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O’Reilly Automotive
2004 Annual Report
2004
HORSEPOWER
ANOTHER YEAR of
FIRING ON ALL CYLINDERS

Table of contents

  • Page 1
    O'Reilly Automotive 2004 Annual Report 2004 H O R S E P OW E R ANOTHER YEAR o f FIRING ON ALL CYLINDERS

  • Page 2
    ...G R O W T H . S U P E R C H A R G E D B Y 1 2 Y E A R S o f RECORD SALES a n d EARNINGS, WE C O N T I N U E A C C E L E R AT I N G T O WA R D $ ...P E R F O R M A N C E - U N B E ATA B L E C U S T O M E R S E R V ICE, SUPERIOR DISTRIBUTION SYSTEMS a n d A U N I Q U E D U A L M A R K E T S T R AT E G Y.

  • Page 3
    ... 14.7% over 2003. Continued focus on driving sales and taking market share along with our relentless watch over expenses, gave us a 17.6% increase in net income in 2004 over 2003. As a result of our excellent customer service, which drives sales and our continued efforts in controlling expenses...

  • Page 4
    ... the United States. As part of this expansion, we moved into South Carolina, giving us a presence in 19 contiguous states. For 2005, we are targeting 160 new stores, with a majority in the southeast, to capitalize on the distribution center we will be opening in Atlanta, Georgia in the spring. This...

  • Page 5
    ... and operational improvements to ensure exceptional customer service, which is our number one priority. As our advertising and promotional programs continue driving stronger store traffic, our professional, well trained team members will deliver strong sales. Our stores have never looked better and...

  • Page 6
    AT O ' R E I L LY, W E H AV E T U R N E D D I S T R I B U T I O N F R O M C A R E F U L LY M A N A G I N G O U R G R O W I N G F O O T P R I N T S O W I T H N I G H T LY D E L I V E R I E S F R O M O U R D I S T R I B U T I O N 4 O'REILLY AUTOMOTIVE

  • Page 7
    A LOGISTICAL PROCESS INTO A STRATEGIC ADVANTAGE - T H AT E V E RY O N E o f O U R 1 , 2 4 9 S TO R E S I S R E S TO C K E D CENTERS. 2004 ANNUAL REPORT 5

  • Page 8
    ... be approximately 350,000 square feet and have the capacity to serve 250 stores. The opening of our distribution center in the Atlanta market will enable us to continue expansion efforts in the southeast market area, while being consistent in our contiguous growth philosophy with capability of same...

  • Page 9
    ... us the industry leader in customer service. I N E A R LY S P R I N G , W E W I L L B E O P E N I N G O U R 11 TH DISTRIBUTION CENTER IN ATLANTA, GEORGIA. THIS FACILITY WILL BE A P P R O X I M AT E LY HAVE THE CAPACITY TO SERVICE UP TO 350,000 SQUARE FEET AND 250 STORES. 2004 ANNUAL REPORT 7

  • Page 10
    I N T O D AY ' S T O U G H S A L E S E N V I R O N M E N T, W E MOMENTUM WITH OUR PROVEN DUAL MARKET N E E D S o f P R O F E S S I O N A L I N S TA L L E R S a n d D O - I T- 8 O'REILLY AUTOMOTIVE

  • Page 11
    C O N T I N U E T O P E N E T R AT E N E W M A R K E T S a n d B U I L D S T R AT E G Y - S U C C E S S F U L LY S E R V I N G T H E D I S T I N C T YOURSELF CUSTOMERS. 2004 ANNUAL REPORT 9

  • Page 12
    ... states. Each O'Reilly Auto Parts store receives nightly delivery from one of our ten distribution centers, allowing them daily access to over 100,000 stock keeping units (SKU's). To achieve this high level of service, each distribution center and store location is carefully planned. Along with the...

  • Page 13
    ...Kansas City Nashville Knoxville L i t t l e R o ck Dallas Houston Mobile Springfield Oklahoma City Distribution Centers O ' R E I L LY A U TO PA RT S S TAT E S alabama arkansas florida georgia illinois indiana iowa kansas kentucky louisiana 73 74 10 22 32 8 65 58 35 56 stores stores stores stores...

  • Page 14
    W E H AV E G A I N E D T H E T R U S T a n d L O YA LT Y o f B O T H D I S T I N C T I V E O ' R E I L LY B R A N D o f O U T S TA N D I N G CUSTOMER SERVICE INTO A CLEAR COMPETITIVE 12 O'REILLY AUTOMOTIVE

  • Page 15
    R E TA I L a n d C O M M E R C I A L C U S T O M E R S W I T H O U R FRIENDLY, KNOWLEDGEABLE SERVICE - a n d ELEVATED EDGE IN THE MARKETPLACE. 2004 ANNUAL REPORT 13

  • Page 16
    ... when they need them, and retail customers trust our knowledgeable and friendly service that they receive with each visit to O'Reilly Auto Parts. Our crew of professional parts people is among the best. New team members complete training programs specialized to their position, while experienced team...

  • Page 17
    ... by December 31, 2005. Comparable store product sales measures increases in sales of existing stores open at least one year. In 2005, we plan to open 160 new stores, located primarily in the southeast to further capitalize on our distribution centers in Alabama and Georgia. 2004 ANNUAL REPORT 15

  • Page 18
    ...O O K TO THESE SAME STRENGTHS TO FUEL OUR C O N T I N U E D G R O W T H a n d S U C C E S S . T O D AY, W E ' R E D R I V I N G I N C R E A S E D P R O F I TA B I L I T Y a n d A C C E L E R AT I N G I N T O K E Y N E W M A R K E T S A S W E SPEED TOWARD $2 BILLION IN SALES ...16 O'REILLY AUTOMOTIVE

  • Page 19
    2004 ANNUAL REPORT 17

  • Page 20
    18 O'REILLY AUTOMOTIVE

  • Page 21
    2004 ANNUAL REPORT 19

  • Page 22
    20 O'REILLY AUTOMOTIVE

  • Page 23
    ...FIRING ON ALL CYLINDERS. 2004 FINANCIAL RESULTS 2004 ANNUAL REPORT 21

  • Page 24
    ... 2004 2003 2002 INCOME STATEMENT DATA: Product sales Cost of goods sold, including warehouse and distribution expenses Gross profit Operating, selling, general and administrative expenses Operating income Other income (expense), net Income before income taxes and cumulative effect of accounting...

  • Page 25
    ...,557 11,638 $ $ $ 19,919 0.48 0.47 $ 201,492 115,730 85,762 62,687 23,075 236 23,311 8,574 $ $ $ 14,737 0.41 0.41 2004 ANNUAL REPORT 23

  • Page 26
    ... Dick Smith Enterprises and Davie Automotive, Inc. in December 2002. (b) Total square footage includes normal selling, office, stockroom and receiving space. Weighted-average product sales per store and per square foot are weighted to consider the approximate dates of store openings or expansions...

  • Page 27
    ...,618 90,463 90,704 170,166 22,641 237 358 556,291 463,731 403,044 218,394 182,039 155,782 133,870 2004 ANNUAL REPORT 25

  • Page 28
    ... 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES T he fundamental objective of financial reporting is...

  • Page 29
    ... 100.0% 57.8 42.2 31.6 10.6 (0.6) 10.9 4.1 6.8 1.3 8.1% 10.6 4.0 6.6 6.6% 10.0 3.7 6.3 6.3% 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. 2004 ANNUAL REPORT 27

  • Page 30
    ... increase of income before income taxes. T he 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...

  • Page 31
    ... 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...

  • Page 32
    ... 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. T he Company's previous method recorded these expenses directly into...

  • Page 33
    ...the Company recorded a correction of an error of $10.4 million ($3.5 million related to 2004) $6.5 million, net of tax. See Note 1 to our consolidated financial statements. (In thousands, except per share data) Fir st Quar t er Product sales Gross profit Operating income Net income Basic net income...

  • Page 34
    ... 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. T he effective date of SFAS 123R is the first reporting period beginning...

  • Page 35
    ... 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...

  • Page 36
    ... 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). T hose standards require that we plan...

  • Page 37
    ... 4,399 656,926 $ 69,028 $ 21,094 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Income taxes payable Accounts payable Self insurance reserve Accrued payroll Accrued benefits and withholdings Deferred income taxes Other current liabilities Current portion of long-term debt Total current...

  • Page 38
    ...) Year s ended Dec ember 31, Product sales Cost of goods sold, including warehouse and distribution expenses Gross profit Operating, selling, general and administrative expenses Operating income Other income (expense): Interest expense Interest income Other, net 2004 $1,721,241 978,076 743,165 552...

  • Page 39
    ... of stock options exercised Net income BALANCE AT DECEMBER 31, 2003 Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Net income BALANCE AT DECEMBER 31, 2004 See accompanying notes. 2004 ANNUAL REPORT 37

  • Page 40
    ... (gain) on sale of property and equipment Deferred income taxes Common stock contributed to employee benefit plans Tax benefit of stock options exercised Changes in operating assets and liabilities: Accounts receivable Amounts receivable from vendors Inventory Refundable income taxes Other current...

  • Page 41
    ...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 T he consolidated financial statements include the accounts of the Company...

  • Page 42
    ... a fairvalue-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...

  • Page 43
    ... 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...

  • Page 44
    ... 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...

  • Page 45
    ...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. The Company also leases certain office space, retail stores, property and equipment under long...

  • Page 46
    ... 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...

  • Page 47
    ... 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 2004 ANNUAL REPORT 45

  • Page 48
    ... as if the Company had accounted for its employee and non-employee director stock options under the fair value method. T he 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...

  • Page 49
    ... rate State income taxes, net of federal tax benefit Other items, net T he 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...

  • Page 50
    ... 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...

  • Page 51
    ... Mann Jr. Director of Purchasing Bert Bentley Director of Little Rock Region Tom Connor Director of Legal and Claims Services Joe Hankins Regional Distribution Center Director Director of Houston Region Regional Distribution Center Director Director of Store Design 2004 ANNUAL REPORT 49

  • Page 52
    ... Distribution Center Manager Les Keeth Regional Field Sales Manager David Furr Director of Springfield Region Dick Smith Supplier Credit Manager Jennifer Kent Director of Construction and Maintenance Mark Smith Southern Division Training and Recruiting Manager Larry Blundell Service Equipment...

  • Page 53
    ... Installer Marketing Manager Terry Yates Regional Field Sales Manager Ed Randall Houston Office Manager Bill Seiber Product Manager Bryan Wade Regional Field Sales Manager Real Estate Site Acquisition Manager Distribution Center Manager Darren Shaw Distribution Center Manager Tamra Waitman...

  • Page 54
    ... 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 MARKET PRICES AND DIVIDEND INFORMATION...

  • Page 55
    ... supplier of auto parts in our market areas by offering our retail customers, professional installers and jobbers the best combination of inventory, price, quality and service; providing our team members with competitive wages and benefits, and working conditions which promote high achievement and...

  • Page 56
    233 SOUTH PATTERSON SPRINGFIELD, MISSOURI 65802 417-862-3333 WWW.OREILLYAUTO.COM