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 June 30, 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 - 21,250,028 shares outstanding as of June 30,
1998
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended June 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5 - OTHER INFORMATION 11
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE PAGE 12
EXHIBIT INDEX 13
PART I Financial Information
ITEM 1. Financial Statements
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ ------------
(Unaudited) (Note)
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents $ 1,416 $ 2,285
Short-term investments 1,000 1,000
Accounts receivable 25,554 12,469
Inventory 213,922 111,848
Deferred income taxes 2,020 1,424
Other current assets 12,946 5,114
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Total current assets 256,858 134,140
Property and equipment, at cost 225,413 137,533
Accumulated depreciation
and amortization 74,673 29,093
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150,740 108,440
Other assets 13,947 5,037
---------- ---------
Total assets $421,545 $247,617
========== =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 44,758 $ 29,713
Income taxes payable 2,955 2,501
Other current liabilities 25,769 8,033
Current portion of long-term debt 6,966 130
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Total current liabilities 80,448 40,377
Long-term debt, less current portion 130,754 22,641
Other liabilities 12,671 2,560
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares- 30,000,000
Issued and outstanding shares -
21,250,028 in 1998
and 21,125,493 in 1997 212 211
Additional paid-in capital 79,218 77,077
Retained earnings 118,242 104,751
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Total stockholders' equity 197,672 182,039
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Total liabilities and stockholders' equity $421,545 $247,617
========== =========
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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands, except per share data)
Product sales $165,242 $ 82,448 $283,511 $150,920
Cost of goods sold,
including warehouse and
distribution expenses 99,041 47,733 166,641 87,014
expenses expenses expenses
Operating, selling, general
and administrative expenses 52,456 25,222 92,289 46,485
--------- --------- --------- ---------
151,497 72,955 258,930 133,499
--------- --------- --------- ---------
Operating income 13,745 9,493 24,581 17,421
Other income (expense), net (1,370) 191 (2,815) 237
--------- --------- --------- ---------
Income before income taxes 12,375 9,684 21,766 17,658
Provision for income taxes 4,703 3,602 8,275 6,569
--------- --------- --------- ---------
Net income $ 7,672 $ 6,082 $ 13,491 $ 11,089
========= ========= ========= =========
Net income per share $0.36 $0.29 $0.64 $0.53
========= ========= ========= =========
Net income per share -
assuming dilution $0.35 $0.29 $0.62 $0.52
========= ========= ========= =========
Weighted average
common shares outstanding 21,226 21,022 21,186 20,988
========= ========= ========= =========
Diluted weighted average
common shares outstanding 21,735 21,210 21,654 21,152
========= ========= ========= =========
See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------------
1998 1997
--------- ---------
(In thousands)
Net cash provided by (used in)
operating activities ($ 3,304) $ 7,730
Investing activities:
Purchases of property and equipment (20,740) (16,022)
Acquisition of Hi-Lo Automotive, Inc.,
net of cash acquired (49,296) --
Proceeds from sale of property and equipment 2,401 242
Other 34 (489)
--------- ---------
Net cash used in investing activities (67,601) (16,269)
Financing activities:
Borrowings on notes payable to banks -- 9,200
Payments on notes payable to banks -- (500)
Proceeds from issuance of long-term debt 109,196 --
Payments on long-term debt (40,024) (69)
Proceeds from issuance of common stock 864 709
--------- ---------
Net cash provided by financing activities 70,036 9,340
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Net increase (decrease) in cash (869) 801
Cash at beginning of period 2,285 1,207
--------- ---------
Cash at end of period $ 1,416 $ 2,008
========= =========
See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
O'Reilly Automotive, Inc. (the "Company") 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 and six months ended June 30, 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 Company's 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 June 30, 1998.
5. Restatement
All share and per share information included in the financial statements as of
June 30, 1997 and the three and six months then ended has been restated to
reflect the retroactive effect of the two-for-one stock split effected 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)
Six months ended June 30,
--------------------------------
1998 1997
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Net sales $301,281 $270,185
Net income $12,271 $11,708
Net income per share $0.58 $0.56
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Product sales for the second quarter of 1998 increased by $82.8 million, or
100.4%, over product sales for the second quarter of 1997 due to the additional
sales from the acquired Hi-Lo Automotive, Inc. ("Hi/LO") stores and a 6.0%
increase in comparable store product sales for the quarter (O'Reilly stores
increased 8.6% and Hi/LO stores increased 2.9%). Product sales for the first six
months of 1998 increased by $132.6 million, or 87.9% over product sales for the
first six months of 1997 due the acquisition discussed above, the impact of
opening of 21 new O'Reilly stores during the last two quarters of 1997 and the
opening of 14 new stores, net, during the first and second quarters of 1998, in
addition to a 4.1% increase (O'Reilly stores increased 6.1% and Hi/LO stores
increased 1.2%) in comparable store product sales. At June 30, 1998, O'Reilly
had 462 stores in operation compared to 239 at June 30, 1997.
Gross profit increased 90.7% from $34.7 million (or 42.1% of product sales) in
the second quarter of 1997 to $66.2 million (or 40.1% of product sales) in the
second quarter of 1998. Gross profit for the first six months increased 82.9%
from $63.9 million (or 42.3% of product sales) in 1997 to $116.9 million or
(41.2% of product sales) in 1998. The decrease in gross profit margin was due to
inclusion of five months of Hi/LO operations which currently has a higher cost
of sales, offset partially by continued improvements in the Company's product
acquisition programs and conversions in the product lines in the Hi/LO stores.
Operating, selling, general and administrative expenses (OSG&A expenses)
increased $27.2 million from $25.2 million (or 30.6% of product sales) in the
second quarter of 1997 to $52.5 million (or 31.7% of product sales) in the
second quarter of 1998. OSG&A expenses increased $45.8 million from $46.5
million (or 30.8% of product sales) in the first six months of 1997 to $92.3
million (or 32.6% of product sales) in the first six months of 1998. OSG&A
expenses increased in dollar amount and as a percent of product sales primarily
from the Hi/LO acquisition and the addition of team members and resources in
order to support the increased level of the Company's operations.
Other income (expense), net, decreased by $1.6 million in the second quarter of
1998 compared to the second quarter of 1997 and by $3.1 million for the first
six months of 1998 compared to the first six months of 1997. These decreases
were primarily due to increased interest expense from higher balances on
long-term debt principally resulting from the Hi/LO acquisition and growth and
scope of operations.
The Company's estimated provision for income taxes increased from 37.2% of
income before income taxes in the second quarter and the first six months of
1997 to 38.0% in the same periods in 1998. The increase in the effective income
tax rate was primarily due to changes in the mix of taxable income among the
states in which the Company operates.
Principally as a result of the foregoing, net income increased from $6.1 million
or 7.4% of product sales in the second quarter of 1997 to $7.7 million or 4.6%
of product sales in the second quarter of 1998 and from $11.1 million or 7.3% of
product sales in the first six months of 1997 to $13.5 million or 4.8% of
product sales in the first six months of 1998.
Liquidity and Capital Resources
Net cash of $3.3 million was used in operating activities for the first six
months of 1998 as compared to $7.7 million net cash provided by operating
activities for the first six months of 1997. This decrease was principally the
result of increases in inventory, accounts receivable and other assets, as
offset by increases in accounts payable and accruals. These increases are
primarily due to the acquisition of Hi/LO and the addition of new stores and
increased sales levels in existing and newly opened stores.
Net cash used in investing activities has increased from $16.3 million in 1997
to $67.6 million in 1998 primarily due to the acquisition of Hi/LO and an
increase in purchases of property and equipment as a result of the Company's
accelerated store growth program.
Cash provided by financing activities has increased from $9.3 million in the
first six months of 1997 to $70.0 million in the first six months of 1998. The
increase was primarily due to increased net borrowings under the Company's
credit facilities during the first six months of 1998.
In order to fund the acquisition of Hi/LO, the Company's continuing store growth
program, and the Company's 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.
In addition to the 189 stores acquired in the Hi/LO transaction and the 14 net
stores (21 new stores less the April 1998 disposal of the seven Hi/LO stores
located in California) opened in the first six months of 1998, the Company plans
to open an additional 29 stores in 1998. The funds required for such planned
expansions will be provided by the existing cash and 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 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.
Inflation and Seasonality
The Company has been successful, in many cases, in reducing 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, management does not believe its
operations have been materially affected by inflation.
The Company's business is seasonal to some extent 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.
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 products, 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
In July 1997, Hi-Lo Auto Supply, L.P., ("Hi-Lo Auto Supply"), one of the
subsidiaries acquired by the Company effective January 31, 1998, was served with
a purported class action petition styled "Charles Beresky vs. Hi-Lo Auto Supply,
L.P.," Cause No. B-157-070 in the District Court of Jefferson County, Texas,
60th Judicial District. The petition alleges that Hi-Lo Auto Supply developed a
scheme to promote, offer and sell "old", "used" and "out of warranty" batteries
as if the batteries were new and seeks certification as a class action on behalf
of all persons and entities in the United States that have purchased a battery
from Hi-Lo Auto Supply during the period May 5, 1990 to the present. In the
petition, the plaintiffs purport to state causes of action for deceptive trade
practices violations, breach of contract, negligence, fraud, negligent
misrepresentation and breach of warranty, and the plaintiffs seek actual
damages, treble damages, punitive damages, attorneys' fees and pre- and
post-judgement interest.
This lawsuit is similar to class action litigation brought against a number
of retail auto parts chains and other retailers of aftermarket automotive
batteries. While it is too early to predict the impact of this litigation, the
Company believes the claims are without merit and intends to vigorously defend
this action.
The Company and/or its subsidiaries are also party to various routine claims and
lawsuits arising in the normal course of the Company's business. The Company
does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's results of
operations or financial position.
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.
PART II - OTHER INFORMATION (continued)
Item 5. Other information
On April 30, 1998, the Company completed the sale of the seven Hi/LO stores
located in California.
Unless otherwise required by law, under applicable regulations of the Securities
and Exchange Commission, proxies solicited by the Company in connection with its
1999 annual meeting of shareholders shall confer upon the individuals named
therein discretionary voting authority to vote on matters the Company did not
receive notice of by March 6, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index on page 13 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.
August 14, 1998 /s/ David E. O'Reilly
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Date David E. O'Reilly, President and
Chief Executive Officer
August 14, 1998 /s/ James R. Batten
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Date James R. Batten, Vice-President of
Finance and Chief Financial Officer
August 14, 1998 /s/ Chris Stange
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Date Chris Stange, Corporate Controller and
Principal Accounting Officer
EXHIBIT INDEX
Number Description Page
- ------ ------------------------------------------------------- ----
27.1 Financial Data Schedule 14
99.1 Certain Risk Factors, filed herewith. 15