Sales increased $52 million, or 8.8% from $591 million in the second quarter of 2006, to $643 million in the second quarter of 2007. Sales for the first six months of 2007 were $1.26 billion, an increase of $129 million or 11.4% over sales for the first six months of 2006. The addition of 91 net new stores opened in the first six months of 2007 provided $13.8 million and $18.4 million of the three and six month increase, respectively. A full three and six months of sales for stores opened throughout 2006 contributed an additional $27.1 million and $62.4 million to the three and six months increase, respectively. Finally, a 2.0% and 4.3% increase in comparable store sales for the first three and six months of 2007, respectively, added an additional $11.6 million and $46.9 million to the three and six month increase, respectively. Comparable store sales are calculated based on the change in sales of stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to team members. We believe that the comparable store sales increase is primarily attributable to our offering of 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, and compensation programs for all store team members that provide incentives for performance. At June 30, 2007, we operated 1,731 stores compared to 1,555 stores at June 30, 2006. We anticipate that continued store unit and sales growth consistent with our historical rates will continue in the future.
Gross profit increased $26 million, or 10.1% from $261 million (or 44.1% of sales) in the second quarter of 2006 to $287 million (or 44.7% of sales) in the second quarter of 2007. Gross profit for the first six months increased 12.6% to $556 million (or 44.3% of sales) in 2007, from $494 million (or 43.8% of sales) in 2006. The increase in gross profit dollars was primarily a result of the increase in sales resulting from the increase in the number of stores open during the second quarter and first six months of 2007 compared to the same period in 2006 and increased sales levels at existing stores. The increase in gross profit as a percentage of sales is the result of improved product mix and acquisition cost. We improved our product mix by continuing to implement strategies to differentiate 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 as a result of our growth. We anticipate these trends to continue at a moderate rate through 2007.
Operating, selling, general and administrative expenses (“OSG&A expenses”) increased $23 million, or 12.6% from $183 million (or 30.9% of sales) in the second quarter of 2006 to $206 million (or 32.0% of sales) in the second quarter of 2007. OSG&A expenses increased $47 million, or 13.3% from $351 million (or 31.1% of sales) in the first six months of 2006 to $398 million (or 31.7% of sales) in the first six months of 2007. The dollar increase in OSG&A expenses resulted primarily from additional team members and resources to support the increased store count. The increase in OSG&A expenses as a percentage of sales in the first three and six months of 2007 was primarily due to higher advertising costs and increased stock compensation expense.
Our estimated provision for income taxes increased $1.4 million to $30.4 million for the second quarter 2007 compared to $29.1 million for the same period in 2006. Our provision for income taxes increased $6.2 million to $59.2 million for the first six months of 2007 compared to $53.0 million for the first six months of 2006. These increases are the result of our increased taxable income. Our effective tax rate was 37.0% of income before income taxes for the second quarter of 2007 and 37.1% for the first six months of 2007 compared to 37.1% for both of the comparable periods in 2006.
Net cash provided by operating activities increased from $123.8 million for the first six months in 2006 to $191.9 million for the first six months of 2007. This increase 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 improved leverage on inventory and our ongoing effort to extend payment terms with our vendors.
Net cash used in investing activities increased from $117.4 million during the first six months in 2006 to $138.7 million for the comparable period in 2007, primarily due to an increase in capital expenditures resulting from our ongoing store expansion program, including the addition of 91 new stores in the first six months of 2007 compared to the addition of 85 new stores for the same period in 2006.
Net cash provided by financing activities decreased from $17.5 million during the first six months of 2006 to $9.4 million for the same period in 2007. The decrease in cash flows from financing activities is the result of a greater amount of repayment of long term debt during the first six months of 2007 versus the comparable period in 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
We have available an unsecured, five-year syndicated revolving credit facility (“Credit Facility”) in the amount of $100 million. The credit facility may be increased by our request to a total of $200 million, subject to availability of such additional credit from either existing banks within the Credit Facility or other banks. At June 30, 2007, there were no outstanding borrowings under the revolving credit facility. Letters of credit totaling $31.6 million were outstanding under the credit facility at June 30, 2007. Accordingly, we have aggregate availability for additional borrowings of $68.4 million under the revolving credit facility. The revolving credit facility, which bears interest at LIBOR plus a spread ranging from 0.375% to 0.75% (5.875% at June 30, 2007,) expires in July 2010.
Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. The costs associated with opening a new store (including the cost of land acquisition, improvements, fixtures, net inventory investment and computer equipment) are estimated to average approximately $1.1 to $1.3 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 facilities.
During the second quarter of 2007, we opened 46 new stores and closed 2 stores for a net increase of 44 stores. We plan to open 99 to 104 additional stores during the remainder of 2007. The funds required for such planned expansions are expected to be provided by operating activities and the existing and available bank credit facilities.
We believe that our existing cash, short-term investments, 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 and liquidity needs for the foreseeable future.
Contractual Obligations
At June 30, 2007, we had long-term debt with maturities of less than one year of $25,315,000 and long-term debt with maturities over one year of $75,311,000, representing a total decrease in all outstanding debt of $9,853,000 from December 31, 2006.
New Accounting Standards
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 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 sustained upon examination by the applicable taxing authority. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. We 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. At the adoption date of January 1, 2007, the we had a gross exposure for unrecognized potential tax benefits of $14.9 million and a related future potential tax deduction related to that gross exposure of a $4.9 million deferred tax asset (for a net $10.0 million of unrecognized tax benefits) which would affect our effective tax rate if recognized. At June 30, 2007, we had a gross exposure for unrecognized tax benefits accrued of $17.5 million and a related future tax deduction related to that gross exposure of a $5.9 million deferred tax asset (for a net $11.6 million of unrecognized tax benefits) which would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in the income tax expense. As of June 30, 2007, we had approximately $2.3 million of accrued interest and penalties related to uncertain tax positions, before the benefit of the deduction for interest on state and federal returns. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2007, we do not anticipate significant increases or decreases to the total amount of unrecognized tax benefits during 2007 or for the period one year subsequent to June 30, 2007.
Our 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 our consolidated 2002, 2003 and 2004 federal income tax returns in the first quarter of 2007. In conjunction with this examination, we agreed to extend the statute of limitations for the 2002 tax year to June 30, 2007. The statute of limitations for 2003 and 2004 will expire on September 17, 2007 and September 15, 2008, respectively, unless otherwise extended. Our state income tax returns remain subject to examination by various state authorities for tax years ranging from 2001 through 2006.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Inflation and Seasonality
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.
Internet Address and Access to SEC Filings
Our Internet address is www.oreillyauto.com. Interested readers can access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Security and Exchange Commission’s website at www.sec.gov. Such reports are generally available on the day they are filed. Additionally, we will furnish interested readers upon request and free of charge, a paper copy of such reports.
Forward-Looking Statements
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” section of our annual report on Form 10-K for the year ended December 31, 2006, for additional factors that could materially affect our financial performance.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk to the extent we borrow against our revolving credit facility with variable interest rates. Since no amounts were outstanding under the revolving credit facility at June 30, 2007, changes in interest rates would not have any effect. In the event of an adverse change in interest rates and assuming the Company had amounts outstanding under the credit facility, management would likely take actions that would mitigate our exposure to interest rate risk particularly if our borrowing levels increase to any significant extent; however, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures as required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act,”) as of June 30, 2007. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of June 30, 2007, to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to the Company's management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in the Company's internal control over financial reporting during the second quarter of 2007 that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of our business. We do not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) | Our Annual Meeting of the Shareholders was held on May 8, 2006. Of the 113,981,927 shares entitled to vote at such meeting, 106,799,525 shares were present at the meeting in person or by proxy. |
(b) | The individuals listed below were elected as a Class II Director, and with respect to each such Director, the number of shares voted for and withheld were as follows: |
| | Number of Shares |
Name of Nominee | | Voted For | | Withheld |
Lawrence P. O’Reilly | | 74,534,770 | | 32,264,756 |
Rosalie O’Reilly - Wooten | | 74,529,673 | | 32,269,852 |
Joe C. Greene | | 66,529,617 | | 40,269,908 |
The individuals listed below are Directors whose term of office continued after the meeting:
Jay D. Burchfield
Paul R. Lederer
John Murphy
Charles H. O’Reilly, Jr.
David E O’Reilly
Ronald Rashkow
(c) | In addition to the election of three Class II Directors, the following matters were voted upon: |
(i) | Ernst & Young LLP was ratified as independent auditor for the fiscal year ending December 31, 2007. The number of shares voted for, against and abstained were as follows: |
Number of Shares |
Voted For | | Voted Against | | Abstained |
105,821,299 | | 894,314 | | 83,912 |
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibits:
Number | Description | Page |
| | |
31.1 | Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | 18 |
31.2 | Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | 19 |
32.1 | Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | 20 |
32.2 | Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | 21 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | O'REILLY AUTOMOTIVE, INC. |
| | |
August 9, 2007 | | /s/ Greg Henslee |
Date | | Greg Henslee, Co-President and Chief Executive Officer (Principal Executive Officer) |
| | |
| | |
August 9, 2007 | | /s/ Thomas McFall |
Date | | Thomas McFall, Senior Vice-President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.1 – CEO Certification
CERTIFICATIONS
I, Greg Henslee, certify that:
1. | I have reviewed this report on Form 10-Q of O’Reilly Automotive, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | | | |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2007 | /s/ Greg Henslee |
| Greg Henslee, Co-President and Chief |
| Executive Officer (Principal Executive Officer) |
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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.2 – CFO Certification
CERTIFICATIONS
I, Thomas McFall, certify that:
1. | I have reviewed this report on Form 10-Q of O’Reilly Automotive, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | | | |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2007 | /s/ Thomas McFall |
| Thomas McFall, Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.1 – CEO Certification
O’REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg Henslee, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ Greg Henslee | |
Greg Henslee | |
Chief Executive Officer (Principal Executive Officer) | |
| |
August 9, 2007 | |
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the Securities and Exchange Commission (the “Commission”) as part of the Report and is not to be incorporated by reference into any filing of the Company with the Commission, whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing.
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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.2 – CFO Certification
O’REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas McFall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ Thomas McFall | |
Thomas McFall | |
Chief Financial Officer (Principal Financial and Accounting Officer) | |
| |
August 9, 2007 | |
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the Securities and Exchange Commission (the “Commission”) as part of the Report and is not to be incorporated by reference into any filing of the Company with the Commission, whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing.
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