O'Reilly Auto Parts 2004 Annual Report Download - page 34

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.
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 “modi-
fied 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. 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.
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.
32 O’REILLY AUTOMOTIVE
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)