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, 1998
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.
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(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)
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
Common stock, $0.01 par value - 21,199,313 shares outstanding as of March 31,
1998
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended March 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE PAGE
EXHIBIT INDEX
PART I Financial Information
ITEM 1. Financial Statements
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
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(In thousands, except share data) (Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 1,878 $ 2,285
Short-term investments 1,000 1,000
Accounts receivable 23,681 12,469
Inventory 204,708 111,848
Other current assets 20,827 6,538
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Total current assets 252,094 134,140
Property and equipment, at cost 170,149 137,533
Accumulated depreciation
and amortization ( 30,096) ( 29,093)
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140,053 108,440
Other assets 12,074 5,037
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Total assets $ 404,221 $ 247,617
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Liabilities and stockholders' equity Current liabilities:
Accounts payable $50,017 $ 29,713
Income taxes payable 4,521 2,501
Other current liabilities 27,337 8,033
Current portion of long-term debt 2,000 130
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Total current liabilities 83,875 40,377
Long-term debt, less current portion 124,132 22,641
Other liabilities 6,649 2,560
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares- 30,000,000
Issued and outstanding shares -
21,199,313 at March 31, 1998
and 21,125,493 at December 31,
1997 212 211
Additional paid-in capital 78,783 77,077
Retained earnings 110,570 104,751
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Total stockholders' equity 189,565 182,039
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Total liabilities and
stockholders' equity $404,221 $247,617
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NOTE: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
1998 1997
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(In thousands, except per share data)
Product sales $118,269 $68,472
Cost of goods sold, including warehouse and distribution expenses 67,600 39,281
Operating, selling, general and administrative expenses 40,067 21,263
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107,667 60,544
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Operating income 10,602 7,928
Other income (expense) , net (1,200) 46
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Income before income taxes 9,402 7,974
Provision for income taxes 3,583 2,967
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Net income $ 5,819 $ 5,007
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Earnings per common share $0.28 $0.24
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Earnings per common share - assuming dilution $0.27 $0.24
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Weighted average common shares outstanding 21,146 20,956
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Diluted weighted average common shares outstanding 21,572 21,097
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See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
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1998 1997
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(In thousands)
Net cash provided by operating activities $3,726 $9,500
Investing activities:
Purchases of property and equipment (11,429) (9,049)
Acquisition of Hi-Lo Automotive, Inc., net of cash acquired (53,241) --
Proceeds from sale of property and equipment 14 25
Other 17 --
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Net cash used in investing activities (64,639) (9,024)
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Financing activities:
Borrowings on notes payable to banks -- 2,000
Proceeds from issuance of long-term debt 82,496 --
Payments on long-term debt (22,525) (39)
Proceeds from issuance of common stock 535 141
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Net cash provided by financing activities 60,506 2,102
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Net increase (decrease) in cash (407) 2,578
Cash at beginning of period 2,285 1,207
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Cash at end of period $1,878 $3,785
=================== ===================
The Company refinanced the long-term borrowings of Hi-Lo Automotive, Inc.
totaling $43.4 million in connection with the new credit facility.
See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with 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 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, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the O'Reilly Automotive,
Inc. and Subsidiaries' annual report on Form 10-K for the year ended December
31, 1997.
2. Debt
In connection with the acquisition of Hi-Lo Automotive, Inc. ("Hi/LO") in
January 1998, the Company replaced its lines of credit with new, unsecured
credit facilities totaling $175 million. The facilities are comprised of a $125
million five-year revolving credit facility which includes a $5 million sublimit
for the issuance of letters of credit and a $50 million five-year term loan
facility. These credit facilities are guaranteed by the subsidiaries of the
Company and currently bear interest at the London Interbank Offered Rate
("LIBOR") plus 0.875%. The Company is required to meet various financial
covenants as defined in the credit agreement.
3. Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore the company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Companys financial statements.
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement 130,
Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, Statement 130 had no impact on the Company's net income or
shareholders' equity as of March 31, 1998.
5. Restatement
All share and per share information included in the financial statements as of
March 31, 1997 and the three months then ended has been restated to reflect the
retroactive effect of the stock split distributed on August 31, 1997.
6. Business Acquisition
Effective January 31, 1998, the Company acquired all of the outstanding common
shares of Hi-Lo Automotive, Inc. and its subsidiaries for $47.8 million or $4.35
per common share. This acquisition has been accounted for as a purchase by
recording the assets and liabilities of Hi/LO at their estimated fair values at
the acquisition date. The consolidated results of operations of the Company
include the operations of Hi/LO from the acquisition date. Unaudited Pro Forma
consolidated results of operations assuming the purchase was made at the
beginning of each period are shown below: (amounts in thousands, except per
share data)
March 31, March 31,
1998 1997
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Net sales $136,039 $123,977
Net income $4,588 $4,529
Net income per share $0.22 $0.22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Product sales for the first quarter of 1998 increased by $49.8 million, or
72.7%, over product sales for the first quarter of 1997 due to the acquisition
of 189 Hi-Lo Automotive, Inc. ("Hi/LO") stores on January 31, 1998, a 3.32%
increase in O'Reilly comparable store product sales and a 1.4% decrease for
Hi/LO comparable store product sales, and the opening of 12 new stores during
the first quarter of 1998.
Gross profit increased 73.6% from $29.2 million (or 42.6% of product sales) in
the first quarter of 1997 to $50.7 million (or 42.8% of product sales) in the
first quarter of 1998. The increase in gross profit margin resulted primarily
from improvements in the Company's product acquisition programs and changes in
the product sales mix. The Company's product acquisition programs have resulted
in lower product costs due to increased buying power and promotional programs
and allowances offered by the Company's vendors.
Operating, selling, general and administrative expenses (OSG&A expenses)
increased $18.8 million from $21.3 million (or 31.1% of product sales) in the
first quarter of 1997 to $40.1 million (or 33.9% of product sales) in the first
quarter of 1998. OSG&A expenses increased in dollar amount and as a percent of
product sales primarily from the addition of the Hi/LO operation, which
historically has generated a higher OSG&A ratio than O'Reilly, new store
openings in the first quarter of 1998, additions to administrative staff and
facilities in order to support the increased level of the Company's operations,
changes in the timing of advertising programs and increased depreciation.
Other income, net, decreased by $1.2 million in the first quarter of 1998
compared to the first quarter of 1997. This decrease was primarily due to
increased interest expense from the new credit facilities obtained to fund the
acquisition of Hi/LO, and reduced interest income from short-term investments.
The Company's estimated provision for income taxes increased from 37.2% of
income before income taxes in the first quarter of 1997 to 38.1% in the first
quarter of 1998. The increase in the effective income tax rate was primarily due
to more of the Company's sales occurring in states with higher income tax rates.
Principally as a result of the foregoing, net income increased from $5.0 million
or 7.3% of product sales in the first quarter of 1997 to $5.8 million or 4.9% of
product sales in the first quarter of 1998.
Liquidity and Capital Resources
Net cash of $3.7 million was provided by operating activities for the first
three months of 1998 as compared to $9.5 million for the first three months of
1997. This decrease was principally the result of increases in inventory, other
assets, and accrued expenses as offset by decreases in accounts payable. The
increases in accrued expenses, inventory and other assets are primarily due to
the acquisition of Hi/LO, the addition of new stores and increased sales levels
in existing and newly opened stores.
Net cash used in investing activities has increased from $9.0 million in 1997 to
$64.6 million in 1998 primarily due to the purchase of Hi/LO's net assets and
the ongoing addition of new stores and improvements of existing stores as a
result of the Company's accelerated store growth program.
Cash provided by financing activities has increased from $2.1 million in the
first three months of 1997 to $60.5 million in the first three months of 1998.
The increase was primarily due to the borrowings under the Company's new credit
facilities during the first three months of 1998 utilized to acquire Hi/LO and
assume Hi/LO's debt.
In order to fund the acquisition of Hi/LO, and the Company's continuing working
capital and general corporate needs, the Company replaced its lines of credit in
January 1998 with new, unsecured, syndicated credit facilities totaling $175
million. The facilities are comprised of a $125 million five-year revolving
credit facility which includes a $5 million sublimit for the issuance of letters
of credit and a $50 million five-year term loan facility.
Aside from the 189 stores acquired in the Hi/LO transaction, the Company plans
to open an additional 38 stores in 1998 (for a net total of 50). The funds
required for such planned expansions will be provided by the cash expected to be
generated from operating activities, short-term investments and the existing
bank credit facilities.
Management believes that the cash expected to be generated from operating
activities, existing cash and short-term investments, existing and future bank
credit facilities and trade credit will be sufficient to fund both the short and
long-term capital and liquidity needs of the Company for the foreseeable future.
Year 2000
Management has developed a plan to modify the Company's information technology
to recognize the year 2000 and has begun converting critical data processing
systems. The Company's Year 2000 initiative is being managed by a team of
internal staff and management. Management currently expects the project to be
substantially complete by early 1999 and that the cost of the Year 2000
initiative, principally including internal costs, will not be material to the
Company's results of operations or financial position. Furthermore, this project
is not expected to have a significant effect on operations. The Company will
continue to implement systems with strategic value though some projects may be
delayed due to resource constraints.
Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth, store development and expansion strategy, business strategies,
future revenues and future performance. The forward-looking statements are
subject to risks, uncertainties and assumptions including, but not limited to
competitive pressures, demand for the Company's procedures, the market for auto
parts, the economy in general, inflation, consumer debt levels and the weather.
Actual results may materially differ from anticipated results described in these
forward-looking statements. Certain risks are discussed in Exhibit 99.1 hereto.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
On February 5, 1998, the Board of Directors amended the O'Reilly Automotive,
Inc. 1993 Stock Option Plan (the "1998 Plan Amendment") in order to increase the
number of shares of stock available for issuance thereunder from 2,000,000 to
3,000,000, subject to shareholder approval, which approval was obtained. See
Item 4 below.
On February 5, 1998, the Board of Directors amended the O'Reilly Automotive,
Inc. Directors' Stock Option Plan (the "1998 Directors' Plan Amendment") in
order to increase the number of shares of stock available for issuance
thereunder from 100,000 to 150,000 subject to shareholder approval, which
approval was obtained. See Item 4 below.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Shareholders of the Company was held on May 8,
1998. Of the 21,149,429 shares entitled to vote at such meeting, 18,780,762
shares were present at the meeting in person or by proxy.
(b) The three individuals listed below were elected as Class II Directors of the
Company, and, with respect to each such Director, the number of shares voted for
and against were as follows:
Number of Shares Voted
Name of Nominee For Withheld
Rosalie O'Reilly Wooten. 18,546,179 234,583
Lawrence P. O'Reilly 18,546,439 234,323
Joe C. Greene 18,544,756 236,006
The individuals listed below are Directors of the Company whose term of office
continued after the meeting:
Charles H. O'Reilly, Sr.
Charles H. O'Reilly, Jr.
David E. O'Reilly
Jay Burchfield
(c) 18,470,838 shares were voted in favor of the amendment to the Company's 1993
Stock Option Plan, constituting a majority of the outstanding shares which was
required for approval; 187,208 shares were voted against such amendment; 91,497
shares abstained and there were 31,219 non-voting shares.
(d) 18,530,414 shares were voted in favor of the amendment to the Directors'
Stock Option Plan, constituting a majority of the outstanding shares which was
required for approval; 150,023 shares were voted against such amendment; 100,225
shares abstained and there were 100 non-voting shares.
Item 5. Other information
On April 30, 1998, the Company completed the sale of the seven California Hi/LO
stores.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index on page 14 hereof
(b) Reports on Form 8-K: A Form 8-K was filed by the Registrant on February
2, 1998, to disclose the acquisition of Hi-Lo Automotive, Inc. on January
27, 1998, and is incorporated herein by this reference. This filing was
amended by a Form 8-K/A which was filed by the Registrant on April 13,
1998, and is also incorporated herein by this reference.
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 15, 1998 /s/ David E. O'Reilly
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Date David E. O'Reilly, President and
Chief Executive Officer
May 15, 1998 /s/ James R. Batten
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Date James R. Batten, Chief Financial Officer
(Principal Financial Officer)
May 15, 1998 /s/ Christopher T. Stange
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Date Christopher T. Stange, Corporate Controller
(Principal Accounting Officer)
EXHIBIT INDEX
Number Description
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10.20 Credit Agreement between the Registrant and NationsBank, N.A.,
dated January 27, 1998, filed herewith
10.21 Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed herewith
10.22 Second Amendment to the O'Reilly Automotive, Inc. Directors' Stock
Option Plan, filed herewith
10.23 O'Reilly Automotive, Inc. Deferred Compensation Plan, filed here-
with
10.24 Trust Agreement between the Registrant's Deferred Compensation
Plan and Bankers Trust Company, dated February 2, 1998.
27.1 Financial Data Schedule
99.1 Certain Risk Factors, filed herewith.