O'Reilly Auto Parts 2004 Annual Report Download - page 42

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 interpreta-
tions 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.
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:
(In thousands, except per share data) 2004 2003 2002
Excluding inventory accounting change
Net income, as reported $139,566 $100,087 $81,992
Stock-based compensation expense, net of tax, as reported ---
Stock-based compensation expense, net of tax, under fair value method 7,468 9,204 7,217
Pro forma net income $132,098 $ 90,883 $74,775
Pro forma basic net income per share $2.40 $ 1.69 $ 1.41
Pro forma net income per share-assuming dilution $2.37 $ 1.67 $ 1.39
Net income per share, as reported
Basic $2.54 $ 1.86 $ 1.54
Assuming dilution $2.51 $ 1.84 $ 1.53
Including inventory accounting change
Net income N/A $100,599 $84,633
Stock based compensation expense, net of tax, as reported N/A --
Stock based compensation expense, net of tax, under fair value method N/A 9,204 7,217
Pro forma net income N/A $ 91,395 $77,416
Pro forma basic net income per share N/A $ 1.70 $ 1.46
Pro forma net income per share-assuming dilution N/A $ 1.68 $ 1.44
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.
40 O’REILLY AUTOMOTIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)