O'Reilly Auto Parts 2002 Annual Report Download - page 30

The fo llowing dis cus s ion of o ur financial condition, res ults o f ope rations and liquidity and c apital re s o urce s s hould be
re ad in co njunction with our Co ns o lidate d Financial State me nts , re late d note s and o the r financial info rmation include d
e lse whe re in this annual report.
We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and
accessories in the United States, selling our products to both do-it-yourself (“DIY”) customers and professional
installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts,
maintenance items and accessories, and a complete line of auto body paint and related materials, automotive tools
and professional service equipment.
Beginning in January 2000, we calculate same-store product sales based on the change in product sales for
stores open at least one year. We also calculate same-store product sales based on the change in product sales of
only those stores open during both full periods being compared. We calculate the percentage increase in both same-
store product sales based on store sales results, which exclude sales of specialty machinery, sales by outside
salesmen and sales to employees.
Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods
sold as a percentage of product sales may be affected by variations in our product mix, price changes in response to
competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of store payroll, store occupancy, adver-
tising expenses, other store expenses and general and administrative expenses, including salaries and related benefits
of corporate team members, administrative office occupancy expenses, data processing, professional expenses and
other related expenses.
DISCLOSURE AND INTERNAL CONTROL
Our chief executive officer and chief financial officer have reviewed and evaluated the Company’s disclosure controls and
procedures as of December 31, 2002. Based on such review and evaluation, the officers believe that the disclosure con-
trols and procedures are designed effectively to ensure that the information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and forms and that the information required
to be discussed by the Company in the reports that it files and submits under the Securities Exchange Act of 1934, as
amended, and (ii) is documented and communicated to the Company’s management, including the officers, as appropri-
ate to allow timely decisions regarding required disclosure. There were no significant changes in the Company’s internal
controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, includ-
ing any corrective actions with regard to significant deficiencies and material weaknesses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the
business activities of our Company. To aid in that understanding, management has identified our “critical accounting poli-
cies.” These policies have the potential to have a more significant impact on our financial statements, either because of
the significance of the financial statement item to which they relate, or because they require judgment and estimation
due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
Cost of Goods Sold – Cost of goods sold includes estimates of shortages that are adjusted upon physical inven-
tory counts in subsequent periods and estimates of amounts due from vendors for certain merchandise allowances and
rebates. These estimates are consistent with historical experience.
Operating, Selling, General and Administrative Expense (“OSG&A”) – Operating, selling, general and administra-
tive expense includes estimates for worker’s compensation and other general liability obligations, which are partially
based on estimates of certain claim costs and historical experience.
Credit Operations – Allowance for doubtful accounts is estimated based on historical loss ratios and consistently
have been within management’s expectations.
Revenue – We recognize sales upon shipment of the products.
Stock-based Compensation – We have elected to use the intrinsic value method of accounting for stock options
issued under our stock option plans and accordingly do not record an expense for such stock options. For purposes of
pro forma disclosures under the fair value method, the estimated fair value of the options is amortized to expense over
the options’ vesting period.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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