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, 1999
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 - 25,339,322 shares outstanding as of June 30,
1999
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended June 30, 1999
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
MARKET RISK 10
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5 - OTHER INFORMATION 10
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURE PAGE 11
EXHIBIT INDEX 12
PART I Financial Information
ITEM 1. Financial Statements
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
----------- -----------
(Unaudited) (Note)
(In thousands, except share data)
Assets
Current assets:
Cash $ 4,114 $ 1,728
Short-term investments 500 500
Accounts receivable, net 32,282 27,580
Amounts receivable from vendors 19,605 26,660
Inventory 285,431 246,012
Other current assets 9,599 8,402
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Total current assets 351,531 310,882
Property and equipment 239,014 210,207
Accumulated depreciation 47,035 39,256
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191,979 170,951
Other assets 13,811 11,455
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Total assets $557,321 $493,288
=========== ==========
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank $ 2,240 $ 5,000
Accounts payable 82,343 66,737
Other current liabilities 33,459 22,091
Current portion of long-term debt 11,571 8,691
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Total current liabilities 129,613 102,519
Long-term debt, less current portion 51,707 170,166
Other liabilities 638 2,209
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares- 90,000,000
Issued and outstanding shares-
25,339,322 shares at June 30, 1999
and 21,349,700 at December 31, 1998 253 213
Additional paid-in capital 219,215 82,658
Retained earnings 155,895 135,523
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Total shareholders' equity 375,363 218,394
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Total liabilities and shareholders' equity $557,321 $493,288
=========== ===========
NOTE: The balance sheet at December 31, 1998 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,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per share data)
Product sales $196,107 $165,242 $362,511 $283,511
Cost of goods sold, including
warehouse and distribution expenses 114,284 99,041 209,731 166,641
Operating, selling, general
and administrative expenses 62,193 52,456 116,909 92,289
-------- -------- -------- --------
176,477 151,497 326,640 258,930
-------- -------- -------- --------
Operating income 19,630 13,745 35,871 24,581
Other expense (557) (1,370) (2,853) (2,815)
-------- -------- -------- --------
Income before income taxes 19,073 12,375 33,018 21,766
Provision for income taxes 7,304 4,703 12,646 8,275
-------- -------- -------- --------
Net income $ 11,769 $ 7,672 $ 20,372 $ 13,491
======== ======== ======== ========
Basic income per share data:
Net income per common share $ 0.47 $ 0.36 $ 0.87 $ 0.64
======== ======== ======== ========
Weighted average common shares outstanding 25,212 21,226 23,297 21,186
======== ======== ======== ========
Income per common share-assuming dilution:
Net income per common share-assuming dilution $ 0.46 $ 0.35 $ 0.86 $ 0.62
======== ======== ======== ========
Adjusted weighted average common shares outstanding 25,542 21,735 23,709 21,654
======== ======== ======== ========
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,
-----------------------------
1999 1998
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(In thousands)
Net cash provided by
(used in) operating activities $ 16,689 $ (3,304)
Investing activities:
Purchases of property and equipment (32,377) (20,740)
Acquisition of Hi-Lo Automotive, Inc.,
net of cash acquired -- (49,296)
Proceeds from sale of property and equipment 6,659 2,401
Payments received on notes receivable 887 --
Advances made on notes receivable (70) --
Other -- 34
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Net cash used in investing activities (24,901) (67,601)
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Financing activities:
Borrowings on note payable to bank 2,240 --
Payments on note payable to bank (5,000) --
Proceeds from issuance of long-term debt 68,058 109,196
Payments on long-term debt (185,984) (40,024)
Net proceeds from secondary offering 124,944 --
Proceeds from issuance of common stock 6,340 864
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Net cash provided by financing activities 10,598 70,036
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Net increase (decrease) in cash 2,386 (869)
Cash at beginning of period 1,728 2,285
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Cash at end of period $ 4,114 $ 1,416
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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
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 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 and six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
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
sub-limit 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 0.50%. The Company is required to meet various financial
covenants as defined in the credit agreement.
3. Secondary Offering
On March 31, 1999, the Company completed a public offering of 3,340,000 shares
of common stock, 3,000,000 of which were issued by the Company resulting in net
proceeds of $106.8 million. A portion of the proceeds was used to repay a
significant amount of the outstanding indebtedness of the Company under its
credit facility. The remaining portion of the proceeds will be used to fund
future expansion. On April 7, 1999, the Company issued 501,000 shares of common
stock related to the Company's portion of the over-allotment option resulting in
net proceeds to the Company of $17.9 million.
4. Segments of an Enterprise and Related Information
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which established new
standards for the way public companies report information about operating
segments in annual and interim financial statements. The Company operates in a
single segment and accordingly, no segment disclosures are warranted for the
periods ended June 30, 1999 and 1998.
5. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established new rules for the reporting and display
of comprehensive income and its components. SFAS No. 130 had no impact on the
Company's financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(Unaudited)
June 30, 1999
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 $49.3 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 excess of net assets acquired over the purchase price,
which totaled approximately $9.7 million, has been applied as a reduction to the
acquired property and equipment.
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,
--------------------------
1999 1998
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Net sales $362,511 $301,281
Net income $20,372 $12,271
Net income per share $0.87 $0.58
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.
Results of Operations
Product sales for the second quarter of 1999 increased by $30.9 million, or
18.7%, over product sales for the second quarter of 1998. Product sales for the
first six months of 1999 increased by $79.0 million, or 27.9% over product sales
for the first six months of 1998. This is due to the opening of 14 net, new
O'Reilly stores during the last quarter of 1998 and opening 24 net, new stores
during the first and second quarters of 1999, in addition to a 9.3% increase in
comparable store product sales (O'Reilly stores increased 4.3% and HiLo stores
increased 16.9%). At June 30, 1999, we operated 515 stores compared to 462
stores at June 30, 1998.
Gross profit increased 23.6% from $66.2 million (or 40.1% of product sales) in
the second quarter of 1998 to $81.8 million (or 41.7% of product sales) in the
second quarter of 1999. Gross profit for the first six months increased 30.7%
from $116.9 million (or 41.2% of product sales) in 1998 to $152.8 million or
(42.1% of product sales) in 1999.
Operating, selling, general and administrative expenses ("OSG&A expenses")
increased $9.7 million from $52.5 million (or 31.7% of product sales) in the
second quarter of 1998 to $62.2 million (or 31.7% of product sales) in the
second quarter of 1999. OSG&A expenses increased $24.6 million from $92.3
million (32.6% of product sales) in the first six months of 1998 to $116.9
million (or 32.2% of product sales) in the first six months of 1999. The dollar
amount increase in OSG&A expenses resulted from the addition of team members and
resources in order to support the increased level of our operations.
Other expense decreased by $800,000 in the second quarter of 1999 compared to
the second quarter of 1998 and increased by $40,000 for the first six months of
1999 compared to the first six months of 1998. The overall decrease in other
expense is due to the repayment of a significant amount of our debt, with
proceeds from the secondary stock offering, thereby reducing interest expense.
Our estimated provision for income taxes increased from 38.0% of income before
income taxes in the second quarter and the first six months of 1998 to 38.3% in
the same period in 1999. The increase in the effective income tax rate was
primarily due to changes in the mix of taxable income among the states in which
we operate.
Principally as a result of the foregoing, net income increased from $7.7 million
or 4.6% of product sales in the second quarter of 1998 to $11.8 million or 6.0%
of product sales in the second quarter of 1999 and from $13.5 million or 4.8% of
products sales in the first six months of 1998 to $20.4 million or 5.6% of
product sales in the first six months of 1999.
Liquidity and Capital Resources
Net cash of $16.7 million was provided by operating activities for the first six
months of 1999 as compared to $3.3 million of cash used by operating activities
for the first six months of 1998. This increase was principally the result of
increases in net income, accounts payable and accruals, offset by increases in
inventory and amounts receivable from vendors. These increases are the result of
the addition of new stores and a distribution center and increased sales levels
in existing and newly opened stores and the results of product line conversions.
Net cash used in investing activities has decreased from $67.6 million in 1998
to $24.9 million in 1999 primarily due to the acquisition of Hi/LO in early
1998, partially offset by the proceeds of the sale of property and equipment.
Cash provided by financing activities has decreased from $70.0 million in the
first six months of 1998 to $10.6 million in the first six months of 1999. The
decrease was primarily due to the scheduled principal payments on debt as well
as the substantial reduction of our outstanding indebtedness with the proceeds
of the secondary stock offering.
Aside from the 24 net, new stores opened in the first six months of 1999, we
plan to open an additional 56 net new stores in 1999. The funds required for
such planned expansions will be provided by operating activities, short-term
investments and the existing and available 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 our short and long-term
capital and liquidity needs for the foreseeable future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT.)
Inflation and Seasonality
We have 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, we do not believe our operations have been
materially affected by inflation.
Our 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 Readiness Disclosure
We have appointed an internal Year 2000 issue project manager and remediation
team and have adopted a four phase approach of assessment, remediation, testing
and contingency planning. The scope of the project includes our review of all
internal software, hardware and operating systems and an assessment of the risk
to our business posed by any lack of vendor preparedness with respect to the
Year 2000 issue. We have completed the initial assessment of all internal
systems, are progressing with the remediation and testing phases, and have begun
contingency planning for information technology systems. We believe that this
approach of assessment (including prioritization by business risk), remediation
(including conversions to new software), testing of necessary changes, and
contingency planning will minimize the business risk of the Year 2000 issue from
internal systems.
We are utilizing internal personnel to correct, replace and test our software
and plan to complete the Year 2000 project no later than September 1, 1999. The
total cost of the Year 2000 project is estimated at $200,000. Of the total
project cost, approximately $25,000 represents the purchase of replacements or
upgrades of software and hardware, which will be capitalized. We will expense
the remaining portion of the project cost as incurred during 1999. As of June
30, 1999, we had spent approximately $125,000 on the Year 2000 project.
We have established ongoing communications with all our significant vendors to
monitor their progress in resolving their issues related to the Year 2000 issue.
Many of such vendors have informed us that they are making substantial progress
in resolving their Year 2000 issue. However, the most likely worst case scenario
for us would entail failure of one or more of our significant vendors to
continue operations (even temporarily) following transition to the year 2000. We
have also contacted suppliers of products significant to our operations
containing embedded chips to monitor their progress in resolving issues related
to the Year 2000 issue. No material issues have been identified to date as a
result of these contacts. We cannot guarantee that our business partners will
adequately address issues related to the Year 2000 issue in a timely manner or
that the failure of our business partners to correct these issues would not have
a material adverse effect on the Company.
We have completed contingency plans to be used in the event of a business
interruption caused by the Year 2000 issue for some, but not all, of our
internal information technology systems. Such plans are being developed for some
of our other systems. Elements of our contingency plans include switching
vendors and utilizing back-up systems that do not rely on computers.
The cost and time estimated for the Year 2000 project are based on our best
current estimates. We cannot guarantee that these estimates will be achieved and
that planned results will be achieved.
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 our 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk through derivative financial instruments and other
financial instruments is not material.
PART II - OTHER INFORMATION
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 4,
1999. Of the 21,376,421 shares entitled to vote at such meeting, 17,230,654
shares were present at the meeting in person or by proxy.
(b) The two individuals listed below were elected as Class III 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
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David E. O'Reilly 17,034,080 196,574
Jay D. Burchfield 17,038,223 192,431
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.
Rosalie O'Reilly Wooten
Lawrence P. O'Reilly
Joe C. Greene
(c) In addition to the election of two individuals as Class III Directors of
the Company; the shareholders of the Company voted on a proposal to amend
the Company's Restated Articles of Incorporation to increase the number of
authorized shares of common stock, par value $.01 per share, from 30
million to 90 million. 16,122,317 shares were voted in favor of the
amendment constituting in excess of the requisite number of shares required
for approval; 1,080,310 shares were voted against such amendment and 28,027
shares abstained.
Item 5. Other Items
On July 27, 1999, Ted Wise and Greg Henslee were named Co-Presidents of the
Company. Mr. Wise, formerly Executive Vice-President of Operations, has over 28
years of service with O'Reilly. Mr. Wise will oversee store operations, sales
and real estate. Mr. Henslee, formerly Senior Vice-President of Operations, has
over 15 years of service with O'Reilly and will be responsible for distribution,
merchandise and information systems.
On July 27, 1999, David O'Reilly, Chief Executive Officer, and Larry
O'Reilly, Chief Operations Officer, were named as Co-Chairmen of the Board.
Charles H. O'Reilly, Jr., previous Chairman of the Board, will now serve as
Vice-Chairman of the Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index on page 12 hereof.
(b) No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1999.
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 16, 1999 /s/ David E. O'Reilly
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Date David E. O'Reilly, President and
Chief Executive Officer
August 16, 1999 /s/ James R. Batten
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Date James R. Batten, Vice-President of Finance
and Chief Financial Officer
EXHIBIT INDEX
Number Description Page
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3.3 Amendment of Articles of Incorporation 13
27.1 Financial Data Schedule 15
99.1 Certain Risk Factors, filed herewith. 16