UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-21318
O'REILLY AUTOMOTIVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 44-0618012
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
233 South Patterson
Springfield, Missouri 65802
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(Address of principal executive offices, Zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Common stock, $0.01 par value - 55,602,945 shares outstanding as of March 31,
2005. As of that date, the aggregate market value of the voting stock held by
non-affiliates of the Company was approximately $2,754,013,865.85 based on the
last sale price of the common stock reported by the Nasdaq Stock Market
(National Market).
This report contains a total of 20 pages of which this page is number 1.
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended March 31, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 8
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
ITEM 4 - CONTROLS AND PROCEDURES 12
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION 12
ITEM 6 - EXHIBITS 13
SIGNATURE PAGE 14
Page 2
<page>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<table>
<caption>
March 31, December 31,
2005 2004
------------ ------------
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 89,270 $ 69,028
Accounts receivable, net 63,180 60,928
Amounts receivable from vendors, net 42,631 52,976
Inventory 649,297 625,320
Other current assets 5,763 5,225
------------ ------------
Total current assets 850,141 813,477
Property and equipment, at cost 835,860 791,794
Accumulated depreciation and amortization 235,962 224,301
------------ ------------
Net property and equipment 599,898 567,493
Notes receivable, less current portion 27,375 21,690
Other assets, net 27,653 29,697
------------ ------------
Total assets $ 1,505,067 $ 1,432,357
============ ============
Liabilities and shareholders' equity
Current liabilities:
Income taxes payable $ 16,099 $ 9,736
Accounts payable 258,470 240,548
Accrued payroll 15,779 15,130
Accrued benefits and withholdings 40,159 35,794
Deferred income taxes 11,370 7,198
Other current liabilities 23,061 24,817
Current portion of long-term debt 591 592
------------ ------------
Total current liabilities 365,529 333,815
Long-term debt, less current portion 100,173 100,322
Deferred income taxes 38,165 38,440
Other liabilities 12,184 11,963
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares-90,000,000
Issued and outstanding shares-
55,602,945 shares at March 31, 2005,
and 55,377,130 at December 31, 2004 556 554
Additional paid-in capital 334,634 326,650
Retained earnings 653,826 620,613
------------ ------------
Total shareholders' equity 989,016 947,817
------------ ------------
Total liabilities and shareholders' equity $ 1,505,067 $ 1,432,357
============ ============
</table>
NOTE: The balance sheet at December 31, 2004, has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements.
See notes to condensed consolidated financial statements.
Page 3
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
<table>
<caption>
Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
Product sales $ 466,239 $ 403,294
Cost of goods sold, including
warehouse and distribution expenses 270,070 233,701
----------- -----------
Gross profit 196,169 169,593
Operating, selling, general and
administrative expenses 142,588 125,566
----------- -----------
Operating income 53,581 44,027
Other expense, net (668) (446)
----------- -----------
Income before income taxes and
cumulative effect of accounting change 52,913 43,581
Provision for income taxes 19,700 16,296
----------- -----------
Income before cumulative effect
of accounting change 33,213 27,285
Cumulative effect of accounting change,
net of tax - 21,892
----------- -----------
Net income $ 33,213 $ 49,177
=========== ===========
Income per common share - basic:
Income before cumulative effect
of accounting change $ 0.60 $ 0.50
Cumulative effect of accounting
change, net of tax - 0.40
----------- -----------
Net income per common share $ 0.60 $ 0.90
=========== ===========
Income per common share -
assuming dilution:
Income before cumulative effect
of accounting change $ 0.59 $ 0.49
Cumulative effect of accounting
change, net of tax - 0.40
----------- -----------
Net income per common share -
assuming dilution $ 0.59 $ 0.89
=========== ===========
Weighted-average common shares
outstanding - basic 55,448 54,694
=========== ===========
Adjusted weighted-average common
shares outstanding - assuming dilution 56,255 55,381
=========== ===========
</table>
See notes to condensed consolidated financial statements.
Page 4
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<table>
<caption>
Three Months Ended
March 31,
----------------------
2005 2004
--------- ---------
(In thousands)
Net cash provided by operating activities $ 64,359 $ 80,529
Investing activities:
Purchases of property and equipment (45,570) (40,078)
Proceeds from sale of property and equipment 350 667
Payments received on notes receivable 1,205 936
Advance on notes receivable (6,896) -
Reduction of other assets 1,532 55
--------- ---------
Net cash used in investing activities (49,379) (38,420)
Financing activities:
Principal payments on long-term debt (149) (20,246)
Net proceeds from issuance of common stock 5,411 2,380
--------- ---------
Net cash provided by (used in) financing activities 5,262 (17,866)
--------- ---------
Net increase in cash and cash equivalents 20,242 24,243
Cash and cash equivalents at beginning of period 69,028 21,094
--------- ---------
Cash and cash equivalents at end of period $ 89,270 $ 45,337
========= =========
</table>
See notes to condensed consolidated financial statements.
Page 5
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2005
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
O'Reilly Automotive, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2005, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 ("2004 Form 10-K").
2. Stock-based Compensation
The Company has elected to use the intrinsic value method of accounting for
stock options issued under our stock option plans and accordingly does not
record an expense for such stock options. For purposes of pro forma disclosures
under the fair value method, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information for the quarters ended March 31, is as follows:
<table>
<caption>
2005 2004
--------------------
(In thousands, except
per share data)
Net income, as reported................... $ 33,213 $ 49,177
Stock-based compensation expense, net
of tax, as reported..................... - -
Stock-based compensation expense, net
of tax, under fair value method......... 1,814 2,896
--------------------
Pro forma net income...................... $ 31,399 $ 46,281
====================
Pro forma basic net income per share...... $ 0.57 $ 0.85
====================
Pro forma net income per share-
assuming dilution....................... $ 0.56 $ 0.84
====================
</table>
3. Synthetic Lease Facility
On June 26, 2003, we completed an amended and restated master agreement relating
to our properties leased from SunTrust Equity Funding, LLC ("the Facility"). The
terms of the amended and restated Facility provide for an initial lease period
of five years, a residual value guarantee of approximately $43.2 million at
March 31, 2005, and purchase options on the properties. The Facility also
contains a provision for an event of default whereby the lessor, among other
things, may require us to purchase any or all of the properties. One additional
renewal period of five years may be requested from the lessor, although the
lessor is not obligated to grant such renewal. The agreement with SunTrust
Equity Funding, LLC has been recorded and disclosed as an operating lease in
accordance with Financial Accounting Standards Board Statement No. 13 and FASB
Interpretation No. 46 and 46R.
Page 6
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
March 31, 2005
4. Income Per Common Share
The following table sets forth the computation of basic and diluted income per
common share for the quarters ended March 31:
<table>
<caption>
2005 2004
---------------------
Numerator (basic and diluted):
Net income.................................. $ 33,213 $ 49,177
=====================
Denominator:
Denominator for basic income per common
share-weighted-average shares............. 55,448 54,694
Effect of stock options..................... 807 687
---------------------
Denominator for diluted income per common
share-adjusted weighted-average shares
and assumed conversion.................... 56,255 55,381
=====================
Basic net income per common share............. $ 0.60 $ 0.90
=====================
Net income per common share-assuming
dilution.................................... $ 0.59 $ 0.89
=====================
</table>
5. Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4. The standard requires that abnormal amounts of idle capacity
and spoilage costs should be excluded from the cost of inventory and expensed
when incurred. The standard is effective for fiscal periods beginning after
June 15, 2005. We do not expect the adoption of this standard will have a
material effect on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. We do not expect the adoption of this standard will have a material effect
on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS
No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation,
and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25
and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS 123R is the first reporting
period beginning after January 1, 2006, which is first quarter 2006 for calendar
year companies, such as ourselves, although early adoption is allowed. SFAS 123R
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
123R. Under the "modified retrospective" method, the requirements are the same
as under the "modified prospective" method, but also permits entities to restate
financial statements of previous periods based on pro forma disclosures made in
accordance with SFAS 123. We currently utilize a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options granted to
employees. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. We have not yet determined
which model we will use to measure the fair value of employee stock options upon
the adoption of SFAS 123R. See Note 8 of the Company's 2004 Form 10-K for
further information. SFAS 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
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date. These
future amounts cannot be estimated, because they depend on, among other things,
when employees exercise stock options. However, the amount of operating cash
flows recognized in prior periods for such excess tax deductions, as shown in
our Consolidated Statement of Cash Flows of the 2004 Form 10-K, were
$4.5 million, $5.5 million, and $1.5 million, for the years ended December 31,
2004, 2003, and 2002, respectively. We currently expect to adopt SFAS 123R
effective January 1, 2006; however, we have not yet determined which of the
aforementioned adoption methods we will use and are still evaluating the
standard. See Note 8 of the Company's 2004 Form 10-K for further information on
our stock-based compensation plans.
Page 7
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Unless otherwise indicated, "we," "us," "our" and similar terms, as well as
references to the "Company" or "O'Reilly" refer to O'Reilly Automotive, Inc. and
its subsidiaries.
Critical Accounting Policies and Estimates
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of our
company. To aid in that understanding, management has identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
o Cost of goods sold - Cost of goods sold includes warehouse and distribution
expenses and estimates of amounts due from vendors for certain merchandise
allowances and rebates. These estimates are consistent with historical
experience.
o Operating, selling, general and administrative expense (OSG&A) - Operating,
selling, general and administrative expense includes estimates for medical,
worker's compensation and other general liability insurance obligations,
which are partially based on estimates of certain claim costs and
historical experience.
o Accounts receivable - Allowance for doubtful accounts is estimated based on
historical loss ratios and consistently has been within management's
expectations.
o Revenue - Over-the-counter retail sales are recorded when the customer
takes possession of merchandise. Sales to professional installers, also
referred to as "commercial sales", are recorded upon delivery of
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 merchandise. All sales are recorded net of
estimated allowances and discounts.
o Vendor concessions - The Company receives concessions from its vendors
through a variety of programs and arrangements, including co-operative
advertising, allowances for warranties 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 vendor concessions are
recognized as a reduction of cost of sales when recognized in the
consolidated statement of income.
o Stock-based compensation - We have elected to use the intrinsic value
method of accounting for stock options issued under our stock option plans
and accordingly do not record an expense for such stock options. For
purposes of pro forma disclosures under the fair value method, the
estimated fair value of the options is amortized to expense over the
options' vesting period. Our pro forma information for the years ended
March 31, is as follows:
<table>
<caption>
2005 2004
--------------------
(In thousands, except
per share data)
Net income, as reported................... $ 33,213 $ 49,177
Stock-based compensation expense, net
of tax, as reported..................... - -
Stock-based compensation expense, net
of tax, under fair value method......... 1,814 2,896
--------------------
Pro forma net income...................... $ 31,399 $ 46,281
====================
Pro forma basic net income per share...... $ 0.57 $ 0.85
====================
Pro forma net income per share-
assuming dilution....................... $ 0.56 $ 0.84
====================
</table>
Page 8
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Results of Operations
Product sales increased $62.9 million, or 15.6% from $403.3 million in the first
quarter of 2004, to $466.2 million in the first quarter of 2005. This increase
was primarily due to the opening of 37 net, new stores during the first quarter
of 2005, in addition to a 7.1% increase in comparable store product sales for
the first quarter of 2005. Comparable store product sales are calculated based
on the change in product sales of stores open at least one year. Percentage
increase in comparable store product sales is calculated based on store sales
results, which exclude sales of specialty machinery, sales by outside salesmen
and sales to employees. At March 31, 2005, we operated 1,286 stores compared to
1,132 stores at March 31, 2004.
Gross profit increased $26.6 million, or 15.7% from $169.6 million (or 42.1% of
product sales) in the first quarter of 2004, to $196.2 million (or 42.1% of
product sales) in the first quarter of 2005. 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 first quarter of 2005 compared
to the same period in 2004, and increased sales levels at existing stores.
Operating, selling, general and administrative expenses ("OSG&A expenses")
increased $17.0 million, or 13.6% from $125.6 million (or 31.2% of product
sales) in the first quarter of 2004 to $142.6 million (or 30.6% of product
sales) in the first quarter of 2005. The dollar increase in OSG&A expenses
resulted from the addition of team members and resources in order to support the
increased level of our operations. The decrease in OSG&A expenses as a
percentage of product sales was primarily due to economies of scale achieved and
the result of management's efforts to increase labor productivity.
Our estimated provision for income taxes increased $3.4 million to $19.7 million
for the first quarter of 2005 compared to the same period in 2004, as a result
of our increased taxable income. Our effective tax rate was 37.2% of income
before income taxes for the first quarter of 2005 and 37.4% for the first
quarter of 2004.
Principally, as a result of the foregoing, income before cumulative effect of
accounting change increased from $27.3 million (or 6.8% of product sales) in the
first quarter of 2004 to $33.2 million (or 7.1% of product sales) in the first
quarter of 2005.
Liquidity and Capital Resources
Net cash provided by operating activities decreased from $80.5 million for the
first three months in 2004 to $64.4 million for the first three months of 2005.
This decrease was principally the result of an increase in inventory primarily
due to our continuing store growth and the opening of the Atlanta distribution
center and a smaller increase in accounts payable.
Net cash used in investing activities increased from $38.4 million during the
first three months in 2004 to $49.4 million for the comparable period in 2005,
primarily due to increases in notes receivable and purchases of property and
equipment.
Net cash provided by financing activities increased from ($17.9) million in the
first three months of 2004 to $5.3 million in the first three months of 2005,
primarily due to a decrease in principal payments on long-term debt.
We have available an unsecured, three-year syndicated revolving credit facility
in the amount of $150 million. The credit facility is guaranteed by all of our
subsidiaries and may be increased to a total of $200 million, subject to
availability of such additional credit from either existing banks within the
syndicate or other banks. At March 31, 2005, none of the revolving credit
facility was outstanding. Additionally, letters of credit totaling $21.2 million
were outstanding at March 31, 2005. Accordingly, we have aggregate availability
for additional borrowings of $128.8 million under the revolving credit facility.
The revolving credit facility, which bears interest at LIBOR plus a spread
ranging from 0.875% to 1.375% (0.875% at March 31, 2005), expires in July 2005.
Page 9
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Our continuing store expansion program requires significant capital expenditures
and working capital principally for inventory requirements. The costs associated
with the opening of a new store (including the cost of land acquisition,
improvements, fixtures, inventory and computer equipment) are estimated to
average approximately $900,000 to $1.1 million; however, such costs may be
significantly reduced where we lease, rather than purchase, the store site.
Although the cost to acquire the business of an independently owned parts store
varies, depending primarily upon the amount of inventory and the amount, if any,
of real estate being acquired, we estimate that the average cost to acquire such
a business and convert it to one of our stores is approximately $400,000,
exclusive of the cost of inventory. 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 first three months of 2005, we opened 37 net, new stores. The Company
plans to open 123 additional stores during the remainder of 2005. 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.
Off Balance Sheet Arrangements
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. 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 the Company. 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 June 26, 2003, we completed an amended and restated master agreement to our
$50 million Synthetic Operating Lease Facility (the Facility or the Synthetic
Lease) with a group of financial institutions. The terms of the Facility provide
for an initial lease period of five years, a residual value guarantee of
approximately $43.2 million at December 31, 2004, and purchase options on the
properties. The Facility also contains a provision for an event of default
whereby the lessor, among other things, may require us to purchase any or all of
the properties. One additional renewal period of five years may be requested
from the lessor, although the lessor is not obligated to grant such renewal. The
Facility has been accounted for as an operating lease under the provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 13 and related interpretations, including FASB
Interpretation No. 46.
Page 10
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Off Balance Sheet Arrangements (continued)
We issue stand-by letters of credit provided by a $30 million sublimit 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 $21.2 million and $13.8 million were outstanding at March 31,
2005 and 2004, respectively.
New Accounting Standards
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4. The standard requires that abnormal amounts of idle capacity
and spoilage costs should be excluded from the cost of inventory and expensed
when incurred. The standard is effective for fiscal periods beginning after
June 15, 2005. We do not expect the adoption of this standard will have a
material effect on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. We do not expect the adoption of this standard will have a material effect
on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS
No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation,
and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25
and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS 123R is the first reporting
period beginning after January 1, 2006, which is first quarter 2006 for calendar
year companies, such as ourselves, although early adoption is allowed. SFAS 123R
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
123R. Under the "modified retrospective" method, the requirements are the same
as under the "modified prospective" method, but also permits entities to restate
financial statements of previous periods based on pro forma disclosures made in
accordance with SFAS 123. We currently utilize a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options granted to
employees. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. We have not yet determined
which model we will use to measure the fair value of employee stock options upon
the adoption of SFAS 123R. See Note 8 of the Company's Annual Report on Form
10-K for the year ended December 31, 2004 ("2004 Form 10-K") for further
information. SFAS 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 current
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other things, when
employees exercise stock options. However, the amount of operating cash flows
recognized in prior periods for such excess tax deductions, as shown in our
Consolidated Statement of Cash Flows of the 2004 Form 10-K, were $4.5 million,
$5.5 million, and $1.5 million, for the years ended December 31, 2004, 2003, and
2002, respectively. We currently expect to adopt SFAS 123R effective January 1,
2006; however, we have not yet determined which of the aforementioned adoption
methods we will use and are still evaluating the standard. See Note 8 of the
Company's 2004 Form 10-K for further information on our stock-based compensation
plans.
Page 11
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
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 store sales. 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 the
Company's 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 www.sec.gov. Such reports are generally available on the
day they are filed. Additionally, the Company will furnish interested readers
upon request and free of charge, a paper copy of such reports.
Page 12
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
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," "good," "plan," "intend," "estimate," "project," "will" or similar
words. In addition, statements contained within this filing 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 Exhibit 99.1 of
this Form 10-Q, for additional factors that could materially affect our
financial performance.
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 March 31, 2005, 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 of March 31, 2005. 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 March 31, 2005, to ensure that the
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934, as amended, (a) is
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms and (b) is accumulated and communicated to the
Company's management, including the 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 first quarter of
2005 that have materially affected or are reasonably likely to materially affect
the Company's internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits:
<table>
<caption>
Number Description Page
- ------ ------------------------------------------------------------------------- ----
31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of the 15
Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the 16
Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certificate of the Chief Executive Officer pursuant to Section 906 of the 17
Sarbanes-Oxley Act of 2002, filed herewith.
32.2 Certificate of the Chief Financial Officer pursuant to Section 906 of the 18
Sarbanes-Oxley Act of 2002, filed herewith.
99.1 Certain Risk Factors, filed herewith. 19
</table>
Page 13
<page>
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.
May 9, 2005 /s/ Greg Henslee
- ----------- --------------------------------------------------------
Date Greg Henslee, Co-President and Chief Executive
Officer (Principal Executive Officer)
May 9, 2005 /s/ James R. Batten
- ----------- --------------------------------------------------------
Date James R. Batten, Executive Vice-President of Finance and
Chief Financial Officer (Principal Financial and
Accounting Officer)
Page 14
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.1 - CEO Certification
CERTIFICATIONS
I, Greg Henslee, certify that:
1. I have reviewed this quarterly 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 quarterly
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;
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:May 9, 2005 /s/ Greg Henslee
--------------------------------------------------------
Greg Henslee, Co-President and Chief
Executive Officer (Principal Executive Officer)
Page 15
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.2 - CFO Certification
CERTIFICATIONS
I, James R. Batten, certify that:
1. I have reviewed this quarterly 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 quarterly
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;
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:May 9, 2005 /s/ James R. Batten
--------------------------------------------------------
James R. Batten, Executive Vice President of Finance
and Chief Financial Officer (Principal Financial and
Accounting Officer)
Pate 16
<page>
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 Quarterly Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2005, 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
Principle Executive Officer
May 9, 2005
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
Page 17
<page>
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 Quarterly Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
R. Batten, 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/ James R. Batten
- ------------------------------------------------
James R. Batten
Chief Financial Officer
Principle Financial Officer
May 9, 2005
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
Page 18
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 99.1 - Certain Risk Factors
Some of the information in this Form 10-Q contains and future reports, press
releases and other public information may contain forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. These
"forward-looking statements" are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (See Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934.) You should read statements that contain these words carefully because
they: (1) discuss our future expectations; (2) contain projections of our future
results of operations or of our financial condition; or (3) state other
"forward-looking" information. We believe it is important to communicate our
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or over which we have no control.
The risk factors listed in this exhibit, as well as any cautionary language in
this Form 10-Q, 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 business, weather, terrorist activities, war and the
threat of war. Actual results may materially differ from anticipated results
described in these forward-looking statements. You should be aware that the
occurrence of the events described in these risk factors and elsewhere in our
annual report on Form 10-K for the year ended December 31, 2004 (the "2004 Form
10-K") could have a material adverse effect on our business, operating results
and financial condition.
Competition
We compete with a large number of retail (DIY) and wholesale (professional
installers) automotive aftermarket product suppliers. The distribution of
automotive aftermarket products is a highly competitive industry, particularly
in the more densely populated market areas that we serve. Competitors include
national and regional automotive parts chains, independently owned parts stores
(some of which are associated with national auto parts distributors or
associations), automobile dealerships, mass or general merchandise, discount and
convenience chains that carry automotive products, independent warehouse
distributors and parts stores and national warehouse distributors and
associations. Some of our competitors are larger than we are and have greater
financial resources. In addition, some of our competitors are smaller than we
are overall but have a greater presence than we do in a particular market. For a
list of our principal competitors, see the "Competition" section of Item 1 to
our 2004 Form 10-K.
No Assurance of Future Growth
We believe that our ability to open additional stores at an accelerated rate
will be a significant factor in achieving our growth objectives for the future.
Failure to achieve our growth objectives may negatively impact the trading price
of our common stock. Our ability to accomplish our growth objectives is
dependent, in part, on matters beyond our control, such as weather conditions,
zoning and other issues related to new store site development, the availability
of qualified management personnel and general business and economic conditions.
We cannot be sure that our growth plans for 2005 and beyond will be achieved.
For a discussion of our growth strategies, see the "Growth and Expansion
Strategies" section of Item 1 to our 2004 Form 10-K.
Acquisitions May Not Lead to Expected Growth
We expect to continue to make acquisitions as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth to differ
from our expectations. For example: (1) we may not be able to continue to
identify suitable acquisition candidates or to acquire additional companies at
favorable prices or on other favorable terms; (2) our management's attention may
be distracted; (3) we may fail to retain key acquired personnel; (4) we may
assume unanticipated legal liabilities and other problems; and (5) we may not be
able to successfully integrate the operations (accounting and billing functions,
for example) of businesses we acquire to realize economic, operational and other
benefits.
Page 19
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 99.1 - Certain Risk Factors (continued)
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States. In
particular, approximately 30% of our stores are located in Texas. Therefore, our
business is sensitive to the economic and weather conditions of this region.
Unusually severe or inclement weather tends to reduce sales, particularly to DIY
customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key personnel,
including David E. O'Reilly, Ted F. Wise, Greg L. Henslee and James R. Batten.
Our business and results of operations could be materially adversely affected by
the loss of the services of one or more of these individuals. Additionally, our
successful implementation and management of our growth and expansion strategies
will depend on our ability to continue to attract and retain qualified
personnel. We cannot be sure that we will be able to continue to attract such
personnel. For a further discussion of our management and personnel, see the
"Business" section of Item 1 and Item 4a of our 2004 Form 10-K and our Proxy
Statement on Schedule 14A for the 2005 Annual Meeting of Shareholders.
Concentration of Ownership by Management
Our executive officers and directors as a group beneficially own a substantial
percentage of the outstanding shares of our common stock. These officers and
directors have the ability to exercise effective voting control of the company,
including the election of all of our directors, and to effectively determine the
vote on any matter being voted on by our shareholders, including any merger,
sale of assets or other change in control of the company.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to volatile
fluctuations based on general economic and market conditions. The market price
for our common stock may also be affected by our ability to meet analysts'
expectations. Failure to meet such expectations, even slightly, could have an
adverse effect on the market price of our common stock. In addition, stock
market volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business.
Shares Eligible for Future Sale
All of the shares of common stock currently held by our affiliates may be sold
in reliance upon the exemptive provisions of Rule 144 of the Securities Act of
1933, as amended, subject to certain volume and other conditions imposed by such
rule. We cannot predict the effect, if any, that future sales of shares of
common stock or the availability of such shares for sale will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock, or the perception that such sales might occur, could
adversely affect the prevailing market price of the common stock.
Page 20