O'Reilly Auto Parts 2007 Annual Report Download - page 38

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Notes to Consolidated Financial Statements (continued)
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 affect. 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.
A summary of the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the year ended December 31,
2007, is shown below:
(In thousands)
Balance as of January 1, 2007 $ 13,245
Addition based on tax postions related to the current year 3,484
Addition based on tax positions related to prior years 827
Reduction due to lapse of statute of limitations (604)
Balance as of December 31, 2007 $ 16,952
NOTE 2 – INVESTMENTS
The following is a summary of available-for-sale securities included in Other Current Assets on the Company’s balance sheet at
December 31,2007:
Available-for-Sale-Securities
Estimated
Fair Value
Gross Gross (Net
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Amount)
Equity securities
(In thousands) $ 21,724 $ -- $ (10,933) $ 10,791
$ 21,724 $ -- $ (10,933) $ 10,791
Available-for-sale securities held by the Company are securities that are publicly traded in active markets and are valued based on quoted closing
prices as of December 31, 2007.
NOTE 3 - ACQUISITION
On May 31, 2005, the Company purchased all of the outstanding stock of W.E. Lahr Company and its subsidiary, Midwest Auto Parts
Distributors, Inc. and combined affiliates (“Midwest”) for approximately $63 million cash, net of cash acquired, including acquisition costs.
Midwest was a specialty retailer, which supplied automotive aftermarket parts in Minnesota, Montana, North Dakota, South Dakota, Wisconsin
and Wyoming. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of