O'Reilly Auto Parts 2010 Annual Report Download - page 43

32
acquisition of CSK, our mix of sales to DIY customers was approximately equal to sales to professional service provider customers.
At the time of the acquisition in July of 2008, acquired CSK stores generated more than 90% of their total sales from DIY customers.
The addition of the acquired CSK stores’ predominantly retail sales has resulted in a mix shift of our consolidated sales to
approximately 65% DIY and 35% professional service provider. In 2009, core O’Reilly stores derived approximately 53% of our
sales from our DIY customers and approximately 47% from our professional service provider customers, while acquired CSK stores
derived approximately 84% of sales from our DIY customers and approximately 16% from our professional service provider
customers. Sales to DIY customers generally have higher gross margin percentages than sales to professional service providers as
volume discounts are granted on these wholesale transactions to professional service providers. In addition, we have added our
private label product lines to the acquired CSK stores inventory mix. Private label product sales generally offer better gross margin
percentages than sales of corresponding branded products. Improvements in our distribution system were the result of capital projects
designed to create operating expense efficiencies. The reductions in commodity prices, without corresponding decreases in retail
pricing, that we experienced in 2009 returned to more normal levels by the end of 2009 and we would not anticipate this favorable
pricing environment to continue in 2010. Additionally, in conjunction with the opening of our distribution centers (“DC”) in our
western markets, we would anticipate a temporary decrease in distribution efficiencies as the new DC team members become
proficient with the O’Reilly distribution systems and as duplicative capacity is removed from the system.
Selling, general and administrative expense:
SG&A increased $497 million, or 38%, from $1.29 billion (36.1% of sales) in 2008 to $1.79 billion (36.9% of sales) in 2009. The
dollar increase in SG&A expenses resulted from a full year inclusion of CSK and new stores. The increase in SG&A expenses as a
percentage of sales was attributable to the addition of the acquired CSK stores, which have a higher expense structure than the core
O’Reilly store base, and the additional store payroll required to complete the ongoing product-line changeovers for acquired CSK
stores. These increases were offset by a reduction in duplicative administrative corporate overhead as we continue to transition the
CSK headquarters operations in Phoenix, Arizona to our facilities in Springfield, Missouri and increased leverage of fixed costs as a
result of the increase in comparable store sales.
Operating income:
Operating income in 2009 increased $202 million, or 60%, from $336 million (or 9.4% of sales) in 2008 to $538 million (or 11.1% of
sales) in 2009, representing an increase of 60%.
Interest expense:
Interest expense increased $19 million, from $26 million (or 0.7% of sales) in 2008 to $45 million (or 0.9% of sales) in 2009. The
increase in interest expense is the result of a full-year of borrowings under our Credit Facility in 2009 that was used to fund the
acquisition of CSK in 2008, the opening of new stores, ongoing capital expenditures related to the integration of the operations of
CSK, the expansion of our distribution infrastructure and the operation of our existing stores slightly offset by more favorable interest
rates in 2009 on the non-swapped portion of the outstanding borrowings under our Credit Facility which are subject to variable interest
rate changes. Other income (expense) for the year ended December 31, 2008, included one-time charges of $4 million for interim
financing facility commitment fees related to the CSK acquisition and $7 million of debt prepayment costs resulting from the payoff
of our existing senior notes and synthetic lease facility.
Income taxes:
Our provision for income taxes increased from $116 million in 2008 (38.4% effective tax rate) to $189 million in 2009 (38.1%
effective tax rate). The decrease in effective tax rate is the result of the one-time charge to adjust tax liabilities in 2008 relating to the
CSK acquisition, offset by the generally higher effective tax rates in most states where CSK stores are located. The increase in the
dollar amount for income taxes was due to the increase in income before income taxes.
Net income:
As a result of the impacts discussed above, net income increased $121 million, or 65%, from $186 million in 2008 (5.2% of sales) to
$307 million in 2009 (6.3% of sales).
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2009, increased 51% to $2.23 on 138 million shares
compared to $1.48 for the year ended December 31, 2008, on 125 million shares.
Adjustments for nonrecurring and non-operating events:
Our year ended December 31, 2008, included one-time and non-cash charges related to the July 11, 2008, acquisition of CSK. These
charges included one-time costs for prepayment and extinguishment of our existing debt, commitment fees for an unused interim
financing facility, a one-time adjustment to the tax liabilities resulting from the acquisition of CSK, a one-time charge to conform the
CSK team member vacation policy with the O’Reilly policy and a non-cash charge to amortize the value assigned to CSK’s trade
names and trademarks, which will be amortized over a period coinciding with the anticipated conversion of CSK store locations. Our
year ended December 31, 2009, results included a non-cash charge to amortize the value assigned to CSK’s trade names and
trademarks. Adjusted diluted earnings per share, excluding the impact of the acquisition related charges, increased 38% to $2.26 for
33
the year ended December 31, 2009, from $1.64 for the same period one year ago. The table below outlines the impact of the
acquisition related charges for the years ended December 31, 2009 and 2008 (amounts in thousands, except per share data):
For the Year Ended December 31,
2009 2008
Amount % of Sales Amount % of Sales
Net income $ 307,498 6.3 % $ 186,232 5.2 %
Acquisition related charges:
Debt prepayment costs, net of tax - - % 4,402 0.1 %
Commitment fee for interim financing facility, net of tax - - % 2,552 0.1 %
Adjustments to tax liabilities - - % 3,142 0.1 %
Charge to conform vacation policies, net of tax - - % 5,879 0.1 %
Amortization of trade names and trademarks, net of tax 3,894 0.1 % 3,267 0.1 %
Adjusted net income $ 311,392 6.4 % $ 205,474 5.7 %
Diluted earnings per common share $ 2.23 $ 1.48
Acquisition related charges:
Debt prepayment costs, net of tax - 0.04
Commitment fee for interim financing facility, net of tax - 0.02
Adjustments to tax liabilities - 0.02
Charge to conform vacation policies, net of tax - 0.05
Amortization of trade names and trademarks, net of tax 0.03 0.03
Adjusted diluted earnings per common share $ 2.26 $ 1.64
The acquisition-related adjustments to EPS in the above paragraph and table present certain financial information not derived in
accordance with GAAP. We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation
from, or as a substitute for, GAAP financial information. We believe that the presentation of adjusted net income and earnings per
share excluding acquisition-related charges provides meaningful supplemental information to both management and investors that is
indicative of the Company’s ongoing core operations. Management excludes these items in judging our performance and believes this
non-GAAP information is useful to gain an understanding of the recurring factors and trends affecting our business. Material
limitations of this non-GAAP measure are that such measures do not reflect actual GAAP amounts and amortization of acquisition-
related trade names and trademarks reflect charges to net income and earnings per share that will recur over the estimated useful lives
of the assets ranging from one to three years. We compensate for such limitations by presenting, in the table above, the accompanying
reconciliation to the most directly comparable GAAP measures.
FORM 10-K