O'Reilly Auto Parts 2007 Annual Report Download - page 37

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Notes to Consolidated Financial Statements (continued)
in the year ended December 31, 2005 for purposes of pro forma disclosure. The pro forma effects of recognizing estimated compensation
expense under the fair value method on net income and earnings per common share were as follows:
(In thousands, except per share data)
Year Ended December 31, 2005
Net income, as reported $ 164,266
Add stock-based compensation expense, net of tax, as reported 5,699
Deduct stock-based compensation expense, net of tax, under fair value method (26,522)
Pro forma net income $ 143,443
Pro forma basic net income per share $1.29
Pro forma net income per share – assuming dilution $1.27
Net income per share, as reported
Basic $1.47
Assuming dilution $1.45
Prior to the adoption of SFAS No. 123R in 2006, the Company presented all tax benefits of deductions resulting from the exercise of stock
options as operating cash flows in the accompanying consolidated statement of cash flows. SFAS No. 123R requires excess tax benefits, the cash
flow resulting from the tax deductions in excess of the compensation cost recognized for those options, to be classified as financing cash flows.
The excess tax benefit was $6.8 million and $8.5 million for the years ended December 31, 2007 and 2006, respectively.
Earnings per Share
Basic earnings per share is based on the weighted-average outstanding common shares. Diluted earnings per share is based on the weighted-
average outstanding shares adjusted for the effect of common stock equivalents. Common stock equivalents that could potentially dilute basic
earnings per share in the future that were not included in the fully diluted computation because they would have been antidilutive were
1,613,000, 448,000 and 226,750 for the years ended December 31, 2007, 2006 and 2005, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, accounts
receivable and notes receivable.
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Concentrations of credit risk
with respect to these receivables are limited because the Company’s customer base consists of a large number of smaller customers, thus spreading
the credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. Generally, the Company
does not require security when credit is granted to customers. Credit losses are provided for in the Company's consolidated financial statements
and consistently have been within management's expectations.
The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value.
Reclassifications
The accompanying consolidated financial statements for prior years contain certain reclassifications to conform to the presentation used in 2007.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, a revision of SFAS No. 123 that supersedes APB No. 25.
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.