<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k2004.txt
<DESCRIPTION>O'REILLY AUTOMOTIVE, INC 2004 10K
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-21318
O'REILLY AUTOMOTIVE, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 44-0618012
--------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
233 South Patterson
Springfield, Missouri 65802
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(Address of principal executive offices, zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained here, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No _____
At February 25, 2005, an aggregate of 55,421,404 shares of the common stock of
the registrant was outstanding. As of that date, the aggregate market value of
the voting stock held by non-affiliates of the Company was approximately
$2,762,756,989 based on the last sale price of the common stock reported by the
Nasdaq Stock Market (National Market).
At June 30, 2004, an aggregate of 55,063,579 shares of the common stock of the
registrant was outstanding. As of that date, the aggregate market value of the
voting stock held by non-affiliates of the Company was approximately
$2,488,873,771 based on the last sale price of the common stock reported by the
Nasdaq Stock Market (National Market).
DOCUMENTS INCORPORATED BY REFERENCE
As provided below, portions of the registrant's documents specified below are
incorporated here by reference:
Document Part-Form 10-K
------------------------------------------- ----------------------------
Portions of the Annual Shareholders' Report
for the Year Ended December 31, 2004 Part II
Proxy Statement for 2005 Annual Meeting of
Shareholders (to be filed pursuant to
Regulation 14A within 120 days of the end of
registrant's most recently completed fiscal year) Part III
<page>
Forward Looking Information
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," "good," "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 this annual report on Form 10-K for the year ended December 31,
2004, for additional factors that could materially affect our financial
performance.
PART I
Item 1. Business
General
O'Reilly Automotive, Inc. is one of the largest specialty retailers of
automotive aftermarket parts, tools, supplies, equipment and accessories in the
United States, selling our products to both do-it-yourself (DIY) customers and
professional installers. At December 31, 2004, we operated 1,249 stores in
Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South
Carolina, Tennessee, Texas and Virginia. Our stores carry an extensive product
line consisting of:
o new and remanufactured automotive hard parts, such as alternators,
starters, fuel pumps, water pumps, brake shoes and pads, chassis parts and
engine parts;
o maintenance items, such as oil, antifreeze, fluids, engine additives and
appearance products;
o accessories, such as floor mats and seat covers; and
o a complete line of autobody paint and related materials, automotive tools
and professional service equipment.
We do not sell tires or perform automotive repairs or installations.
We were founded in 1957 by Charles F. O'Reilly and his son, Charles H.
''Chub'' O'Reilly, Sr. and initially operated from a single store in
Springfield, Missouri. The O'Reilly family has managed the Company since our
inception.
Our goal is to continue to achieve growth in sales and profitability by
capitalizing on our competitive advantages and executing our growth and
expansion strategies.
Our Internet address is www.oreillyauto.com. Interested readers can access
the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, through the Securities and Exchange Commissions website at
www.sec.gov. Such reports are generally available on the day they are filed.
Additionally, the Company will furnish interested readers a paper copy of such
reports, upon request, free of charge.
See "Risk Factors" beginning on page 11 for a description of certain risks
relevant to our business. These risk factors include, among others, risks
related to competition in the automotive aftermarket business, our growth
strategy, our acquisition strategy, our sensitivity to regional economic and
weather conditions, our dependence upon key and other personnel and the
significant voting control held by our principal shareholders.
2
<page>
Competitive Advantages
Proven Ability to Execute Dual Market Strategy. We have an established
track record of serving both DIY customers and professional installers. We
believe our ability to execute a dual market strategy is a competitive
advantage, which enables us to:
o target a larger base of consumers of automotive aftermarket parts;
o capitalize on our existing retail and distribution infrastructure;
o profitably operate both in large markets and less densely populated
geographic areas that typically attract fewer competitors; and
o enhance service levels offered to our DIY customers by offering a broad
selection of stock keeping units (SKUs) and extensive product knowledge
required by professional installers.
We have been committed to a dual market strategy for over 20 years. For
2004, we derived approximately 52% of our product sales from our DIY customers
and approximately 48% from our professional installer customers. As a result of
our historical success in executing our dual market strategy and our 172
full-time sales representatives dedicated solely to calling upon and selling to
the professional installer, we believe we will increase the sales to
professional installers and have a competitive advantage over our retail
competitors who have only recently entered and begun focusing on the
professional installer market.
Superior Customer Service. We seek to attract new DIY and professional
installer customers and to retain existing customers by offering superior
customer service, the key elements of which include:
o superior in-store service through highly-motivated, technically proficient
store personnel (Professional Parts People) using advanced point-of-sale
systems;
o an extensive selection of products;
o attractive stores in convenient locations; and
o competitive pricing, with a low price guarantee.
Technically Proficient Professional Parts People. Our highly proficient
Professional Parts People provide us with a significant competitive advantage,
particularly over less specialized retail operators. We require our Professional
Parts People to undergo extensive and ongoing training and to be technically
knowledgeable, particularly with respect to hard parts, in order to better serve
the technically-oriented professional installers with whom they interact on a
daily basis. Such technical proficiency also enhances the customer service we
provide to our DIY customers, who appreciate the expert assistance provided by
our Professional Parts People.
Strategic Distribution Systems. We believe that the geographic
concentration of our store network in nineteen, contiguous states (Alabama,
Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South
Carolina, Tennessee, Texas and Virginia) and the strategic locations of our ten
distribution centers enable us to maintain optimum inventory levels throughout
our store network. In addition, our inventory management and distribution
systems electronically link each of our stores to a distribution center,
providing for efficient inventory control and management. Our distribution
system provides each of our stores with same day or overnight access to over
100,000 SKUs, many of which are hard to find items not typically stocked by
other parts retailers. We believe the availability of a broad range of products
is a key competitive advantage in satisfying customer demand and generating
repeat business.
Experienced Management Team. Our management team has a demonstrated ability
to successfully execute our business plan, including the identification and
integration of strategic acquisitions. We have experienced twelve consecutive
years of record revenues and earnings growth since becoming a public company in
April 1993. We have a strong senior management team comprised of 60
professionals who average over 16 years of experience with O'Reilly. In
addition, our 90 corporate managers average over 13 years of experience with us
and our 117 district managers average over 9 years of experience with us.
3
<page>
Growth and Expansion Strategies
Aggressively Open New Stores. We intend to continue to aggressively open
new stores in order to achieve greater penetration in existing markets and to
expand into new, contiguous markets. We plan to open approximately 160 stores in
2005 and approximately 170-180 stores in 2006. A majority of the sites for our
proposed 2005 store openings and several of the sites for our proposed 2006
store openings have been identified. In selecting sites for new stores, we seek
to strategically locate store sites in clusters within geographic areas in order
to achieve economies of scale in areas such as management, advertising and
distribution.
We target both small (population less than 100,000) and large markets
(population greater than 100,000) for expansion of our store network. Of the 140
net, new stores added in 2004, 30 are located in Alabama, 2 in Arkansas, 3 in
Florida, 14 in Georgia, 13 in Illinois, 2 in Indiana, 1 in Iowa, 1 in Kansas, 14
in Kentucky, 6 in Louisiana, 15 in Mississippi, 10 in Missouri, 6 in North
Carolina, 1 in Oklahoma, 1 in South Carolina, 15 in Tennessee and 6 in Texas.
While we have faced, and expect to continue to face, more aggressive competition
in the more densely populated markets, we believe that we have competed
effectively, and that we are well positioned to continue to compete effectively,
in such markets and achieve our goal of continued sales and profit growth within
these markets. We also believe that because of our dual market strategy, we are
better able to operate stores in less densely populated areas within our
regional market, which would not otherwise support a national or regional chain
store selling to one portion of the market or the other. Consequently, we expect
to continue to open new stores in less densely populated market areas.
To date, we have experienced no significant difficulties in locating
suitable store sites for construction of new stores or identifying suitable
acquisition candidates for conversion to O'Reilly stores. We typically open new
stores either by (i) constructing a new store at a site we purchase or lease and
stocking the new store with fixtures and inventory, or (ii) acquiring an
independently owned auto parts store, typically by the purchase of substantially
all of the inventory and other assets (other than realty) of such store. Store
sites are strategically located in clusters within geographic areas that
complement our distribution system in order to achieve economies of scale in
management, advertising and distribution costs. Other key factors we consider in
the site selection process include population density and growth patterns, age
and per capita income, vehicle traffic counts, the number and type of existing
automotive repair facilities, other competing auto parts stores, and other
competitors within a pre-determined radius, and the operational strength of such
competitors. When entering new, more densely populated markets, we generally
seek to initially open several stores within a short span of time in order to
maximize the effect of initial promotional programs and achieve further
economies of scale.
Same store growth through increased sales and profitability is also an
important part of our growth strategy. To achieve improved sales and
profitability at existing O'Reilly stores, we continually strive to improve upon
the service provided to our customers. We believe that while competitive pricing
is essential in the competitive environment of the automotive aftermarket
business, it is customer satisfaction (whether of the DIY consumer or
professional installer), resulting from superior customer service that generates
increased sales and profitability.
Selectively Pursue Strategic Acquisitions. Although the automotive
aftermarket industry is still highly fragmented, we believe the ability of
national and regional specialty retail chains, such as O'Reilly, to operate more
efficiently than smaller independent operators or mass merchandisers will result
in continued industry consolidation. Thus, we intend to selectively pursue
acquisition targets that will strengthen our position as a leading automotive
products retailer.
Continually Enhance Store Design and Location. Our current prototype store
design features enhancements such as greater square footage, higher ceilings,
more convenient interior store layouts, brighter lighting, increased parking
availability and dedicated counters to serve professional installers, each
designed to increase product sales and operating efficiencies and enhance
customer service. We continually update the location and condition of our store
network through systematic renovation and relocation of our existing stores to
conform with our prototype store design. We believe that our ability to
consistently achieve growth in same store product sales is due in part to our
commitment to maintaining an attractive store network, which is strategically
located to best serve our customers.
4
<page>
Products and Purchasing
Our stores offer DIY and professional installer customers a wide selection
of brand name and private label products for domestic and imported automobiles,
vans and trucks. We do not sell tires or perform automotive repairs or
installations. Our merchandise generally consists of nationally recognized,
well-advertised, name brand products such as AC Delco, Moog, Murray, Wagner,
Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol,
Valvoline, STP, BWD, Cardone, Wix, Armor All and Turtle Wax. In addition to name
brand products, our stores carry a wide variety of high-quality private label
products under our O'Reilly Auto Parts, SuperStart, BrakeBest, Ultima, Master
Pro and Omnispark proprietary name brands. Because most of our private label
products are produced by nationally recognized manufacturers in accordance with
our specifications, we believe that the private label products are generally of
equal or, in some cases, better quality than comparable name brand products, a
characteristic which is important to our professional installer clientele. We
further believe that the private label products are packaged attractively to
promote customer interest and are generally priced below comparable name brand
products carried in our stores.
We purchase automotive products from approximately 530 vendors, the five
largest of which accounted for approximately 37% of our total purchases in 2004.
Our largest vendor in 2004 accounted for approximately 18% of our total
purchases and the next four largest vendors accounted for 4 - 7% of such
purchases each. We have no long-term contractual purchase commitments with any
of our vendors, nor have we experienced difficulty in obtaining satisfactory
alternative sources of supply for automotive parts. We believe that alternative
supply sources exist at substantially similar costs, for substantially all
automotive products that we sell. It is our policy to take advantage of payment
and seasonal purchasing discounts offered by our vendors, and to utilize
extended dating terms available from vendors due to volume purchasing. During
2004, we entered into various programs and arrangements with certain of our
vendors that provide for extended dating and payment terms for inventory
purchases, including pay-on-scan arrangements. We consider our relationships
with our suppliers to be good.
Inflation and Seasonality
We have been successful, in many cases, in reducing the effects of
merchandise cost increases principally by taking advantage of vendor incentive
programs, economies of scale resulting from increased volume of purchases and
selective forward buying. As a result, we do not believe our operations have
been materially affected by inflation.
Our business is seasonal to some extent primarily as a result of the impact
of weather conditions on store sales. Store sales and profits have historically
been higher in the second and third quarters (April through September) of each
year than in the first and fourth quarters.
5
<page>
Store Network
Store Locations. As a result of our dual market strategy, we are able to
profitably operate in both large, densely populated markets and less densely
populated areas that would not otherwise support a national or regional chain
selling to just one portion of the automotive aftermarket. The following table
sets forth the geographic distribution of our stores:
<table>
<caption>
State Number of Stores
--------------- --------------------
<S> <C>
Alabama 73
Arkansas 74
Florida 10
Georgia 22
Illinois 32
Indiana 8
Iowa 65
Kansas 58
Kentucky 35
Louisiana 56
Mississippi 47
Missouri 142
Nebraska 24
North Carolina 21
Oklahoma 100
South Carolina 1
Tennessee 93
Texas 387
Virginia 1
--------------------
Total 1,249
</table>
Our stores on average carry approximately 23,000 SKUs and average
approximately 6,700 total square feet in size. At December 31, 2004, we had a
total of approximately 8.3 million square feet in our 1,249 stores. Our stores
are served primarily by the nearest distribution center, but also have access to
the broader selection of inventory available at one of our 85 Master Inventory
Stores, which on average carry approximately 36,000 SKUs and average
approximately 8,800 square feet in size. Master Inventory Stores, in addition to
serving DIY and professional installer customers in their markets, also provide
our other stores within their area access to a greater selection of SKUs on a
same-day basis.
We believe that our stores are ''destination stores'' generating their own
traffic rather than relying on traffic created by the presence of other stores
in the immediate vicinity. Consequently, most of our stores are freestanding
buildings situated on or near major traffic thoroughfares, and offer ample
parking and easy customer access.
Store Layout. We utilize a computer-assisted ''plan-o-grammed'' store
layout system to provide a uniform and consistent merchandise presentation;
however, some variation occurs in order to meet the specific needs of a
particular market area. Merchandise is arranged to provide easy customer access
and maximum selling space, keeping high-turnover products and accessories within
view of the customer. Aisle displays are generally used to feature high-demand
or seasonal merchandise, new items and advertised specials.
Store Automation. To enhance store level operations and customer service,
we use IBM AS/400 computer systems in all of our stores. These systems are
linked with the IBM AS/400 computers located in each of our distribution
centers. Our point-of-sale terminals provide immediate access to our electronic
catalog to display parts and pricing information by make, model and year of
vehicle and use bar code scanning technology to price our merchandise. This
system speeds transaction times, reduces register lines and provides enhanced
customer service. Moreover, our store automation systems capture sales
information which assists in store management, strategic planning, inventory
control and distribution efficiency.
6
<page>
New Store Site Selection. In selecting sites for new stores, we seek to
strategically locate store sites in clusters within geographic areas in order to
achieve economies of scale in management, advertising and distribution. Other
key factors we consider in the site selection process include:
o population density and growth patterns;
o age and per capita income;
o vehicle traffic counts;
o the number and type of existing automotive repair facilities; and
o the number of auto parts stores and other competitors within a
pre-determined radius and the operational strength of such competitors.
When entering new, more densely populated markets, we generally seek to
initially open several stores within a short span of time in order to maximize
the effect of initial promotional programs and achieve further economies of
scale. After opening this initial cluster of new stores, we seek to begin
penetrating the less densely populated surrounding areas. This strategy enables
us to achieve additional distribution and advertising efficiencies in each
market.
Distribution System
The following table sets forth the distribution centers we currently
operate:
<table>
<caption>
Square Footage
------------------------------------------------------
Location Distribution Center (1) Office Total
----------------- ---------------------- ------------ ------------
<S> <C> <C> <C>
Dallas, TX 442,376 21,889 464,265
Des Moines, IA 220,691 8,325 229,016
Houston, TX 508,858 21,280 530,138
Kansas City, MO 128,064 2,590 130,654
Knoxville, TN 153,664 9,725 163,389
Little Rock, AR 119,852 7,200 127,052
Mobile, AL 301,068 23,721 324,789
Nashville, TN 398,641 35,000 433,641
Oklahoma City, OK 301,745 5,940 307,685
Springfield, MO 440,850 111,122 (2) 551,972
---------------------- ------------ ------------
3,015,809 246,792 3,262,601
<fn>
(1) Includes both floor and mezzanine square footage.
(2) Includes square footage for corporate offices, technical center and
training center.
</fn>
</table>
Adjacent to the Springfield, Missouri distribution center, we operate a
36,000 square foot bulk merchandise warehouse used for the distribution of bulk
products such as motor oil, antifreeze, batteries, lubricants and other fast
moving bulk products, and a 22,000 square foot returned goods processing
facility, that is included in the above square footage. We also operate a 17,500
square foot bulk warehouse in McAllen, Texas that serves the surrounding
distribution centers with bulk products.
Our distribution centers are equipped with highly automated conveyor
systems, which expedite the movement of our products to loading areas for
shipment to individual stores on a nightly basis. The distribution centers
utilize computer-assisted technology to electronically receive orders from
computers located in each of our stores. In addition to the bar code system
employed in our stores, we have established a satellite-based data interchange
system among those stores in which high-speed data transmission technology is
not readily available, the distribution center, which services such stores and
our corporate headquarters.
We believe that our distribution system assists us in lowering our
inventory-carrying costs, improving our store in-stock positions, and
controlling and managing our inventory. Moreover, we believe that our expanding
network of distribution centers allows us to more efficiently service existing
stores, as well as new stores planned for opening in contiguous market areas.
Our distribution center expansion strategy also complements our new store
opening strategy by supporting newly established clusters of stores located in
the regions surrounding each distribution center. As part of our continuing
efforts to enhance our distribution network, in 2005 we plan to:
7
<page>
o continue to implement improvement plans to increase inventory turnover in
all distribution centers; and
o implement a hands free/eyes free voice picking system; and
o upgrade material handling equipment in several distribution centers
including conveyor systems, forklifts and racking.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY
customers through an extensive advertising program, which includes direct mail,
newspaper, radio and television advertising in selected markets. We believe that
our advertising and promotional activities have resulted in significant name
recognition in each of our market areas. Newspaper and radio advertisements are
generally directed towards specific product and price promotions, frequently in
connection with specific sale events and promotions. To promote sales to car
enthusiasts, who we believe on an individual basis spend more on automotive
products than the public generally, we sponsor 16 nationally televised races and
over 288 motorsports races and car shows at over 200 facilities in 18 states,
including, 3 NASCAR Craftsmen Truck Series Races, 2 NASCAR Busch Series Races in
Dallas, 5 National Hotrod Racing Association races, as well as the O'Reilly
Chili Bowl. O'Reilly Auto Parts is the "official auto parts store" of Texas
Motor Speedway, Kansas Speedway, Bristol Motor Speedway, Houston Raceway Park,
Texas Motorplex, Memphis Motorsports Park, Heartland Park and Talladega
Speedway.
Beginning in 2003, we started work on branding the O'Reilly name in the
National Collegiate Athletic Association, also known as the NCAA. Our first
initiative was to partner with Texas Tech University through a variety of
programs including sponsoring of a television show featuring Bobby Knight, the
coach of the men's basketball team at Texas Tech University, placing the
O'Reilly logo on the home basketball court and coach Knight's sweater, and
advertising on the backs of seats and banners for the scoring table. This has
lead to additional opportunities with approximately 24 colleges and 3
conferences in our current markets. We have found that the more progressive
marketing concepts utilized in the DIY portion of our business can also be
applied to increase sales to our professional installer customers.
Marketing to the Professional Installer. We have over 172 full-time
O'Reilly sales representatives strategically located in the more densely
populated market areas that we serve, and each is dedicated solely to calling
upon and selling to the professional installer. Our First Call program, which is
our commitment to the professional customer, includes a dedicated sales force,
sales and promotions directed to the professional installer and overnight
delivery service from the distribution center to the professional customer.
Moreover, each district manager and store manager throughout our store network
calls upon existing and potential new professional installer customers on a
regular basis. Our First Call marketing strategy, with respect to professional
installers, emphasizes our ability to offer:
o prompt delivery using small trucks or vans operated by virtually all of our
stores;
o a separate counter in all of our stores dedicated exclusively to serving
professional installers;
o trade credit for qualified professional installers;
o broad inventory of merchandise and competitive pricing;
o a professional installer computer system that connects directly to our
inventory system; and
o seminars concerning topics of interest to professional installers, such as
technical updates, safety and general business management.
Marketing to the Independently Owned Parts Store. Along with the operation
of the distribution centers and the distribution of automotive products to the
O'Reilly stores, Ozark Automotive Distributors, Inc. (Ozark) also sells
automotive products to independently owned parts stores whose retail stores are
generally located in areas not serviced by an O'Reilly store. We generally do
not compete with any independently owned parts store to which we sell automotive
products, but have, on occasion, acquired the business assets of an
independently owned parts store supplied by Ozark. Ozark operates its own
separate marketing program to independently owned parts stores through a staff
of three.
8
<page>
Of the approximately 215 independently owned parts stores currently
purchasing automotive products from Ozark, 211 participate in the Auto Value
program through Ozark. As a participant in this program, an independently owned
parts store which meets certain minimum financial and operational standards is
permitted to indicate its Auto Value membership through the display of the Auto
Value logo, which is owned by The Alliance, Inc. (formerly known as Auto Value
Associates, Inc.), a non-profit buying group consisting of approximately 4,500
members as of December 31, 2004, including O'Reilly, engaged in the distribution
or sale of automotive products. Additionally, we provide advertising and
promotional assistance to Auto Value stores purchasing automotive products from
Ozark, as well as marketing and sales support. In return for a commitment to
purchase automotive products from Ozark, we offer assistance to an Auto Value
independently owned parts store by making available computer software for
inventory control.
Management Structure
Each of our stores is staffed with a store manager and an assistant
manager, in addition to the parts specialists and support staff required to meet
the specific needs of each store. Each of our 117 district managers has general
supervisory responsibility for an average of 11 stores within such manager's
district.
Each district manager receives comprehensive training on a bi-monthly
basis, focusing on management techniques, new product announcements, advanced
automotive systems and our policies and procedures. In turn, the information
covered at such bi-monthly meetings is discussed in full by district managers at
bi-monthly meetings with their store managers. All assistant managers and
manager trainees are required to successfully complete a six-month manager
training program, which includes classroom and field training, as a prerequisite
to becoming a store manager. This program covers operations extensively, as well
as principles of successful management. Shortly after becoming a store manager,
all managers attend a manager development program, at the corporate office
headquarters, which includes 40 hours of classroom training. Upon returning to
the stores, managers are given continuous field training throughout their
management experience.
We provide financial incentives to our district managers, store managers,
assistant managers and sales specialists through an incentive compensation
program. Under our incentive compensation program, base salary is augmented by
incentive compensation based upon the achievement of sales and profitability
goals. We believe that our incentive compensation program significantly
increases the motivation and overall performance of our Professional Parts
People and our ability to attract and retain qualified management and other
personnel.
Most of our current senior management, district managers and store managers
were promoted to their positions from within the Company. Our senior management
team averages 16 years of experience with the Company, corporate managers
average over 13 years of service and district managers have an average length of
service with the Company of over 9 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is
essential in providing superior service both to DIY and professional installer
customers. Each of our Professional Parts People is required to be technically
proficient in the workings and application of automotive products due to the
significant portion of our business represented by the professional installer.
In addition, we have found that the typical DIY customer often seeks assistance
from sales persons, particularly in connection with the purchase of hard parts.
We believe that the ability of our Professional Parts People to provide such
assistance to the DIY customer creates a favorable impression during a
customer's visit to our store and is a significant factor in generating repeat
DIY business.
9
<page>
We screen prospective employees, whom we refer to as team members, to
identify highly motivated individuals either with experience in automotive parts
or repairs, or an aptitude for automotive knowledge. Each person who becomes a
team member first participates in an intensive two-day orientation program
designed to introduce the team member to our culture and his or her job duties
before being assigned specific job responsibilities. The successful completion
of additional training is required before a team member is deemed qualified as a
parts specialist and thus able to work at the parts counter of one of our
stores. All new counter people are required to successfully complete a six-month
basic automotive systems training course and are then enrolled in a six-month
advanced automotive systems course for certification by the National Institute
for Automotive Service Excellence (ASE), which administers national exams for
various automotive specialties and requires ASE certified specialists to take
recertification exams every five years.
Each of our stores participates in our sales specialist training program.
Under this program, selected team members complete two days of extensive sales
call training for business development, after which these team members will
spend one day per week calling on existing and new professional installer
customers. Additionally, each team member engaged in such sales activities will
participate in quarterly advanced training programs for sales and business
development.
Customer Service
We seek to provide our customers with an efficient and pleasant in-store
experience by maintaining attractive stores in convenient locations with a wide
selection of automotive products. We believe that the satisfaction of DIY and
professional installer customers is substantially dependent upon our ability to
provide, in a timely fashion, the specific automotive product requested.
Accordingly, each O'Reilly store carries a broad selection of automotive
products designed to cover a wide range of vehicle specifications. We
continuously refine the inventory levels carried in our stores, based in large
part on the sales movement shown by our computerized inventory control system
and on management's assessment of the changes and trends in the marketplace.
Pricing
We believe that a competitive pricing policy is essential within product
categories in order to compete successfully. Product pricing is generally
established to meet the pricing policies of competitors in the market area
served by each store. Most automotive products that we sell are priced at
discounts to the manufacturer suggested prices, and additional savings are
offered through volume discounts and special promotional pricing. Consistent
with our low price guarantee, each of our stores will match any verifiable price
on any in-stock product of the same or comparable quality offered by any of our
competitors.
Competition
We compete in both the DIY and professional installer portions of the
automotive aftermarket. We compete primarily with:
o national and regional retail automotive parts chains (such as AutoZone,
Inc., Advance Auto Parts, CSK Auto Corp. and The Pep Boys-Manny, Moe and
Jack, Inc.);
o independently owned parts stores;
o wholesalers or jobber stores (some of which are associated with national
automotive parts distributors or associations such as NAPA and CarQuest);
o automobile dealers; and
o mass merchandisers that carry automotive replacement parts, maintenance
items and accessories (such as Wal-Mart Stores, Inc.).
We compete on the basis of customer service, which includes merchandise
selection and availability, price, helpfulness of store personnel and store
layout and location.
10
<page>
Team Members
As of December 31, 2004, we had 14,149 full-time team members and 3,261
part-time team members, of whom 13,582 were employed at our stores, 2,818 were
employed at our distribution centers and 1,010 were employed at our corporate
and administrative headquarters. Our team members are not subject to a
collective bargaining agreement. We consider our relations with our team members
to be excellent, and strive to promote good relations with our team members
through various programs designed for such purposes.
Servicemarks and Trademarks
We have registered the servicemarks O'Reilly Automotive, O'Reilly Auto
Parts, and Parts Payoff and the trademarks SuperStart, BrakeBest, Omnispark,
First Call, Ultima, and Master Pro. Further, we are licensed to use the
registered trademarks and servicemarks Auto Value and Parts Master owned by The
Alliance (formerly Auto Value Associates) in connection with our marketing
program. We believe that our business is not otherwise dependent upon any
patent, trademark, servicemark or copyright.
Regulations
Although subject to various laws and governmental regulations relating to
our business, including those related to the environment, we do not believe that
compliance with such laws and regulations has a material adverse effect on our
operations. Further, we are unaware of any failure to comply with any such laws
and regulations that could have a material adverse effect on our operations. We
can not give any assurance, however, that we will not incur significant expenses
in the future in order to comply with any such law or regulation.
Risk Factors
The risk factors listed in this section, as well as any cautionary language
in this Form 10-K, 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 business, weather, terrorist activities, war
and the threat of war. Actual results may materially differ from anticipated
results described in these forward-looking statements. You should be aware that
the occurrence of the events described in these risk factors and elsewhere in
this Form 10-K could have a material adverse effect on our business, operating
results and financial condition.
The Automotive Aftermarket Business is Highly Competitive
Both the DIY and professional installer portions of our business are highly
competitive, particularly in the more densely populated areas that we serve.
Some of our competitors are larger than we are and have greater financial
resources. In addition, some of our competitors are smaller than we are overall
but have a greater presence than we do in a particular market. For a list of our
principal competitors, see the ''Competition'' section of Item 1 of this Form
10-K.
We Cannot Assure Future Growth
We believe that our ability to open additional stores at an accelerated
rate will be a significant factor in achieving our growth objectives for the
future. Failure to achieve our growth objectives may negatively impact the
trading price of our common stock. Our ability to accomplish our growth
objectives is dependent, in part, on matters beyond our control, such as weather
conditions, zoning and other issues related to new store site development, the
availability of qualified management personnel and general business and economic
conditions. We cannot be sure that our growth plans for 2005 and beyond will be
achieved. For a discussion of our growth strategies, see the ''Growth and
Expansion Strategies'' section of Item 1 of this Form 10-K.
11
<page>
Acquisitions May Not Lead to Expected Growth
We expect to continue to make acquisitions as an element of our growth
strategy. Acquisitions involve certain risks that could cause our actual growth
to differ from our expectations. For example:
o we may not be able to continue to identify suitable acquisition candidates
or to acquire additional companies at favorable prices or on other
favorable terms;
o our management's attention may be distracted;
o we may fail to retain key acquired personnel;
o we may assume unanticipated legal liabilities and other problems; and
o we may not be able to successfully integrate the operations (accounting and
billing functions, for example) of businesses we acquire to realize
economic, operational and other benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States. In
particular, approximately 31% of our stores are located in Texas. Therefore, our
business is sensitive to the economic and weather conditions of these regions.
Unusually severe or inclement weather tends to reduce sales, particularly to DIY
customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key
personnel, including David O'Reilly, Ted Wise, Greg Henslee and Jim Batten. Our
business and results of operations could be materially adversely affected by the
unexpected loss of the services of one or more of these individuals.
Additionally, our successful implementation and management of our growth and
expansion strategies will depend on our ability to continue to attract and
retain qualified personnel. We cannot be sure that we will be able to continue
to attract such personnel. For a further discussion of our management and
personnel, see the ''Business'' section of Item 1 and Item 4a of this Form 10-K
and our Proxy Statement on Schedule 14A for the 2005 Annual Meeting of
Shareholders, a portion of which is incorporated herein.
Significant Voting Block is held by the O'Reilly Family
As of the date of this Form 10-K, the O'Reilly family beneficially owns
approximately 10%, or 5,614,687 number of shares, of the outstanding shares of
our common stock. As a result, the O'Reilly family, if they act and act
togehter, represents one of the largest known blocks of our shares and may
continue to be a significant factor in any matter voted on by our shareholders,
including the election of our directors and any merger, sale of assets or other
change in control.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to
volatile fluctuations based on general economic and market conditions. The
market price for our common stock may also be affected by our ability to meet
analysts' expectations. Failure to meet such expectations, even slightly, could
have an adverse effect on the market price of our common stock. In addition,
stock market volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business.
Shares Eligible for Future Sale
All of the shares of common stock currently held by our affiliates may be
sold in reliance upon the exemptive provisions of Rule 144 of the Securities Act
of 1933, as amended, subject to certain volume and other conditions imposed by
such rule. We cannot predict the effect, if any, that future sales of shares of
common stock or the availability of such shares for sale will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock, or the perception that such sales might occur, could
adversely affect the prevailing market price of the common stock.
12
<page>
Item 2. Properties
The following table provides certain information regarding our
administrative offices and distribution centers and offices as of December 31,
2004:
<table>
<caption>
Square
Location Principal Uses(s) Footage Interest
----------------- ----------------------------------------- --------- -----------
<S> <C> <C> <C>
Springfield, MO Distribution Center, Bulk and Return
Facilities and Corporate Offices 333,332 Owned
Springfield, MO Return Facility 130,150 Leased (a)
Springfield, MO Corporate Offices, Training and Technical 33,580 Leased (b)
Center
Springfield, MO Corporate Offices 54,910 Leased (c)
Kansas City, MO Distribution Center and Offices 130,654 Owned
Oklahoma City, OK Distribution Center and Offices 307,685 Owned
Des Moines, IA Distribution Center and Offices 229,016 Owned
Houston, TX Distribution Center and Offices 530,138 Owned
Dallas, TX Distribution Center and Offices 464,265 Owned
Little Rock, AR Distribution Center and Offices 127,052 Leased (d)
Nashville, TN Distribution Center and Offices 433,641 Leased (e)
Knoxville, TN Distribution Center and Offices 163,389 Owned
Mobile, AL Distribution Center and Offices 324,789 Leased (f)
<fn>
(a) Occupied under the terms of two separate leases with an unaffiliated party
both expiring May 31, 2007, subject to renewal of five five-year terms at
our option.
(b) Occupied under the terms of a lease expiring July 31, 2007, with an
unaffiliated party, subject to renewal for three five-year terms at our
option.
(c) Occupied under the terms of a lease with an unaffiliated party expiring
March 31, 2007, subject to renewal for one three-year term at our option.
(d) Occupied under the terms of a lease with an unaffiliated party expiring
March 31, 2012, subject to renewal for four five-year terms at our option.
(e) Occupied under the terms of a two separate leases with an unaffiliated
party with the distribution center lease expiring in December 31, 2008,
subject to renewal of two five-year options. The office space lease expires
December 14, 2008, subject to renewal of two five-year options.
(f) Occupied under the terms of a lease with an unaffiliated party expiring
December 31, 2012, subject to renewal for ten five-year terms at our
option.
</fn>
</table>
Of the 1,249 stores that we operated at December 31, 2004, 455 stores were
owned, 723 stores were leased from unaffiliated parties and 71 stores were
leased from one of three entities owned by the O'Reilly family. Leases with
unaffiliated parties generally provide for payment of a fixed base rent, payment
of certain tax, insurance and maintenance expenses, and an original term of 10
years, subject to one or more renewals at our option. We have entered into
separate master lease agreements with each of the affiliated entities for the
occupancy of the stores covered thereby. Such master lease agreements expire on
December 31, 2004. We believe that the lease agreements with the entities are on
terms comparable to those obtainable from third parties.
We believe that our present facilities are in good condition, are
adequately insured and together with those under construction, are suitable and
adequate for the conduct of our current operations.
13
<page>
Item 3. Legal Proceedings
The Company is involved in various other legal proceedings incidental to
the conduct of its 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, they will have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2004.
Item 4A. Executive Officers of the Company
The following paragraphs discuss information about executive officers of
the Company who are not also directors:
Greg L. Henslee, age 44, Chief Executive Officer and Co-President, has been
an O'Reilly team member for 20 years. Mr. Henslee's primary areas of
responsibilities are Merchandise, Systems and Distributions. His O'Reilly career
started as a Parts Specialist, and during his first five years he served in
several positions in retail store operations, including District Manager. From
there he advanced to Computer Operations Manager, and over the past ten years,
he has served as Director of Computer Operations/Loss Prevention, Vice President
of Store Operations and as Senior Vice President. He has been President of
Merchandise, Distribution, Information Systems and Loss Prevention since July
1999, and in his current position of Chief Executive Officer since February
2005.
Ted F. Wise, age 54, Chief Operating Officer and Co-President, has been an
O'Reilly team member for 34 years. Mr. Wise's primary areas of responsibilities
are Sales, Operations and Real Estate. He began his O'Reilly career in sales in
1970, was promoted to store manager in 1973, and became our first district
manager in 1977. He continued his progression through the ranks as Operations
Manager, Vice President, Senior Vice President focusing on Operations and Sales,
and Executive Vice President. He has been President of Sales, Operations and
Real Estate since July 1999, and in his current position of Chief Operating
Officer since February 2005.
James R. Batten, CPA, age 42, Executive Vice President of Finance, Chief
Financial Officer and Treasurer has been an O'Reilly team member for 12 years.
Mr. Batten's primary areas of responsibility are Accounting and Finance. His
O'Reilly career started as Finance Manager in January 1993 where he served until
being promoted to Chief Financial Officer in March 1994. Prior to joining us in
January 1993, Mr. Batten was employed by the accounting firms of Whitlock, Selim
& Keehn, from 1986 to 1993 and Deloitte, Haskins & Sells from 1984 until 1986.
Jeff Shaw, age 42, Senior Vice President of Sales and Operations, has been
an O'Reilly team member for 15 years. Mr. Shaw's primary areas of responsibility
are managing Store Sales and Operations. His O'Reilly career started as a parts
specialist, and was promoted to store manager within a year. He was promoted to
District Manager in 1992 and placed in charge of the Oklahoma expansion,
promoted to Regional Manager in 1994, and was responsible for the opening of 80
stores over the next 4 years. With the acquisition of HiLo Auto Supply in 1998,
he was promoted to Vice President of the Southern Division responsible for 180
stores. He was in charge of the majority of our expansion growing the Division
to over 500 stores before being transferred to the corporate office in 2003 as
Vice President of Sales and Operations, and was promoted to Senior Vice
President of Sales and Operations in 2004.
Mike Swearengin, age 44, Senior Vice President of Merchandise, has been an
O'Reilly team member 11 years. Mr. Swearengin's primary areas of responsibility
are Merchandise and Purchasing. His O'Reilly career started as a Product
Manager, a position he held four years. From there he advanced to Senior Product
Manager, Director of Merchandise and Vice President of Merchandise with
responsibility for product mix and replenishment. He has been in his current
position as Senior Vice President since January 2004.
14
<page>
PART II
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
Common Stock Market Prices and Dividend Information on page 52 of the
Annual Shareholders' Report for the year ended December 31, 2004, under the
captions, "Market Prices and Dividend Information" and "Number of Shareholders,"
are incorporated herein by reference.
Item 6. Selected Financial Data
Selected Financial Data on pages 22 and 23 of the Annual Shareholders'
Report for the year ended December 31, 2004, under the caption "Selected
Consolidated Financial Data," is incorporated herein by reference.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 26 through 32 of the Annual Shareholders' Report for the
year ended December 31, 2004, under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," is incorporated
herein by reference.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
We do not have any material amounts outstanding under our senior revolving
line of credit, rely on foreign currencies or purchase raw materials or other
commodities. Accordingly, we currently do not experience material levels of
market risk.
Item 8. Financial Statements And Supplementary Data
The Company's consolidated financial statements, the notes thereto and the
report of Ernst & Young LLP, independent registered public accounting firm, on
pages 35 through 48 of the Annual Shareholders' Report for the year ended
December 31, 2004, under the captions, "Consolidated Financial Statements,"
"Notes to Consolidated Financial Statements" and "Report of Independent
Registered Public Accounting Firm," are incorporated herein by reference.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
Item 9A. Disclosure and Internal Control
The Company's management, under the supervision and with the participation
of our chief executive officer and chief financial officer, have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
as of December 31, 2004. Based on such review and evaluation, our chief
executive officer and chief financial officer have concluded that the disclosure
controls and procedures were effective as of December 31, 2004, to ensure that
the information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, (a) is
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms and (b) is accumulated and communicated to the
Company's management, including the officers, as appropriate to allow timely
decisions regarding required disclosure. There were no material changes in the
Company's internal control over financial reporting during the fourth quarter of
2004 that have materially affected or are reasonably likely to materially affect
the Company's internal controls over financial reporting.
15
<page>
Management assessed our internal control over financial reporting as of
December 31, 2004. Management's assessment report is included at the beginning
of Item 8 of this Form 10-K.
Our independent registered public accounting firm, Ernst & Young, LLP,
audited management's assessment and independently assessed the effectiveness of
the Company's internal control over financial reporting. Ernst & Young has
issued an attestation report concurring with management's assessment, which is
included at the beginning of Part II, Item 8 of this Form 10-K.
16
<page>
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the
Company's Proxy Statement on Schedule 14A for the 2005 Annual Meeting of
Shareholders (the Proxy Statement) under the caption "Proposal 1-Election of
Class III Directors" is incorporated herein by reference. The Proxy Statement is
being filed with the Securities and Exchange Commission within 120 days of the
end of the Company's most recent fiscal year end. The information regarding
executive officers called for by item 401 of Regulation S-K is included in Part
I as Item 4A, in accordance with General Instruction G(3) to Form 10-K, for the
executive officers of the Company who are not also directors.
The Company has adopted a code of ethics that applies to all of its
directors, officers (including its chief executive officer, chief operating
officer, chief financial officer, chief accounting officer, controller and any
person performing similar functions) and employees. The Company has also made
the Code of Ethics available on its website at www.oreillyauto.com.
The Company's Board of Directors has determined that Mr. Murphy, Chairman
of the Audit Committee, is a financial expert and independent, under the
standards of Rule 10A-3 and that Mr. Murphy qualifies as an audit committee
financial expert under Item 401(h)(2) of Regulation S-K and is presumed to
satisfy The Nasdaq Marketplace Rule 4350(d)(2) requirements.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 included in the Company's Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" is
incorporated herein by reference.
Item 11. Executive Compensation
The material in the Proxy Statement under the caption "Executive
Compensation", other than the material under the captions "Compensation
Committee Report", "Audit Committee Report" and "Performance Graph" is
incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Information regarding equity compensation plans of the Company in the Proxy
Statement under the caption "Securities Authorized for Issuance Under Equity
Compensation Plans" is incorporated herein by reference. The material in the
Proxy Statement under the caption "Security Ownership of Management and Certain
Beneficial Owners" is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with
Insiders and Others" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The material in the Proxy Statement under the caption "Fees Paid to
Independent Registered Public Accounting Firm" is incorporated herein by
reference.
17
<page>
Item 15. Exhibits, Financial Statement Schedule And Reports On Form 8-K
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive, Inc. and
Subsidiaries included in the Annual Shareholders' Report of the registrant for
the year ended December 31, 2004, are incorporated herein by reference in Part
II, Item 8:
Consolidated Balance Sheets as of December 31, 2004, and 2003 (page 35)
Consolidated Statements of Income for the years ended December 31, 2004,
2003, and 2002 (page 36)
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2003, and 2002 (page 37)
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003, and 2002 (page 38)
Notes to Consolidated Financial Statements for the years ended December 31,
2004, 2003, and 2002 (pages 39-47)
Report of Independent Registered Public Accounting Firm (page 48)
(a) 2. Financial Statement Schedule-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statement schedule of O'Reilly
Automotive, Inc. and Subsidiaries is included in Item 15(d):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) 3. Management Contracts and Compensatory Plans or Arrangements
Each of the Company's management contracts and compensatory plans or
arrangements is identified in the Exhibit Index.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 27, 2004,
that contained financial results for the quarter and year ended December
31, 2003.
The Company filed a Current Report on Form 8-K dated April 20, 2004, that
contained a press release stating that the Company planned to report
financial results for the quarter ended March 31, 2004 on April 29, 2004.
The Company filed a Current Report on Form 8-K dated April 27, 2004, that
contained a press release stating that the Company planned to make a
presentation at the Lehman Brothers Retail Seventh Annual Seminar in New
York, New York on April 26, 2004.
18
<page>
The Company filed a Current Report on Form 8-K dated April 29, 2004, that
contained financial results for the quarter ended March 31, 2004.
The Company filed a Current Report on Form 8-K dated June 9, 2004, that
contained a press release stating that the Company planned to make a
presentation at the Credit Suisse First Boston Retail Conference in New
York, New York.
The Company filed a Current Report on Form 8-K dated June 18, 2004, that
contained a press release stating that the Company planned to make a
presentation at the William Blair & Company 24th Annual Growth Stock
Conference in Chicago, Illinois.
The Company filed a Current Report on Form 8-K dated July 20, 2004, that
contained a press release stating that the Company planned to report
financial results for the quarter ended June 30, 2004 on July 29, 2004.
The Company filed a Current Report on Form 8-K dated July 29, 2004, that
contained financial results for the quarter ended June 30, 2004.
The Company filed a Current Report on Form 8-K dated October 20, 2004, that
contained a press release stating that the Company planned to report
financial results for the quarter ended September 30, 2004 on October 29,
2004.
The Company filed a Current Report on Form 8-K dated October 29, 2004, that
contained financial results for the quarter ended
September 30, 2004.
The Company filed a Current Report on Form 8-K dated October 29, 2004, that
contained a press release stating that the Company planned to make a
presentation at the Gabelli & Company 28th Annual Automotive Aftermarket
Syposium in Las Vegas, Nevada.
(c) Exhibits
See Exhibit Index on page E-1.
19
<page>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
<table>
<caption>
Col. A Col. B Col. C Col. D Col. E
----------------------------- ---------- ----------------------- ---------- ----------
Additions -
Additions - Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions End of
Description of Period Expenses Describe Describe Period
----------------------------- ---------- ---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 2004:
Deducted from asset account:
Allowance for doubtful
accounts $ 986 $ 5,900 $ -- $ 3,469(1) $ 3,417
Year ended December 31, 2003:
Deducted from asset account:
Allowance for doubtful
accounts $ 865 $ 2,319 $ -- $ 2,198(1) $ 986
Year ended December 31, 2002:
Deducted from asset account:
Allowance for doubtful
accounts $ 1,760 $ 1,633 $ -- $ 2,528(1) $ 865
<fn>
(1) Uncollectible accounts written off.
</fn>
</table>
20
<page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
O'REILLY AUTOMOTIVE, INC.
(Registrant)
Date: March 15, 2005
By /s/ Greg Henslee
----------------------------------------
Greg Henslee
Chief Executive Officer and Co-President
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<table>
Signature Title Date
<S> <C> <C>
/s/ David E. O'Reilly Director and Chairman of the Board March 15, 2005
-----------------------------------------------
David E. O'Reilly
/s/ Lawrence P. O'Reilly Director and Vice-Chairman of the Board March 15, 2005
-----------------------------------------------
Lawrence P. O'Reilly
/s/ Charles H. O'Reilly, Jr. Director and Vice-Chairman of the Board March 15, 2005
-----------------------------------------------
Charles H. O'Reilly, Jr.
/s/ Rosalie O'Reilly - Wooten Director March 15, 2005
-----------------------------------------------
Rosalie O'Reilly Wooten
/s/ Ted F. Wise Chief Operating Officer and Co-President March 15, 2005
-----------------------------------------------
Ted F. Wise
/s/ Greg Henslee Chief Executive Officer and Co-President March 15, 2005
(principal executive officer)
-----------------------------------------------
Greg Henslee
/s/ James R. Batten Executive Vice-President of Finance March 15, 2005
Chief Financial Officer and Treasurer
----------------------------------------------- (principal financial officer)
James R. Batten
/s/ Jay D. Burchfield Director March 15, 2005
-----------------------------------------------
Jay D. Burchfield
/s/ Joe C. Greene Director March 15, 2005
-----------------------------------------------
Joe C. Greene
/s/ Paul R. Lederer Director March 15, 2005
-----------------------------------------------
Paul R. Lederer
/s/ John Murphy Director March 15, 2005
-----------------------------------------------
John Murphy
</table>
21
<page>
<table>
<S> <C> <C>
/s/ Ronald Rashkow Director March 15, 2005
-----------------------------------------------
Ronald Rashkow
</table>
22
<page>
<page>
EXHIBIT INDEX
Exhibit
No. Description
2.1* Plan of Reorganization Among the Registrant, Greene County Realty Co.
("Greene County Realty") and Certain Shareholders.
2.2 Agreement and Plan of Merger, dated as of December 23, 1997, by and among
O"Reilly Automotive, Inc., Shamrock Acquisition, Inc. and Hi/LO Automotive,
Inc., filed as Exhibit (c)(1) to the Registrant's Tender Offer Statement on
Schedule 14D-1 dated December 23, 1997, are incorporated herein by this
reference.
3.1* Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3 Amendment to the Restated Articles of Incorporation of the Registrant,
filed as Exhibit 3.3 to the Registrant's quarterly report on Form 10-Q for
the quarter ended September 30,1999, are incorporated herein by this
reference.
4.1* Form of Stock Certificate for Common Stock.
4.2 Rights Agreement, dated as of May 7, 2002, between O'Reilly Automotive,
Inc. and UMB Bank, N.A., as Rights Agent, including the form of Certificate
of Designation, Preferences and Rights as Exhibit A, the form of Rights
Certificates as Exhibit B and the Summary of Rights as Exhibit C, filed as
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated May 8,
2002, is incorporated herein by this reference.
10.1*(a) Form of Employment Agreement between the Registrant and David E.
O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr. and Rosalie
O'Reilly Wooten.
10.2* Lease between the Registrant and O'Reilly Investment Company.
10.3* Lease between the Registrant and O'Reilly Real Estate Company.
10.4 (a) Form of Retirement Agreement between the Registrant and David E.
O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr. and Rosalie
O'Reilly Wooten, filed as Exhibit 10.4 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31, 1997, is
incorporated herein by this reference.
10.7 (a) O'Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File
No. 33-73892, is incorporated herein by this reference.
10.8* (a) O'Reilly Automotive, Inc. 1993 Stock Option Plan.
10.9* (a) O'Reilly Automotive, Inc. Stock Purchase Plan.
10.10* (a) O'Reilly Automotive, Inc. Director Stock Option Plan.
10.11* Commercial and Industrial Real Estate Sale Contract between Westinghouse
Electric Corporation and Registrant.
Page E-1
23
<page>
EXHIBIT INDEX (continued)
Exhibit
No. Description
10.12* Form of Assignment, Assumption and Indemnification Agreement between
Greene County Realty and Shamrock Properties, Inc.
10.13Loan commitment and construction loan agreement between the Registrant and
Deck Enterprises, filed as Exhibit 10.13 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31, 1993, are
incorporated here by this reference.
10.14Lease between the Registrant and Deck Enterprises, filed as Exhibit 10.14
to the Registrant's Annual Shareholders' Report on Form 10-K for the year
ended December 31, 1993, is incorporated here by this reference.
10.15(a) Amended Employment Agreement between the Registrant and Charles H.
O'Reilly, Jr., filed as Exhibit 10.17 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31, 1996, is
incorporated herein by this reference.
10.16O'Reilly Automotive, Inc. Performance Incentive Plan, filed as Exhibit
10.18 (a) to the Registrant's Annual Shareholders' Report on Form 10-K for
the year ended December 31, 1996, is incorporated herein by this reference.
10.17(a) Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.20 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, is incorporated herein by this
reference.
10.18Credit Agreement between the Registrant and NationsBank, N.A. , dated
October 16, 1997, filed as Exhibit 10.17 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, is
incorporated herein by this reference.
10.19Credit Agreement between the Registrant and NationsBank, N.A. , dated
January 27, 1998, filed as Exhibit 10.20 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated
herein by this reference.
10.20(a) Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.21 to the Registrant's Amended Quarterly Report
on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated herein
by this reference.
10.21(a) First Amendment to the O'Reilly Automotive, Inc. Directors' Stock
Option Plan, filed as Exhibit 10.22 to the Registrant's Amended Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated
herein by this reference.
10.22(a) O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as Exhibit
10.23 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, is incorporated herein by this reference.
10.23Trust Agreement between the Registrant's Deferred Compensation Plan and
Bankers Trust, dated February 2, 1998, filed as Exhibit 10.24 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, is incorporated herein by this reference.
24
Page E-2
<page>
EXHIBIT INDEX (continued)
Exhibit
No. Description
10.24(a) 2001 Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan,
dated May 8, 2001, filed herewith.
10.25Note Purchase Agreement, filed as Exhibit 10.25 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, is
incorporated herein by this reference.
10.26(a) First Amendment to Retirement Agreement, dated February 7, 2001, filed
on Exhibit 10.26 to the Registrant's Annual Shareholders' Report on Form
10-K for the year ended December 31, 2001, is incorporated herein by this
reference.
10.27(a) Fourth Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, dated February 7, 2001, filed on Exhibit 10.27 to the Registrant's
Annual Shareholders' Report on Form 10-K for the year ended December 31,
2001, is incorporated herein by this reference.
10.28Credit Agreement between Registrant and Wells Fargo Bank, N.A., dated July
29, 2002 filed as Exhibit 10.28 to the Registrant's Quarterly Report on
From 10-Q for the quarter ended June 30, 2002, is incorporated herein by
this reference.
10.29(a) O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan, filed
herewith.
10.30(a) O'Reilly Automotive, Inc. 2003 Director Stock Option Plan, filed
herewith.
10.31O'Reilly Automotive, Inc. Corporate Governance/Nominating Committee
Charter, filed herewith.
10.32 O'Reilly Automotive, Inc. Audit Committee Charter, filed herewith.
10.33 O'Reilly Automotive, Inc. Compensation Committee Charter, filed herewith.
10.34O'Reilly Automotive, Inc. Code of Business Conduct and Ethics, filed
herewith.
13.1 Portions of the 2003 Annual Report to Shareholders, filed herewith.
18.0 Independent Registered Public Accounting Firm Letter Regarding Accounting
Change, filed herewith.
21.1 Subsidiaries of the Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, independent registered public accounting
firm, filed herewith.
31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
32.2 Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
<page>
25
* Previously filed as Exhibit of same number to the Registration Statement of
the Registrant on Form S-1, File No. 33-58948, and incorporated here by
this reference.
(a) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
Page E-3
26
<page>
<table>
<caption>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders
Selected Consolidated Financial Data
Years ended December 31, 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share data)
INCOME STATEMENT DATA:
Product sales $1,721,241 $1,511,816 $1,312,490 $1,092,112 $890,421 $754,122 $616,302 $316,399 $259,243 $201,492
Cost of goods sold,
including warehouse
and distribution
expenses 978,076 873,481 759,090 624,294 507,720 428,832 358,439 181,789 150,772 116,768
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Gross profit 743,165 638,335 553,400 467,818 382,701 325,290 257,863 134,610 108,471 84,724
Operating, selling,
general and
administrative expenses 552,707 473,060 415,099 353,987 292,672 248,370 200,962 97,526 79,620 62,687
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Operating income 190,458 165,275 138,301 113,831 90,029 76,920 56,901 37,084 28,851 22,037
Other income (expense), net (2,721) (5,233) (7,319) (7,104) (6,870) (3,896) (6,958) 472 1,182 236
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Income before income taxes
and cumulative effect of
accounting change 187,737 160,042 130,982 106,727 83,159 73,024 49,943 37,556 30,033 22,273
Provision for income taxes 70,063 59,955 48,990 40,375 31,451 27,385 19,171 14,413 11,062 8,182
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Income before cumulative
effect of accounting
change 117,674 100,087 81,992 66,352 51,708 45,639 30,772 23,143 18,971 14,091
Cumulative effect of
accounting change,
net of tax (a) 21,892 - - - - - - - - -
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net income $ 139,566 $ 100,087 $ 81,992 $ 66,352 $ 51,708 $ 45,639 $ 30,772 $ 23,143 $ 18,971 $ 14,091
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
BASIC EARNINGS PER COMMON
SHARE:
Income before cumulative
effect of
accounting change $ 2.14 $ 1.86 $ 1.54 $ 1.27 $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40
Cumulative effect of
accounting change (a) 0.40 - - - - - - - - -
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net income per share $ 2.54 $ 1.86 $ 1.54 $ 1.27 $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
Weighted-average common
shares outstanding 55,010 53,908 53,114 52,121 51,168 48,674 42,476 42,086 41,728 35,640
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION:
Income before cumulative
effect of
accounting change $ 2.11 $ 1.84 $ 1.53 $ 1.26 $ 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39
Cumulative effect of
accounting change (a) 0.40 - - - - - - - - -
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net income per share $ 2.51 $ 1.84 $ 1.53 $ 1.26 $ 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
Weighted-average common
shares outstanding
- adjusted 55,711 54,530 53,692 52,786 51,728 49,715 43,204 42,554 42,064 35,804
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
PRO FORMA INCOME
STATEMENT DATA:
Product sales $1,511,816 $1,312,490 $1,092,112 $890,421 $754,122 $616,302 $316,399 $259,243 $201,492
Cost of goods sold,
including warehouse
and distribution
expenses 872,658 754,844 618,217 501,567 425,229 350,581 180,170 149,248 115,730
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Gross profit 639,158 557,646 473,895 388,854 328,893 265,721 136,229 109,995 85,762
Operating, selling,
general and
administrative expenses 473,060 415,099 353,987 292,672 248,370 200,962 97,526 79,620 62,687
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Operating income 166,098 142,547 119,908 96,182 80,523 64,759 38,703 30,375 23,075
Other income
(expense), net (5,233) (7,319) (7,104) (6,870) (3,896) (6,958) 472 1,182 236
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Income before
income taxes 160,865 135,228 112,804 89,312 76,627 57,801 39,175 31,557 23,311
Provision for
income taxes 60,266 50,595 42,672 33,776 28,747 22,141 15,025 11,638 8,574
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net income $ 100,599 $ 84,633 $ 70,132 $ 55,536 $ 47,880 $ 35,660 $ 24,150 $ 19,919 $ 14,737
========== ========== ========== ======== ======== ======== ======== ======== ========
Net income per share $ 1.87 $ 1.59 $ 1.35 $ 1.09 $ 0.98 $ 0.84 $ 0.57 $ 0.48 $ 0.41
========== ========== ========== ======== ======== ======== ======== ======== ========
Net income per share -
assuming dilution $ 1.84 $ 1.58 $ 1.33 $ 1.07 $ 0.96 $ 0.83 $ 0.57 $ 0.47 $ 0.41
========== ========== ========== ======== ======== ======== ======== ======== ========
<fn>
(a) See Management's Discussion and Analysis of Financial Condition and Results
of Operations, 2004 Compared to 2003.
</fn>
</table>
27
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
(In thousands, except selected operating data)
<table>
Years ended December 31, 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores at
year-end (a) 1,249 1,109 981 875 672 571 491 259 219 188
Total store square
footage at year-end
(in 000's) (a) (b) 8,318 7,348 6,408 5,882 4,491 3,777 3,172 1,417 1,151 923
Weighted-average product
sales per store
(in 000's) (a) (b) $ 1,443 $ 1,413 $ 1,372 $ 1,426 $ 1,412 $ 1,422 $ 1,368 $ 1,300 $ 1,240 $ 1,101
Weighted-average product
sales per square
foot (b) (d) $ 217 $ 215 $ 211 $ 219 $ 218 $ 223 $ 238 $ 244 $ 251 $ 227
Percentage increase in
same-store product
sales (c) 6.8% 7.8% 3.7% 8.8% 5.0% 9.6% 6.8% 6.8% 14.4% 8.9%
BALANCE SHEET DATA:
Working capital $ 479,662 $ 441,617 $ 483,623 $ 429,527 $296,272 $249,351 $208,363 $ 93,763 $ 74,403 $ 80,471
Total assets 1,432,357 1,157,033 1,009,419 856,859 715,995 610,442 493,288 247,617 183,623 153,604
Current portion of
long-term debt
and short-term debt 592 925 682 16,843 49,121 19,358 13,691 130 3,154 231
Long-term debt,
less current portion 100,322 120,977 190,470 165,618 90,463 90,704 170,166 22,641 237 358
Shareholders' equity 947,817 784,285 650,524 556,291 463,731 403,044 218,394 182,039 155,782 133,870
<fn>
(a) Store count for 2002 does not include 27 stores acquired from Dick Smith
Enterprises and Davie Automotive, Inc. in December 2002.
(b) Total square footage includes normal selling, office, stockroom and
receiving space. Weighted-average product sales per store and per square
foot are weighted to consider the approximate dates of store openings or
expansions.
(c) Same-store product sales are calculated based on the change in product
sales of stores open at least one year. Prior to 2000, same-store product
sales data were calculated based on the change in product sales of only
those stores open during both full periods being compared. Percentage
increase in same-store product sales is calculated based on store sales
results, which exclude sales of specialty machinery, sales by outside
salesmen and sales to employees.
(d) 1998 does not include stores acquired from Hi/LO. Consolidated
weighted-average product sales per square foot were $207.
</fn>
</table>
28
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of operations
and liquidity and capital resources should be read in conjunction with our
consolidated financial statements, related notes and other financial information
included elsewhere in this annual report.
We are one of the largest specialty retailers of automotive aftermarket
parts, tools, supplies, equipment and accessories in the United States, selling
our products to both do-it-yourself (DIY) customers and professional installers.
Our stores carry an extensive product line consisting of new and remanufactured
automotive hard parts, maintenance items and accessories, and a complete line of
auto body paint and related materials, automotive tools and professional service
equipment.
We calculate same-store product sales based on the change in product sales
for stores open at least one year. Prior to January 2000, we calculated
same-store product sales based on the change in product sales of only those
stores open during both full periods being compared. We calculate the percentage
increase in same-store product sales based on store sales results, which exclude
sales of specialty machinery, sales by outside salesmen and sales to team
members.
Cost of goods sold consists primarily of product costs and warehouse and
distribution expenses. Cost of goods sold as a percentage of product sales may
be affected by variations in our product mix, price changes in response to
competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily
of salaries and benefits for store and corporate team members, occupancy,
advertising expenses, general and administrative expenses, data processing,
professional expenses and other related expenses.
29
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of our
company. To aid in that understanding, management has identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
o Cost of goods sold - Cost of goods sold includes warehouse and distribution
expenses and estimates of amounts due from vendors for certain merchandise
allowances and rebates. These estimates are consistent with historical
experience.
o Operating, selling, general and administrative expense (OSG&A) - Operating,
selling, general and administrative expense includes estimates for medical,
workers' compensation and other general liability insurance obligations,
which are partially based on estimates of certain claim costs and
historical experience.
o Accounts receivable - Allowance for doubtful accounts is estimated based on
historical loss ratios and consistently has been within management's
expectations.
o Revenue - Over-the-counter retail sales are recorded when the customer
takes possession of merchandise. Sales to professional installers, also
referred to as "commercial sales", are recorded upon delivery of
merchandise to the customer, generally at the customer's place of business.
Wholesale sales to other retailers, also referred to as "jobber sales" are
recorded upon shipment of merchandise. All sales are recorded net of
estimated allowances and discounts.
o Vendor concessions ' The Company receives concessions from its vendors
through a variety of programs and arrangements, including co-operative
advertising, allowances for warranties and volume purchase rebates.
Co-operative advertising allowances that are incremental to our advertising
program, specific to a product or event and identifiable for accounting
purposes are reported as a reduction of advertising expense in the period
in which the advertising occurred. All other vendor concessions are
recognized as a reduction of cost of sales when recognized in the
consolidated statement of income.
30
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
o Stock-based compensation - We have elected to use the intrinsic value
method of accounting for stock options issued under our stock option plans
and accordingly do not record an expense for such stock options. For
purposes of pro forma disclosures under the fair value method, the
estimated fair value of the options is amortized to expense over the
options' vesting period. During the fourth quarter of 2004, the Company
changed its method of applying its LIFO accounting policy for inventory
costs (see Note 2 - Accounting Changes). Our stock compensation pro forma
information for the years ended December 31, is as follows, both excluding
and including the effects of the inventory accounting change:
<table>
<caption>
2004 2003 2002
---------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Excluding inventory accounting change
Net income, as reported.................... $ 139,566 $ 100,087 $ 81,992
Stock-based compensation expense, net
of tax, as reported...................... - - -
Stock-based compensation expense, net
of tax, under fair value method.......... 7,468 9,204 7,217
---------------------------------
Pro forma net income....................... $ 132,098 $ 90,883 $ 74,775
=================================
Pro forma basic net income per share....... $ 2.40 $ 1.69 $ 1.41
=================================
Pro forma net income per share-
assuming dilution........................ $ 2.37 $ 1.67 $ 1.39
=================================
Net income per share, as reported
Basic...................................... $ 2.54 $ 1.86 $ 1.54
=================================
Assuming dilution.......................... $ 2.51 $ 1.84 $ 1.53
=================================
Including inventory accounting change
Net income................................. $ 100,599 $ 84,633
Stock based compensation expense, net
of tax, as reported...................... - -
Stock based compensation expense, net
of tax, under fair value method.......... 9,204 7,217
----------------------
Pro forma net income....................... $ 91,395 $ 77,416
======================
Pro forma basic net income per share....... $ 1.70 $ 1.46
======================
Pro forma net income per share-
assuming dilution........................ $ 1.68 $ 1.44
======================
</table>
31
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth, certain income statement data as a percentage of
product sales for the years indicated:
<table>
<Caption>
Years ended December 31,
--------------------------
2004 2003 2002
<S> <C> <C> <C>
Product sales.............................. 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse
and distribution expenses................ 56.8 57.8 57.8
--------------------------
Gross profit............................... 43.2 42.2 42.2
Operating, selling, general and
administrative expenses.................. 32.1 31.3 31.6
--------------------------
Operating income........................... 11.1 10.9 10.6
Other expense, net......................... (0.2) (0.3) (0.6)
--------------------------
Income before income taxes and cumulative
effect of accounting change.............. 10.9 10.6 10.0
Provision for income taxes................. 4.1 4.0 3.7
--------------------------
Income before cumulative effect of
accounting change........................ 6.8 6.6 6.3
--------------------------
Cumulative effect of accounting
change, net of tax....................... 1.3 - -
--------------------------
Net income................................. 8.1% 6.6% 6.3%
==========================
</table>
See Management's Discussion and Analysis of Financial Condition and Results
of Operations, 2004 Compared to 2003, for detailed information on cumulative
effect of accounting change.
32
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2004 COMPARED TO 2003
Product sales increased $209.4 million, or 13.9% from $1.51 billion in 2003
to $1.72 billion in 2004, primarily due to 140 net additional stores opened
during 2004, and a 6.8% increase in same-store product sales for stores open at
least one year. We believe that the increased product sales achieved by the
existing stores are the result of our offering of a broader selection of
products in most stores, an increased promotional and advertising effort through
a variety of media and localized promotional events, and continued improvement
in the merchandising and store layouts of most stores. Also, our continued focus
on serving professional installers contributed to increased product sales.
Gross profit increased 16.4% from $638.3 million (42.2% of product sales)
in 2003 to $743.2 million (43.2% of product sales) in 2004. Gross profit dollars
rose $100.4 million due to the increase in product sales and $4.4 million due to
a change in accounting method. The increase in gross profit as a percent of
product sales is related to improvements in our distribution cost and improved
product margin related to product acquisition cost.
OSG&A increased $79.6 million from $473.1 million (31.3% of product sales)
in 2003 to $552.7 million (32.1% of product sales) in 2004. The increase in
these expenses was primarily attributable to increased salaries and benefits,
rent and other costs associated with the addition of employees and facilities to
support the increased level of our operations.
Corrections of errors related to lease accounting represented $10.4 million
($3.5 million related to 2004) of the increase. Rent expense increased $4.4
million ($0.9 million related to 2004), as a result of corrections in the
Company's method of calculating straight-line rent expense. Depreciation
increased $6.0 million ($2.6 million related to 2004), as a result of
corrections in the Company's method of calculating amortization of leasehold
improvements. The Company's policy is to amortize leasehold improvements over
the lesser of the lease term or the estimated economic life of those assets.
Generally, for stores the lease term is the base lease term and for distribution
centers the lease term includes the base lease term plus certain renewal option
periods for which renewal is reasonably assured and failure to exercise the
renewal option would result in an economic penalty. The calculation for
straight-line rent expense is based on the same lease term. Previously,
leasehold improvements were amortized over a period of time which included both
the base lease term and the first renewal option period of the lease and rent
expense was recorded as paid.
Other expense, net, decreased by $2.5 million from $5.2 million in 2003 to
$2.7 million in 2004. The decrease was primarily due to a reduction in interest
expense as a result of lower average borrowings under our credit facility.
Provision for income taxes increased from $60.0 million in 2003 (37.5%
effective tax rate) to $70.1 million in 2004 (37.3% effective tax rate). The
increase in the dollar amount was primarily due to the increase of income before
income taxes.
The cumulative change in accounting method, effective January 1, 2004,
changed the method of applying our LIFO accounting policy for certain inventory
costs. Under the new method, we inventoried certain procurement, warehousing and
distribution center costs. The previous method was to recognize those costs as
incurred, reported as a component of costs of goods sold. We believe the new
method is preferable, since it better matches revenues and expenses and is the
prevalent method used by other entities within the automotive aftermarket
industry.
Net income in 2004 was $139.6 million (8.1% of product sales), an increase
of $39.5 million or 39.4%, from net income in 2003 of $100.1 million (6.6% of
product sales).
34
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2003 COMPARED TO 2002
Product sales increased $199.3 million, or 15.2% from $1.31 billion in 2002
to $1.51 billion in 2003, primarily due to 128 net additional stores opened
during 2003, and a 7.8% increase in same-store product sales for stores open at
least one year. We believe that the increased product sales achieved by the
existing stores are the result of our offering of a broader selection of
products in most stores, an increased promotional and advertising effort through
a variety of media and localized promotional events, and continued improvement
in the merchandising and store layouts of most stores. Also, our continued focus
on serving professional installers contributed to increased product sales.
Gross profit increased 15.4% from $553.4 million (42.2% of product sales)
in 2002 to $638.3 million (42.2% of product sales) in 2003. The increase in
gross profit dollars is due to the increase in product sales.
OSG&A increased $58.0 million from $415.1 million (31.6% of product sales)
in 2002 to $473.1 million (31.3% of product sales) in 2003. The increase in
these expenses was primarily attributable to increased salaries and benefits,
rent and other costs associated with the addition of employees and facilities to
support the increased level of our operations. The decrease in OSG&A expenses as
a percent of product sales was primarily due to achieving greater economies of
scale resulting from increased product sales and through management's expense
control initiatives.
Other expense, net, decreased by $2.1 million from $7.3 million in 2002 to
$5.2 million in 2003. The decrease was primarily due to a reduction in interest
expense as a result of lower average borrowings under our credit facility and to
a lesser extent lower average interest rates.
Provision for income taxes increased from $49.0 million in 2002 (37.4%
effective tax rate) to $60.0 million in 2003 (37.5% effective tax rate). The
increase in the dollar amount was primarily due to the increase of income before
income taxes.
Net income in 2003 was $100.1 million (6.6% of product sales), an increase
of $18.1 million or 22.1%, from net income in 2002 of $82.0 million (6.3% of
product sales).
34
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $226.5 million in 2004,
$168.8 million in 2003 and $104.5 million in 2002. The increase in cash provided
by operating activities in 2004 compared to 2003 was primarily due to increases
in net income and accounts payable, partially offset by increases in receivables
and inventory. The increase in accounts payable was primarily due to
management's efforts with vendors to extend the terms of payment. The increases
in accounts receivable and inventory primarily relate to the increased level of
our operations.
The increase in cash provided by operating activities in 2003 compared to
2002 was primarily due to increases in net income and accounts payable and a
smaller increase in inventory than the prior year. The increase in accounts
payable was primarily due to management's efforts with vendors to extend the
terms of payment. Inventory growth was reduced by transition of certain product
lines to vendor consignment programs.
Net cash used in investing activities was $172.0 million in 2004, $130.6
million in 2003 and $105.4 million in 2002. The increase in cash used in
investing activities in 2004 and 2003 was primarily due to increased purchases
of property and equipment.
Capital expenditures were $173.5 million in 2004, $136.5 million in 2003
and $102.3 million in 2002. These expenditures were primarily related to the
opening of new stores, as well as the relocation or remodeling of existing
stores. We either opened or acquired 140, 128 and 106 net stores in 2004, 2003
and 2002, respectively. We remodeled or relocated 30 stores and remodeled one
distribution center in 2004, remodeled or relocated 46 stores and two
distribution centers in 2003 and 27 stores in 2002. One new distribution center
was acquired in 2003, located near Mobile, Alabama.
Our continuing store expansion program requires significant capital
expenditures and working capital principally for inventory requirements. Our
2005 growth plans call for approximately 160 new stores and capital expenditures
of $175 million to $185 million. The costs associated with the opening of a new
store (including the cost of land acquisition, improvements, fixtures, inventory
and computer equipment) are estimated to average approximately $900,000 to $1.1
million; however, such costs may be significantly reduced where we lease, rather
than purchase, the store site. Although the cost to acquire the business of an
independently owned parts store varies, depending primarily upon the amount of
inventory and the amount, if any, of real estate being acquired, we estimate
that the average cost to acquire such a business and convert it to one of our
stores is approximately $400,000. We plan to finance our expansion program
through cash expected to be provided from operating activities and available
borrowings under our existing credit facilities.
35
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (continued)
On July 29, 2002, we completed an unsecured, three-year syndicated credit
facility (Credit Facility) in the amount of $150 million led by Wells Fargo Bank
as the Administrative Agent, replacing a five-year syndicated credit facility.
The Credit Facility is guaranteed by all of our subsidiaries and may be
increased to a total of $200 million, subject to the availability of such
additional credit from either existing banks within the Credit Facility or other
banks. At December 31, 2004 we had no outstanding balance with the Credit
Facility. The Credit Facility bears interest at LIBOR plus a spread ranging from
0.875% to 1.375% (2.06% at December 31, 2003) and expires in July 2005. At
December 31, 2003, $20.0 million of the Credit Facility was outstanding.
Additionally, letters of credit totaling $21.3 million and $11.0 million were
outstanding at December 31, 2004 and 2003, respectively. Accordingly, our
aggregate availability for additional borrowings under the Credit Facility was
$128.7 million and $119.0 million at December 31, 2004 and 2003, respectively.
OFF BALANCE SHEET ARRANGEMENTS
We have utilized various financial instruments from time to time as sources
of cash when such instruments provided a cost effective alternative to our
existing sources of cash. We do not believe, however, that we are dependent on
the availability of these instruments to fund our working capital requirements
or our growth plans.
On December 29, 2000, we completed a sale-leaseback transaction. Under the
terms of the transaction, we sold 90 properties, including land, buildings and
improvements, which generated $52.3 million of additional cash. The lease, which
is being accounted for as an operating lease, provides for an initial lease term
of 21 years and may be extended for one initial ten-year period and two
additional successive periods of five years each. The resulting gain of $4.5
million has been deferred and is being amortized over the initial lease term.
Net rent expense during the initial term will be approximately $5.5 million
annually and is included in the table of contractual obligations under
non-cancelable operating leases.
In August 2001, we completed a sale-leaseback with O'Reilly-Wooten 2000 LLC
(an entity owned by certain shareholders of the Company). The transaction
involved the sale and leaseback of nine O'Reilly Auto Parts stores and resulted
in approximately $5.6 million of additional cash to the Company. The transaction
did not result in a material gain or loss. The lease, which has been accounted
for as an operating lease, calls for an initial term of 15 years with three
five-year renewal options.
On June 26, 2003, we completed an amended and restated master agreement to
our $50 million Synthetic Operating Lease Facility (the Facility or the
Synthetic Lease) with a group of financial institutions. The terms of the
Facility provide for an initial lease period of five years, a residual value
guarantee of approximately $43.2 million at December 31, 2004, and purchase
options on the properties. The Facility also contains a provision for an event
of default whereby the lessor, among other things, may require us to purchase
any or all of the properties. One additional renewal period of five years may be
requested from the lessor, although the lessor is not obligated to grant such
renewal. The Facility has been accounted for as an operating lease under the
provisions of Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 13 and related interpretations, including FASB
Interpretation No. 46. Future minimum rental commitments under the Facility have
been included in the table of contractual obligations below.
36
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OFF BALANCE SHEET ARRANGEMENTS (CONTINUED)
We issue stand-by letters of credit provided by a $30 million sublimit
under the Credit Facility that reduce our available borrowings. These letters of
credit are issued primarily to satisfy the requirements of workers compensation,
general liability and other insurance policies. Substantially all of the
outstanding letters of credit have a one-year term from the date of issuance and
have been issued to replace surety bonds that were previously issued. Letters of
credit totaling $21.3 million and $11.0 million were outstanding at December 31,
2004 and 2003, respectively.
CONTRACTUAL OBLIGATIONS
We have other liabilities reflected in our balance sheet, including
deferred income taxes and self-insurance accruals. The payment obligations
associated with these liabilities are not reflected in the financial commitments
table due to the absence of scheduled maturities. Therefore, the timing of these
payments cannot be determined, except for amounts estimated to be payable in
2005 that are included in current liabilities.
Our contractual obligations, including commitments for future payments
under non-cancelable lease arrangements and short and long-term debt
arrangements, are summarized below and are fully disclosed in Notes 4 and 5 to
the consolidated financial statements.
<table>
<caption>
Payments Due By Period
---------------------------------------------------------
Before 1-3 4-5 Over 5
Total 1 Year Years Years Years
Contractual Obligations: (In thousands)
<S> <C> <C> <C> <C> <C>
Long-term debt......................... $ 100,914 $ 592 $ 75,317 $ 25,005 $ -
Operating leases....................... 315,043 36,341 66,108 52,576 160,018
---------------------------------------------------------
Total contractual cash obligations..... $ 415,957 $ 36,933 $ 141,425 $ 77,581 $ 160,018
=========================================================
</table>
We believe that our existing cash and cash equivalents, cash expected to be
provided by operating activities, available bank credit facilities and trade
credit will be sufficient to fund both our short-term and long-term capital
needs for the foreseeable future.
INFLATION AND SEASONALITY
We attempt to mitigate the effects of merchandise cost increases
principally by taking advantage of vendor incentive programs, economies of scale
resulting from increased volume of purchases and selective forward buying. As a
result, we do not believe that our operations have been materially affected by
inflation. Our business is somewhat seasonal, primarily as a result of the
impact of weather conditions on store sales. Store sales and profits have
historically been higher in the second and third quarters (April through
September) of each year than in the first and fourth quarters.
37
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESTATEMENT OF QUARTERLY RESULTS
The following table sets forth certain quarterly unaudited operating data
for fiscal 2004 and 2003. The unaudited quarterly information includes all
adjustments which management considers necessary for a fair presentation of the
information shown. We have restated our quarterly financial information for each
of the first three quarters of 2004. Effective January 1, 2004, the Company
changed its method of applying its LIFO accounting policy for inventory costs.
Under the new method, the Company has inventoried certain warehousing and
distribution center costs. The Company's previous method recorded these expenses
directly into cost of goods sold. The Company believes the change in application
of accounting method is preferable as it more accurately matches revenues and
expenses and is the prevelant method used by other entities within the Company's
industry. The cumulative effect of this change in application of accounting
method is $21,892,000 as of January 1, 2004, net of the related deferred tax
effect of $13,303,000.
The unaudited operating data presented below should be read in conjunction
with our consolidated financial statements and related notes included elsewhere
in this annual report, and the other financial information included therein.
<table>
<caption>
Fiscal 2004
---------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter
-------------------- -------------------- -------------------
Previously Previously Previously Fourth
Reported Restated Reported Restated Reported Restated Quarter(a)
--------- --------- --------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Product sales.................... $ 403,294 $ 403,294 $ 435,167 $ 435,167 $ 455,162 $ 455,162 $ 427,618
Gross profit..................... 169,338 169,593 187,758 189,435 195,848 198,169 185,968
Operating income................. 43,772 44,027 52,565 54,242 53,809 56,130 36,059
Income before cumulative effect
of accounting change........... 27,126 27,285 32,652 33,695 33,243 34,687 22,007
Cumulative effect of accounting
change, net of tax............. - 21,892 - - - - -
Net income....................... 27,126 49,177 32,652 33,695 33,243 34,687 22,007
Basic net income per common
share before cumulative effect
of accounting change........... 0.50 0.50 0.59 0.61 0.60 0.63 0.40
Cumulative effect of accounting
change, net of tax............. - 0.40 - - - - -
Basic net income per
common share................... 0.50 0.90 0.59 0.61 0.60 0.63 0.40
Diluted net income per common
share before cumulative effect
of accounting change........... 0.49 0.49 0.59 0.61 0.60 0.62 0.39
Cumulative effect of accounting
change, net of tax............. - 0.40 - - - - -
Net income per common
share-assuming dilution........ 0.49 0.89 0.59 0.61 0.60 0.62 0.39
<fn>
(a) During the fourth quarter 2004, the Company recorded a correction of an
error of $10.4 million ($3.5 million related to 2004) $6.5 million, net of
tax. See Note 1 to our consolidated financial statements.
</fn>
</table>
38
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESTATEMENT OF QUARTERLY RESULTS (CONTINUED)
<table>
<caption>
Fiscal 2003
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Product sales............... $ 339,475 $ 393,112 $ 412,182 $ 367,047
Gross profit................ 140,946 165,713 175,653 156,023
Operating income............ 33,341 44,726 48,362 38,846
Net income.................. 19,728 26,924 29,533 23,902
Basic net income per
common share.............. 0.37 0.50 0.55 0.44
Net income per common
share-assuming dilution... 0.37 0.50 0.54 0.43
</table>
NEW ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle
capacity and spoilage costs should be excluded from the cost of inventory and
expensed when incurred. The provision is effective for fiscal periods beginning
after June 15, 2005. We do not expect the adoption of this standard to have a
material effect on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.
SFAS 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. We do not expect the adoption of this standard to have a material
effect on our financial position, results of operations or cash flows.
39
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NEW ACCOUNTING STANDARDS (continued)
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS
No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation,
and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25
and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS 123R is the first reporting
period beginning after June 15, 2005, which is third quarter 2005 for calendar
year companies, such as ourselves, although early adoption is allowed. SFAS 123R
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
123R. Under the "modified retrospective" method, the requirements are the same
as under the "modified prospective" method, but also permits entities to restate
financial statements of previous periods based on pro forma disclosures made in
accordance with SFAS 123. We currently utilize a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options granted to
employees. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. We have not yet determined
which model we will use to measure the fair value of employee stock options upon
the adoption of SFAS 123R. See Note 8 for further information. SFAS 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 current literature. This requirement
will reduce net operating cash flows and increase net financing cash flows in
periods after the effective date. These future amounts cannot be estimated,
because they depend on, among other things, when employees exercise stock
options. However, the amount of operating cash flows recognized in prior periods
for such excess tax deductions, as shown in our Consolidated Statement of Cash
Flows, were $4.5 million, $5.5 million, and $1.5 million, for the years ended
December 31, 2004, 2003, and 2002, respectively. We currently expect to adopt
SFAS 123R effective July 1, 2005; however, we have not yet determined which of
the aforementioned adoption methods we will use and are still evaluating the
standard. See Note 8 for further information on our stock-based compensation
plans.
40
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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," "good," "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, 2004,
for additional factors that could materially affect our financial performance.
41
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of O'Reilly Automotive, Inc. and Subsidiaries (the Company) is
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Internal control over financial reporting includes all policies and procedures
that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company;
and
o provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
Under the supervision and with the participation of our management, including
our principal Executive Officer and our principal Financial Officer, we assessed
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2004. In making this assessment, we used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control - Integrated Framework. Based on our assessment, we believe
that as of December 31, 2004, the Company's internal control over financial
reporting is effective based on those criteria.
Ernst & Young LLP, Independent Registered Public Accounting Firm, that audited
the Company's consolidated financial statements has issued an attestation report
on management's assessment of the Company's internal control over financial
reporting, as stated in their report which is included herein.
/s/ Greg Henslee /s/ Jim Batten
-------------------------------- -------------------------------------
Chief Executive Officer & Executive Vice President of Finance &
Co-President Chief Financial Officer
42
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of O'Reilly Automotive, Inc. and
Subsidiaries
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that O'Reilly
Automotive, Inc. and Subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). O'Reilly
Automotive, Inc. and Subsidiaries' management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that O'Reilly Automotive, Inc. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, O'Reilly Automotive, Inc. and Subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
O'Reilly Automotive, Inc. and Subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004 of
O'Reilly Automotive, Inc. and Subsidiaries and our report dated March 7, 2005
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 7, 2005
43
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
<table>
<caption>
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
2004 2003
------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $ 69,028 $ 21,094
Accounts receivable, less
allowance for doubtful accounts
of $3,417 in 2004 and $986 in 2003... 60,928 52,235
Amounts receivable from vendors, net... 52,976 50,695
Inventory.............................. 625,320 523,750
Deferred income taxes.................. - 4,753
Other current assets................... 5,225 4,399
------------------------
Total current assets................ 813,477 656,926
Property and equipment, at cost:
Land................................... 82,781 58,571
Buildings.............................. 278,752 212,937
Leasehold improvements................. 108,144 79,994
Furniture, fixtures and equipment ..... 257,890 220,123
Vehicles............................... 64,227 54,517
------------------------
791,794 626,142
Accumulated depreciation and
amortization......................... 224,301 177,084
------------------------
Net property and equipment.......... 567,493 449,058
Notes receivable, less current portion.. 21,690 24,313
Other assets, net....................... 29,697 26,736
------------------------
Total assets............................ $1,432,357 $1,157,033
========================
</table>
44
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
<table>
<caption>
December 31,
2004 2003
------------------------
(In thousands)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Income taxes payable.................. $ 9,736 $ 6,872
Accounts payable...................... 240,548 145,954
Self insurance reserve................ 25,174 18,847
Accrued payroll....................... 15,130 17,307
Accrued benefits and withholdings..... 10,620 8,521
Deferred income taxes................. 7,198 -
Other current liabilities............. 24,817 16,883
Current portion of long-term debt..... 592 925
------------------------
Total current liabilities........... 333,815 215,309
Long-term debt, less current portion.... 100,322 120,977
Deferred income taxes................... 38,440 29,448
Other liabilities....................... 11,963 7,014
Commitments and contingencies........... - -
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized shares-5,000,000
Issued and outstanding shares-none.. - -
Common stock, $0.01 par value:
Authorized shares-90,000,000
Issued and outstanding shares-
55,377,130 in 2004 and
54,664,976 in 2003................ 554 547
Additional paid-in capital ............. 326,650 302,691
Retained earnings....................... 620,613 481,047
------------------------
Total shareholders' equity.............. 947,817 784,285
------------------------
Total liabilities and
shareholders' equity.................. $1,432,357 $1,157,033
========================
</table>
See accompanying notes.
45
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
<table>
<caption>
Years ended December 31,
2004 2003 2002
----------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Product sales........................... $1,721,241 $1,511,816 $1,312,490
Cost of goods sold, including warehouse
and distribution expenses............. 978,076 873,481 759,090
----------------------------------
Gross profit............................ 743,165 638,335 553,400
Operating, selling, general and
administrative expenses............... 552,707 473,060 415,099
----------------------------------
Operating income........................ 190,458 165,275 138,301
Other income (expense):
Interest expense...................... (4,700) (6,864) (9,248)
Interest income....................... 901 298 989
Other, net............................ 1,078 1,333 940
----------------------------------
(2,721) (5,233) (7,319)
----------------------------------
Income before income taxes and cumulative
effect of accounting change........... 187,737 160,042 130,982
Provision for income taxes.............. 70,063 59,955 48,990
Income before cumulative effect of
----------------------------------
accounting change..................... 117,674 100,087 81,992
Cumulative effect of accounting change,
net of tax $13,303.................... 21,892 - -
----------------------------------
Net income.............................. $ 139,566 $ 100,087 $ 81,992
==================================
Basic income per common share:
Income before cumulative effect of
accounting change..................... $ 2.14 $ 1.86 $ 1.54
Cumulative effect of accounting change.. 0.40 - -
----------------------------------
Net income per common share............. $ 2.54 $ 1.86 $ 1.54
==================================
Weighted-average common shares
outstanding........................... 55,010 53,908 53,114
==================================
Income per common share-assuming dilution:
Income before cumulative effect of
accounting change..................... $ 2.11 $ 1.84 $ 1.53
Cumulative effect of accounting change.. 0.40 - -
Net income per common share-
----------------------------------
assuming dilution..................... $ 2.51 $ 1.84 $ 1.53
==================================
Adjusted weighted-average common
shares outstanding.................... 55,711 54,530 53,692
==================================
</table>
46
See accompanying notes.
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Statements Of Shareholders' Equity
<table>
<caption>
Additional
Common Stock Paid-In Retained
Shares Par Value Capital Earnings Total
------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 2001.............. 52,851 $ 528 $ 256,795 $ 298,968 $ 556,291
Issuance of common stock under
employee benefit plans................ 223 3 6,094 - 6,097
Issuance of common stock under
stock option plans.................... 297 3 4,677 - 4,680
Tax benefit of stock options exercised.. - - 1,464 - 1,464
Net income.............................. - - - 81,992 81,992
------------------------------------------------------
Balance at December 31, 2002.............. 53,371 534 269,030 380,960 650,524
Issuance of common stock under
employee benefit plans................ 242 2 6,746 - 6,748
Issuance of common stock under
stock option plans.................... 1,052 11 21,429 - 21,440
Tax benefit of stock options exercised.. - - 5,486 - 5,486
Net income.............................. - - - 100,087 100,087
------------------------------------------------------
Balance at December 31, 2003.............. 54,665 547 302,691 481,047 784,285
Issuance of common stock under
employee benefit plans................ 221 2 8,358 - 8,360
Issuance of common stock under
stock option plans.................... 491 5 11,075 - 11,080
Tax benefit of stock options exercised.. - - 4,526 - 4,526
Net income.............................. - - - 139,566 139,566
------------------------------------------------------
Balance at December 31, 2004.............. 55,377 $ 554 $ 326,650 $ 620,613 $ 947,817
======================================================
</table>
See accompanying notes.
47
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
<table>
<caption>
Years ended December 31,
2004 2003 2002
---------------------------------
(In thousands)
Operating activities
<S> <C> <C> <C>
Net income................................ $ 139,566 $ 100,087 $ 81,992
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change.. (21,892) - -
Depreciation............................ 53,126 41,216 35,923
Amortization............................ 1,199 1,158 984
Provision for doubtful accounts
and notes............................. 2,942 2,461 1,873
Loss (gain) on sale of property
and equipment......................... 46 (264) (58)
Deferred income taxes................... 7,640 13,796 5,666
Common stock contributed to employee
benefit plans......................... 5,067 4,026 3,512
Tax benefit of stock options exercised.. 4,526 5,486 1,464
Changes in operating assets and liabilities:
Accounts receivable................... (11,636) (9,108) (5,701)
Amounts receivable from vendors ...... (3,606) (4,824) (4,478)
Inventory............................. (66,375) (19,652) (56,305)
Refundable income taxes............... - - 168
Other current assets.................. (835) (540) (788)
Other assets.......................... (50) (4,005) -
Accounts payable...................... 94,594 29,760 23,495
Income taxes payable.................. 2,865 (2,926) 9,798
Accrued payroll....................... (2,177) 2,050 2,391
Accrued benefits and withholdings..... 8,427 8,203 5,127
Other current liabilities............. 7,934 (267) (1,148)
Other liabilities..................... 5,175 2,179 618
---------------------------------
Net cash provided by
operating activities.............. 226,536 168,836 104,533
---------------------------------
Investing activities
Purchases of property and equipment....... (173,486) (136,497) (102,257)
Proceeds from sale of property
and equipment .......................... 1,653 1,273 2,278
Payments received on notes receivable..... 2,634 871 862
(Investment in) reduction of other assets. (2,787) 3,793 (6,268)
---------------------------------
Net cash used in
investing activities............. (171,986) (130,560) (105,385)
---------------------------------
Financing activities
Payments on notes payable to bank........ - - (5,000)
Proceeds from issuance of long-term debt. - 27,900 179,640
Principal payments on long-term debt..... (20,989) (98,577) (166,761)
Net proceeds from issuance of
common stock........................... 14,373 24,162 7,265
---------------------------------
Net cash (used in) provided by
financing activities.............. (6,616) (46,515) 15,144
---------------------------------
Net increase (decrease) in cash and
cash equivalents....................... 47,934 (8,239) 14,292
Cash and cash equivalents at
beginning of year...................... 21,094 29,333 15,041
---------------------------------
Cash and cash equivalents at end of year. $ 69,028 $ 21,094 $ 29,333
=================================
</table>
See accompanying notes.
48
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. (the Company) is a specialty retailer and
supplier of automotive aftermarket parts, tools, supplies and accessories to
both the do-it-yourself (DIY) customer and the professional installer throughout
Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South
Carolina, Tennessee, Texas and Virginia.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Over-the-counter retail sales are recorded when the customer takes
possession of merchandise. Sales to professional installers, also referred to as
"commercial sales", are recorded upon delivery of merchandise to the customer,
generally at the customer's place of business. Wholesale sales to other
retailers, also referred to as "jobber sales," are recorded upon shipment of
merchandise. All sales are recorded net of estimated allowances and discounts.
Use of Estimates
The preparation of the consolidated financial statements, in conformity
with accounting principles generally accepted in the United States (GAAP),
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance items,
accessories and tools, is stated at the lower of cost or market. Inventory also
includes related procurement, warehousing and distribution center costs. Cost
has been determined using the last-in, first-out (LIFO) method. If the first-in,
first-out (FIFO) method of costing inventory had been used by the Company,
inventory would have been $628,309,000 and $513,365,000 as of December 31, 2004
and 2003, respectively. Please refer to Note 2 for cumulative effect of
accounting change.
49
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of
programs and arrangements, including co-operative advertising, devaluation
programs, allowances for warranties and volume purchase rebates. Co-operative
advertising allowances that are incremental to our advertising program, specific
to a product or event and identifiable for accounting purposes are reported as a
reduction of advertising expense in the period in which the advertising
occurred. All other vendor concessions are recognized as a reduction of cost of
sales when recognized in the consolidated income statement. Amounts receivable
from vendors also includes amounts due to the Company for changeover merchandise
and product returns. Reserves for uncollectable amounts receivable from vendors
are provided for in the Company's consolidated financial statements and
consistently have been within management's expectations.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on a
straight-line method over the estimated useful lives of the assets. Service
lives for property and equipment generally range from three to forty years.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated economic life of the assets. The lease term includes renewal options
determined by management at lease inception for which failure to renew options
would result in a substantial economic penalty to the Company. Maintenance and
repairs are charged to expense as incurred. Upon retirement or sale, the cost
and accumulated depreciation are eliminated and the gain or loss, if any, is
included in the determination of net income as a component of other income
(expense). The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable.
The Company capitalizes interest costs as a component of construction in
progress, based on the weighted-average rates paid for long-term borrowings.
Total interest costs capitalized for the years ended December 31, 2004, 2003 and
2002, were $2,579,000, $1,808,000 and $369,000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109. The
liability method provides that deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
50
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
charged to operations amounted to $22,999,000, $19,533,000 and $14,442,000 for
the years ended December 31, 2004, 2003 and 2002, respectively.
Pre-opening Costs
Costs associated with the opening of new stores, which consist primarily of
payroll and occupancy costs, are charged to operations as incurred.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 8, the alternative fair value accounting provided for under
SFAS No. 123, Accounting for Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, further established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. Under the intrinsic value method in accordance with
APB 25, because the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
51
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Option Plans (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. During the
fourth quarter of 2004, the Company changed its method of applying its LIFO
accounting policy for inventory costs (see Note 2 - Accounting Changes). Our
stock compensation pro forma information for the years ended December 31, is as
follows, both excluding and including the effects of the inventory accounting
change:
<table>
<caption>
2004 2003 2002
---------------------------------
(In thousands, except per share data)
Excluding inventory accounting change
<S> <C> <C> <C>
Net income, as reported................. $ 139,566 $ 100,087 $ 81,992
Stock-based compensation expense, net
of tax, as reported................... - - -
Stock-based compensation expense, net
of tax, under fair value method....... 7,468 9,204 7,217
---------------------------------
Pro forma net income.................... $ 132,098 $ 90,883 $ 74,775
=================================
Pro forma basic net income per share.... $ 2.40 $ 1.69 $ 1.41
=================================
Pro forma net income per share-
assuming dilution..................... $ 2.37 $ 1.67 $ 1.39
=================================
Net income per share, as reported
Basic................................. $ 2.54 $ 1.86 $ 1.54
=================================
Assuming dilution..................... $ 2.51 $ 1.84 $ 1.53
=================================
Including inventory accounting change
Net income.............................. $ 100,599 $ 84,633
Stock based compensation expense, net
of tax, as reported................... - -
Stock based compensation expense, net
of tax, under fair value method....... 9,204 7,217
---------------------
Pro forma net income.................... $ 91,395 $ 77,416
=====================
Pro forma basic net income per share.... $ 1.70 $ 1.46
=====================
Pro forma net income per share -
assuming dilution..................... $ 1.68 $ 1.44
=====================
</table>
52
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 272,000, 66,750 and 816,250 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Cash Equivalents
Cash equivalents consist of investments with maturities of 90 days or less
at the day of purchase.
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.
Notes Receivable
The Company had notes receivable from vendors and other third parties
amounting to $25,108,000 and $27,742,000 at December 31, 2004 and 2003,
respectively. The notes receivable, which bear interest at rates ranging from 0%
to 10%, are due in varying amounts through August 2017.
53
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle
capacity and spoilage costs should be excluded from the cost of inventory and
expensed when incurred. The provision is effective for fiscal periods beginning
after June 15, 2005. The Company does not expect the adoption of this standard
to have a material effect on its financial position, results of operations or
cash flows.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.
SFAS 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company does not expect the adoption of this standard to have
a material effect on its financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS
No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation,
and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25
and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS 123R is the first reporting
period beginning after June 15, 2005, which is third quarter 2005 for calendar
year companies, although early adoption is allowed. SFAS 123R permits companies
to adopt its requirements using either a "modified prospective" method, or a
"modified retrospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all unvested awards granted prior to the effective date of SFAS 123R. Under the
"modified retrospective" method, the requirements are the same as under the
"modified prospective" method, but also permits entities to restate financial
statements of previous periods based on pro forma disclosures made in accordance
with SFAS 123. The Company currently utilizes a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options granted to
employees. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. The Company has not yet
determined which model it will use to measure the fair value of employee stock
options upon the adoption of SFAS 123R. See Note 8 for further information. SFAS
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 current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after the effective date. These future amounts cannot be
estimated, because they depend on, among other things, when employees exercise
stock options. However, the amount of operating cash flows recognized in prior
periods for such excess tax deductions, as shown in the Company's Consolidated
Statement of Cash Flows, were $4.5 million, $5.5 million, and $1.5 million, for
the years ended December 31, 2004, 2003, and 2002, respectively. The Company
currently expects to adopt SFAS 123R effective July 1, 2005; however, the
Company has not yet determined which of the aforementioned adoption methods it
will use and is still evaluating the standard.
54
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
The Company made certain reclassifications to prior periods to conform to
current year presentation.
Leases
The Company's policy is to amortize leasehold improvements over the lesser
of the lease term or the estimated economic life of those assets. Generally, for
stores the lease term is the base lease term and for distribution centers the
lease term includes the base lease term plus certain renewal option periods for
which renewal is reasonably assured and failure to exercise the renewal option
would result in an economic penalty. The calculation for straight-line rent
expense is based on the same lease term. Previously, leasehold improvements were
amortized over a period of time which included both the base lease term and the
first renewal option period of the lease and rent expense was recorded as paid.
As a result, the Company's 2004 statement of income includes an adjustment
to correct its lease accounting of $10.4 million ($3.5 million related to 2004),
$6.5 million, net of tax. Prior years' financial statements will not be restated
due to the immateriality of the amount to the results of operations and
statement of financial position for the current year or any individual year. As
the correction relates solely to accounting treatment, it does not affect the
Company's historical or future cash flows.
The effect from these corrections, which is reflected in the financial
statements, is an increase in depreciation expense of $6.0 million ($2.6 million
related to 2004), an increase in rent expense of $4.4 million ($0.9 million
related to 2004), and a decrease in income tax expense of $3.9 million.
55
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 2 - ACCOUNTING CHANGES
The Company's inventory consists of automotive hard parts, maintenance
items, accessories and tools. During the fourth quarter of 2004, the Company
changed its method of applying its LIFO accounting policy for inventory costs.
Under the new method, the Company has inventoried certain procurement,
warehousing and distribution center costs. The Company's previous method was to
recognize those costs as incurred, reported as a component of costs of goods
sold. The Company believes the change in application of the LIFO accounting
method is preferable as it better matches revenues and expenses and is the
prevalent method used by other entities within the Company's industry. The
cumulative effect of this change in application of accounting method is
$21,892,000 as of January 1, 2004, net of the related deferred tax effect of
$13,303,000. The change increased 2004 net income by $2,722,000 or $0.05 per
share. Prior 2004 quarterly financial statements have been restated to reflect
this change, effective January 1, 2004, (see Restatement of Quarterly Results in
Management's Discussion and Analysis of Financial Condition and Results of
Operations). Pro forma changes to results of operations as if the new method had
been applied for the years ended December 31, 2003 and 2002 are presented below.
<table>
<caption>
Years Ended December 31,
----------------------------------------------------------------------
(in thousands)
As originally As originally
reported Pro forma reported Pro forma
2003 Adjustment 2003 2002 Adjustment 2002
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Product sales.................... $1,511,816 $ - $1,511,816 $1,312,490 $ - $1,312,490
Cost of goods sold, including
warehouse and distribution
expense........................ 873,481 (823) 872,658 759,090 (4,246) 754,844
Operating, selling, general and
administrative expenses........ 473,060 - 473,060 415,099 - 415,099
---------------------------------- ----------------------------------
Operating income............... 165,275 823 166,098 138,301 4,246 142,547
Other expense, net............. (5,233) - (5,233) (7,319) - (7,319)
---------------------------------- ----------------------------------
Income before income taxes..... 160,042 823 160,865 130,982 4,246 135,228
Provision for income taxes..... 59,955 311 60,266 48,990 1,605 50,595
---------------------------------- ----------------------------------
Net income....................... $ 100,087 $ 512 $ 100,599 $ 81,992 $ 2,641 $ 84,633
================================== ==================================
Basic income per share........... $ 1.86 $ 0.01 $ 1.87 $ 1.54 $ 0.05 $ 1.59
================================== ==================================
Net income per share -
assuming dilution.............. $ 1.84 $ 0.00 $ 1.84 $ 1.53 $ 0.05 $ 1.58
================================== ==================================
Weighted-average common
shares outstanding............. 53,908 53,908 53,908 53,114 53,114 53,114
================================== ==================================
Weighted-average common shares
outstanding-assuming dilution.. 54,530 54,530 54,530 53,692 53,692 53,692
================================== ==================================
</table>
NOTE 3-RELATED PARTIES
The Company leases certain land and buildings related to fifty of its
O'Reilly Auto Parts stores under six-year operating lease agreements with
O'Reilly Investment Company and O'Reilly Real Estate Company, partnerships in
which certain shareholders and directors of the Company are partners. Generally,
these lease agreements provide for renewal options for an additional six years
at the option of the Company. Additionally, the Company leases certain
56
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 3-RELATED PARTIES (CONTINUED)
land and buildings related to twenty-one of its O'Reilly Auto Parts stores under
15-year operating lease agreements with O'Reilly-Wooten 2000 LLC, which is owned
by certain shareholders of the Company. Generally, these lease agreements
provide for renewal options for two additional five-year terms at the option of
the Company (see Note 5). Rent payments under these operating leases totaled
$3,374,000, $3,238,000 and $3,222,000 in 2004, 2003 and 2002, respectively.
NOTE 4-LONG-TERM DEBT
On July 29, 2002, the Company amended the unsecured, three-year syndicated
credit facility (Credit Facility) in the amount of $150 million led by Wells
Fargo Bank as the Administrative Agent, replacing a five-year syndicated credit
facility. The Credit Facility is guaranteed by all of the Company's subsidiaries
and may be increased to a total of $200 million, subject to the availability of
such additional credit from either existing banks within the Credit Facility or
other banks. At December 31, 2004 the Company had no outstanding balance with
the Credit Facility. The Credit Facility bears interest at LIBOR plus a spread
ranging from 0.875% to 1.375% (2.06% at December 31, 2003) and expires in July
2005. At December 31, 2003, $20.0 million of the Credit Facility was
outstanding. Accordingly, the Company's aggregate availability for additional
borrowings under the Credit Facility was $128.7 million and $119.0 million at
December 31, 2004 and 2003, respectively.
The Company issues stand-by letters of credit provided by a $30 million
sublimit under the Credit Facility that reduce available borrowings. These
letters of credit are issued primarily to satisfy the requirements of workers
compensation, general liability and other insurance policies. Substantially all
of the outstanding letters of credit have a one-year term from the date of
issuance and have been issued to replace surety bonds that were previously
issued. Letters of credit totaling $21.3 million and $11.0 million were
outstanding at December 31, 2004 and 2003, respectively.
On May 16, 2001, the Company completed a $100 million private placement of
two series of unsecured senior notes (Senior Notes). The Series 2001-A Senior
Notes were issued for $75 million, are due May 16, 2006, and bear interest at
7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are
due May 16, 2008, and bear interest at 7.92% per year. The private placement
agreement allows for a total of $200 million of Senior Notes issuable in series.
Proceeds from the transaction were used to reduce outstanding borrowings under
the Company's former revolving credit facility.
The Company leases certain computer equipment under a capitalized lease.
The lease agreement has a term of 30 months, expiring in 2006. At December 31,
2004, the monthly installment under this agreement was approximately $48,500.
The present value of the future minimum lease payments under these agreements
totaled $858,000 and $1,426,300 at December 31, 2004, and 2003, respectively,
which has been classified as long-term debt in the accompanying consolidated
financial statements. During 2004, the Company did not purchase any assets under
a capitalized lease. During 2003, the Company purchased $1,426,300 of assets
under a capitalized lease.
57
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 4-LONG-TERM DEBT (CONTINUED)
Principal maturities of long-term debt for each of the next five years
ending December 31, are as follows (amounts in thousands):
<table>
<S> <C>
2005 $ 592
2006 75,300
2007 17
2008 25,005
2009 -
Thereafter -
----------
$ 100,914
</table>
Cash paid by the Company for interest during the years ended December 31,
2004, 2003, and 2002, amounted to $4,960,000, $6,864,000, and $9,248,000,
respectively.
NOTE 5-COMMITMENTS
Lease Commitments
On June 26, 2003, we completed an amended and restated master agreement to
our $50 million Synthetic Operating Lease Facility (the Facility or the
Synthetic Lease) with a group of financial institutions. The terms of the
Facility provide for an initial lease period of five years, a residual value
guarantee of approximately $43.2 million at December 31, 2004, and purchase
options on the properties. The Facility also contains a provision for an event
of default whereby the lessor, among other things, may require us to purchase
any or all of the properties. One additional renewal period of five years may be
requested from the lessor, although the lessor is not obligated to grant such
renewal. The amended and restated Facility has been accounted for as an
operating lease under SFAS No. 13 and related interpretations, including FASB
Interpretation No. 46. Future minimum rental commitments under the Facility have
been included in the table of future minimum annual rental commitments below.
58
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 5-COMMITMENTS (CONTINUED)
The Company also leases certain office space, retail stores, property and
equipment under long-term, non-cancelable operating leases. Most of these leases
include renewal options and some include options to purchase and provisions for
percentage rent based on sales. At December 31, 2004, future minimum rental
payments under all of the Company's operating leases for each of the next five
years and in the aggregate are as follows (amounts in thousands):
<table>
Related Non-related
Parties Parties Total
-------- -------- --------
<S> <C> <C> <C>
2005 $ 3,334 $ 33,041 $ 36,375
2006 3,349 30,910 34,259
2007 3,351 29,386 32,737
2008 3,277 26,587 29,864
2009 2,462 23,882 26,344
Thereafter 7,479 182,629 190,108
-------- -------- ---------
$ 23,252 $326,435 $349,687
======== ======== ========
</table>
Rental expense amounted to $39,145,000, $31,865,000 and $29,652,000 for the
years ended December 31, 2004, 2003, and 2002, respectively. 2004 rental expense
includes an adjustment to correct lease accounting in the amount of $4,367,000
($900,000 related to 2004.) See Note 1 - Leases for further details.
Other Commitments
The Company had construction commitments, which totaled approximately $32.3
million, at December 31, 2004.
NOTE 6-LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its 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, they will have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
59
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 7-EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit sharing and savings plan that
covers substantially all employees who are 21 years of age with at least six
months of service. A total of 1,600,000 shares of common stock were reserved for
issuance under the plan. Employees may contribute up to 100% of their annual
compensation subject to Internal Revenue Code maximum limitations. The Company
has agreed to make matching contributions equal to 50% of the first 2% of each
employee's contribution and 25% of the next 4% of each employee's contribution.
Additional contributions to the plan may be made as determined annually by the
Board of Directors. After two years of service, Company contributions and
earnings thereon vest at the rate of 20% per year. Company contributions charged
to operations amounted to $5,278,000 in 2004, $4,353,000 in 2003 and $3,438,000
in 2002. Company contributions, in the form of common stock, to the profit
sharing and savings plan to match employee contributions during the years ended
December 31 were as follows:
<table>
Year Market
Contributed Shares Value
------------ ------------ ------------
<S> <C> <C>
2004 40,684 $1,766,000
2003 42,183 1,478,000
2002 38,354 1,136,000
</table>
Profit sharing contributions accrued at December 31, and funded in the next
year through the issuance of shares of the Company's common stock were as
follows:
<table>
Year Market
Funded Shares Value
------------ ------------ ------------
<S> <C> <C>
2004 78,730 $3,000,000
2003 85,184 2,300,000
2002 77,876 2,200,000
</table>
60
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 7-EMPLOYEE BENEFIT PLANS (CONTINUED)
Additionally, the Company has adopted a stock purchase plan under which
1,300,000 shares of common stock were reserved for issuance. Under the plan,
substantially all employees and non-employee directors have the right to
purchase shares of the Company's common stock monthly at a price equal to 85% of
the fair market value of the stock, not to exceed 5% of the participants annual
salary. Purchases of common stock under the plan during the years ended December
31 were as follows:
<table>
Weighted
Average Market
Year Shares Fair Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C>
2004 93,877 $41.70 $3,915,000
2003 103,457 32.38 3,350,000
2002 102,662 29.62 3,041,000
</table>
The Company has in effect a performance incentive plan for the Company's
senior management under which 400,000 shares of stock were reserved for
issuance. Shares awarded under the plan vest equally over a three-year period
and are held in escrow until such vesting has occurred. Shares are forfeited
when an employee ceases employment. Shares, net of forfeitures, issued under the
plan during the years ended December 31 were as follows:
<table>
Year Market
Funded Shares Value
------------ ------------ ------------
<S> <C> <C>
2004 7,917 $302,000
2003 10,530 248,000
2002 4,779 175,000
</table>
NOTE 8-SHAREHOLDERS' EQUITY
Shareholder Rights Plan
On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan.
One Right was distributed for each share of common stock, par value $.01 per
share, of the Company held by stockholders of record as of the close of business
on May 31, 2002. The Rights initially entitle stockholders to buy a unit
representing one one-hundredth of a share of a new series of preferred stock of
the Company for $160 and expire on May 30, 2012. The Rights generally will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of
the Company's common stock. If a person or group acquires beneficial ownership
of 15% or more of the Company's common stock, each Right (other than Rights held
by the acquiror) will, unless the Rights are redeemed by the Company, become
exercisable upon payment of the exercise price of $160 for common stock of the
Company having a market value of twice the exercise price of the Right. A copy
of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities
and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K.
Stock Option Plans
The Company has a stock option plan under which incentive stock options or
non-qualified stock options may be granted to officers and key employees. An
aggregate of 12,000,000 shares of common stock were reserved for issuance
61
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 8-SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (continued)
under this plan. The exercise price of options granted shall not be less than
the fair market value of the stock on the date of grant and the options will
expire no later than 10 years from the date of grant. Options granted pursuant
to the plan become exercisable no sooner than six months from the date of grant.
All grants under the plan since its inception have been non-qualified stock
option grants. A summary of outstanding stock options under this plan is as
follows:
<table>
Number
Price per Share of Shares
------------------------------
<S> <C> <C>
Outstanding at December 31, 2001.... $ 8.69 - 37.62 3,277,135
Granted........................... 24.96 - 35.48 712,500
Exercised......................... 8.69 - 30.23 (296,858)
Canceled.......................... 8.75 - 38.00 (202,075)
------------------------------
Outstanding at December 31, 2002.... $ 8.94 - 37.62 3,490,702
Granted........................... 23.01 - 44.81 1,035,750
Exercised......................... 8.94 - 37.62 (1,051,940)
Canceled.......................... 8.94 - 38.98 (222,413)
------------------------------
Outstanding at December 31, 2003.... $ 10.56 - 44.81 3,252,099
Granted........................... 37.06 - 46.75 858,125
Exercised......................... 10.56 - 40.39 (470,977)
Canceled.......................... 10.94 - 46.29 (239,114)
------------------------------
Outstanding at December 31, 2004.... $ 10.94 - 46.75 3,400,133
</table>
Options to purchase 1,612,600, 1,223,409 and 1,566,104 shares of common
stock were exercisable at December 31, 2004, 2003, and 2002, respectively.
62
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 8-SHAREHOLDERS' EQUITY (CONTINUED)
The Company also maintains a stock option plan for non-employee directors
of the Company under which 500,000 shares of common stock were reserved for
issuance. All director stock options are granted at fair market value on the
date of grant and expire on the earlier of termination of service to the Company
as a director or seven years. Options granted under this plan become exercisable
six months from the date of grant. A summary of outstanding stock options under
this plan is as follows:
<table>
Number
Price per Share of Shares
-------------------------------
<S> <C> <C>
Outstanding at December 31, 2001.... $ 12.44 - 23.91 50,000
Granted........................... 29.02 30,000
------------------------------
Outstanding at December 31, 2002.... $ 12.44 - 29.02 80,000
Granted........................... 29.20 30,000
------------------------------
Outstanding at December 31, 2003.... $ 12.44 - 29.20 110,000
Granted........................... 41.67 12,500
Exercised......................... 12.44 - 20.65 (20,000)
------------------------------
Outstanding at December 31, 2004.... $ 20.65 - 41.67 102,500
</table>
All options under this plan were exercisable at December 31, 2004, 2003,
and 2002.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee and non-employee director stock options under the
fair value method.
The fair values for these options were estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 2004, 2003, and 2002, respectively: risk-free interest rates of
3.01%, 3.61% and 4.01%; volatility factors of the expected market price of the
Company's common stock of .404, .458, and .481; and expected life of the options
of 4.0, 9.4 and 9.0 years. The Company assumed a 0% dividend yield over the
expected life of the options. The weighted-average fair values of options
granted during the years ended December 31, 2004, 2003, and 2002 were $14.47,
$20.56 and $17.75, respectively. The weighted-average remaining contractual life
at December 31, 2004, for all outstanding options under the Company's stock
option plans is 7.2 years. The weighted-average exercise price for all
outstanding options under the Company's stock option plans was $29.88, $26.11
and $22.78 at December 31, 2004, 2003 and 2002, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
63
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 9-INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income
per common share:
<table>
<caption>
Years ended December 31,
2004 2003 2002
---------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator (basic and diluted):
Net income....................................... $ 139,566 $ 100,087 $ 81,992
=================================
Denominator:
Denominator for basic income per common share-
weighted-average shares........................ 55,010 53,908 53,114
Effect of stock options (Note 8)................. 701 622 578
---------------------------------
Denominator for diluted income per common share-
adjusted weighted-average shares and
assumed conversion............................. 55,711 54,530 53,692
=================================
Basic net income per common share.................. $ 2.54 $ 1.86 $ 1.54
=================================
Net income per common share-assuming dilution...... $ 2.51 $ 1.84 $ 1.53
=================================
</table>
64
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 10-INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at December 31:
<table>
<caption>
2004 2003
-----------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts... $ 1,292 $ 373
Other accruals.................... 10,038 6,973
Noncurrent:
Other accruals.................... 1,980 -
-----------------------
Total deferred tax assets......... 13,310 7,346
-----------------------
Deferred tax liabilities:
Current:
Inventory carrying value.......... 18,528 2,593
Noncurrent:
Property and equipment............ 39,203 29,171
Other............................. 1,217 277
-----------------------
Total deferred tax liabilities.... 58,948 32,041
-----------------------
Net deferred tax liabilities ..... $ (45,638) $ (24,695)
=======================
</table>
65
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 10-INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
<table>
<caption>
Current Deferred Total
---------------------------------
(In thousands)
<S> <C> <C> <C>
2004:
Federal.......... $ 56,385 $ 6,942 $ 63,327
State............ 6,038 698 6,736
---------------------------------
$ 62,423 $ 7,640 $ 70,063
=================================
2003:
Federal.......... $ 41,465 $ 12,362 $ 53,827
State............ 4,694 1,434 6,128
---------------------------------
$ 46,159 $ 13,796 $ 59,955
=================================
2002:
Federal.......... $ 39,038 $ 5,113 $ 44,151
State............ 4,286 553 4,839
---------------------------------
$ 43,324 $ 5,666 $ 48,990
=================================
</table>
A reconciliation of the provision for income taxes to the amounts computed
at the federal statutory rate is as follows:
<table>
<caption>
2004 2003 2002
---------------------------------
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate.......... $ 65,708 $ 56,015 $ 45,844
State income taxes, net of federal tax benefit.. 4,355 3,935 3,140
Other items, net................................ - 5 6
---------------------------------
$ 70,063 $ 59,955 $ 48,990
</table>
The tax benefit associated with the exercise of non-qualified stock options
has been reflected as additional paid-in capital in the accompanying
consolidated financial statements.
During the years ended December 31, 2004, 2003, and 2002, cash paid by the
Company for income taxes amounted to $55,140,000, $43,007,000 and $31,119,000,
respectively.
66
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Report Of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of O'Reilly Automotive, Inc. and
Subsidiaries
We have audited the accompanying consolidated balance sheets of O'Reilly
Automotive, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of O'Reilly
Automotive, Inc. and Subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 2004 the
Company changed its method of accounting for inventory.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of O'Reilly
Automotive, Inc. and Subsidiaries' internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 7, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 7, 2005
67
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Shareholder Information
CORPORATE ADDRESS
233 South Patterson
Springfield, Missouri 65802
417/862-3333
Web site - www.oreillyauto.com
REGISTRAR AND TRANSFER AGENT
UMB Bank
928 Grand Boulevard
Kansas City, Missouri 64141-0064
Inquiries regarding stock transfers, lost certificates or address changes should
be directed to UMB Bank at the above address.
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
Kansas City, Missouri 64105-2143
LEGAL COUNSEL
Gallop Johnson & Neuman, L.C.
101 South Hanley Road, Suite 1600
St. Louis, Missouri 63105
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive, Suite 2100
Chicago, Illinois 60606
ANNUAL MEETING
The annual meeting of shareholders of O'Reilly Automotive, Inc. will be held at
10:00 a.m. local time on May 3, 2005, at the Clarion Hotel, Ballrooms 1 and 2,
3333 South Glenstone Ave in Springfield, Missouri. Shareholders of record as of
February 25, 2005, will be entitled to vote at this meeting.
FORM 10-K REPORT
The Form 10-K Report of O'Reilly Automotive, Inc. filed with the Securities and
Exchange Commission and our quarterly press releases are available without
charge to shareholders upon written request. These requests and other investor
contacts should be directed to James R. Batten, Executive Vice President of
Finance/Chief Financial Officer, at the corporate address.
TRADING SYMBOL
The Company's common stock is traded on The Nasdaq Stock Market (National
Market) under the symbol ORLY.
68
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
NUMBER OF SHAREHOLDERS
As of February 25, 2005, O'Reilly Automotive, Inc. had approximately 29,282
shareholders based on the number of holders of record and an estimate of the
number of individual participants represented by security position listings.
ANALYST COVERAGE
The following analysts provide research coverage of O'Reilly Automotive, Inc.:
AG Edwards & Sons - Brian Postol
Friedman, Billings, Ramsey & Co, Inc. - Reed Anderson
Lehman Brothers Equities Research - Alan Rifkin
Monarch Research LLC - Cid Wilson
Piper Jaffray - Michael Cox
Prudential Equity Group, LLC - John Tomlinson
Raymond James & Associates - Gerald Marks
RBC Capital Markets - Scot Ciccarelli
Robert W. Baird & Co - David Cumberland
SG Cowen Securities - Joseph Feldman
Smith Barney - Bill Sims
SunTrust Robinson Humphrey Capital Markets - Frank Brown
UBS Equities - Gary Balter
William Blair & Company - Sharon Zackfia
MARKET PRICES AND DIVIDEND INFORMATION
The prices in the table below represent the high and low sales price for
O'Reilly Automotive, Inc. common stock as reported by the Nasdaq Stock Market.
The common stock began trading on April 22, 1993. No cash dividends have been
declared since 1992, and the Company does not anticipate paying any cash
dividends in the foreseeable future.
<table>
2004 2003
------------------------------------------------------------
High Low High Low
------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 41.69 $ 36.46 $ 27.86 $ 22.91
Second Quarter 47.07 39.18 35.39 26.76
Third Quarter 45.35 36.06 39.96 33.23
Fourth Quarter 45.64 37.00 44.90 36.54
For the Year 47.07 36.06 44.90 22.91
</table>
69
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 18.0 - Independent Registered
Public Accounting Firm Letter REgarding Accounting Change
Mr. James R. Batten
Chief Financial Officer
O'Reilly Automotive, Inc.
233 South Patterson
Springfield, MO 65802
Dear Sir:
Note 2 to the Consolidated Financial Statements of O'Reilly Automotive, Inc. and
Subsidiaries included in its Form 10-K as of and for the year ended December 31,
2004 describes a change in the method of accounting for inventory to capitalize
into inventory certain procurement, warehousing and distribution costs, which
were previously expensed as incurred. There are no authoritative criteria for
determining a preferable inventory costing method based on the particular
circumstances; however, we conclude that such change in the method of accounting
is to an acceptable alternative method which, based on your business judgment to
make this change and for the stated reasons, is preferable in your
circumstances.
Very truly yours,
/s/ Ernst & Young LLP
March 7, 2005
Kansas City, Missouri
70
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation
Ozark Automotive Distributors, Inc. Missouri
Greene County Realty Co. Missouri
O'Reilly II Aviation, Inc. Missouri
Ozark Services, Inc. Missouri
Hi-LO Investment Company Delaware
Hi-LO Management Company Delaware
One hundred percent of the capital stock of each of the above listed
subsidiaries directly owned by O'Reilly Automotive, Inc.
71
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 23.1 - Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of O'Reilly Automotive, Inc. and Subsidiaries of our reports dated March 7,
2005, with respect to the consolidated financial statements of O'Reilly
Automotive, Inc. and Subsidiaries, O'Reilly Automotive, Inc. and Subsidiaries
management's assessment of the effectiveness of internal control over financial
reporting, and the effectiveness of internal control over financial reporting of
O'Reilly Automotive, Inc. and Subsidiaries, included in the 2004 Annual Report
to Shareholders of O'Reilly Automotive, Inc. and Subsidiaries.
Our audits also included the financial statement schedule of O'Reilly
Automotive, Inc. and Subsidiaries listed in Item 15(a). This schedule is the
responsibility of O'Reilly Automotive, Inc. and Subsidiaries' management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-59568, Form S-8 No. 333-63467 and Form S-8 No. 333-111976)
pertaining to the O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan, the
O'Reilly Automotive, Inc. 2003 Director Stock Option Plan, the O'Reilly
Automotive, Inc. 1993 Stock Option Plan, the O'Reilly Automotive Inc. Stock
Purchase Plan, the O'Reilly Automotive, Inc. Profit Sharing and Savings Plan and
the O'Reilly Automotive, Inc. 1993 Employee Stock Option Plan of O'Reilly
Automotive, Inc. and Subsidiaries of our reports dated March 7, 2005, with
respect to the consolidated financial statements of O'Reilly Automotive, Inc.
and Subsidiaries, O'Reilly Automotive, Inc. and Subsidiaries management's
assessment of the effectiveness of internal control over financial reporting,
and the effectiveness of internal control over financial reporting of O'Reilly
Automotive, Inc. and Subsidiaries, incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of O'Reilly
Automotive, Inc. and Subsidiaries for the year ended December 31, 2004.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 11, 2005
72
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.1 - CEO Certification
CERTIFICATIONS
I, Greg Henslee, certify that:
1. I have reviewed this annual report on Form 10-K of O'Reilly Automotive,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
14d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 15, 2005 /s/ Greg Henslee
------------------------------------------------
Greg Henslee, Chief Executive Officer (Principal
Executive Officer) and Co-President
73
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.2 - CFO Certification
CERTIFICATIONS
I, James R. Batten, certify that:
1. I have reviewed this annual report on Form 10-K of O'Reilly Automotive,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
14d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 15, 2005 /s/ James R. Batten
----------------------------------------------------
James R. Batten, Executive Vice President of Finance
and Chief Financial Officer (Principal Financial and
Accounting Officer)
74
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.1 - CEO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Greg Henslee, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Greg Henslee
----------------------------------------
Greg Henslee
Chief Executive Officer
March 15, 2005
74
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.2 - CFO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
James R. Batten, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ James R. Batten
----------------------------------------
James R. Batten
Chief Financial Officer
March 15, 2005
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
76
<page>
</TEXT>
</DOCUMENT>