Making Connections
for 50 Years
The O’Reilly Fundamental Difference
2007 Annual Report
Financial Highlights
In thousands, except earnings per share data and operating data (a)
years ended december 31
Sales
Operating Income
Net Income(a)
Working Capital
Total Assets
Total Debt
Shareholders’ Equity
2007
$2,522,319
305,151
193,988
573,328
2,279,737
100,469
1,592,477
2006
2005
2004
2003
$2,283,222
$2,045,318
$1,721,241
$1,511,816
282,315
178,085
566,892
252,524
164,266
424,974
190,458
117,674
479,662
165,275
100,087
441,617
1,977,496
1,718,896
1,432,357
1,157,033
110,479
100,774
1,364,096
1,145,769
100,914
947,817
121,902
784,285
Net Income Per Common Share
(assuming dilution)
Weighted-Average Common Shares
(assuming dilution)
Stores At Year-End
Same-Store Sales Gain
1.67
116,080
1,830
3.7%
1.55
1.45
1.05
0.92
115,119
113,385
111,423
109,060
1,640
3.3%
1,470
7.5%
1,249
6.8%
1,109
7.8%
O’Reilly generated another solid year of sales and earnings in 2007. Our commitment to providing the right part at the right price
while maintaining industry-leading customer service levels continues to be the fuel for our growth. 2007 marked the 15th consecutive year of
record revenue and earnings and positive comparable store sales increases since we became a public company in 1993.
E A R N I N G S P E R S H A R E (a)
(assuming dilution)
7
6
.
5 1
5
.
1
5
4
.
1
5
0
.
2 1
9
.
0
N E T I N C O M E (a)
(in thousands)
8
8
9
,
3
9
1
5
8
0
,
8
7
1
6
6
2
,
4
6
1
4
7
6
,
7
1
1
7
8
0
,
0
0
1
O P E R AT I N G I N C O M E (a)
(in thousands)
1
5
1
,
5
0
3
5
1
3
,
2
8
2
4
2
5
,
2
5
2
8
5
4
,
0
9
1
5
7
2
,
5
6
1
‘03
‘04
‘05
‘06
‘07
‘03
‘04
‘05
‘06
‘07
‘03
‘04
‘05
‘06
‘07
Our focus remains on profitable growth
which resulted in a 7.7% increase in
Earning Per Share to $1.67 in 2007.
We continue to grow market share while
maintaining our commitment to providing
unparalleled customer service which resulted
in an increase in Net Income of 8.9% to
$194 million in 2007.
Operating income increased 8.1%
to $305 million in 2007 as a result
of our continued improvements in
vendor relationships and distribution
system efficiencies.
(a) 2004 f igures are based on income before cumulative effect of accounting change.
C O M PA R I S O N O F F I V E -Y E A R C U M U L AT I V E R E T U R N
o’reilly auto parts
nasdaq retail trade stocks
nasdaq us market
$ 300
200
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Letter to Shareholders
the professional expertise that they expect
and the parts availability that they need.
At the core of our customer service
culture is the partnership that we form with
our customers. Our experience over the past
50 years has provided ample evidence that
the auto parts business is a relationship
business. We work diligently to build these
relationships with our professional installer
customers who count on us to consistently
provide them with industry-leading parts
availability and technical expertise. We
understand that our success is contingent on
their success, so we focus on the key factors
that make their businesses profitable. We
maintain the best in-stock parts availability
in the automotive aftermarket business, so
that our professional installers can get the
parts they need quickly and can maximize
the efficiency and profitability of their shops.
We recruit and train the best parts people
because our customers expect a very high
level of expertise … the wrong part delivered
to one of our professional installers means a
repair job gets delayed and their customer is
disappointed. So we focus on training through
our e-learning system and hands-on mentoring
of our store operations management.
Our focus on training and mentoring
the best parts people in the business allows
us to establish and maintain a strong
In 1957, Charles F. “C.F.” O’Reilly and his
son, Charles H. “Chub” O’Reilly, along with
11 team members, opened the first O’Reilly
Auto Parts store in Springfield, Missouri,
and established the blueprint that has
powered the growth of our company through
50 years and 1,830 new stores. The key
elements of that blueprint haven’t really
changed over the past 50 years since the
opening of that first store. Team O’Reilly
continues to be unwavering in its commitment
by providing the best possible service to our
customers and by working hard each and
every day. At the center of our success are
our people. Our financial success in 2007
reflect the thousands of daily interactions
between our professional parts people and
our customers. Our commitment to service
means that we strive on a daily basis to make
a connection with our customers by providing
Wisdom
comes with age –
a glance at our
50-year journey.
1957
Chub O'Reilly and his father,
C.F. O'Reilly, made the decision to open
O'Reilly Automotive, Inc. They began
with a single store and 11 team members
at 403 Sherman in Springfield, Mo.
1958
After our first full year in business,
sales totaled $700,000.
1961
Ozark Automotive Distributors
was formed to specialize in wholesale
distribution to independent
auto parts stores.
1964
O’Reilly Automotive added its first
branch store at Glenstone and
Bennett in Springfield, Mo.
1
S A L E S
(in billions)
5
.
2
3
.
2
0
.
2
7
.
1
5
.
1
2.5
2.0
1.5
1.0
.5
0
‘03
‘04
‘05
‘06
‘07
Our dual market strategy and 50 years of experience in
providing industry-leading customer service resulted in a
10.5% increase in sales to $2.52 billion in 2007.
connection with our do-it-yourself customers.
Do-it-yourself customers require more from
their shopping experience than a cashier
at a register. They seek out our professional
parts people and rely on their professional
expertise. If you spend any time in one
of our stores, you quickly realize that the
majority of our DIY sales are the culmination
of a conversation at the counter where an
O’Reilly team member works with the
customer to get the right part to solve
their problem. We know that our success
in these individual encounters is the key to
capturing our customer’s repeat business
and word-of-mouth business, which leads to
increased share in our markets. We constantly
focus on meeting the highest service standards
to ensure customer satisfaction.
2007 was a year of challenges for O’Reilly
Auto Parts and our customers. After a strong
start to the year, the demand in our markets
softened as our customers encountered
significant financial pressures due to higher
energy costs and the generally difficult
economic conditions. In this challenging
environment, Team O’Reilly remained
dedicated to providing the best service
and value to our customers and achieved
comparable store sales growth of 3.7%, which
led our industry. In 2007, our team extended
O’Reilly Auto Part’s track record of significant
profitable growth through continued focus
on exceptional customer service and expense
control. We also added 190 new stores while
delivering an operating margin of 12.1% and
7.7% earnings per share growth. We are
pleased to have achieved total sales growth
of 10.5% while increasing inventory only
8.5%. We were able to grow sales at a rate
greater than inventory due to continued
leverage of our core competency in inventory
management. Our focus on deploying the
right inventory assortment in our stores has
allowed us to reduce average inventory per
store even as sales volume has grown.
We view the recent challenges in the
macroeconomic environment to be temporary
and continue to be very optimistic about
the long-term prospects for growth and
profitability in our industry. Even during
the difficult economic conditions faced by
consumers in 2007, the total number of miles
driven in the United States remained stable.
The total number of miles driven is one of
the key factors that drives demand in the
1974
With nine stores operating in
southwest Missouri, we broke ground
on a new 48,000 square-foot
distribution center.
1978
Our “Dual Market Strategy” was born
to maximize sales in the professional
installer and DIY businesses.
1979
O’Reilly began enhanced advertising
campaigns with the addition of our
animated little red van, which helped
make O’Reilly a household brand.
1980
O’Reilly held first Managers’ Conference
at Kentwood Arms Hotel,
Springfield, Mo.
2
automotive aftermarket business. We are
confident that the American consumer will
adjust to economic pressures and that miles
driven will be a positive contributor to demand
over the long term. Over the past several years,
the average age of the vehicle population in
the United States, for both cars and light
trucks, has seen significant increases. We
expect that these increasing vehicle age trends
will continue due to the higher quality level
of the drive trains and key interior and exterior
components in newer vehicles. These higher-
mileage vehicles go through more routine
maintenance and repair cycles and represent
a significant driver of demand for our products.
We are uniquely positioned to capitalize
on the growth of the automotive aftermarket
industry because of our time-tested,
dual-market strategy that is unmatched by
Our 14 distribution centers are staffed by over 3,300 dedicated team members
who fill over 400,000 orders each day. When a customer requests a hard-to-find
part, it is immediately picked and delivered to the store within 24 hours.
any of our competitors. This core competency
enables us to take advantage of growth in
demand in both the DIY and the DIFM sides
of our business and contributes to our consistent
financial performance, particularly during
these difficult economic conditions. Our
ability to execute our dual-market strategy
is the result of over 50 years of experience
and a sustained commitment to building
relationships, by providing our customers
with the best parts availability in the
business through an expansive network of
14 distribution centers supported by over
100 master inventory stores. Our competitive
advantage in distribution is amplified by our
sophisticated inventory management systems
that customize the product assortment
stocked at each store based upon market
demand and vehicle registration data. Our
ability to equip our highly-trained professional
parts people with timely access to the parts
our customers need translates into consistent
customer satisfaction and loyalty.
Building upon our proven dual-market
strategy, we are planning to continue our
aggressive growth in 2008 and have
established a goal of opening 205 new stores.
Store growth in 2008 will follow our strategy
of concentrating new store openings in
contiguous geographic markets, enabling us
to quickly leverage our distribution, operating
and advertising investment. In 2008, we will
open our 15th distribution center in Lubbock,
Texas, providing capacity for further growth
1983
O’Reilly Automotive reaches its
25 anniversary with 37 stores in
Missouri and the Ozarks.
1993
O’Reilly went public and began offering
stock on the NASDAQ market under the
symbol ORLY at $17.50 per share.
1993
O’Reilly opened our second distribution
center in Kansas City, Mo.
1996
O’Reilly opened our 200th store in
St. Joseph, Mo.
3
From the 11 team members who joined
our founders to open the first O’Reilly Auto
Parts store in 1957 to the 23,576 team
members who staff our 1,830 stores,
14 distribution centers and corporate
offices today, the culture at Team O’Reilly
has truly been the foundation that has always
set our company apart and allowed us to
become the dominant auto parts supplier
in the markets we serve. We understand
that “culture” or “core values” is a popular
and even overused conversation point for
many companies. Our culture goes beyond
a catchy corporate slogan … it is reflected
in the daily activities of each of our team
members. We understand the importance
of our culture and the impact it has had
on our 50 years as a company, and our top
priority is perpetuating our culture values
which have been such a meaningful
contributor to our success.
On behalf of Team O’Reilly, we want to
express appreciation to our valued customers
and shareholders. We are extremely excited
about the outlook for O’Reilly Auto Parts
and pledge to be the dominant auto parts
supplier in our markets.
Our co-founder, C.F. O’Reilly once said, “People do business with people
they like”. Highly trained Parts Specialists offer industry leading customer
service to each and every one of our customers.
in one of our stronghold markets. Acquisitions
have historically been a key component of
our growth, and we continue to view our
company as a consolidator in the automotive
aftermarket industry. We will not waver
from our commitment to profitable growth
in our expansion strategy and will continue
to exercise discipline in our selection of
acquisition targets that fit our culture and
return value to our shareholders. As each
member of Team O’Reilly helps drive us on
to achieving our sales goals, our customers
and shareholders will reap the rewards of
our continued success.
DAVID O’REILLY
Chairman of the Board
GREG HENSLEE
TED WISE
TOM MCFALL
Chief Executive Officer and
Co-President
Chief Operating Officer and
Co-President
Chief Financial Officer and
Executive Vice President
1998
O’Reilly merged with Hi/LO Auto Supply,
adding 182 stores in Texas and Louisiana,
as well as a distribution center in
Houston, Texas. This merger increased
our total store count to 491 stores.
2001
O’Reilly acquired Mid-State Automotive
Distributors, ending 2001 with
875 stores, 12,676 team members
and over $1 billion in sales.
2005
O’Reilly reached $2 billion in sales and
purchased Midwest Automotive Distributors,
Inc., adding 71 stores in Minnesota,
Montana, North Dakota, South Dakota,
Wisconsin and Wyoming, and DCs in
St. Paul, Minn. and Billings, Mont.
2007
Team O’Reilly celebrated 50 years
in the auto parts industry with
1,830 stores, 23,576 team members
and over $2.5 billion in sales.
4
Making Connections for 50 Years
The O’Reilly Fundamental Difference
At O’Reilly,
our focus continues to be on making customer
connections by building on the basic fundamentals.
We do this by hiring the right people, training them
to provide the highest levels of customer service and
creating a culture in which our team members can
thrive. We have always stayed true to the fundamentals
that have set us apart and made us successful, and we
continue to look for ways to grow as individuals,
as a team and as a company.
Making connections with our team members,
our customers and our communities will always
be a key to our growth and success.
5
Making Connections with
our customers
From the first printed announcement of the opening of
O’Reilly Auto Parts to many of the business relationships
we enjoy today, friendship and loyalty have always been at
the core of our partnerships with our customers. We have
been offering our customers the proven hand of friendship,
courtesy and consideration, backed by extensive stocks of
quality merchandise, and prompt, efficient service since
the day our doors opened 50 years ago.
In today’s competitive market, it takes more than
good prices and quality products to gain and retain
customers. We must make their shopping experience
memorable by providing service far above the realm of
what our customers expect. After all, customer loyalty
is not something we get, but something that comes as
a result of what we give.
We receive countless letters from our customers
recounting the great service provided by our team
members. They think they’ve received special treatment,
but to Team O’Reilly, it’s a way of life.
6
“Since our humble beginning in
1957, we’ve been in the business
of making lasting impressions
on our customers.”
“Bleeding Green” is a term often used by O’Reilly team members to
describe our dedication. Since O’Reilly Automotive began in 1957 as
a family-owned business, the philosophy has always been to treat team
members like family. Our founders understood the importance of
investing business trust in our team members and sharing the fruits
of the venture as well as the burden. Today, nearly 24,000 dedicated
team members work to keep this tradition alive.
Making Connections with
dedicated team members
7
We have a soft spot in our hearts for our professional installer
customers as they were our first customers, and we’ve
enjoyed serving them since our very beginning. It wasn’t
until the recession of the late 1970s that a new breed of
automotive customer began to emerge and became known
as the do-it-yourselfer. Our ability to successfully serve our
traditional installer customers and the do-it-yourselfers
led to our dual market strategy and set us apart from our
competition. Our store inventories are designed to provide
brands that professional installers prefer as well as quality
private brands that are competitively priced. We also provide
daily deliveries to all stores from our distribution centers
and supplement customer needs at many of our stores with
multiple deliveries throughout the day. We have extensive
marketing programs for our installer customers and a
dedicated sales force that delivers a wide array of support
and services to our installer customers. We never lose sight
of the fact that the better we serve our installer customers,
the stronger our relationships become.
“We have the systems and the fleet to
connect our extensive distribution
network to our parts people so we
can be responsive to the needs of
our installer customers.”
Making Connections with
installer customers
8
Making Connections with
advanced technology
Our voice-directed picking systems, e-learning technology, graphical
point-of-sale systems, web-based sales and global inventory management
systems are just a few of the advanced technologies that help us grow sales,
control expenses and maximize profits. These technological advances
increase efficiencies in our distribution processes, enhance our team
members technical knowledge and make a greater assortment of parts
available to our customers at competitive prices … every day!
9
Making Connections with
new markets
In keeping with the “family” connection that is always present for Team
O’Reilly, we are eager to be actively involved in our business communities.
We make connections with customers as soon as we enter a new market.
We let communities know that we are in town, not only to be their first
choice for auto parts, but also to show our active support for the community
by beginning each grand opening ribbon-cutting ceremony with a
donation to a local charity.
2000
1500
1000
500
0
0
3
8
,
1
2
7
3
,
1
0
6
7 2
2
1
6
8
‘87
‘92
‘97
‘02
‘07
T O TA L N U M B E R
O F S T O R E S
We successfully opened 190 stores in
2007, bringing our total number of
stores to 1,830, and we have plans to
open 205 new stores in 2008.
10
O’Reilly distribution centers make an average of 4,000
connections to our stores each day, this high service level
is a strong competitive advantage. Virtually every O’Reilly
store has access to over 116,000 stock keeping units (SKUs)
by same-day or overnight delivery service.
We have real-time connectivity to our stores, which
allows every store to see not only their servicing DC
inventory, but also the entire O’Reilly inventory network.
The O’Reilly distribution process connects to our stores in
metro markets several times a day. Hub stores act as mini
distribution centers and deliver to spoke stores in their area,
allowing them to provide an enhanced inventory selection.
Our highly automated systems allow for more
efficient handling, which means increased service to
our stores at reduced costs. We will continue to take
advantage of new technologies that will boost our
productivity, accuracy and, ultimately, our bottom line,
and are committed to strengthening this competitive
advantage in 2008 and beyond.
2 0 0 7 O ’ R E I L L Y A U T O P A R T S S T O R E S
A N D D I S T R I B U T I O N C E N T E R S
DISTRIBU TION CENTERS
OPERATING FOOTPRINT
ALABAMA
ARKANSAS
FLORIDA
GEORGIA
ILLINOIS
INDIANA
IOWA
KANSAS
KENTUCKY
LOUISIANA
100
90
20
115
61
55
65
63
50
73
stores
stores
stores
stores
stores
stores
stores
stores
stores
stores
MINNESOTA
MISSISSIPPI
MISSOURI
MONTANA
NEBRASKA
NORTH CAROLINA
NORTH DAKOTA
OHIO
OKLAHOMA
SOUTH CAROLINA
stores
58
stores
63
stores
169
stores
20
27
stores
38 stores
stores
7
stores
14
stores
103
stores
32
SOUTH DAKOTA
TENNESSEE
TEXAS
VIRGINIA
WISCONSIN
WYOMING
stores
3
stores
117
stores
467
4
stores
11 stores
stores
5
TOTAL NUMBER
OF STORES
1,830
Making Connections with
distribution efficiency
11
Making Connections with
the O’Reilly culture
Team O’Reilly is connected through our culture – the
grass roots of our early beginnings. Our culture is the glue
that holds us all together. We stick together by offering
great customer service, watching our expenses, working
hard to share the load and having fun. We care for each
other, respect each other and help each other to be the
best that we can become.
When you hear a team member talk about “LIVING
GREEN,” they are talking about living all aspects of our
culture values. It’s the tool we use to help us accomplish
our personal and professional goals and to help lead and
influence our fellow team members.
As we continue to strive toward our goal of being the
dominant supplier of auto parts in all of our market areas,
our key advantage will be the culture that was established by
our founders 50 years ago. This culture has been fostered
ever since our inception and is at the heart of everything
we do as we “LIVE GREEN!”
12
“We depend on our team members
to make our company a success
and, in the process, our team
members succeed.”
Making Connections for 50 Years
The O’Reilly Fundamental Difference
“We’re focused, connected and committed to keeping
our minds on the MAIN THING . . . People, Service
and Performance! We are ENTHUSIASTIC,
HARD-WORKING PROFESSIONALS who are
DEDICATED to TEAMWORK, SAFETY and
EXCELLENT CUSTOMER SERVICE. We will
practice EXPENSE CONTROL, while setting
an example of RESPECT, HONESTY and a
WIN-WIN ATTITUDE in everything we do!”
13
Selected Consolidated Financial Data
(In thousands, except per share data)
Years ended December 31,
I NCOME STAT EMENT DATA:
Sales
Cost of goods sold, including warehouse and distribution expenses
Gross profit
Operating, selling, general and administrative expenses
Operating income
Other income (expense), net
Income before income taxes and cumulative effect of accounting change
Provision for income taxes
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax (a)
2007
2006
2005
$ 2,522,319
$ 2,283,222
$ 2,045,318
1,401,859
1,120,460
815,309
305,151
2,337
307,488
113,500
193,988
--
1,276,511
1,006,711
724,396
282,315
(50)
282,265
104,180
178,085
--
1,152,815
892,503
639,979
252,524
(1,455)
251,069
86,803
164,266
--
Net income
$
193,988
$
178,085
$ 164,266
BASIC EARNI NGS P ER COMMON SHARE:
Income before cumulative effect of accounting change
Cumulative effect of accounting change (a)
Net income per share
Weighted-average common shares outstanding
EARNI NGS P ER COMMON SHARE-ASSUMI NG DI LU T ION:
Income before cumulative effect of accounting change
Cumulative effect of accounting change (a)
Net income per share
$
$
$
$
1.69
--
1.69
114,667
1.67
--
1.67
$
$
$
$
1.57
--
1.57
113,253
1.55
--
1.55
$
$
$
$
1.47
--
1.47
111,613
1.45
--
1.45
Weighted-average common shares outstanding – adjusted
116,080
115,119
113,385
P RO FORMA I NCOME STAT EMENT DATA: (b)
Sales
Cost of goods sold, including warehouse and distribution expenses
Gross profit
Operating, selling, general and administrative expenses
Operating income
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Net income per share
Net income per share – assuming dilution
(a) The cumulative change in accounting method, effective January 1, 2004, changed the method of applying LIFO accounting policy for certain inventory costs.
Under the new method, included in the value of inventory are certain procurement, warehousing and distribution center costs.
The previous method was to recognize those costs as incurred, reported as a component of costs of goods sold.
(b) The pro forma income statement reflects the retroactive application of the cumulative effect of the accounting change to historical periods.
14
Selected Consolidated Financial Data (continued)
2004
2003
2002
2001
2000
1999
1998
$ 1,721,241
$ 1,511,816
$ 1,312,490
$ 1,092,112
$ 890,421
$ 754,122
$ 616,302
978,076
743,165
552,707
190,458
(2,721)
187,737
70,063
117,674
21,892
873,481
638,335
473,060
165,275
(5,233)
160,042
59,955
100,087
--
759,090
553,400
415,099
138,301
(7,319)
130,982
48,990
81,992
--
624,294
467,818
353,987
113,831
(7,104)
106,727
40,375
66,352
--
507,720
382,701
292,672
90,029
(6,870)
83,159
31,451
51,708
--
428,832
325,290
248,370
76,920
(3,896)
73,024
27,385
45,639
--
358,439
257,863
200,962
56,901
(6,958)
49,943
19,171
30,772
--
$
139,566
$
100,087
$
81,992
$
66,352
$ 51,708
$ 45,639
$ 30,772
$
$
$
$
1.07
0.20
1.27
110,020
1.05
0.20
1.25
$
$
$
$
0.93
--
0.93
107,816
0.92
--
0.92
$
$
$
$
0.77
--
0.77
106,228
0.76
--
0.76
$
$
$
$
0.64
--
0.64
104,242
0.63
--
0.63
$
$
$
$
0.51
--
0.51
102,336
0.50
--
0.50
$
$
$
$
0.47
--
0.47
97,348
0.46
--
0.46
$
$
$
$
0.36
--
0.36
84,952
0.36
--
0.36
111,423
109,060
107,384
105,572
103,456
99,430
86,408
$ 1,511,816
$ 1,312,490
$ 1,092,112
$ 890,421
$ 754,122
$ 616,302
872,658
639,158
473,060
166,098
(5,233)
160,865
60,266
100,599
0.93
0.92
$
$
$
754,844
557,646
415,099
142,547
(7,319)
135,228
50,595
84,633
0.80
0.79
$
$
$
618,217
473,895
353,987
119,908
(7,104)
112,804
42,672
70,132
0.67
0.66
$
$
$
501,567
388,854
292,672
96,182
(6,870)
89,312
33,776
425,229
328,893
248,370
80,523
(3,896)
76,627
28,747
350,581
265,721
200,962
64,759
(6,958)
57,801
22,141
$ 55,536
$ 47,880
$ 35,660
$
$
0.54
0.54
$
$
0.49
0.48
$
$
0.42
0.41
15
Selected Consolidated Financial Data (continued)
(In thousands, except per share data)
Years ended December 31,
SELECT ED OP ERAT I NG DATA:
Number of stores at year-end (a)
Total store square footage at year-end (in 000’s)(a)(b)
Sales per weighted-average store (in 000’s)(a)(b)
Sales per weighted-average square foot (b)(d)
Percentage increase in same store sales (c)
BALANCE SH EET DATA:
Working capital
Total assets
Current portion of long-term debt and short-term debt
Long-term debt, less current portion
Shareholders’ equity
2007
2006
2005
1,830
12,439
1,430
212
$
$
1,640
11,004
1,439
215
$
$
1,470
9,801
1,478
220
$
$
3.7%
3.3%
7.5%
$
573,328
$
566,892
$
424,974
2,279,737
1,977,496
1,718,896
25,320
75,149
1,592,477
309
110,170
1,364,096
75,313
25,461
1,145,769
(a) Store count for 2002 does not include 27 stores acquired from Dick Smith 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 are calculated based on the change in sales of stores open at least one year. Prior to 2000, same-store sales data was calculated based on
the change in sales of only those stores open during both full periods being compared. Percentage increase in same-store sales is calculated based on store sales results,
which exclude sales of specialty machinery, sales by outside salesmen and sales to team members.
(d) 1998 does not include stores acquired from Hi/LO. Consolidated sales per weighted-average square foot were $207.
16
Selected Consolidated Financial Data (continued)
2004
2003
2002
2001
2000
1999
1998
1,249
8,318
1,443
217
$
$
1,109
7,348
1,413
215
$
$
981
6,408
1,372
211
$
$
875
5,882
1,426
219
$
$
672
4,491
1,412
218
$
$
571
3,777
1,422
223
$
$
491
3,172
1,368
238
$
$
6.8%
7.8%
3.7%
8.8%
5.0%
9.6%
6.8%
$
479,662
$
441,617
$
483,623
$
429,527
$ 296,272
$ 249,351
$ 208,363
1,432,357
1,157,033
1,009,419
592
100,322
947,817
925
120,977
784,285
682
190,470
650,524
856,859
16,843
165,618
556,291
715,995
49,121
90,463
463,731
610,442
19,358
90,704
403,044
493,288
13,691
170,166
218,394
17
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion of our financial condition, results of operations and liquidity and capital resources should be read in conjunction with our consolidated financial
statements, related notes and other financial information included elsewhere in this annual report.
We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States,
selling our products to both do-it-yourself (DIY) customers and professional installers. Our stores carry 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.
We calculate same-store sales based on the change in sales for stores open at least one year. We calculate the percentage increase in same-store
sales based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to team members.
Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of sales may be
affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of salaries and benefits for store and corporate team members, occupancy
costs, advertising expenses, depreciation, general and administrative expenses, information technology expenses, professional expenses and other
related expenses.
C R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M AT E 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. Management bases its assumptions, estimates, and adjustments on historical
experience, current trends and other factors believed to be relevant at the time the consolidated financial statements are prepared. Management
believes that the following policies are critical due to the inherent uncertainty of these matters and the complex and subjective judgments
required to establish these estimates. Management continues to review these critical accounting policies and estimates to ensure that the
consolidated financial statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions
and estimates and such differences could be material.
• Vendor concessions – We receive concessions from our vendors through a variety of programs and arrangements, including co-operative
advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising allowances that are
incremental to our advertising program, specific to a product or event and identifiable for accounting purposes, are reported as a reduction of
advertising expense in the period in which the advertising occurred. All other material vendor concessions are recognized as a reduction to the
cost of inventory. Amounts receivable from vendors also include amounts due to us relating to vendor purchases and product returns.
Management regularly reviews amounts receivable from vendors and assesses the need for a reserve for uncollectible amounts based on our
evaluation of our vendors’ financial position and corresponding ability to meet their financial obligations. Based on our historical results and
current assessment, we have not recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not believe
there is a reasonable likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability of our vendors to
pay us the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or gains that could be material.
• Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities from
workers’ compensation, general liability, vehicle liability, property loss, and employee health care benefits. With the exception of employee health
care benefit liabilities, which are limited by the design of these plans, we obtain third-party insurance coverage to limit our exposure for any
individual claim. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and
trend-lines, projected medical and legal inflation, and growth patterns and exposure forecasts. The assumptions made by management as they
relate to each of these factors represents our judgment as to the most probable cumulative impact of each factor to our future obligations. Our
calculation of our self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims and
claims incurred but not yet reported as of the balance sheet date and the application of alternative assumptions would result in a different
estimate of these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may result in material
losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize liabilities for claims
incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on this additional information.
If self-insurance reserves were changed 10% from our estimated reserves at December 31, 2007, the financial impact would have been
approximately $4.7 million or 1.5% of pretax income.
• Accounts receivable – Management estimates the allowance for doubtful accounts based on historical loss ratios and other relevant factors.
Actual results have consistently been within management’s expectations, and we do not believe that there is a reasonable likelihood that there
will be a material change in the future that will require a significant change in the assumptions or estimates we use to calculate our allowance for
doubtful accounts. However, if actual results differ from our estimates, we may be exposed to losses or gains. If the allowance for doubtful
accounts were changed 10% from our estimated allowance at December 31, 2007, the financial impact would have been approximately
$0.3 million or 0.1% of pretax income.
18
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
• Taxes – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues,
which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax years subject to audit. The amount
of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with
previous tax audits and applicable tax law rulings. Changes in our tax liability may occur in the future as our assessments change based on the
progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s opinion, adequate provisions for income
taxes have been made for all years presented. The estimates of our potential tax liabilities contain uncertainties because management must use
judgment to estimate the exposures associated with our various tax positions and actual results could differ from our estimates. Alternatively, we
could have applied assumptions regarding the eventual outcome of the resolution of open tax positions that would differ from our current estimates
but that would still be reasonable given the nature of a particular position. Our judgment regarding the most likely outcome of uncertain tax
positions has historically resulted in an estimate of our tax liability that is greater than actual results. While our estimates are subject to the
uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities have historically not been materially different
from actual results except in instances where we have reversed liabilities that were recorded for periods that were subsequently closed with the
applicable taxing authority.
The accounting for our tax reserves changed with the adoption 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. Refer to Note 1
for further discussion of the impact of adopting FIN 48 and change in reserves during Fiscal 2007.
• Share-based compensation – Prior to January 1, 2006, we accounted for share-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), as permitted under Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.
Effective January 1, 2006, we adopted SFAS No. 123R, “Share Based Payment,” under the modified prospective method. Accordingly, prior
period amounts have not been restated. Under this application, we record share-based compensation expense for all awards granted on or after
the date of adoption and for the portion of previously granted awards that remain unvested at the date of adoption. Currently, our share-based
compensation relates to stock option awards, employee share purchase plan discounts, restricted stock awards and shares contributed directly to
other employee benefit plans.
Under SFAS No. 123R, we use a Black-Scholes option-pricing model to determine the fair value of stock options. The Black-Scholes model
includes various assumptions, including the expected life of stock options, the expected volatility and the expected risk-free interest rate. These
assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside our control. Since
our adoption of SFAS No. 123R, share-based compensation cost would not have been materially impacted by the variability in the range of
reasonable assumptions we could have applied to value option award grants, but we anticipate that share-based compensation cost could be
materially impacted by the application of alternate assumptions in future periods. Also, under SFAS No. 123R, we are required to record share-based
compensation expense net of estimated forfeitures. Our forfeiture rate assumption used in determining share-based compensation expense is estimated
based on historical data. The actual forfeiture rate and corresponding share-based compensation expense could differ from those estimates.
• Inventory Obsolescence and Shrink – Inventory, which consists of automotive hard parts, maintenance items, accessories and tools is
stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of obsolescence of our inventory
is minimal. The products that we sell generally have application in our markets for a relatively long period of time in conjunction with the
corresponding vehicle population. We have developed sophisticated systems for monitoring the life cycle of a given product and, accordingly,
have historically been very successful in adjusting the volume of our inventory in conjunction with a decrease in demand. We do record a reserve
to reduce the carrying value of our inventory through a charge to cost of sales in the isolated instances where we believe that the market value of
a product line is lower than our recorded cost. This reserve is based on our assumptions about the marketability of our existing inventory and is
subject to uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be sold in future
periods. Ultimately, our projections could differ from actual results and could result in a material impact to our stated inventory balances. We
have historically not had to materially adjust our obsolescence reserves due to the factors discussed above and do not anticipate that we will
experience material changes in our estimates in the future.
We also record a reserve to reduce the carrying value of our perpetual inventory to 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. To the extent that our estimates do not accurately
reflect the actual inventory shrinkage, we could potentially experience a material impact to our inventory balances. We have historically been able
to provide a timely and accurate measurement of shrink and have not experienced material adjustments to our estimates. If unrecorded shrink at
December 31, 2007 were double the estimate that we recorded based on our historical experience, the financial impact would have been less than
$3 million or less than 1.0% of pretax income.
19
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
R E S U LT S O F O P E R AT I O N S
The following table sets forth, certain income statement data as a percentage of sales for the years indicated:
Years ended December 31,
Sales
Cost of goods sold, including warehouse and
distribution expenses
Gross profit
Operating, selling, general and administrative expenses
Operating income
Other income/(expense), net
Income before income taxes and cumulative
effect of accounting change
Provision for income taxes
Net income
2007
100.0%
55.6
44.4
32.3
12.1
0.1
12.2
4.5
7.7%
2006
100.0%
55.9
44.1
31.7
12.4
--
12.4
4.6
7.8%
2005
100.0%
56.4
43.6
31.3
12.3
(0.1)
12.2
4.2
8.0%
2 0 0 7 C O M PA R E D T O 2 0 0 6
Sales increased $239 million, or 10.5%, from $2.28 billion in 2006 to $2.52 billion in 2007, due to 190 net additional stores opened during 2007
which contributed $72.5 million to the sales increase, a full year of sales for stores opened throughout 2006 adding $83.5 million and a 3.7%
increase in same-store sales for stores open at least one year providing $82.6 million of the sales increase. We believe that the increased sales
achieved by our existing stores are the result of superior inventory availability, offering a broader selection of products in most stores, an increased
promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising
and store layouts of most stores, compensation programs for all store team members that provide incentives for performance and our continued
focus on serving professional installers. The same store sales increase in 2007 of 3.7% was greater than the prior year’s increase of 3.3%, but
below our historical results. The decrease from historical trends is the result of challenging external macroeconomic factors in 2006 and 2007.
The external macroeconomic factors, which we believe negatively impacted our sales, were constraints on our customers’ discretionary income as
a result of increased interest rates and higher energy costs. Consumers also encountered higher gas prices which resulted in annual miles driven,
a key driver of demand for our products, remaining flat in comparison to the long term trend of annual increases. We anticipate that continued
store unit and sales growth consistent with our historical rates will continue in the future.
Gross profit increased $113.7 million, or 11.3%, from $1.01 billion (44.1% of sales) in 2006 to $1.12 billion (44.4% of sales) in 2007, primarily
due to the increase in sales resulting from a larger number of stores and increased sales levels at existing stores. The increase in gross profit as a
percent of sales is the result of improvements in product mix, lower product acquisition cost and distribution system efficiencies. Improvements
in product mix were the result of strategies which differentiated our merchandise selections at each store based on customer demand and vehicle
demographics in the store’s market and through ongoing Team Member training initiatives focused on selling products with greater gross margin
contribution. Product acquisition cost improved due to increased imports from lower cost providers in foreign countries as well as improved
negotiating leverage with our vendors resulting from our increased purchasing power. Improvements in our distribution system were the result of
capital projects designed to create operating expense efficiencies. We anticipate these trends to continue at a moderate rate throughout 2008.
SG&A increased $90.9 million, or 12.6%, from $724.4 million (31.7% of sales) in 2006 to $815.3 million (32.3% of sales) in 2007. The increase
in these expenses 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. The increase in SG&A as a percentage of sales was the result of increased store salaries
primarily driven by the timing of new store openings, higher advertising costs, increased depreciation expense primarily driven by investment in
new store technology and increased stock compensation expense.
Other income, net, increased by $2.4 million from ($0.1) million in 2006 to $2.3 million in 2007. The increase was primarily due to decreased
interest expense on long-term debt resulting from a reduction in the interest rate on long-term debt as well as increased interest income derived
from a higher than average cash balance.
Provision for income taxes increased from $104.2 million in 2006 (36.9% effective tax rate) to $113.5 million in 2007 (36.9% effective tax rate).
The increase in the dollar amount was due to the increase of income before income taxes.
As a result of the impacts discussed above, net income increased $15.9 million from $178.1 million in 2006 (7.8% of sales) to $194.0 million in
2007 (7.7% of sales).
20
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
2 0 0 6 C O M PA R E D T O 2 0 0 5
Sales increased $238 million, or 11.6%, from $2.05 billion in 2005 to $2.28 billion in 2006, primarily due to 170 net additional stores opened
during 2006 which contributed $67.4 million to the sales increase, a full year of sales for stores opened throughout 2005 adding $76.1 million
and a 3.3% increase in same-store sales for stores open at least one year providing $93.5 million of the sales increase. We believe that the
increased sales achieved by our existing stores are the result of our offering of a broader selection of products in most stores, an increased promo-
tional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and
store layouts of most stores and compensation programs for all store team members that provide incentives for performance. Also, our continued
focus on serving professional installers contributed to increased sales. The same store sales increase in 2006 of 3.3% was below the prior year
increase of 7.5% and our historical results. The decrease from the prior year is the result of extremely strong same store sales in 2005 (higher
than historical rates) and external macroeconomic factors in 2006. The external macroeconomic factors which we believe negatively impacted our
sales were constraints on our customer's discretionary income as a result of increased interest rates and higher energy costs combined with a
reduction in the miles driven due to higher gas prices during the key summer selling season.
Gross profit increased $114.2 million, or 12.8%, from $892.5 million (43.6% of sales) in 2005 to $1.01 billion (44.1% of sales) in 2006, due to
the increase in sales. The increase in gross profit as a percent of sales is the result of improvements in product mix and product acquisition cost.
Improvements in product mix were the result of strategies which differentiated our merchandise selections at each store based on customer
demand and vehicle demographics in the store’s market and through ongoing Team Member training initiatives focused on selling products with
greater gross margin contribution. Product acquisition cost improved due to increased imports from lower cost providers in foreign countries as
well as improved negotiating leverage with our vendors resulting from our increased purchasing power.
SG&A increased $84.4 million, or 13.2%, from $640.0 million (31.3% of sales) in 2005 to $724.4 million (31.7% of sales) in 2006. The increase
in these expenses 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. The increase in SG&A as a percentage of sales was the result of increased advertising
and energy costs.
Other expense, net, decreased by $1.4 million from $1.5 million in 2005 to $0.1 million in 2006. The decrease was primarily due to decreased
interest expense on long-term debt resulting from a reduction in the interest rate on long-term debt.
Provision for income taxes increased from $86.8 million in 2005 (34.6% effective tax rate) to $104.2 million in 2006 (36.9% effective tax rate).
The increase in the dollar amount was primarily due to the increase of income before income taxes. The increase in the effective tax rate in 2006
is primarily attributable to a non-cash adjustment of $6.1 million in the third quarter of 2005 resulting from the favorable resolution of prior year
tax uncertainties. This tax benefit was nonrecurring and reflected the reversal of previously recorded income tax reserves related to a prior acquisition.
As a result of the impacts discussed above, net income increased $13.8 million from $164.3 million in 2005 (8.0% of sales) to $178.1 million in
2006 (7.8% of sales).
L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S
Net cash provided by operating activities was $299.4 million in 2007, $185.9 million in 2006 and $206.7 million in 2005. The increase in net
cash provided by operating activities in 2007 was principally due to increased net income and a reduction in net inventory investment. Net
inventory investment reflects our investment in inventory net of the amount of accounts payable to vendors. The reduction in net inventory
investment is the result of reductions in our per store inventory levels and our ongoing effort to extend terms with our vendors. Reductions in
our per store inventory levels are driven by our continued optimization of inventory selection at our stores and our ability to efficiently deploy
inventory throughout our distribution network.
The decrease in net cash provided by operating activities in 2006 compared to 2005 was primarily due to increases in inventory related to new
store growth and a decrease in the percentage of inventory funded by accounts payable, partially offset by the effect of increased net income in
2006. The decrease in net cash provided by operating activities in 2006 was also due to the reclassification of the tax benefit derived from the
exercise of stock options. In accordance with our prior year adoption of SFAS No. 123R, the excess tax benefit from the exercise of stock options
of $8.5 million is reflected as cash provided by financing activities in our consolidated statement of cash flows for the year ended December 31,
2006. For the year ended December 31, 2005, the excess tax benefit totaled $7.1 million and was included with net cash provided by operating
activities in our 2005 consolidated statement of cash flows.
Net cash used in investing activities was $300.3 million in 2007, $225.2 million in 2006 and $262.4 million in 2005. The increase in cash used
in investing activities in 2007 was due to increases in capital expenditures resulting from our ongoing store expansion program, store relocations,
enhancements in existing store technology and the purchase of $21.7 million in short-term investments. The changes in cash used in investing
activities during 2006 were the result of changes in capital expenditures and the $63 million acquisition in 2005 of Midwest Auto Parts
Distributors, Inc. (“Midwest”), which included 72 stores and distribution centers in St. Paul, Minnesota and Billings, Montana. Capital
expenditures were $282.7 million in 2007, $228.9 million in 2006 and $205.2 million in 2005. These expenditures were primarily related to
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
the opening of new stores and distribution centers, as well as the relocation or remodeling of existing stores. We opened 190, 170, and 149
(excluding the 72 stores acquired with Midwest) net stores in 2007, 2006 and 2005, respectively. We remodeled or relocated 55, 31 and 37 stores
in 2007, 2006 and 2005, respectively. Enhancements in existing store technology include the roll out of our new point of sale system as well as
hardware upgrades, new in-store starter and alternator testers and the installation of energy management systems. We acquired a location and
began construction in 2007 on a new distribution center that will be located in Lubbock, TX. The new distribution center is scheduled to be
completed and to begin operations in 2008. We acquired a new facility near Minneapolis, Minnesota in 2006 for the relocation of the St. Paul,
Minnesota distribution center that was completed and began operations in 2007. We acquired a new distribution center near Indianapolis,
Indiana in 2005 that was subsequently equipped and opened in 2006.
Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements.
Our 2008 growth plans call for approximately 205 new stores and the addition of one distribution center with total capital expenditures of $275
million to $285 million. 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 $1.2 million to $1.4 million; however, such costs may be
significantly reduced where we lease, rather than purchase, the store site. We plan to finance our expansion program through cash expected to be
provided from operating activities and available borrowings under our existing credit facility.
On May 15, 2006, we entered into a private placement agreement that allows for the issuance of an aggregate of $300 million in unsecured senior
notes, issuable in series. On May 15, 2006, the Company completed the private placement of $75 million of the first series of Senior Notes (the
“Series 2006-A Senior Notes”) under the Private Placement Agreement. The $75 million of Series 2006-A Senior Notes are due May 15, 2016
and bear interest at 5.39% per year. Proceeds from the Series 2006-A Senior Notes private placement transaction were used to repay certain
existing debt of the Company, including $75 million of 7.72% Series 2001-A Senior Notes due May 15, 2006.
On July 29, 2005, we entered into an unsecured, five-year syndicated credit facility (“Credit Facility”) in the amount of $100 million led by Wells
Fargo Bank as the Administrative Agent, replacing a three-year $150 million syndicated credit facility. The Credit Facility is guaranteed by all of
our subsidiaries and may be increased to a total of $200 million, subject to the availability of such additional credit from either existing banks
within the Credit Facility or other banks. The Credit Facility bears interest at LIBOR plus a spread ranging from 0.375% to 0.750% (5.25% at
December 31, 2007) and expires in July 2010. There were no outstanding borrowings under the Credit Facility at December 31, 2007. Outstanding
borrowings totaled $9.7 million at December 31, 2006. The available borrowings under the Credit Facility are reduced by stand-by letters of
credit issued by us primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. Our aggregate
availability for additional borrowings under the Credit Facility was $71.4 million and $57.4 million at December 31, 2007 and 2006, respectively.
O F F B A L A N C E S H E E T A R R A N G E M E N T S
We have utilized various financial instruments from time to time as sources of cash when such instruments provided a cost effective alternative
to our existing sources of cash. We do not believe, however, that we are dependent on the availability of these instruments to fund our working
capital requirements or our growth plans.
On December 29, 2000, we completed a sale-leaseback transaction with an unrelated party. Under the terms of the transaction, we sold 90
properties, including land, buildings and improvements, which generated $52.3 million of additional cash. 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 ten-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.
In August 2001, we completed a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company).
The transaction involved the sale and leaseback of nine O’Reilly Auto Parts stores and resulted in approximately $5.6 million of additional cash
to us. The transaction did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial
term of 15 years with three five-year renewal options.
On September 28, 2007, the Company completed a second amended and restated master agreement to its $49 million Synthetic Operating
Lease Facility with a group of financial institutions. The terms of such lease facility provide for an initial lease period of seven years, a residual
value guarantee of approximately $39.7 million at December 31, 2007 and purchase options on the properties. The lease facility also contains a
provision for an event of default whereby the lessor, among other things, may require the Company to purchase any or all of the properties.
Management believes it is reasonable to assume that such an event of default will not occur. One additional renewal period of seven years may
be requested from the lessor, although the lessor is not obligated to grant such renewal. The second amended and restated Facility has been
accounted for as an operating lease under SFAS No. 13 and related interpretations, including FASB Interpretation No. 46R.
22
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
We issue stand-by letters of credit provided by a $50 million sub limit under the Credit Facility that reduce our available borrowings. These letters
of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. Substantially all
of the outstanding letters of credit have a one-year term from the date of issuance and have been issued to replace surety bonds that were previously
issued. Letters of credit totaling $28.6 million and $32.9 million were outstanding at December 31, 2007 and 2006, respectively.
C O N T R A C T UA L O B L I G AT I O N S
We have other liabilities reflected in our balance sheet, including deferred income taxes and self-insurance accruals. The payment obligations
associated with these liabilities are not reflected in the financial commitments table due to the absence of scheduled maturities. Therefore, the
timing of these payments cannot be determined, except for amounts estimated to be payable in 2008 that are included in current liabilities. In
addition, we have commitments with various vendors for the purchase of inventory as of December 31, 2007. The financial commitments table
excludes these commitments because they are cancelable by their terms.
Our contractual obligations, including commitments for future payments under non-cancelable lease arrangements, short and long-term debt
arrangements, interest payments related to long-term debt and purchase obligations for construction contract commitments, are summarized
below and are fully disclosed in Notes 6 and 7 to the consolidated financial statements.
Payments Due By Period
(In thousands)
CONT RACT UAL OBLIGAT IONS:
Long-term debt
Interest payments related to long-term debt
Operating leases
Purchase obligations
Total contractual cash obligations
Total
Before
1 Year
1-3
Years
3-5
Years
Over 5
Years
$ 100,469
35,165
502,583
96,251
$ 734,468
$ 25,320
4,845
51,765
96,251
$ 178,181
$
149
8,086
90,619
--
$ 98,854
$ --
8,085
74,896
--
$ 82,981
$ 75,000
14,149
285,303
--
$ 374,452
We believe that our existing cash and cash equivalents, cash expected to be provided by operating activities, available bank credit facilities and
trade credit will be sufficient to fund both our short-term and long-term capital needs for the foreseeable future.
I N F L AT I O N A N D S E A S O N A L I T Y
We attempt to mitigate the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of
scale resulting from increased volume of purchases and selective forward buying. As a result, we do not believe that our operations have been
materially affected by inflation. Our business is somewhat seasonal, primarily as a result of the impact of weather conditions on customer buying
patterns. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in
the first and fourth quarters.
Q UA R T E R LY R E S U LT S
The following table sets forth certain quarterly unaudited operating data for fiscal 2007 and 2006. The unaudited quarterly information includes
all adjustments which management considers necessary for a fair presentation of the information shown.
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.
(In thousands, except per share data)
Sales
Gross profit
Operating income
Net income
Basic net income per common share
Net income per common share – assuming dilution
First
Quarter
$ 613,145
269,281
77,192
48,407
0.42
0.42
Fiscal 2007
Second
Quarter
$ 643,108
287,185
81,558
51,899
0.45
0.45
Third
Quarter
$ 661,778
293,701
82,716
53,087
0.46
0.46
Fourth
Quarter
$ 604,288
270,293
63,685
40,595
0.35
0.35
23
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
(In thousands, except per share data)
Sales
Gross profit
Operating income
Net income
Basic net income per common share
Net income per common share – assuming dilution
First
Quarter
$ 536,547
233,428
64,966
40,564
0.36
0.35
Fiscal 2006
Second
Quarter
$ 591,199
260,928
78,236
49,313
0.44
0.43
Third
Quarter
$ 597,144
263,326
75,084
47,856
0.42
0.42
Fourth
Quarter
$ 558,332
249,029
64,029
40,352
0.35
0.35
N E W A C C O U N T I N G S TA N D A R D S
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, a revision of SFAS No. 123, Accounting for Stock Based
Compensation, that supersedes APB No. 25, Accounting for Stock Issued to Employees. In April 2005, the SEC adopted a rule permitting
implementation of SFAS No. 123R at the beginning of the first fiscal year commencing after June 15, 2005. Among other items, SFAS No.
123R eliminated the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize in the financial
statements the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those
awards. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. The Company was required to adopt SFAS No.
123R beginning in its quarter ended March 31, 2006. Under the provisions of SFAS No. 123R, the Company had the choice of adopting the
fair-value-based method of expensing of stock options using (a) the “modified prospective method”, whereby the Company recognizes the
expense only for periods beginning after December 31, 2005, or (b) the “modified retrospective method”, whereby the Company recognizes the
expense for all years and interim periods since the effective date of SFAS No. 123. The Company adopted SFAS No. 123R using the modified
prospective method. See Note 9, “Share-Based Employee Compensation Plans”, for information regarding expensing of stock options in 2006
and 2007 and for pro forma information regarding the Company’s accounting for stock options in 2005.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and a measurement process for
recording in the financial statements the tax benefit of uncertain tax positions taken or expected to be taken in a tax return. For a benefit to be
recognized, a tax position must be more-likely-than-not to be sustainable upon examination by the applicable taxing authority. Additionally, FIN
48 provides guidance on derecognition, measurement, classification, accounting in interim periods and disclosure requirements for uncertain tax
positions. The Company adopted the provisions of FIN 48 on January 1, 2007. No adjustment was required in the liability for unrecognized
income tax benefits as a result of the implementation of FIN 48. As of January 1, 2007 and December 31, 2007, the Company had a gross
exposure for unrecognized tax benefits (including interest and penalties) of $14.9 million and $19.7 million, respectively, all of which would
affect the Company’s effective tax rate if recognized, generally net of federal tax effect. The Company recognizes interest and penalties related
to uncertain tax positions in income tax expense. As of January 1, 2007 and December 31, 2007, the Company had accrued approximately
$1.7 million and $2.8 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for
interest on state and federal returns. During the year ended December 31, 2007, the Company recorded tax expense related to an increase in
its liability for interest and penalties of $1.3 million. Although unrecognized tax benefits for individual tax positions may increase or decrease
during 2008, the Company expects a reduction of $0.8 million of unrecognized tax benefits during the one-year period subsequent to
December 31, 2007 resulting from settlement or expiration of the statute of limitations.
The Company’s U.S. federal income tax returns for tax years 2005 and beyond remain subject to examination by the Internal Revenue Service
(“IRS”). The IRS concluded an examination of the Company’s consolidated 2002, 2003 and 2004 federal income tax returns in the first quarter
of 2007. The statute of limitations for the Company’s federal income tax returns for tax years 2003 and prior have expired. The statute of
limitations for the Company’s U.S. federal income tax return for 2004 will expire on September 15, 2008, unless otherwise extended. The
Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2001 through 2006.
F O R WA R D - L O O K I N G S TAT E M E N T S
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. You can identify these statements by forward-looking words such as “expect,” “believe,” “anticipate,” “should,” “plan,” “intend,” “estimate,”
“project,” “will” or similar words. In addition, statements contained within this annual report that are not historical facts are forward-looking statements,
such as statements discussing among other things, expected growth, store development and expansion strategy, business strategies, future revenues
and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of
future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product
demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain
qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results
may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors sections of
the annual report on Form 10-K for the year ended December 31, 2007, for additional factors that could materially affect our financial performance.
24
Management’s Report On Internal Control Over Financial Reporting
The management of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”), under the supervision and with the participation of the
Company’s principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the
United States.
Internal control over financial reporting includes all policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the Company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets
that could have a material effect on the financial statements.
Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with 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, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control – Integrated Framework. Based on this assessment, management believes that as of December 31, 2007, the Company’s internal control
over financial reporting is effective based on those criteria.
Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company’s consolidated financial statements and has
issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, as stated in their report which is
included herein.
Greg Henslee
Chief Executive Officer and
Co-President
Thomas McFall
Chief Financial Officer and
Executive Vice President
25
Report Of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of O’Reilly Automotive, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of O’Reilly Automotive, Inc. and Subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of O’Reilly
Automotive, Inc. and Subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), O’Reilly
Automotive, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 27, 2008 expressed an unqualified opinion thereon.
Kansas City, Missouri
February 27, 2008
26
Report Of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of O’Reilly Automotive, Inc. and Subsidiaries
We have audited O’Reilly Automotive, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). O’Reilly Automotive, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, O’Reilly Automotive, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2007 of O’Reilly Automotive, Inc. and Subsidiaries and our report dated February 27,
2008 expressed an unqualified opinion thereon.
Kansas City, Missouri
February 27, 2008
27
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $3,179 in 2007 and $2,861 in 2006
Amounts receivable from vendors
Inventory
Other current assets
Total current assets
Property and equipment, at cost
Less: accumulated depreciation and amortization
Net property and equipment
Notes receivable, less current portion
Goodwill
Other assets
Total assets
LIABI LI T I ES AND SHAREHOLDERS’ EQ UI T Y:
Current liabilities:
Accounts payable
Self insurance reserve
Accrued payroll
Accrued benefits and withholdings
Deferred income taxes
Other current liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred income taxes
Other liabilities
Shareholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares – 5,000,000
Issued and outstanding shares – none
Common stock, $0.01 par value:
Authorized shares – 245,000,000
Issued and outstanding shares – 115,260,564 in 2007 and 113,929,327 in 2006
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements
2007
2006
$
47,555
$
29,903
84,242
48,263
881,761
40,483
1,102,304
1,479,779
389,619
1,090,160
25,437
50,447
11,389
81,048
47,790
812,938
28,997
1,000,676
1,214,854
331,759
883,095
30,288
49,065
14,372
$ 2,279,737
$ 1,977,496
$
380,683
29,967
23,739
13,496
6,235
49,536
25,320
528,976
75,149
27,241
55,894
$
318,404
31,084
21,171
12,948
5,779
44,089
309
433,784
110,170
38,171
31,275
--
--
1,153
441,731
1,156,393
(6,800)
1,592,477
$ 2,279,737
1,139
400,552
962,405
--
1,364,096
$ 1,977,496
28
Consolidated Statements Of Income
(In thousands, except per share data)
December 31,
Sales
Cost of goods sold, including warehouse
and distribution expenses
Gross profit
Operating, selling, general and administrative expenses
Operating income
Other income (expense), net:
Interest expense
Interest income
Other, net
Total other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic income per common share:
Net income per common share
Weighted-average common shares outstanding
Income per common share-assuming dilution:
Net income per common share-assuming dilution
Adjusted weighted-average common shares outstanding
See accompanying Notes to Consolidated Financial Statements.
2007
$ 2,522,319
1,401,859
1,120,460
815,309
305,151
(3,723)
4,077
1,983
2,337
307,488
113,500
2006
$ 2,283,222
1,276,511
1,006,711
724,396
282,315
(4,322)
1,573
2,699
(50)
282,265
104,180
2005
$ 2,045,318
1,152,815
892,503
639,979
252,524
(5,062)
1,582
2,025
(1,455)
251,069
86,803
$
193,988
$
178,085
$
164,266
$
$
1.69
114,667
1.67
116,080
$
1.57
113,253
$
1.47
111,613
$
1.55
115,119
$
1.45
113,385
29
Consolidated Statements Of Shareholders' Equity
Common Stock
Accumulated
Other
Retained Comprehensive
Loss
Earnings
Comprehensive
Income
Total
(In thousands)
Balance at December 31, 2004
Net income
Other comprehensive income
Comprehensive income
2-for-1 stock split
Issuance of common stock under
employee benefit plans
Issuance of common stock under
stock option plans
Tax benefit of stock options exercised
Share based compensation
Balance at December 31, 2005
Net income
Other comprehensive income
Comprehensive income
Issuance of common stock under
employee benefit plans
Issuance of common stock under
stock option plans
Tax benefit of stock options exercised
Share based compensation
Balance at December 31, 2006
Net income
Other comprehensive loss
Comprehensive income
Issuance of common stock under
employee benefit plans
Issuance of common stock under
stock option plans
Tax benefit of stock options exercised
Share based compensation
Shares
55,377
--
--
--
55,861
268
883
--
--
112,389
--
--
--
387
1,153
--
--
113,929
--
--
--
367
965
--
--
Additional
Paid-In
Capital
$ 326,650
--
--
--
--
9,477
14,906
7,137
2,155
Par Value
$ 554
--
--
--
559
2
9
--
--
$ 620,613
164,266
--
--
(559)
--
--
--
--
$ 1,124
--
--
--
$ 360,325
--
--
--
$ 784,320
178,085
--
--
4
11
--
--
12,169
15,959
8,538
3,561
--
--
--
--
$ 164,266
--
$ 164,266
$ 178,085
--
$ 178,085
$ --
--
--
--
--
--
--
--
--
$ 947,817
164,266
--
--
--
9,479
14,915
7,137
2,155
-- $ 1,145,769
178,085
--
--
--
--
--
--
--
--
--
12,173
15,970
8,538
3,561
$ 1,139
--
--
--
$ 400,552
--
--
--
$ 962,405
193,988
--
--
-- $ 1,364,096
193,988
--
(6,800)
(6,800)
--
--
$ 193,988
(6,800)
$ 187,188
4
10
--
--
11,543
17,114
6,835
5,687
--
--
--
--
--
--
--
--
11,547
17,124
6,835
5,687
Balance at December 31, 2007
115,261
$ 1,153
$ 441,731
$ 1,156,393
$ (6,800) $ 1,592,477
See accompanying Notes to Consolidated Financial Statements.
30
Consolidated Statements Of Cash Flows
2007
2006
2005
$ 193,988
$ 178,085
$ 164,266
(In thousands)
Years ended December 31,
OP ERAT I NG ACT IVI T I ES
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Deferred income taxes
Share based compensation programs
Tax benefit of stock options exercised
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Accounts payable
Other
Net cash provided by operating activities
I NVEST I NG ACT IVI T I ES
Purchases of property and equipment
Proceeds from sale of property and equipment
Payments received on notes receivable
Purchase of short-term investments
Advances made on notes receivable
Acquisition of Midwest Auto Parts Distributors net of cash acquired
Other
Net cash used in investing activities
FI NANCI NG ACT IVI T I ES
Proceeds from issuance of long-term debt
Principal payments on long-term debt
Tax benefit of stock options exercised
Net proceeds from issuance of common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
78,943
(6,341)
12,777
--
5,007
(8,555)
(68,823)
62,279
30,143
299,418
(282,655)
2,327
5,202
(21,724)
--
--
(3,468)
(300,318)
16,450
(26,460)
6,835
21,727
18,552
17,652
29,903
$ 47,555
SUP P LEMENTAL DISCLOSURES OF CASH FLOW I NFORMAT ION:
Income taxes paid
Interest paid, net of capitalized interest
$ 93,040
3,727
See accompanying Notes to Consolidated Financial Statements.
31
64,938
(1,017)
11,029
--
1,812
(9,426)
(91,427)
25,737
6,197
185,928
(228,871)
875
5,174
--
--
--
(2,379)
(225,201)
88,950
(80,189)
8,538
20,493
37,792
(1,481)
31,384
$ 29,903
$ 98,650
4,536
57,228
(671)
7,840
7,137
1,978
(8,974)
(68,794)
43,158
3,517
206,685
(205,159)
1,935
4,558
--
(624)
(63,145)
(1)
(262,436)
--
(602)
--
18,709
18,107
(37,644)
69,028
$ 31,384
$ 98,440
5,062
Notes to Consolidated Financial Statements
N O T E 1 — S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
Nature of Business
O'Reilly Automotive, Inc. (the “Company”) is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies and accessories to
both the do-it-yourself (“DIY”) customer and the professional installer throughout Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, South
Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin and Wyoming.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Revenue Recognition
Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional installers, also referred
to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at the customer’s place of business.
Wholesale sales to other retailers, also referred to as “jobber sales,” are recorded upon shipment of the merchandise from a regional distribution
center with same-day delivery to the jobber customer's location. All sales are recorded net of estimated allowances, discounts and taxes.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States
(“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of investments with maturities of 90 days or less at the day of purchase.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to
make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer
credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms.
Inventory
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Inventory
also includes related procurement, warehousing and distribution center costs. Cost has been determined using the last-in, first-out (“LIFO”)
method. The replacement cost of inventory was $888,299,000 and $833,626,000 as of December 31, 2007 and 2006, respectively.
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising,
devaluation programs, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that are incremental to the
Company’s advertising program, specific to a product or event and identifiable for accounting purposes, are reported as a reduction of advertising
expense in the period in which the advertising occurred. All other material vendor concessions are recognized as a reduction to the cost of
inventory. Amounts receivable from vendors also includes amounts due to the Company for changeover merchandise and product returns.
The Company regularly reviews vendor receivables for collectibility and assesses the need for a reserve for uncollectible amounts based on an
evaluation of the Company’s vendors’ financial position and corresponding ability to meet its financial obligations. Management does not believe
there is a reasonable likelihood that the Company will be unable to collect the amounts receivable from vendors and the Company did not
record a reserve for uncollectible amounts in the consolidated financial statements at December 31, 2007 and 2006.
Investments
The Company determines the appropriate classification of marketable equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Available-for-sale securities are stated at fair value, with the unrecognized gains and losses, net of tax, reported in
accumulated other comprehensive income (loss). Available-for-sale securities in the amount of $10.8 million, stated at fair value, are included
in Other Current Assets on the Company’s balance sheet at December 31, 2007. The Company did not own any material available-for-sale
securities on December 31, 2006. See Note 2, “Investments”, for information regarding available-for-sale securities acquired during 2007.
32
Notes to Consolidated Financial Statements (continued)
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease term includes
renewal options determined by management at lease inception for which failure to renew options would result in a substantial economic penalty
to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are
eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
fully recoverable.
(In thousands)
Land
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Vehicles
Construction in progress
Less: accumulated depreciation and amortization
Net property and equipment
Original Useful Lives
December 31, 2007
December 31, 2006
15 – 39 years
3 – 25 years
3 – 20 years
5 – 10 years
$ 220,950
501,598
189,097
429,217
102,665
36,252
1,479,779
389,619
$ 1,090,160
$ 171,048
394,810
147,357
351,889
90,240
59,510
1,214,854
331,759
$ 883,095
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average rates paid for long-term
borrowings. Total interest costs capitalized for the years ended December 31, 2007, 2006 and 2005 were $2,554,000, $2,639,000 and
$2,885,000, respectively.
Leases
The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the estimated economic life of those assets.
Generally, for stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain
renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in a significant economic
penalty. The calculation for straight-line rent expense is based on the same lease term.
Notes Receivable
The Company had notes receivable from vendors and other third parties amounting to $32,119,000 and $36,955,000 at December 31, 2007 and
2006, respectively. The notes receivable, which bear interest at rates ranging from 0% to 10%, are due in varying amounts through August 2017.
Goodwill
The accompanying consolidated balance sheets at December 31, 2007 and 2006 include goodwill recorded as the result of previous acquisitions.
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires the Company to assess goodwill for
impairment rather than systematically amortize goodwill against earnings. The goodwill impairment test compares the fair value of a reporting
unit to its carrying amount, including goodwill. The Company operates as one reporting unit, and its fair value exceeds its carrying value,
including goodwill. Therefore, the Company has determined that no impairment of goodwill existed at December 31, 2007 and 2006.
At December 31, 2007 and 2006, the carrying value of the Company’s goodwill was as follows:
(In thousands)
Beginning balance
Acquisitions
Ending balance
Self-Insurance Reserves
December 31, 2007
December 31, 2006
$ 49,065
1,382
$ 50,447
$ 48,069
996
$ 49,065
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation,
general liability, vehicle liability, property loss, and employee health care benefits. With the exception of employee health care benefit liabilities,
which are limited by the design of these plans, the Company obtains third-party insurance coverage to limit its exposure. The Company
estimates its self-insurance liabilities by considering a number of factors, including historical claims experience and trend-lines, projected
medical and legal inflation, and growth patterns and exposure forecasts.
33
Notes to Consolidated Financial Statements (continued)
Income Taxes
The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities using enacted tax rules currently scheduled to be in effect for the year in
which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in
the period of the enactment date.
The Company adopted the provisions of FIN 48 on January 1, 2007. This interpretation provides guidance on measurement, derecognition of
benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition and requires that income tax positions must
meet a more-likely-than-not recognition threshold at the effective date to be recognized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $40,472,000, $34,929,000 and
$28,715,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Pre-opening Costs
Costs associated with 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. Please see Note 9 for further information
concerning these plans. In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share
Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) and
supersedes the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), using the modified
prospective transition method and began recognizing compensation expense for its share-based payments based on the fair value of the awards.
Under this transition method, compensation cost recognized in 2006 includes the compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No.
123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated. Share-based payments include stock option
awards issued under the Company’s employee stock option plan, director stock option plan, stock issued through the Company’s employee stock
purchase plan and stock awarded to employees through other benefit programs. Prior to January 1, 2006, the Company accounted for share-
based payments using the intrinsic value based recognition method in accordance with APB No. 25. Under APB No. 25, no compensation
expense for stock option awards was recognized since the exercise price of the Company’s stock options equaled the market price of the
underlying stock on the date of grant.
As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s income before income taxes and net income for the year ended
December 31, 2006, are approximately $2.8 million and $1.7 million lower, respectively, than if it had continued to account for share-based
compensation under APB No. 25. Basic and diluted earnings per share for the year ended December 31, 2006 are $0.02 lower than if the
Company had continued to account for share-based compensation under APB No. 25.
In the fourth quarter of 2005, the Board of Directors approved the accelerated vesting of all unvested stock options previously awarded to
employees and executive officers. Option awards granted subsequent to the Board’s action are not included in the acceleration and will vest
equally over the service period established in the award, typically four years. The primary purpose of the accelerated vesting was to enable the
Company to avoid recognizing future compensation expense associated with these options upon the planned adoption of SFAS No. 123R in
2006. As a result of the vesting acceleration, options to purchase approximately 4.2 million shares of O’Reilly Common Stock 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 share-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.
For purposes of pro forma disclosures required under SFAS No. 123 for the year ended December 31, 2005, the estimated fair value of the stock
options was assumed to be amortized to expense over the stock options’ vesting periods. For unvested stock option awards that were included in
the acceleration in the fourth quarter of 2005, any unamortized estimated fair value is assumed to be fully recognized as compensation expense
34
Notes to Consolidated Financial Statements (continued)
in the year ended December 31, 2005 for purposes of pro forma disclosure. The pro forma effects of recognizing estimated compensation
expense under the fair value method on net income and earnings per common share were as follows:
(In thousands, except per share data)
Year Ended December 31, 2005
Net income, as reported
Add stock-based compensation expense, net of tax, as reported
Deduct stock-based compensation expense, net of tax, under fair value method
Pro forma net income
Pro forma basic net income per share
Pro forma net income per share – assuming dilution
Net income per share, as reported
Basic
Assuming dilution
$ 164,266
5,699
(26,522)
$ 143,443
$
$
$
$
1.29
1.27
1.47
1.45
Prior to the adoption of SFAS No. 123R in 2006, the Company presented all tax benefits of deductions resulting from the exercise of stock
options as operating cash flows in the accompanying consolidated statement of cash flows. SFAS No. 123R requires excess tax benefits, the cash
flow resulting from the tax deductions in excess of the compensation cost recognized for those options, to be classified as financing cash flows.
The excess tax benefit was $6.8 million and $8.5 million for the years ended December 31, 2007 and 2006, 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
1,613,000, 448,000 and 226,750 for the years ended December 31, 2007, 2006 and 2005, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, accounts
receivable and notes receivable.
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Concentrations of credit risk
with respect to these receivables are limited because the Company’s customer base consists of a large number of smaller customers, thus spreading
the credit risk. The Company 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's expectations.
The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value.
Reclassifications
The accompanying consolidated financial statements for prior years contain certain reclassifications to conform to the presentation used in 2007.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, a revision of SFAS No. 123 that supersedes APB No. 25.
In April 2005, the SEC adopted a rule permitting implementation of SFAS No. 123R at the beginning of the first fiscal year commencing after
June 15, 2005. Among other items, SFAS No. 123R eliminated the use of APB No. 25 and the intrinsic value method of accounting, and
requires companies to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments,
based on the grant date fair value of those awards. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of
recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. The
Company was required to adopt SFAS No. 123R beginning in its quarter ended March 31, 2006. Under the provisions of SFAS No. 123R, the
Company had the choice of adopting the fair-value-based method of expensing of stock options using (a) the “modified prospective method”,
whereby the Company recognizes the expense only for periods beginning after December 31, 2005, or (b) the “modified retrospective method”,
whereby the Company recognizes the expense for all years and interim periods since the effective date of SFAS No. 123. The Company adopted
SFAS No. 123R using the modified prospective method. See Note 9, “Share-Based Employee Compensation Plans”, for information regarding
expensing of stock options in 2006 and 2007 and for pro forma information regarding the Company’s accounting for stock options in 2005.
35
Notes to Consolidated Financial Statements (continued)
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and a measurement process for
recording in the financial statements the tax benefit of uncertain tax positions taken or expected to be taken in a tax return. For a benefit to be
recognized, a tax position must be more-likely-than-not to be sustainable upon examination by the applicable taxing authority. Additionally, FIN
48 provides guidance on derecognition, measurement, classification, accounting in interim periods and disclosure requirements for uncertain tax
positions. The Company adopted the provisions of FIN 48 on January 1, 2007. No adjustment was required in the liability for unrecognized
income tax benefits as a result of the implementation of FIN 48. As of January 1, 2007 and December 31, 2007, the Company had a gross
exposure for unrecognized tax benefits (including interest and penalties) of $14.9 million and $19.7 million, respectively, all of which would
affect the Company’s effective tax rate if recognized, generally net of federal tax affect. The Company recognizes interest and penalties related
to uncertain tax positions in income tax expense. As of January 1, 2007 and December 31, 2007, the Company had accrued approximately
$1.7 million and $2.8 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for
interest on state and federal returns. During the year ended December 31, 2007, the Company recorded tax expense related to an increase in
its liability for interest and penalties of $1.3 million. Although unrecognized tax benefits for individual tax positions may increase or decrease
during 2008, the Company expects a reduction of $0.8 million of unrecognized tax benefits during the one-year period subsequent to
December 31, 2007 resulting from settlement or expiration of the statute of limitations.
The Company’s U.S. federal income tax returns for tax years 2005 and beyond remain subject to examination by the Internal Revenue Service
(“IRS”). The IRS concluded an examination of the Company’s consolidated 2002, 2003 and 2004 federal income tax returns in the first quarter
of 2007. The statute of limitations for the Company’s federal income tax returns for tax years 2003 and prior have expired. The statute of
limitations for the Company’s U.S. federal income tax return for 2004 will expire on September 15, 2008, unless otherwise extended. The
Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2001 through 2006.
A summary of the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the year ended December 31,
2007, is shown below:
(In thousands)
Balance as of January 1, 2007
Addition based on tax postions related to the current year
Addition based on tax positions related to prior years
Reduction due to lapse of statute of limitations
Balance as of December 31, 2007
$ 13,245
3,484
827
(604)
$ 16,952
N O T E 2 – I N V E S T M E N T S
The following is a summary of available-for-sale securities included in Other Current Assets on the Company’s balance sheet at
December 31,2007:
Available-for-Sale-Securities
Equity securities
(In thousands)
Amortized
Cost
$ 21,724
$ 21,724
Gross
Unrealized
Gains
$
$
--
--
Estimated
Fair Value
(Net
Carrying
Amount)
Gross
Unrealized
Losses
$ (10,933)
$ (10,933)
$ 10,791
$ 10,791
Available-for-sale securities held by the Company are securities that are publicly traded in active markets and are valued based on quoted closing
prices as of December 31, 2007.
N O T E 3 - A C Q U I S I T I O N
On May 31, 2005, the Company purchased all of the outstanding stock of W.E. Lahr Company and its subsidiary, Midwest Auto Parts
Distributors, Inc. and combined affiliates (“Midwest”) for approximately $63 million cash, net of cash acquired, including acquisition costs.
Midwest was a specialty retailer, which supplied automotive aftermarket parts in Minnesota, Montana, North Dakota, South Dakota, Wisconsin
and Wyoming. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of
36
Notes to Consolidated Financial Statements (continued)
Midwest are included in the consolidated statements of income from the date of acquisition. The purchase price was allocated to assets acquired
and liabilities assumed based on their estimated fair values on the date of acquisition with the excess allocated to goodwill. The acquisition of
Midwest was not material for pro forma presentation requirements.
N O T E 4 – S T O C K S P L I T
On May 20, 2005, the Company’s Board of Directors declared a two-for-one stock split that was effected in the form of a 100% stock dividend
payable to all shareholders of record as of May 31, 2005. The stock dividend was paid on June 15, 2005. Accordingly, this stock split has been
recognized by reclassifying $559,000, the par value of the additional shares resulting from the split, from retained earnings to common stock.
All share and per share information included in the accompanying consolidated financial statements has been restated to reflect the retroactive
effect of the stock split for all periods presented.
N O T E 5 — R E L AT E D PA R T I E S
The Company leases certain land and buildings related to 48 of its O'Reilly Auto Parts stores under six-year operating lease agreements with
O'Reilly Investment Company and O'Reilly Real Estate Company, partnerships in which certain shareholders and directors of the Company are
partners. Generally, these lease agreements provide for renewal options for an additional six years at the option of the Company and the lease
agreements are periodically modified to further extend the lease term for specific stores under the agreement. Additionally, the Company leases
certain land and buildings related to 21 of its O’Reilly Auto Parts stores under fifteen-year operating lease agreements with O’Reilly-Wooten
2000 LLC, which is owned by certain shareholders and directors of the Company. Generally, these lease agreements provide for renewal options
for two additional five-year terms at the option of the Company (see Note 7). Rent payments under these operating leases totaled $3,446,000,
$3,413,000 and $3,380,000 in 2007, 2006 and 2005, respectively.
N O T E 6 — L O N G -T E R M D E B T
On July 29, 2005, the Company entered into an unsecured, five-year syndicated credit facility (Credit Facility) in the amount of $100 million led
by Wells Fargo Bank as the Administrative Agent, replacing a three-year $150 million syndicated credit facility. The Credit Facility is guaranteed
by all of the Company’s subsidiaries and may be increased to a total of $200 million, subject to the availability of such additional credit from
either existing banks within the Credit Facility or other banks. The Credit Facility bears interest at LIBOR plus a spread ranging from 0.375%
to 0.750% (5.25% at December 31, 2007) and expires in July 2010. There were no outstanding borrowings under the Credit Facility at
December 31, 2007. Outstanding borrowings under the Credit Facility at December 31, 2006 totaled $9.7 million.
The Company issues stand-by letters of credit provided by a $50 million sub limit under the Credit Facility that reduce available borrowings.
These letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies.
Substantially all of the outstanding letters of credit have a one-year term from the date of issuance and have been issued to replace surety
bonds that were previously issued. Letters of credit totaling $28.6 million and $32.9 million were outstanding at December 31, 2007 and 2006,
respectively. Accordingly, the Company’s aggregate availability for additional borrowings under the Credit Facility was $71.4 million and $57.4
million at December 31, 2007 and 2006, respectively. The Company is subject to a commitment fee ranging from 0.075% to 0.175% (.075% at
December 31, 2007) for unused borrowings under the Credit Facility.
On May 15, 2006, the Company entered into a private placement agreement that allows for the issuance of an aggregate of $300 million in
unsecured senior notes, issuable in series. On May 15, 2006, the Company completed the private placement of $75 million of the first series of
Senior Notes (the “Series 2006-A Senior Notes”) under the Private Placement Agreement. The $75 million of Series 2006-A Senior Notes are
due May 15, 2016 and bear interest at 5.39% per year. Proceeds from the Series 2006-A Senior Notes private placement transaction were used
to repay certain existing debt of the Company, including $75 million of 7.72% Series 2001-A Senior Notes due May 15, 2006.
On May 16, 2001, the Company 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 and were repaid on May 15, 2006 from the proceeds from the issuance of the Series 2006-A Senior
Notes discussed above. 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 Company leases certain computer equipment under a capital lease agreement. The lease agreement has a term of 36 months, expiring in
2009. At December 31, 2007, the monthly installment under this agreement was approximately $28,000. The present value of the future minimum
lease payments under capital leases totaled approximately $469,000 and $779,000 at December 31, 2007 and 2006 respectively, which have been
classified as long-term debt in the accompanying consolidated financial statements. The Company did not acquire any equipment under capital
37
Notes to Consolidated Financial Statements (continued)
leases during the period ended December 31, 2007. The Company acquired $943,000 of assets under the capital lease during the periods ended
December 31, 2006.
Principal maturities of long-term debt are as follows (amounts in thousands):
2008
2009
2010
2011
2012
Thereafter
$ 25,320
149
--
--
--
75,000
$ 100,469
N O T E 7 — C O M M I T M E N T S
Lease Commitments
On September 28, 2007, the Company completed a second amended and restated master agreement to its $49 million Synthetic Operating
Lease Facility with a group of financial institutions. The terms of such lease facility provide for an initial lease period of seven years, a residual
value guarantee of approximately $39.7 million at December 31, 2007 and purchase options on the properties. The lease facility also contains a
provision for an event of default whereby the lessor, among other things, may require the Company to purchase any or all of the properties. One
additional renewal period of seven years may be requested from the lessor, although the lessor is not obligated to grant such renewal. The second
amended and restated Facility has been accounted for as an operating lease under SFAS No. 13 and related interpretations, including FASB
Interpretation No. 46R. Future minimum rental commitments under the Facility have been included in the table of future minimum annual
rental commitments below.
The Company also leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most of
these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. At December 31,
2007, future minimum rental payments under all of the Company’s operating leases for each of the next five years and in the aggregate are as
follows (amounts in thousands):
2008
2009
2010
2011
2012
Thereafter
Related
Parties
$ 3,404
2,790
2,043
1,778
1,746
6,817
$ 18,578
Non-related
Parties
$ 48,361
45,131
40,655
37,452
33,920
278,486
$ 484,005
Total
$ 51,765
47,921
42,698
39,230
35,666
285,303
$ 502,583
Rental expense amounted to $55,358,000, $49,245,000 and $43,047,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Other Commitments
The Company had construction commitments, which totaled approximately $96.3 million, at December 31, 2007.
N O T E 8 — L E G A L P R O C E E D I N G S
The Company is involved in various legal proceedings incidental to the ordinary conduct of its business. Although the Company cannot
ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters
will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
N O T E 9 — S H A R E - B A S E D E M P L O Y E E C O M P E N S AT I O N P L A N S
Stock Options
The Company’s employee stock based incentive plan provides for the granting of stock options to certain key employees of the Company for the
purchase of common stock of the Company. A total of 24,000,000 shares have been authorized for issuance under this plan. Options are granted
at an exercise price that is equal to the market value of the Company’s common stock on the date of the grant. Options granted under the plan
expire after ten years and typically vest 25% a year, over four years. Since the adoption of SFAS No. 123R, the Company records compensation
38
Notes to Consolidated Financial Statements (continued)
expense for the grant date fair value of option awards evenly over the vesting period under the straight-line method. A summary of the shares
subject to currently issued and outstanding stock options under this plan is as follows:
Outstanding at December 31, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2007
Vested or expected to vest at December 31, 2007
Exercisable at December 31, 2007
Shares
6,450,745
1,416,925
(1,045,292)
(577,538)
6,244,840
5,846,832
4,404,403
Weighted-Average
Exercise Price
$ 20.38
33.67
16.38
27.86
$ 23.41
$ 22.76
$ 19.31
Weighted-Average
Remaining Contractual
Terms (in years)
Aggregate
Intrinsic Value
6.69
6.53
5.70
$ 58,549,000
$ 58,319,000
$ 57,879,000
The Company maintains a stock based incentive plan for non-employee directors of the Company pursuant to which the Company may grant
stock options. Up to 1,000,000 shares of common stock have been authorized for issuance under this plan. Options are granted at an exercise
price that is equal to the market value of the Company’s common stock on the date of the grant. Options granted under the plan expire after
seven years and vest fully after six months. Since the adoption of SFAS No. 123R, the Company records compensation expense for the grant
date fair value of option awards evenly over the vesting period under the straight-line method. A summary of the shares subject to currently
issued and outstanding stock options under this plan is as follows:
Outstanding at December 31, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2007
Vested or expected to vest at December 31, 2007
Exercisable at December 31, 2007
Shares
190,000
25,000
--
--
215,000
215,000
215,000
Weighted-Average
Exercise Price
$ 18.09
34.84
--
--
$ 20.12
$ 20.12
$ 20.12
Weighted-Average
Remaining Contractual
Terms (in years)
Aggregate
Intrinsic Value
2.89
2.89
2.89
$ 2,769,000
$ 2,769,000
$ 2,769,000
At December 31, 2007, approximately 10,687,000 and 375,000 shares were reserved for future issuance under the employee stock option plan
and director stock option plan, respectively. For the year ended December 31, 2007, the Company recognized stock option compensation
expense related to these plans of $4,882,000 and a corresponding income tax benefit of $1,801,000. For the year ended December 31, 2006,
the Company recognized stock option compensation expense related to these plans of $2,762,000 and a corresponding income tax benefit
of $1,019,000.
The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes
model requires the use of assumptions, including expected volatility, expected life, the risk free rate and the expected dividend yield. Expected
volatility is based upon the historical volatility of the Company’s stock. Expected life represents the period of time that options granted are
expected to be outstanding. The Company uses historical data and experience to estimate the expected life of options granted. The risk free
interest rate for periods within the contractual life of the options are based on the United States Treasury rates in effect for the expected life of
the options. The following weighted-average assumptions were used for grants issued for the years ended December 31, 2007, 2006 and 2005:
Risk free interest rate
Expected life
Expected volatility
Expected dividend yield
2007
4.47%
4.4 years
33.7%
0%
2006
4.01%
4.7 years
35.1%
0%
2005
4.25%
4.0 years
35.8%
0%
The weighted-average grant-date fair value of options granted during the years ended December 31, 2007, 2006 and 2005 were $11.81,
$11.72 and $8.82, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005
were $19,511,000, $22,985,000 and $19,100,000, respectively. The Company recorded cash received from the exercise of stock options of
$17,124,000, $15,970,000 and $14,915,000, in the years ended December 31, 2007, 2006 and 2005, respectively. The remaining unrecognized
compensation cost related to unvested awards at December 31, 2007, was $18,107,000 and the weighted-average period of time over which this
cost will be recognized is 2.9 years.
39
Notes to Consolidated Financial Statements (continued)
Employee Stock Purchase Plan
The Company’s employee stock purchase plan permits all eligible employees to purchase shares of the Company’s common stock at 85% of the
fair market value. Participants may authorize the Company to withhold up to 5% of their annual salary to participate in the plan. The stock
purchase plan authorizes up to 2,600,000 shares to be granted. During the year ended December 31, 2007, the Company issued 156,466 shares
under the purchase plan at a weighted average price of $29.12 per share. During the year ended December 31, 2006, the Company issued
165,306 shares under the purchase plan at a weighted average price of $27.36 per share. During the year ended December 31, 2005, the
Company issued 161,903 shares under the purchase plan at a weighted average price of $27.57 per share. SFAS No. 123R requires compensation
expense to be recognized based on the discount between the grant date fair value and the employee purchase price for shares sold to employees.
During the year ended December 31, 2007, the Company recorded $804,000 of compensation cost related to employee share purchases and a
corresponding income tax benefit of $290,000. During the year ended December 31, 2006, the Company recorded $799,000 of compensation
cost related to employee share purchases and a corresponding income tax benefit of $295,000. At December 31, 2007, approximately 243,000
shares were reserved 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 to 50% of the first 2% of each employee’s
wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed. The Company also makes additional discretionary
profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The Company’s matching and profit sharing
contributions under this plan are funded in the form of shares of the Company’s common stock. A total of 4,200,000 shares of common stock
have been authorized for issuance under this plan. During the year ended December 31, 2007, the Company recorded $6,849,000 of compensation
cost for contributions to this plan and a corresponding income tax benefit of $2,527,000. During the year ended December 31, 2006, the
Company recorded $6,429,000 of compensation cost for contributions to this plan and a corresponding income tax benefit of $2,372,000.
During the year ended December 31, 2005, the Company recorded $6,606,000 of compensation cost for contributions to this plan and a
corresponding income tax benefit of $2,444,000. The compensation cost recorded in 2007 includes matching contributions made in 2007 and
profit sharing contributions accrued in 2007 to be funded with issuance of shares of common stock in 2008. The Company issued 197,431
shares in 2007 to fund profit sharing and matching contributions at an average grant date fair value of $32.90. The Company issued 204,000
shares in 2006 to fund profit sharing and matching contributions at an average grant date fair value of $34.34. The Company issued 210,461
shares in 2005 to fund profit sharing and matching contributions at an average grant date fair value of $25.79. A portion of these shares related
to profit sharing contributions accrued in prior periods. At December 31, 2007, approximately 863,000 shares were reserved for future issuance
under this plan.
The Company has in effect a performance incentive plan for the Company’s senior management under which the Company awards shares of
restricted stock that vest equally over a three-year period and are held in escrow until such vesting has occurred. Shares are forfeited when an
employee ceases employment. A total of 800,000 shares of common stock have been authorized for issuance under this plan. Shares awarded
under this plan are valued based on the market price of the Company’s common stock on the date of grant and compensation cost is recorded
over the vesting period. The Company recorded $459,000 of compensation cost for this plan for the year ended December 31, 2007 and
recognized a corresponding income tax benefit of $169,000. The Company recorded $416,000 of compensation cost for this plan for the year
ended December 31, 2006 and recognized a corresponding income tax benefit of $154,000. The Company recorded $289,000 of compensation
cost for this plan for the year ended December 31, 2005 and recognized a corresponding income tax benefit of $107,000. The total fair value of
shares vested (at vest date) for the years ended December 31, 2007, 2006 and 2005 were $478,000, $503,000 and $524,000, respectively. The
remaining unrecognized compensation cost related to unvested awards at December 31, 2007 was $521,000. The Company awarded 16,189
shares under this plan in 2007 with an average grant date fair value of $34.02. The Company awarded 18,698 shares under this plan in 2006
with an average grant date fair value of $33.12. The Company awarded 14,896 shares under this plan in 2005 with an average grant date fair
value of $25.41. Compensation cost for shares awarded is recognized over the three-year vesting period. Changes in the Company’s restricted
stock for the year ended December 31, 2007 were as follows:
Non-vested at December 31, 2006
Granted during the period
Vested during the period
Forfeited during the period
Non-vested at December 31, 2007
Shares
16,291
16,189
(14,738)
(2,619)
15,123
Weighted-Average Grant Date Fair Value
$ 30.80
34.02
31.05
32.53
$ 33.70
At December 31, 2007, approximately 645,000 shares were reserved for future issuance under this plan.
40
Notes to Consolidated Financial Statements (continued)
N O T E 1 0 — S H A R E H O L D E R R I G H T S P L A N
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 stockholders to buy a unit representing one one-hundredth of a share of a new series of preferred stock of the Company for $160
and expire on May 30, 2012. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of
the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially
own 15% or more of the Company's common stock. If a person or group acquires beneficial ownership of 15% or more of the Company's com-
mon stock, each Right (other than Rights held by the acquiror) will, unless the Rights are redeemed by the Company, become exercisable upon
payment of the exercise price of $160 for an amount of common stock of the Company having a market value of twice the exercise price of the
Right. A copy of the Rights Agreement was filed on June 3, 2002, with the Securities and Exchange Commission, as Exhibit 4.2 to the
Company’s report on Form 8-K.
N O T E 1 1 — I N C O M E P E R C O M M O N S H A R E
The following table sets forth the computation of basic and diluted income per common share:
(In thousands, except per share data)
Years ended December 31,
Numerator (basic and diluted):
Net income
2007
2006
2005
$ 193,988
$ 178,085
$ 164,266
Denominator:
Denominator for basic income per common share–
weighted-average shares
Effect of stock options (Note 9)
Denominator for diluted income per common share-
adjusted weighted-average shares and assumed conversion
Basic net income per common share
Net income per common share-assuming dilution
114,667
1,413
116,080
$
$
1.69
1.67
113,253
1,866
115,119
$
$
1.57
1.55
111,613
1,772
113,385
$
$
1.47
1.45
N O T E 1 2 — I N C O M E TA X E S
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities
are as follows at December 31:
(In thousands)
Deferred tax assets:
Current:
Allowance for doubtful accounts
Unrecognized loss on short term investments
Other accruals
Noncurrent:
Other accruals
Total deferred tax assets
Deferred tax liabilities:
Current:
Inventories
Noncurrent:
Property and equipment
Other
Total deferred tax liabilities
Net deferred tax liabilities
41
2007
2006
$
1,202
4,133
14,440
17,800
37,575
26,010
40,431
4,610
71,051
$
958
--
19,251
2,967
23,176
25,988
37,517
3,621
67,126
$ (33,476)
$ (43,950)
Notes to Consolidated Financial Statements (continued)
The provision for income taxes consists of the following:
(In thousands)
Current
Deferred
Total
2007:
Federal
State
2006:
Federal
State
2005:
Federal
State
$ 110,302
9,539
$ (5,847)
(494)
$ 104,455
9,045
$ 119,841
$ (6,341)
$ 113,500
$ 96,824
8,373
$
(938)
(79)
$ 95,886
8,294
$ 105,197
$ (1,017)
$ 104,180
$ 79,720
7,754
$
(616)
(55)
$ 79,104
7,699
$ 87,474
$
(671)
$ 86,803
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows:
(In thousands)
Federal income taxes at statutory rate
State income taxes, net of federal tax benefit
Other items, net
2007
$ 107,620
5,880
--
$ 113,500
2006
$ 98,793
5,387
--
$ 104,180
2005
$ 87,874
4,986
(6,057)
$ 86,803
The Company's provision for income taxes for 2005 included a non-cash tax adjustment of $6.1 million in the third quarter of 2005 resulting
from the favorable resolution of prior tax uncertainties. The tax benefit realized in 2005 was nonrecurring and reflected the reversal of previously
recorded income tax reserves related to a prior acquisition. In determining the provision for income taxes, the Company uses an estimated annual
effective tax rate based on expected annual income by jurisdiction and statutory tax rates. The impact of significant discrete items, including the
tax benefit realized in the third quarter of 2005, is separately recognized in the quarter in which they occur.
The tax benefit associated with the exercise of non-qualified stock options has been reflected as additional paid-in capital in the accompanying
consolidated financial statements.
42
Notes to Consolidated Financial Statements (continued)
N O T E 1 3 — A C C U M U L AT E D O T H E R C O M P R E H E N S I V E L O S S
The adjustment to unrealized holding loss on available-for-sale securities included in accumulated other comprehensive loss for the period ended
December 31, 2007 totaled $10,933,000 with a corresponding tax benefit of $4,133,000 resulting in a net of tax effect of $6,800,000.
Changes in accumulated other comprehensive loss for the period ended December 31, 2007 consist of the following:
(In thousands)
Balance at December 31, 2006
Current-period change
Balance at December 31, 2007
Unrealized Losses
on Securities
Accumulated Other
Comprehensive Loss
$
--
(6,800)
$ (6,800)
$
--
(6,800)
$ (6,800)
43
Directors and Executive Committee
David O'Reilly
Chairman of the Board of
Directors
Charlie O'Reilly
Vice Chairman of the Board of
Directors
Larry O'Reilly
Vice Chairman of the Board of
Directors
Rosalie O'Reilly-Wooten
Director
Jay Burchfield
Director
Compensation Committee
Chairman
Corporate Governance and
Nominating Committee
Joe Greene
Director
Corporate Governance and
Nominating Committee Chairman
Paul Lederer
Director
Audit Committee
Compensation Committee
John Murphy
Director
Audit Committee Chairman
Corporate Governance and
Nomination Committee
Ronald Rashkow
Director
Audit Committee
Compensation Committee
Greg Henslee
Chief Executive Officer and
Co-President
Ted Wise
Chief Operating Officer and
Co-President
Tom McFall
Chief Financial Officer and
Executive Vice President
Greg Johnson
Senior Vice President of
Distribution
Jeff Shaw
Senior Vice President of
Store Operations and Sales
Mike Swearengin
Senior Vice President of
Merchandise
Tricia Headley
Vice President and Corporate
Secretary
Tony Bartholomew
Vice President of Sales
Greg Beck
Vice President of Purchasing
Brad Beckham
Vice President of Eastern Region
Ken Cope
Vice President of Central Region
Charlie Downs
Vice President of Real Estate
and Expansion
Phyllis Evans
Vice President of Store
Administration
Alan Fears
Vice President of Jobber Sales
and Acquisitions
Brett Heintz
Vice President of Retail Systems
Jaime Hinojosa
Vice President of Southern Region
Steve Jasinski
Vice President of Information
Systems
Randy Johnson
Vice President of Store Inventories
Kenny Martin
Vice President of Northern
Region
Wayne Price
Vice President of Risk
Management
Doug Ruble
Vice President of Marketing and
Advertising
Barry Sabor
Vice President of Loss Prevention
Tom Seboldt
Vice President of Merchandise
Phillip Thompson
Vice President of Human
Resources
Mike Williams
Vice President of Advanced
Technology
Operations Management
SENIOR MANAGEMENT
Doug Adams
Director of Atlanta East Region
Tom Allen
Director of Store Computer
Operations
Jeanene Asher
Director of Telecommunications
Mike Ballard
Director of Internet Development
and Networking
Emmitt Barina
Director of Safety and
Environmental Regulations
Steve Beil
Director of Atlanta West Region
Bert Bentley
Director of Houston Region
Rob Bodenhamer
Director of Technology
Development
Larry Boevers
Regional DC Director
Doug Bragg
Director of Oklahoma Region
Julie Gray
Director of Corporate Services
Jack House
Director of Customer Services
Mike Chapman
Director of Dallas Region
Larry Gray
Regional DC Director
Chad Keel
Director of St. Louis Region
Keith Childers
Director of Little Rock Region
Tom Connor
Regional DC Director
Joe Edwards
Director of Store Installations
Jay Enloe
Director of Workers’
Compensation and Risk
Administration
Robert Greene
Director of Real Estate Legal
Services
Ron Greenway
Director of Tax
Jeff Groves
Director of Legal and Claims
Services
Joe Hankins
Director of Store Design
Jeremy Fletcher
Director of Finance/Controller
Chris Harrelson
Director of Nashville Region
Jason Frizzell
Director of Knoxville Region
David Glore
Director of Ozark Sales
John Gouette
Director of Minneapolis/St. Paul
Northwest Region
Billy Harris
Director of Iowa and Nebraska
Region
Doy Hensley
Director of Store Support Services
Doug Hopkins
Director of Distribution Systems
Michelle Kimrey
Director of Accounting
Brad Knight
Director of Pricing
Scott Kraus
Director of Minneapolis/St. Paul
Northeast Region
John Krebs
Director of Gulf States Region
Terry Lee
Director of Mississippi Region
Dave Leonhart
Regional DC Director
Scott Leonhart
Director of Ohio Region
John Martinez
Director of Rio Grande Valley
Region
44
Jim Maynard
Director of Employment and
Team Member Relations
Rodger McClary
Director of Kansas City Region
Curt Miles
Director of Indianapolis Region
Brad Oplotnik
Director of Systems Management
Kevin Overmon
Director of Site Acquisitions
Steve Peterie
Director of Construction/Design
Ed Randall
Director of Property Management
Shari Reaves
Director of Compensation and
Benefits
Steve Rice
Director of Credit and Collections
Art Rodriguez
Director of Southern Division
Sales
Chuck Rogers
Director of Sales Administration
Rick Samsel
Director of Store Inventory
Denny Smith
Director of Springfield Region
Mark Smith
Director of Dallas Region
Charlie Stallcup
Director of Training
David Strom Sr
Director of Houston Region
Ron Todd
Director of Northern Division
Sales
David Turney
Director of Internal Audit
Tamra Waitman
Director of Financial Analysis and
Planning
Jeff Watts
Director of Eastern Division Sales
Saundra Wilkinson
Director of Store Administration
Wes Wise
Director of Marketing
Mike Young
Director of Construction
Operations Management (continued)
CORPORATE MANAGEMENT
Dale Agee
Computer Help Support Manager
Jeff Alexander
Creative Services Manager
Curt Allen
Real Estate Site Acquisition
Manager
Mike Crawford
Division Loss Prevention Manager
Charlie Hill
Regional Field Sales Manager
Bruce Creason
DC Safety Manager
Garry Curbow
Replenishment Manager
Josh Dalrymple
Distribution Center Manager
Mike Hill
Installer Systems Manager
Brian Holdcraft
Regional Field Sales Manager
Jim Hoover
Regional Field Sales Manager
Dan Altis
Distribution Center Manager
Jack Darovich
Regional Field Sales Manager
David Hunsucker
Catalog Department Manager
Keith Asby
Sales Manager of Special Markets
Cecil Davis
DC Inbound Operations Manager
Doug Hutchison
Inventory Project Manager
Gary Baker
Technical Assistance Manager
Tim Evans
National Accounts Manager
Johnny Ivy
Regional Field Sales Manager
Carl Barina
Regional Field Sales Manager
Paula Eyman
Special Projects Manager
Karen James
Retail Marketing Manager
Jason Bayless
Retail Facilities Manager
Paul Fagan
Distribution Center Manager
John Jay
Regional Field Sales Manager
Randy Freund
Regional Field Sales Manager
Steve Lines
Installer Programs Manager
Doug Bennett
Installer Pricing/Bid Manager
Becky Fincher
Advertising Manager
Merle Bever
Senior Product Manager
Ron Biegay
Southern Division Human
Resources Manager
Larry Blundell
Regional Field Sales Manager
Tom Bollinger
Regional Field Sales Manager
Marcus Boyer
Distribution Center Manager
Kevin Ford
DC Projects and Procedures
Manager
Doug Fox
Distribution Center Manager
David Furr
Service Equipment Sales Manager
Lori Fuzzell
Special Orders Manager
Clint Brewer
Regional Field Sales Manager
Jaydee Garrison
Regional Field Sales Manager
Kent Brewer
DC Transportation Manager
Adam Buchanan
Regional Field Sales Manager
Eddie Buttler
Regional Field Sales Manager
Brian Callis
Regional Field Sales Manager
Scott Cannon
Product Manager
Yvonne Cannon
Payroll Manager
Stephen Carlson
Jobber Systems Sales Manager
Danny Clark
Regional Field Sales Manager
Dennis Cook
Real Estate Site Acquisition
Manager
Rudy Cortez
Regional Field Sales Manager
Bob Gillespie
Regulatory and Environmental
Manager
Art Glidewell
Distribution Center Manager
Bridget Harmon
PC Support Manager
Jim Harnisfager
Product Manager
Candy Haskin
Treasury Manager
Mike Hauk
Division Training Manager
David Hawker
Regional Field Sales Manager
Troy Hellerud
Central Support Manager
Diana Hicks
Internal Communications
Manager
45
Les Keeth
Accounts Payable Manager
Jennifer Kent
Store Design Manager
Duane Keys
Application Development
Manager
Jim Litchford
Jobber Regional Field Sales
Manager
T. J. Madrid
Regional Field Sales Manager
Jeff Main
Jobber Systems Sales Manager
Harry Marcley
Distribution Center Manager
Ed Martinez
Distribution Center Manager
John Massie
Regional Field Sales Manager
Shawn McCormick
Division Loss Prevention Manager
Becky McCurry
Accounts Payable Expense
Manager
Carla McElveen
New Store Inventory Manager
Jeff McKinney
Customer Satisfaction Manager
Mindy Morgan
Team Member Relations Manager
Asa Nelson
Distribution Center Manager
Paul Southard
IS Governance Manager
Kim Stone
Product Manager II
Mary Stratton
Human Resources Programs/Tech
Support Manager
Camille Strickland
Real Estate Contract Manager
Robert Suter
Senior Product Manager
Roger Taylor
Regional Field Sales Manager
Dallas Thompson
Real Estate Site Acquisition
Manager
Arnulfo Vega
Regional Field Sales Manager
Darin Venosdel
Application Development
Manager
Rob Verch
Product Manager II
Patton Walden
Training Manager Eastern
Division
Lane Wallace
Pricing Manager
Susan Weaver
Human Resources
Records/Benefits Manager
Sherry Webb
Accounts Payable Merchandise
Manager
Les Weber
Regional Field Sales Manager
David Wehrenberg
Distribution Center Manager
Scotty Weidman
Product Manager II
Brian Welch
Logistics Manager
Matt Weldon
PBE Sales Manager
Jan Whitney
Travel Manager
Larry Wiles
Audio/Video Communications
Manager
Karla Williams
Application Development
Manager
Jimmy Wilmoth
Division Training Manager
Joe Winteberg
Product Manager II
Heather Woody
Assistant Controller
Christina Zahn
HRIS and Compensation
Manager
Tom Nunley
Regional Field Sales Manager
James Owens
Regional Field Sales Manager
Bryan Packer
Jobber Computer Sales and
Support Manager
Operations Management (continued)
Jim Riggs
Construction Manager
Tim Smith
Credit Manager
Corey Robinson
Inventory Accounting Manager
Tom Smith
Training Manager
Mary Sabor
DC Administrative Services
Manager
Wendi Page
Real Estate Property Manager
James Samson
Distribution Center Manager
Suzanne Parks
Accounts Receivable Manager
Rob Payne
Product Manager
Abby Pennell
Real Estate Counsel
Kolby Perusse
Distribution Center Manager
Tony Phelps
Distribution Center Manager
Steve Phillips
Division Loss Prevention Manager
Matt Pickering
Inventory Maintenance Manager
Paul Pike
Regional Field Sales Manager
Chris Pridgen
Human Resources Employment
Manager
Brian Prock
Division Training Manager
Tim Rathbun
Store Inventory Manager
Hugo Sanchez
Hispanic/Sports Marketing
Manager
Tim Scholl
DC Field Projects Manager
Ronald Scivicque
Regional Field Sales Manager
William Seiber
Distribution Center Manager
Darren Shaw
Product Manager II
Tim Shaw
Eastern Division Human
Resources Manager
John Shelton
Regional Field Sales Manager
Leigh Sides
Alarm Services Manager
Craig Smith
Real Estate Counsel
Dave Smith
Product Manager II
Phil Smith
Division Loss Prevention Manager
46
DISTRICT CORPORATE MANAGEMENT
Abel Abila
Eddie Allen
Kurt Anderson
Henry Armington
Scott Baglo
Chris Baker
Tracy Banks
Brince Beasley
Jim Belschner
Michael Bering
Adam Berryman
Aaron Biggs
Kirk Bilski
Richard Blackwell
Tommy Boudwin
Robert Boutwell
Mic Bowers
Eric Bowman
Randy Brewer
Lester Brown
Patrick Brown
Mark Cannon
Donnie Carden
Fred Carrington
Jimmy Carter
Jimmy Chadwick
Carl Chaffin
David Chavis
Dirk Chester
Aaron Clay
Mark Cleary
Justin Coker
Tim Coleman
Adam Cortez
Dean Dassel
Jim Dickens
Robert Doss
Bruce Dowell
Ward Duffy
Robert Dumas
Tommy Dunn
Mike Eckelkamp
Judy Ellington
Paul Engaldo
Ron England
Tony Fagan
Chris Farrow
Bill Fellows
Jacky Floyd
Donald Ford
Rodney Ford
Kirk Frazier
Mark Frazier
Curtis Fulkerson
Butch Galloway
Tim Gardner
Brad Garrison
Craig Garrison
Ernie Golden
Dennis Gonzales
Daniel Grandquest
Dan Griffin
Tony Haag
Jeffery Haire
James Harris
Jon Haught
Paul Hayden
Rick Hedges
Mike Heiter
Gerry Hendrix
Shannon Henry
Ed Hernandez
Perry Hess
Brady Hicks
Matt Hill
Mike Hollis
Kenneth Hubbart
Allen Hughes
Clint Hunter
Johnny Jarvis
Jeff Jennings
Wayne Johnson
Natalie Johnson
Chuck Kaiser
Justin Kale
Butch Kelton
Todd Kemper
Jimi Kent
Troy King
Rick Koehn
Greg Lair
Chris Lewis
Oliverio Lopez
Steve Luellen
Billy Lynn
Shelton Maben
Mark Mach
Chris Mancini
Albert Martinez
Tommy Mason
Brian Matthews
Clint McFadden
Marc McGehee
Chris Meade
Tom Meyer
Jack Miller
Chuck Mitchell
Andy Moore
Don Morgan
Trey Morgan
Randy Morris
Ciro Moya Jr
Ramon Odems
Lance O’Donnell
Ron Papay
Jude Patterson
Gilbert Perez
Pernell Peters
Randy Peterson
David Pilat
Brent Pizzolato
David Plaster
Mike Platt
Rob Pocklington
Troy Polston
Charles Ponder
Robert Poynor
James Ramsey
Clint Reaux
Lee Reese
Will Reger
Christopher
Reynolds
Tommy Rhoads
Alan Riddle
Larry Roof
Randall Rowland
Daniel Rozowski
Juan Salinas
Steve Sandman
Diego Santillana
Matt Schlueter
Paul Schmidt
Barry Scott
Jim Scott
Dusty Sermersheim
Steven Severe
Garry Shelby
Frank Silvas
Eric Sims
Greg Sims
Bobby Smith
Bob Snodgrass
Wayne Spratlin
Robin Stivers
Angela Stokes
Beverli Sumrall
Marvin Swaim
Alan Sweeton
Bert Tamez
Randy Tanner
Ricky Tanner
Shawn Taylor
Rick Tearney
Justin Tracy
Jim Turvey
Mark Van Hoecke
Andy Velez
Robert Verver
Fred Wadle
Bo Waldrop
Terry Walker
Mark Warden
Brent Warner
Rob Weiskirch
Chris Westfall
John Winburn
Allen Wise
Dexter Woods
Cody Zimmerman
47
Shareholder Information
C O R P O R AT E A D D R E S S
233 South Patterson
Springfield, Missouri 65802
417-862-3333
Web site – www.oreillyauto.com
R E G I S T R A R A N D T R A N S F E R A G E N T
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Inquiries regarding stock transfers, lost certificates or address
changes should be directed to Computershare Investor Services
at the above address.
I N D E P E N D E N T R E G I S T E R E D P U B L I C
A C C O U N T I N G F I R M
Ernst & Young LLP
One Kansas City Place
1200 Main Street, Suite 2000
Kansas City, Missouri 64105-2143
A N N UA L M E E T I N G
The annual meeting of shareholders of O’Reilly Automotive, Inc.
will be held at 10:00 a.m. local time on May 6, 2008, at the Clarion
Hotel, Ballrooms 1 and 2, 3333 South Glenstone Ave in Springfield,
Missouri. Shareholders of record as of February 28, 2008, will be
entitled to vote at this meeting.
F O R M 1 0 - K R E P O R T
The Form 10-K Report of O’Reilly Automotive, Inc. filed with the
Securities and Exchange Commission and our quarterly press releases
are available without charge to shareholders upon written request.
These requests and other investor contacts should be directed to
Thomas McFall, Chief Financial Officer and Executive Vice
President, at the corporate address.
T R A D I N G S Y M B O L
The Company’s common stock is traded on The Nasdaq Global
Select Market under the symbol ORLY.
N U M B E R O F S H A R E H O L D E R S
As of February 28, 2008, O’Reilly Automotive, Inc. had approximately
48,463 shareholders based on the number of holders of record and an
estimate of the number of individual participants represented by
security position listings.
A N A LY S T C O V E R A G E
The following analysts provide research coverage of O’Reilly
Automotive, Inc.:
BB&T Capital Markets – Anthony Cristello
BMO Capital Markets U.S. – Richard Weinhart
Credit Suisse – Gary Balter
Deutsche Bank Research – Michael Baker
FTN Midwest Research Securities Corp. – William Keller
Goldman Sachs Research – Matthew J. Fassler
Kevin Dann & Partners – Cid Wilson
Merriman Curhan Ford & Co. – Robert Straus
Morgan Stanley – Gregory Melich
Raymond James & Associates – Dan Wewer
RBC Capital Markets – Scot Ciccarelli
Robert W. Baird & Co. – J. David Cumberland
Sidoti & Company – Scott Stember
Stifel Nicolaus & Company, Incorportated – David Schick
Wachovia Securities – Peter Benedict
William Blair & Company – Sharon Zackfia
M A R K E T P R I C E S A N D
D I V I D E N D I N F O R M AT I O N
The prices in the table below represent the high and low sales price
for O’Reilly Automotive, Inc. common stock as reported by The
Nasdaq Global Select Market (see Note 4 in the Company’s
consolidated financial statements for information concerning the
Company’s stock split in 2005).
The common stock began trading on April 22, 1993. No cash
dividends have been declared since 1992, and the Company does not
anticipate paying any cash dividends in the foreseeable future.
2007
2006
High
$ 35.20
38.84
38.20
34.72
38.84
Low
$ 31.45
32.58
31.44
30.43
30.43
High
Low
$ 38.30
36.99
34.24
35.10
38.30
$ 30.87
29.30
27.49
30.92
27.49
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the Year
48
Board of Directors
DAV I D O’ R E I L LY
Chairman of the Board
C H A R L I E O’ R E I L LY
Vice Chairman of
the Board
L A R R Y O’ R E I L LY
Vice Chairman of
the Board
R O S A L I E
O ’ R E I L LY -W O O T E N
Director
JAY B U R C H F I E L D
Director Since 1997
Compensation Committee -
Chairman Corporate
Governance/Nominating
Committee
J O E G R E E N E
Director Since 1993
Corporate Governance/
Nominating
Committee - Chairman
PA U L L E D E R E R
Director 1993-July 1997;
February 2001
Audit Committee
Compensation Committee
J O H N M U R P H Y
Director Since 2003
Audit Committee - Chairman
Corporate Governance/
Nominating Committee
R O N A L D R A S H KO W
Director Since 2003
Audit Committee
Compensation Committee
Mission Statement
“O’Reilly Automotive will be the dominant 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, benefits and working conditions
which promote high achievement and ensure fair and equitable treatment; and providing our
stockholders with an excellent return on their investment.”
233 South Paterson
Springfield, Missouri 65802
417.862.3333
www.oreillyauto.com