O'Reilly Auto Parts 2004 Annual Report Download - page 31

2004 ANNUAL REPORT 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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).
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.
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