O'Reilly Auto Parts 2002 Annual Report Download - page 32

2001 COMPARED TO 2000
Product sales increased $201.7 million, or 22.7% from $890.4 million in 2000 to $1.09 billion in 2001, primarily due
to 121 net additional stores opened during 2001 and an 8.8% increase in same-store product sales for stores open at
least one year. We believe that the increased product sales achieved by the existing stores are the result of our offering
of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of
media and localized promotional events, and continued improvement in the merchandising and store layouts of most
stores. Also, our continued focus on serving professional installers contributed to increased sales.
Gross profit increased 22.2% from $382.7 million (or 43.0% of product sales) in 2000 to $467.8 million (or
42.8% of product sales) in 2001.
Operating, selling, general and administrative expenses increased $61.3 million from $292.7 million (or 32.9% of
product sales) in 2000 to $354.0 million (or 32.4% of product sales) in 2001. The increase in these expenses in dollar
amount was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition
of employees and facilities to support the increased level of our operations.
Other expense, net, increased by $234,000 from $6.9 million in 2000 to $7.1 million in 2001. The increase
was primarily due to interest expense on increased debt levels related to the issuing of $100 million of senior notes,
partially offset by lower interest expense on borrowings under the revolving credit facility due to lower interest rates.
Provision for income taxes increased from $31.5 million in 2000 (37.8% effective tax rate) to $40.4 million in 2001
(37.8% effective tax rate). The increase in the dollar amount was due to the increase of income before income taxes.
Principally as a result of the foregoing, net income in 2001 was $66.4 million (or 6.1% of product sales), an
increase of $14.6 million (or 28.3% of product sales) from net income in 2000 of $51.7 million (or 5.8% of product sales).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $104.5 million in 2002, $50.0 million in 2001 and $5.8 million in 2000.
The increase in cash provided by operating activities in 2002 compared to 2001 is primarily due to increases in net
income, accounts payable, income taxes payable, accrued payroll and accrued benefits and withholdings, partially off-
set by increases in receivables and inventory. The increase in cash provided by operating activities in 2001 compared
to 2000 is largely the result of smaller increases in inventory, increased net income and, to a lesser extent, increased
accrued benefits and withholdings. This increase in cash provided by operating activities in 2001 compared to 2000
was partially offset by the increase in amounts receivable from vendors and a decrease in accounts payable and other
current liabilities.
Net cash used in investing activities was $105.4 million in 2002, $77.8 million in 2001 and $40.5 million in
2000. The increase in cash used in investing activities in 2002 was primarily due to increased purchases of property
and equipment. The increase in cash used in investing activities in 2001 was largely due to the purchase of Mid-State,
as discussed in Note 2 of the Consolidated Financial Statements, and a significant reduction in the amount of proceeds
received from the sale of property and equipment.
On December 15, 2000, we entered into a $50 million Synthetic Operating Lease Facility (“the Facility”) with a
group of financial institutions. Under the Facility, the Lessor generally acquires land to be developed for O’Reilly Auto
Parts stores and funds the development thereof by the Company as the Construction Agent and Guarantor. We
subsequently leases the property from the Lessor for an initial term through December 15, 2005, and has an option to
request two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee
of $41.7 million at December 31, 2002, and purchase options on the properties. It also contains provisions for an event
of default whereby the Lessor, among other things, may require us to purchase any or all of the properties. We are
utilizing the Facility to finance a portion of its store growth. Funding under the Facility at December 31, 2002, and 2001,
totaled $49.0 million and $43.0 million, respectively. Future minimum rental commitments under the Facility have been
included in the table of future minimum annual rental commitments below. Our lessor under the Facility acts as lessor to
numerous other lessees under similar synthetic lease arrangements and has no other operations. Our maximum loss
under its Facility is limited to its $41.7 million residual value guarantee and none of our assets have been pledged as
collateral for the Lessor’s obligations.
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, for $52.3 million. 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 10-year period
and two additional successive periods of five years 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 future minimum annual rental commitments under non-cancelable operating leases.
Proceeds from the transaction were used to reduce outstanding borrowings under our former revolving credit facility.
On May 16, 2001, we completed a $100 million private placement of two series of unsecured senior notes
(“Senior Notes”). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear
interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and
bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes
issuable in series and is guaranteed by all of our subsidiaries. Proceeds from the transaction were used to reduce outstanding
borrowings under our former revolving credit facility.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
30 O’Reilly Automotive