of legal proceedings arising from claims of employment
discrimination or other types of employment matters as a result of claims by current and former employees. The
damages claimed against the Company in some of these proceedings are substantial; however, because of the
uncertainty of the outcome of such legal proceedings and because the Company’s liability, if any, arising from such
legal matters, including the size of any damages awarded if plaintiffs are successful in litigation or any negotiated
settlement, could vary widely, the Company cannot reasonably estimate the possible loss or range of loss which may
arise. The Company is also involved in various other claims and legal proceedings arising in the normal course of
business. Although the final outcome of these legal matters cannot be determined, based on the facts presently
known, it is management’s opinion that the final outcome of such claims and lawsuits will not have a material
adverse effect on the Company’s financial position, results of operations or liquidity.
The Company is self-insured for general and automobile liability, workers' compensation and the health care
claims of its team members although the Company maintains stop-loss coverage with third-party insurers to limit its
total liability exposure. Liabilities associated with these losses are calculated for claims filed and claims incurred
but not yet reported at the Company's estimate of their ultimate cost based upon analyses of historical data,
demographic and severity factors and periodic valuations provided by third-party actuaries. Management monitors
new claims and claim development as well as negative trends related to the claims incurred but not reported in order
to assess the adequacy of the Company’s insurance reserves. While the Company does not expect the amounts
ultimately paid to differ significantly from its estimates, the self-insurance reserves could be affected if future claim
experience differs significantly from the historical trends and the actuarial assumptions.
The Company accrues for tax contingencies when it is probable that a liability to a taxing authority has been
incurred and the amount of the contingency can be reasonably estimated, based on past experience. The Company’s
tax contingency reserve is adjusted for changes in circumstances and additional uncertainties, such as significant
amendments to existing tax law, both legislated and concluded through the various jurisdictions’ tax court systems.
The Company had a tax contingency reserve of $6,415 and $7,588 at December 30, 2006 and December 31, 2005,
respectively. It is the opinion of the Company’s management that the possibility is remote that costs in excess of
those reserved for will have a material adverse impact on the Company’s financial position, results of operations or
liquidity. The Company’s accounting for income tax contingencies will change subsequent to December 30, 2006
upon the adoption of FIN 48.
The Company has entered into employment agreements with certain team members that provide severance pay
benefits under certain circumstances after a change in control of the Company or upon termination of the team
member by the Company. The maximum contingent liability under these employment agreements is approximately
$5,590 and $1,617 at December 30, 2006 and December 31, 2005, respectively, of which nothing has been accrued.
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