O'Reilly Auto Parts 2008 Annual Report Download

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O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT
ROAD TESTED. RESULTS DRIVEN.
O’R E I L L Y M A K E S A S T R A T E G I C I N V E S T M E N T I N O P P O R T U N I T Y .

Table of contents

  • Page 1
    O ' R E I L LY A U T O M O T I V E 2 0 0 8 A N N U A L R E P O R T R O A D T E S T E D . R E S U LT S D R I V E N . O ' REILLY MAKES A STRATEGIC INVESTMENT IN OPPORTUNITY .

  • Page 2
    ...assuming dilution) Weighted-Average Common Shares (assuming dilution) Stores At Year-End Same-Store Sales Gain O'Reilly's dedication to strong and profitable growth led to an increase in sales of $1.1 billion in 2008, fueled by the acquisition of CSK Auto, Inc. CSK added 1,342 stores and allowed us...

  • Page 3
    ..., 2008, we acquired CSK Auto Corporation (CSK). At the time of the acquisition, CSK was one of the largest specialty retailers of auto parts and accessories in the Western United States and operated 1,342 stores under the brand names of Checker Auto Parts, Schuck's Auto Supply, Kragen Auto Parts and...

  • Page 4
    ..., inventory availability and culture. CSK operated a retail-focused distribution network with four main distribution centers (DCs) servicing stores on a weekly basis. We are closing one CSK DC that overlaps with an existing O'Reilly DC, renovating the remaining three CSK DCs, adding four new DCs...

  • Page 5
    ...150 new stores in 2009. To support this new store growth, we opened the Lubbock, Texas DC in 2008, which is also being leveraged to support acquired CSK stores in El Paso and New Mexico, and we will open the Greensboro, North Carolina DC in 2009 to continue our expansion into the Mid-Atlantic states...

  • Page 6
    ... our proven business model. We remain road tested and results driven. OPPORTUNITY: We have the opportunity with the acquisition of CSK Auto to rapidly expand our proven dual market strategy into the western half of the country. We will implement this strategy with a strong focus on customer service...

  • Page 7
    R O A D T E S T E D. R E S U LT S D R I V E N . O ' R E I L LY A U T O M O T I V E 2 0 0 8 A N N U A L R E P O R T P G . 5

  • Page 8
    R O A D T E S T E D. R E S U LT S D R I V E N . WE ARE ROAD TESTED. WE ARE PROVEN. P G . 6 O ' R E I L LY A U T O M O T I V E 2 0 0 8 A N N U A L R E P O R T

  • Page 9
    ... prices. Installers value our extensive support programs, professional training classes and the dedicated sales team of more than 400 who devote their time to helping our valued customers run profitable businesses. EXT R AO R D INARY SERVICE When it comes to customer service, little things...

  • Page 10
    ... our growing company with an even wider distribution reach. CORE O'REILLY Atlanta, GA Billings, MT Dallas, TX Des Moines, IA Houston, TX Indianapolis, IN Kansas City, MO Knoxville, TN Little Rock, AR Lubbock, TX Minneapolis, MN Mobile, AL Nashville, TN Oklahoma City, OK Springfield, MO UNDER...

  • Page 11
    ..., name-brand products such as AC Delco, Moog, Wagner, Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol, Valvoline, STP, BWD, Cardone, WIX, Armor All and Turtle Wax. In addition to the name-brand products we stock, our stores carry a wide variety of high-quality private...

  • Page 12
    ...inexperienced people who want to work hard and learn, to experienced parts professionals working outside our organization. Each store team member participates in extensive and ongoing training in our industry-leading program that emphasizes customer service and technical knowledge, particularly with...

  • Page 13
    R O A D T E S T E D. R E S U LT S D R I V E N . WE ARE VALUE DRIVEN. WE HAVE A GREAT OPPORTUNITY. O ' R E I L LY A U T O M O T I V E 2 0 0 8 A N N U A L R E P O R T P G . 1 1

  • Page 14
    ... majority of the country. CORE O'REILLY Atlanta, GA Billings, MT Dallas, TX Des Moines, IA Houston, TX Indianapolis, IN Kansas City, MO Knoxville, TN Little Rock, AR Lubbock, TX Minneapolis, MN Mobile, AL Nashville, TN Oklahoma City, OK Springfield, MO CSK CONVERSIONS Detroit, MI Phoenix, AZ Dixon...

  • Page 15
    ... Northern Plains, New Mexico, 1. El Paso and Chicago stores - all stores in O'Reilly's existing distribution reach 2 Convert Detroit, MI distribution center 2. 3 Convert Michigan and Ohio stores 3. 4 Seattle DC opens 4. 5 Denver and Southern California DCs open 5. 6 Utah DC open 6. 7 Convert West...

  • Page 16
    ... Hi-Lo Automotive, Mid-State Auto Parts, Midwest Auto Parts and many, many individually acquired parts stores. This culture, or the ability to LIVE GREEN, is the foundation of our beginning, our growth and our future. It means offering great customer service, watching our expenses, working hard and...

  • Page 17
    ... the road. Over the next year, we will align all of our major product lines across the chain. For the acquired CSK stores, this will mean adding a much wider breadth of hard parts and the elimination of non-core automotive merchandise. Through the application of our finely tuned inventory management...

  • Page 18
    ... during 2008, O'Reilly Automotive has complied with the company's corporate governance requirements, the corporate governance best practice guidelines established by the NASDAQ stock exchange, the provisions of the Sarbanes-Oxley Act of 2002 and the rules adopted by the U.S. Securities and...

  • Page 19
    ... Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Directors and Executive Committee and Operations Management Listings Shareholder Information 18 22 34 35...

  • Page 20
    ... 2008 2007 2006 I NCOME S TATEMENT DATA : Sales Cost of goods sold, including warehouse and distribution expenses Gross profit Selling, general and administrative expenses Operating income Other income (expense), net Income before income taxes and cumulative effect of accounting change Provision...

  • Page 21
    SELECTED F INANCI AL DATA (CON T I NUE D) 2005 2004 2003 2002 2001 2000 1999 $ 2,045,318 1,152,815 892,503 639,979 252,524 (1,455) 251,069 86,803 ...

  • Page 22
    ... Enterprises and Davie Automotive, Inc. in December 2002. (b) Total square footage includes normal selling, office, stockroom and receiving space. Sales per weighted-average store and square foot are weighted to consider the approximate dates of store openings or expansions. (c) Same-store sales...

  • Page 23
    SELECTED F INANCI AL DATA (CON T I NUE D) 2005 2004 2003 2002 2001 2000 1999 1,470 9,801 $ $ 1,478 220 7.5% $ $ 1,249 8,318 1,443 217 6.8% $ $ 1,109 7,348 1,413 215 7.8% $ $ 981 6,408 1,372 ...

  • Page 24
    ... 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 installer service equipment. On July 11, 2008, we completed the acquisition of CSK...

  • Page 25
    ... four brand names: Checker Auto Parts, Schuck's Auto Supply, Kragen Auto Parts and Murray's Discount Auto Parts. This added stores in twelve new states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Michigan, Nevada, New Mexico, Oregon, Utah and Washington, and a number of new markets in...

  • Page 26
    ... and layout of stores, compensation programs for all store team members that provide incentives for performance and our continued focus on serving professional installers. Consolidated comparable store sales for stores open at least one year increased 1.5% for the year ended December 31, 2008. This...

  • Page 27
    ... the core O'Reilly store base, a one-time charge of $9.6 million to align CSK's vacation policy with the Company's policy, $5.3 million of non-cash amortization of CSK trade names and trade marks and partial de-leverage of fixed SG&A expenses on low comparable store sales increases. Interest expense...

  • Page 28
    ... acquisition of CSK, the addition of a distribution center facility in Lubbock, Texas, cash paid in the construction of a distribution center in Greensboro, North Carolina planned to open in 2009 and capital investments made in the initial stage of our integration of the operations of CSK. The 2008...

  • Page 29
    ... 150 new stores and the addition of a distribution center in Greensboro, North Carolina. The costs associated with the opening of a new store (including the cost of land acquisition, improvements, fixtures, net inventory investment and computer equipment) are estimated to average approximately...

  • Page 30
    ...) commencing after July 11, 2008, if the last reported sale price of our common stock is greater than or equal to 130% of the applicable exchange price of $36.17 for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter...

  • Page 31
    ... 31, 2008 and 2007, respectively. CR I T ICA L ACCOUNT I NG POL ICI E S A ND E S T IM ATE S The preparation of our financial statements in accordance with accounting policies generally accepted in the United States ("GAAP") requires the application of certain estimates and judgments by management...

  • Page 32
    ... of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") on January 1, 2007. Inventory, which consists of automotive hard parts, maintenance items, accessories and tools is stated at...

  • Page 33
    ...account for quantities in our perpetual records above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our extensive and frequent cycle counting programs and periodic, full physical inventories at our stores and distribution centers...

  • Page 34
    .... The unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report, and the other financial information included therein. Fiscal 2008 (In thousands, except per share data) First Quarter...

  • Page 35
    ... principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411...

  • Page 36
    ...used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The Swaps have been designated as cash flow hedges. If interest rates increased or decreased by 100 basis points, annualized interest expense and cash payments for interest would increase or...

  • Page 37
    ... policies or procedures. Under the supervision and with the participation of the Company's principal executive officer and principal financial officer, management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. In making this assessment...

  • Page 38
    ... consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2008 of O'Reilly Automotive, Inc. and Subsidiaries and our report dated February 27, 2009 expressed an unqualified opinion thereon. Kansas City, Missouri February...

  • Page 39
    ... of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our...

  • Page 40
    CONSOL IDATED BAL ANCE SHEETS (In thousands, except share data) Years ended December 31, A S SE T S : Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $4,521 in 2008 and $3,179 in 2007 Amounts receivable from vendors Inventory Deferred income ...

  • Page 41
    CONSOL IDATED STATEMENTS OF INCOME (In thousands, except per share data) Years ended December 31, Sales Cost of goods sold, including warehouse and distribution expenses Gross profit Selling, general and administrative expenses Operating income Other income (expense), net: Debt prepayment costs ...

  • Page 42
    ...Tax benefit of stock options exercised Share based compensation Balance at December 31, 2007 Net income Other comprehensive loss Comprehensive income Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Issued in CSK acquisition Tax benefit of stock...

  • Page 43
    ... on property and equipment Amortization of intangible items Premium on 6 ¾% exchangeable notes Amortization of debt issuance costs Deferred income taxes Share based compensation programs Other Changes in operating assets and liabilities: Accounts receivable Inventory Accounts payable Other Net...

  • Page 44
    ... retailer and supplier of automotive aftermarket parts, tools, supplies and accessories to both the do-it-yourself ("DIY") customer and the professional installer in 38 states. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned...

  • Page 45
    NOTES TO CONSOL IDATED F INANCI AL STATEMENTS (CON T I NUE D) 2007. Upon completion of the Company's acquisition of CSK on July 11, 2008, the investment in CSK stock was included as a component of the purchase price of CSK and allocated preliminarily to the assets acquired and liabilities assumed ...

  • Page 46
    ... the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to operations as incurred. SHARE-BASED COMPENSATION PLANS The Company currently sponsors share-based employee benefit plans and stock option plans. In accordance with Statement of Financial Accounting...

  • Page 47
    ...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...

  • Page 48
    ... of FASB Statement No. 133 have been applied, and the impact that hedges have on an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company will...

  • Page 49
    ...Auto Supply, Kragen Auto Parts and Murray's Discount Auto Parts. This acquisition allowed the Company to enter into twelve new states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Michigan, Nevada, New Mexico, Oregon, Utah and Washington, and a number of new markets. As of December 31, 2008...

  • Page 50
    ...expects to occur within the first two years after the acquisition date. Evaluation of involuntary team member terminations is substantially complete. As of December 31, 2008, management of the Company had not finalized all exit plans associated with store closures and other facilities related to the...

  • Page 51
    NOTES TO CONSOL IDATED F INANCI AL STATEMENTS (CON T I NUE D) acquired locations and the Company expects to finalize the plans within the first year after the acquisition date, which may result in adjustments to the allocation of the acquisition purchase price that may impact other current ...

  • Page 52
    ...of CSK (see Note 2 "Business Combination"), the Company entered into its ABL Credit Agreement for a five-year $1.2 billion asset-based revolving credit facility arranged by Bank of America, N.A. ("BA"), which the Company used to refinance debt, fund the cash portion of the acquisition, pay for other...

  • Page 53
    ... are also reduced by stand-by letters of credit issued by the Company primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. As of December 31, 2008, the Company had stand-by letters of credit outstanding in the amount of $55.6 million and...

  • Page 54
    ... 2015. The present value of future minimum lease payments under building capital leases totaled approximately $1,930,000 at December 31, 2008, which has been classified as long-term debt in the accompanying consolidated financial statements. The Company assumed building capital lease liabilities...

  • Page 55
    NOTES TO CONSOL IDATED F INANCI AL STATEMENTS (CON T I NUE D) NOTE 5 - REL ATED PA R T I E S The Company leases certain land and buildings related to 49 of its O'Reilly Auto Parts stores under fifteen-year operating lease agreements with O'Reilly Investment Company and O'Reilly Real Estate Company...

  • Page 56
    ...TO CONSOL IDATED F INANCI AL STATEMENTS (CON T I NUE D) In connection with the acquisition of CSK, the Company recorded $4.1 million of exit costs associated with the planned closure of 33 CSK stores and assumed CSK's existing closed stores liabilities of $3.0 million related to 127 locations that...

  • Page 57
    ... available-for-sale securities, consisting of the Company's investment in CSK common stock prior to the Company's completion of the acquisition of CSK, as well as unrealized losses from interest rate swaps that qualify as cash flow hedges are included in accumulated other comprehensive income (loss...

  • Page 58
    ... securities that are publicly traded in active markets and are valued based on quoted closing prices as of December 31, 2007. The Company did not hold any available-for-sale securities at December 31, 2008. NOTE 11 - SH A RE- BA SED EMPLOY EE COMPENS AT ION PL A NS A ND OTHER BENEF I T PL A NS STOCK...

  • Page 59
    ... for future issuance. OTHER EMPLOYEE BENEFIT PLANS The Company sponsors a contributory profit sharing and savings plan that covers substantially all employees who are at least 21 years of age and have at least six months of service. The Company has agreed to make matching contributions equal...

  • Page 60
    ... July 11, 2008 in conjunction with the acquisition of CSK, the Company became the sponsor for a 401(k) plan that is available to all CSK team members who are at least 21 years of age. The Company matches from 40% to 60% of participant contributions in 10% increments, based on years of service, up to...

  • Page 61
    ... assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards. Significant components of the Company's deferred tax assets and liabilities are as follows at December 31: (In thousands) 2008 2007 Deferred tax...

  • Page 62
    ... consolidated financial statements. As of December 31, 2008, the Company had net operating losses for federal income tax purposes of $110.8 million (for which a portion are also available for state tax purposes) and general business tax credit carryforwards available for federal and state tax...

  • Page 63
    ...pre-acquisition historical accounting practices of CSK. At this time, O'Reilly is cooperating with requests from the DOJ to resolve CSK's pre-merger matters. INDEMNIFICATION MATTERS Several of CSK's former directors or officers and current or former employees have been or may be interviewed as part...

  • Page 64
    ... On May 7, 2002, the Board of Directors adopted a shareholder rights plan whereby one right was distributed for each share of common stock, par value $.01 per share, of the Company held by stockholders of record (the "Rights") as of the close of business on May 31, 2002. The Rights initially entitle...

  • Page 65
    ... of Real Estate and Expansion PHYLLIS EVANS Vice President of Store Administration L A R RY ELLI S Vice President of Distribution Western Division A LA N FEA R S Vice President of Jobber Sales and Acquisitions JEFF G ROV ES Vice President of Legal and Claim Services and General Counsel BR ETT H EI...

  • Page 66
    ... & Young LLP One Kansas City Place 1200 Main Street, Suite 2000 Kansas City, Missouri 64105-2143 A NNUA L MEE T I NG The annual meeting of shareholders of O'Reilly Automotive, Inc. will be held at 10:00 a.m. local time on May 5, 2009, at the Double Tree Hotel, 2431 North Glenstone Ave in Springfield...

  • Page 67
    ... supplier of auto parts in our market areas by offering our retail customers, professional installers and jobbers the best combination of inventory, price, quality and service; providing our team members with competitive wages, bene ts and working conditions which promote high achievement and...

  • Page 68
    PROFITABLE GROWT H. I T ' S W H E R E W E ' V E BEEN. IT ' S WHERE WE ' RE HEAD ING. 2 3 3 S O U T H P AT T E R S O N S P R I N G F I E L D, M I S S O U R I 6 5 8 0 2 4 1 7. 8 6 2 . 3 3 3 3 W W W. O R E I L LYA U T O. C O M