O'Reilly Auto Parts 2007 Annual Report Download - page 26

24
(In thousands, except per share data) Fiscal 2006
First Second Third Fourth
Quarter Quarter Quarter Quarter
Sales $ 536,547 $ 591,199 $ 597,144 $ 558,332
Gross profit 233,428 260,928 263,326 249,029
Operating income 64,966 78,236 75,084 64,029
Net income 40,564 49,313 47,856 40,352
Basic net income per common share 0.36 0.44 0.42 0.35
Net income per common share – assuming dilution 0.35 0.43 0.42 0.35
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, a revision of SFAS No. 123, Accounting for Stock Based
Compensation, that supersedes APB No. 25, Accounting for Stock Issued to Employees. In April 2005, the SEC adopted a rule permitting
implementation of SFAS No. 123R at the beginning of the first fiscal year commencing after June 15, 2005. Among other items, SFAS No.
123R eliminated the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize in the financial
statements the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those
awards. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. The Company was required to adopt SFAS No.
123R beginning in its quarter ended March 31, 2006. Under the provisions of SFAS No. 123R, the Company had the choice of adopting the
fair-value-based method of expensing of stock options using (a) the “modified prospective method”, whereby the Company recognizes the
expense only for periods beginning after December 31, 2005, or (b) the “modified retrospective method”, whereby the Company recognizes the
expense for all years and interim periods since the effective date of SFAS No. 123. The Company adopted SFAS No. 123R using the modified
prospective method. See Note 9, “Share-Based Employee Compensation Plans”, for information regarding expensing of stock options in 2006
and 2007 and for pro forma information regarding the Company’s accounting for stock options in 2005.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and a measurement process for
recording in the financial statements the tax benefit of uncertain tax positions taken or expected to be taken in a tax return. For a benefit to be
recognized, a tax position must be more-likely-than-not to be sustainable upon examination by the applicable taxing authority. Additionally, FIN
48 provides guidance on derecognition, measurement, classification, accounting in interim periods and disclosure requirements for uncertain tax
positions. The Company adopted the provisions of FIN 48 on January 1, 2007. No adjustment was required in the liability for unrecognized
income tax benefits as a result of the implementation of FIN 48. As of January 1, 2007 and December 31, 2007, the Company had a gross
exposure for unrecognized tax benefits (including interest and penalties) of $14.9 million and $19.7 million, respectively, all of which would
affect the Company’s effective tax rate if recognized, generally net of federal tax effect. The Company recognizes interest and penalties related
to uncertain tax positions in income tax expense. As of January 1, 2007 and December 31, 2007, the Company had accrued approximately
$1.7 million and $2.8 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for
interest on state and federal returns. During the year ended December 31, 2007, the Company recorded tax expense related to an increase in
its liability for interest and penalties of $1.3 million. Although unrecognized tax benefits for individual tax positions may increase or decrease
during 2008, the Company expects a reduction of $0.8 million of unrecognized tax benefits during the one-year period subsequent to
December 31, 2007 resulting from settlement or expiration of the statute of limitations.
The Company’s U.S. federal income tax returns for tax years 2005 and beyond remain subject to examination by the Internal Revenue Service
(“IRS”). The IRS concluded an examination of the Company’s consolidated 2002, 2003 and 2004 federal income tax returns in the first quarter
of 2007. The statute of limitations for the Company’s federal income tax returns for tax years 2003 and prior have expired. The statute of
limitations for the Company’s U.S. federal income tax return for 2004 will expire on September 15, 2008, unless otherwise extended. The
Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2001 through 2006.
FORWARD-LOOKING STATEMENTS
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. You can identify these statements by forward-looking words such as “expect,” “believe,” “anticipate,” “should,” “plan,” “intend,” “estimate,”
“project,” “will” or similar words. In addition, statements contained within this annual report that are not historical facts are forward-looking statements,
such as statements discussing among other things, expected growth, store development and expansion strategy, business strategies, future revenues
and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of
future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product
demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain
qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results
may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors sections of
the annual report on Form 10-K for the year ended December 31, 2007, for additional factors that could materially affect our financial performance.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)