O'Reilly Auto Parts 2010 Annual Report Download - page 83

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The provision for income taxes consists of the following as of December 31, 2010, 2009 and 2008 (in thousands):
Current Deferred Total
2010:
Federal $ 146,259 $ 88,395 $ 234,654
State 24,484 10,862 35,346
$ 170,743 $ 99,257 $ 270,000
2009:
Federal $ 121,919 $ 44,339 $ 166,258
State 17,100 6,042 23,142
$ 139,019 $ 50,381 $ 189,400
2008:
Federal $ 90,544 $ 9,313 $ 99,857
State 14,725 1,718 16,443
$ 105,269 $ 11,031 $ 116,300
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows for the years
ended December 31, 2010, 2009 and 2008 (in thousands):
2010 2009 2008
Federal income taxes at statutory rate $ 241,281 $ 173,914 $ 105,887
State income taxes, net of federal tax benefit 22,267 18,896 10,633
Other items, net 6,452 (3,410) (220)
Total provision for income taxes $ 270,000 $ 189,400 $ 116,300
The excess tax benefit associated with the exercise of non-qualified stock options has been included within “Additional paid-in
capital” in the accompanying consolidated financial statements.
As of December 31, 2010, the Company had net operating loss carryforwards for federal income tax purposes of $5.4 million (for
which a portion are also available for state tax purposes) and general business tax credit carry forwards available for federal and state
tax purposes of $2.4 million and $4.1 million, respectively. The Company also has an alternative minimum tax credit carry forward
for federal tax purposes of $2.5 million. The net operating loss carryforwards generally expire in years ranging from 2021 to 2027,
and the tax credits generally expire in years ranging from 2019 to 2028. The alternative minimum tax credit carry forward does not
expire.
For the years ended December 31, 2010, 2009 and 2008, the Company had recorded a reserve for unrecognized tax benefits (including
interest) of $41.3 million, $37.6 million and $34.3 million, respectively, of which $41.3 million, $37.6 million and $34.3 million
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 the years ended December 31, 2010, 2009 and 2008, the
Company had accrued approximately $4.6 million, $4.0 million and $3.9 million, respectively, of interest related to uncertain tax
positions before the benefit of the deduction for interest on state and federal returns. During the years ended December 31, 2010,
2009 and 2008, the Company recorded tax expense related to an increase in its liability for interest of $1.5 million, $1.5 million and
$1.4 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2011, the
Company expects a reduction of $3.1 million of unrecognized tax benefits during the one-year period subsequent to December 31,
2010, resulting from settlement or expiration of the statute of limitations.
The O’Reilly U.S. federal income tax returns for tax years 2007 and beyond remain subject to examination by the Internal Revenue
Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2006 and 2007 federal income tax returns in the
fourth quarter of 2009. The statute of limitations for the O’Reilly federal income tax returns for tax years 2006 and prior expired on
September 15, 2010. The statute of limitations for the O’Reilly U.S. federal income tax return for 2007 will expire on September 15,
2011, unless otherwise extended. The IRS is currently conducting an examination of the O’Reilly consolidated return for the tax year
2008. The O’Reilly state income tax returns remain subject to examination by various state authorities for tax years ranging from
2001 through 2010.
CSK has had net operating losses in various years dating back to the tax year 1993. For CSK, the statute of limitation for a particular
tax year for examination by the IRS is three years subsequent to the last year in which the loss carryover is finally used. The IRS
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completed an examination of the CSK consolidated federal tax return for the fiscal years ended January 30, 2005, January 29, 2006,
February 4, 2007, and February 2, 2008. The statute of limitation for a particular tax year for examination by various states is
generally three to four years subsequent to the last year in which the loss carryover is finally used.
A summary of the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended
December 31, 2010, 2009 and 2008, is shown below (in thousands):
2010 2009 2008
Balance as of January 1 $ 33,570 $ 30,400 $ 16,952
Addition based on tax positions related to the current year 5,138 5,900 5,638
Addition based on tax positions related to CSK acquisition - - 8,620
Reduction due to lapse of statute of limitations (1,998) (2,730) (810)
Balance as of December 31 $ 36,710 $ 33,570 $ 30,400
NOTE 14—LEGAL MATTERS
O’Reilly Litigation:
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. Although the Company
cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate,
these matters, taking into account applicable insurance and reserves, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows in a particular quarter or annual period. In addition, O’Reilly is involved in resolving the
governmental investigations that were being conducted against CSK and CSK’s former officers prior to its acquisition by O’Reilly
Automotive, Inc. as described below.
CSK Pre-Acquisition Matters – Governmental Investigations and Actions:
As previously reported, the pre-acquisition Securities and Exchange Commission (“SEC”) investigation of CSK, which commenced in
2006, was settled in May of 2009 by administrative order without fines, disgorgement or other financial remedies. The Department of
Justice (“DOJ”)’s criminal investigation into these same matters as previously disclosed is near a conclusion and is described more
fully below. In addition, the previously reported SEC complaint against three former employees of CSK for alleged conduct related to
CSK’s historical accounting practices remains ongoing. The action filed by the SEC on July 22, 2009, against Maynard L. Jenkins,
the former Chief Executive Officer of CSK seeking reimbursement from Mr. Jenkins of certain bonuses and stock sale profits pursuant
to Section 304 of the Sarbanes-Oxley Act of 2002, as previously reported, also continues. The previously reported DOJ criminal
prosecution of Don Watson, the former Chief Financial Officer of CSK, remains ongoing with trial set to commence on or about June
7, 2011.
With respect to the ongoing DOJ investigation into CSK’s pre-acquisition accounting practices as referenced above, as previously
disclosed, O’Reilly and the DOJ agreed in principle, subject to final documentation, to resolve the DOJ investigation of CSK’s legacy
pre-acquisition accounting practices. The Company and the DOJ continue work to complete the final documentation necessary for the
execution of the Non-Prosecution Agreement previously referenced and payment of the one-time monetary penalty of $20.9 million,
also previously reported. The Company’s total reserve related to the DOJ investigation of CSK was $21.4 million at December 31,
2010, which relates to the amount of the monetary penalty and associated legal costs.
Notwithstanding the agreement in principle with the DOJ, several of CSK’s former directors or officers and current or former
employees have been or may be interviewed or deposed as part of criminal, administrative and civil investigations and lawsuits. As
described above, certain former employees of CSK are the subject of civil and criminal litigation commenced by the government.
Under Delaware law, the charter documents of the CSK entities and certain indemnification agreements, CSK has certain obligations
to indemnify these persons and, as a result, O’Reilly is currently incurring legal fees on behalf of these persons in relation to pending
matters. Some of these indemnification obligations and other related costs may not be covered by CSK’s insurance policies.
As a result of the CSK acquisition, O’Reilly expects to continue to incur ongoing legal fees related to the indemnity obligations related
to the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly has a remaining reserve, with respect
to such indemnification obligations, of $18.8 million at December 31, 2010, which was primarily recorded as an assumed liability in
the Company’s allocation of the purchase price of CSK.
The foregoing governmental investigations and indemnification matters are subject to many uncertainties, and, given their complexity
and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period the
Company’s results of operations and cash flows could be materially affected by an ultimate unfavorable resolution of such matters,
depending, in part, upon the results of operations or cash flows for such period. However, at this time, management believes that the
ultimate outcome of all of such regulatory proceedings and other matters that are pending, after consideration of applicable reserves
and potentially available insurance coverage benefits not contemplated in recorded reserves, should not have a material adverse effect
on the Company’s consolidated financial condition, results of operations and cash flows.
FORM 10-K