O'Reilly Auto Parts 2004 Annual Report Download - page 32

30 O’REILLY AUTOMOTIVE
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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). T he
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.
We issue stand-by letters of credit provided by a $30 million sublimit under the Credit Facility that reduce our available borrowings. T hese 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. T herefore, 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.
Payment s Due By Period
Before 1-3 4-5 Over 5
(In thousands) Tot al 1 Year Years Years Years
CONTRACTUAL OBLIGATIONS:
Long-term debt $100,914 $ 592 $ 75,317 $ 25,005 $ -
Operating leases 315,043 36,341 66,108 52,576 160,018
Total contractual cash obligations $415,957 $36,933 $141,425 $ 77,581 $160,018
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.
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 informa-
tion 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