O'Reilly Auto Parts 2005 Annual Report Download - page 42

became exercisable immediately. O’Reilly’s Board of Directors took this action with the belief that it is in the best interest of shareholders as it will
reduce the Company’s reported non-cash compensation expense in future periods.
In order to limit unintended personal benefits to employees and officers, the Board of Directors imposed restrictions on any shares received through
the exercise of accelerated options held by those individuals. These restrictions prevent the sale of any stock obtained through exercise of an accelerated
option prior to the earlier of the original vesting date or the individual’s termination of employment. The Company recorded pre-tax stock-based
compensation expense of $2.2 million in 2005 based on the intrinsic value of in-the-money options subject to acceleration and the Company’s estimate
of awards that would have expired unexercisable absent the acceleration. The pro forma table below includes the compensation expense related to the
acceleration of the unamortized portion of unvested stock options. The significant increase in stock based compensation expense under the fair value
method is primarily due to the compensation expense related to the acceleration.
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) 2005 2004 2003
Excluding inventory accounting change
Net income, as reported $164,266 $139,566 $100,087
Add stock-based compensation expense, net
of tax, as reported 1,355 - -
Deduct stock-based compensation expense, net
of tax, under fair value method (22,178) (7,468) (9,204)
Pro forma net income $143,443 $132,098 $ 90,883
Pro forma basic net income per share $ 1.29 $ 1.20 $ 0.84
Pro forma net income per share–assuming dilution $ 1.27 $ 1.19 $ 0.83
Net income per share, as reported
Basic $ 1.47 $ 1.27 $ 0.93
Assuming dilution $ 1.45 $ 1.25 $ 0.92
Including inventory accounting change
Net income N/A N/A $100,599
Add stock-based compensation expense, net of tax, as reported N/A N/A -
Deduct stock-based compensation expense, net
of tax, under fair value method N/A N/A (9,204)
Pro forma net income N/A N/A $ 91,395
Pro forma basic net income per share N/A N/A $0.85
Pro forma net income per share– assuming dilution N/A N/A $ 0.84
The fair values for options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2005, 2004, and 2003, respectively: risk-free interest rates of 4.25%, 3.01% and 3.61%; volatility factors of the expected market price of
the Company's common stock of .358, .404, and .458; and expected life of the options of 4.0, 4.0 and 9.4 years. The Company assumed a 0% dividend
yield over the expected life of the options. The weighted-average fair values of options granted during the years ended December 31, 2005, 2004, and
2003 were $8.82, $14.47 and $20.56, respectively.
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 226,750, 544,000 and
133,500 for the years ended December 31, 2005, 2004 and 2003, respectively.
O’REILLY AUTOMOTIVE 2005 ANNUAL REPORT
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notes to consolidated financial statements (continued)