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.
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.
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.
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.
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:
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.
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:
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:
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.
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.
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.
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.
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.
Item 2.
Item 2. Properties
The following table provides certain information regarding our administrative offices and distribution centers and offices as of December 31, 2004:
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.
Item 3.
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.
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.
PART II
Item 5.
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.
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.
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.
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.
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.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
None.
Item 9A.
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.
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.
PART III
Item 10.
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.
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.
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.
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.
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.
Item 15.
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.
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.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
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.
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
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. Page E-2
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.
* 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
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)
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.
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.
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:
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:
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.
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).
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).
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.
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.
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.
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.
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.
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)
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.
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.
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.
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
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
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Statements Of Shareholders' Equity
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2004 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
See accompanying notes.
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.
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.
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.
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:
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.
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.
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.
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.
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
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.
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):
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.
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):
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.
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:
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:
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:
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:
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
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:
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.
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:
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.
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:
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:
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:
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows:
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.
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
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.
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.
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
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.
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
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
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)
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
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose.
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.