Advance Auto Parts 2007 Annual Report Download - page 46

cost, if any, required by market conditions. Our total inventory reserves increased by $4.2 million in fiscal 2007
compared to fiscal 2006 primarily as the result of an increase in our total shrinkage, as a percentage of sales.
Future changes by vendors in their policies or willingness to accept returns of excess inventory could require us
to revise our estimates of required reserves for excess and obsolete inventory and result in a negative impact on our
consolidated statement of operations. A 10% difference in actual inventory reserves at December 29, 2007 would
have affected net income by approximately $2.2 million.
Warranty Reserves
Our vendors are primarily responsible for warranty claims. We are responsible for merchandise sold under
warranty which is not covered by vendor warranties (primarily batteries). We record a reserve for future warranty
claims as an increase in our cost of sales based on current sales of the warranted products and historical claim
experience. If claims experience differs from historical levels, revisions in our estimates may be required, which
could have an impact on our consolidated statement of operations. Our warranty reserves increased by $4.7 million
in fiscal 2007 compared to fiscal 2006. This increase was primarily due to an increase in our defective return rate as
well as in increase in the sale of premium batteries. A 10% change in the warranty reserves at December 29, 2007
would have affected net income by approximately $1.1 million for the fiscal year ended December 29, 2007.
Self-Insured Reserves
We are self-insured for general and automobile liability, workers' compensation and the health care claims of
our team members, although we maintain stop-loss coverage with third-party insurers to limit our total liability
exposure. Our self-insurance program, started in 2001, has not reached full maturity. A reserve for liabilities
associated with these losses is established for claims filed and claims incurred but not yet reported using actuarial
methods followed in the insurance industry and our historical claims experience. Each year, our reserve for self-
insurance increases over the prior year because each year adds an additional layer of reserves without an equal
amount of prior year reserves being fully relieved. Generally, claims have historically taken several years to settle
and thus are not relieved at the same rate as additional reserves are added each year. Our self-insurance reserves
increased by $14.0 million in fiscal 2007 compared to fiscal 2006. This increase was primarily the result of the
increase in the number of workers’ compensation claims and automobile accident claims as well as an increase in
the total cost to settle workers’ compensation claims as compared to the prior year. The increase in the number of
claims is driven by overall growth, including an increase in total number of stores, employees and commercial
delivery vehicles.
While we do not expect the amounts ultimately paid to differ significantly from our estimates, our self-
insurance reserves and corresponding selling, general and administrative expenses could be affected if future claim
experience differs significantly from historical trends and actuarial assumptions. A 10% change in our self-insurance
liabilities at December 29, 2007 would have affected net income by approximately $5.3 million for the fiscal year
ended December 29, 2007.
Tax Reserves
The determination of our income tax liabilities is based upon the tax code, regulations and pronouncements of
the taxing jurisdictions in which we do business. Our income tax returns are periodically examined by those
jurisdictions. These examinations include, among other things, auditing our filing positions, the timing of deductions
and allocation of income among the various jurisdictions. At any particular time, multiple years are subject to
examination by various taxing authorities.
The accounting for our tax reserves changed with the adoption of FIN 48, “Accounting for Uncertainty in
Income Taxes,” or FIN 48, on December 31, 2006. Refer to Note 12 for further discussion of the impact of adopting
FIN 48 and change in reserves during fiscal 2007.
In evaluating our income tax positions, we record reserves for potential exposures. These tax reserves are
adjusted in the period actual developments give rise to such change. Those developments could be, but are not
limited to; settlement of tax audits, expiration of the statute of limitations, and the evolution of tax code and
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