O'Reilly Auto Parts 2014 Annual Report Download - page 35

FORM 10-K
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our distribution and store networks. Distribution system efficiencies were the result of continued leverage on our increased sales volumes
and more tenured and experienced DC Team Members in our maturing DCs. The decrease in capitalized distribution costs for the year
ended December 31, 2013, was the result of the larger than typical benefit from capitalized distribution costs in 2012 associated with our
initiative to increase our store-level inventories. The costs to move this additional inventory into the stores in 2012 were more efficient
than routine restocking activity; as a result, we realized a larger than normal benefit from capitalized distribution costs. The complete
depletion of our LIFO reserve during the year resulted from the acquisition cost improvements we realized over time. Our policy is to
not write up inventory in excess of replacement cost and, accordingly, we began effectively valuing our inventory at replacement cost in
2013. During 2013, our LIFO cost was written down by approximately $21.6 million to reflect replacement cost in 2013. Professional
service provider sales grew at a faster rate than DIY sales and professional service provider sales typically carry a lower gross profit as
a percentage of sales than DIY sales, as volume discounts are granted on wholesale transactions to professional service provider customers;
therefore, outsized growth in professional service provider sales, as compared to DIY, creates pressure on our gross profit as a percentage
of sales.
Selling, general and administrative expenses:
Selling, general and administrative expenses ("SG&A") for the year ended December 31, 2013, increased to $2.27 billion (or 34.1% of
sales) from $2.12 billion (or 34.3% of sales) for the same period one year prior, representing an increase of 7%. The increase in total
SG&A dollars was primarily the result of additional Team Members, facilities and vehicles to support our increased store count. The
decrease in SG&A as a percentage of sales was primarily the result of improved leverage of store payroll and occupancy costs on strong
comparable store sales results.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2013, increased to $1.10 billion (or 16.6%
of sales) from $977 million (or 15.8% of sales) for the same period one year prior, representing an increase of 13%.
Other income and expense:
Total other expense for the year ended December 31, 2013, increased to $45 million (or 0.7% of sales), from $36 million (or 0.6% of
sales) for the same period one year prior, representing an increase of 24%. The increase in total other expense for the year ended December
31, 2013, was primarily due to increased interest expense on higher average outstanding borrowings.
Income taxes:
Our provision for income taxes for the year ended December 31, 2013, increased to $389 million (36.7% effective tax rate) from $356
million (37.8% effective tax rate) for the same period one year prior, representing an increase of 9%. The increase in our provision for
income taxes was due to the increase in our taxable income. The decrease in our effective tax rate was primarily due to the benefits of
employment tax credits realized in 2013, adjustments to tax reserves related to the favorable resolution of certain income tax audits during
2013 and unfavorable adjustments relating to certain income tax audits in 2012.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2013, increased to $670 million (or 10.1% of
sales), from $586 million (or 9.5% of sales) for the same period one year prior, representing an increase of 14%.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2013, increased 27% to $6.03 on 111 million shares from $4.75
on 123 million shares for the same period one year prior.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate
and maintain existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved
share repurchase program. The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured
revolving credit facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability
to generate funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the
debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.
We believe that cash expected to be provided by operating activities and availability under our unsecured revolving credit facility will
be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future. However, there can be no
assurance that we will continue to generate cash flows at or above recent levels.