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 September 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 - 25,366,464 shares outstanding as of September
30, 1999
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 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 7
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 9
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION 9
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURE PAGE 10
EXHIBIT INDEX 11
PART I Financial Information
ITEM 1. Financial Statements
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note)
(In thousands, except share data)
Assets
Current assets:
Cash $ 2,729 $ 1,728
Short-term investments 500 500
Accounts receivable, net 33,187 27,580
Amounts receivable from vendors 21,579 26,660
Inventory 288,823 246,012
Refundable income taxes -- 3,026
Deferred income taxes 788 2,838
Other current assets 2,696 2,538
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Total current assets 350,302 310,882
Property and equipment 260,550 210,207
Accumulated depreciation 51,257 39,256
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209,293 170,951
Other assets 21,751 11,455
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Total assets $ 581,346 $ 493,288
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank $ 5,000 $ 5,000
Accounts payable 79,592 66,737
Income taxes payable 8,865 --
Other current liabilities 34,308 22,091
Current portion of long-term debt 12,808 8,691
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Total current liabilities 140,573 102,519
Long-term debt, less current portion 50,433 170,166
Other liabilities 631 2,209
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares- 90,000,000
Issued and outstanding shares -
25,366,464 shares at
September 30, 1999 and
21,349,700 at December 31, 1998 253 213
Additional paid-in capital 220,149 82,658
Retained earnings 169,307 135,523
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Total shareholders' equity 389,709 218,394
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Total liabilities and shareholders'
equity $ 581,346 $ 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.
Page 3
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In thousands, except per share data)
Product sales $ 208,401 $ 172,784 $ 570,912 $ 456,295
Cost of goods sold, including
warehouse and distribution expenses 120,400 103,439 330,130 270,080
Operating, selling, general and
administrative expenses 65,770 53,910 182,679 146,199
----------- ----------- ----------- -----------
186,170 157,349 512,809 416,279
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Operating income 22,231 15,435 58,103 40,016
Other expense (564) (1,955) (3,417) (4,770)
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Income before income taxes 21,667 13,480 54,686 35,246
Provision for income taxes 8,255 5,119 20,901 13,394
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Net income $ 13,412 $ 8,361 $ 33,785 $ 21,852
=========== =========== =========== ===========
Basic income per share data:
Net income per common share $ 0.53 $ 0.39 $ 1.41 $ 1.03
=========== =========== =========== ===========
Weighted average common shares outstanding 25,346 21,256 23,987 21,209
=========== =========== =========== ===========
Income per common share-assuming dilution:
Net income per common share-assuming dilution $ 0.52 $ 0.38 $ 1.39 $ 1.00
=========== =========== =========== ===========
Adjusted weighted average common shares
outstanding 25,589 21,883 24,343 21,744
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
Page 4
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
----------------------------------
1999 1998
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(In thousands)
Net cash provided by (used in) operating activities $ 33,483 $ (16,698)
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Investing activities:
Purchases of property and equipment (54,138) (37,335)
Acquisition of Hi-Lo Automotive, Inc., net of cash acquired -- (49,296)
Proceeds from sale of property and equipment 6,775 2,627
Payments received on notes receivable 1,061 --
Advances made on notes receivable (70) --
Other -- (455)
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Net cash used in investing activities (46,372) (84,459)
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Financing activities:
Borrowings on note payable to bank 5,000 --
Payments on note payable to bank (5,000) --
Proceeds from issuance of long-term debt 84,013 145,241
Payments on long-term debt (201,976) (46,217)
Net proceeds from secondary offering 124,890 --
Proceeds from issuance of common stock 6,963 1,432
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Net cash provided by financing activities 13,890 100,456
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Net increase (decrease) in cash 1,001 (701)
Cash at beginning of period 1,728 2,285
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Cash at end of period $ 2,729 $ 1,584
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See notes to condensed consolidated financial statements.
Page 5
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 nine months ended September 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
The Company has 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. Business Acquisition
Effective January 31, 1998, the Company acquired all of the outstanding common
shares of Hi-Lo Automotive, Inc. and its subsidiaries ("Hi/LO") 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)
Nine months ended September 30,
-----------------------------------
1999 1998
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Net sales $570,912 $474,064
Net income $33,785 $25,505
Net income per share $1.41 $1.09
Page 6
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 third quarter of 1999 increased by $35.6 million, or
20.6%, over product sales for the third quarter of 1998. Product sales for the
first nine months of 1999 increased by $114.6 million, or 25.1% over product
sales for the first nine months of 1998. This is due to the opening of 14 net,
new O'Reilly stores during the last quarter of 1998 and the opening of 50 net,
new stores during the first three quarters of 1999, in addition to a 11.6%
increase in comparable store product sales (O'Reilly stores increased 6.7% and
HiLo stores increased 19.0%). At September 30, 1999, we operated 541 stores
compared to 477 stores at September 30, 1998.
Gross profit increased 26.9% from $69.3 million (or 40.1% of product sales) in
the third quarter of 1998 to $88.0 million (or 42.2% of product sales) in the
third quarter of 1999. Gross profit for the first nine months increased 29.3%
from $186.2 million (or 40.8% of product sales) in 1998 to $240.8 million or
(42.2% of product sales) in 1999. The increase in gross profit margin was
attributable to continued improvement to our product acquisition programs, some
of which were related to conversions of product lines in the Hi-Lo stores.
Operating, selling, general and administrative expenses ("OSG&A expenses")
increased $11.9 million from $53.9 million (or 31.2% of product sales) in the
third quarter of 1998 to $65.8 million (or 31.6% of product sales) in the third
quarter of 1999. OSG&A expenses increased $36.5 million from $146.2 million
(32.0% of product sales) in the first nine months of 1998 to $182.7 million (or
32.0% of product sales) in the first nine 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 $1.4 million in the third quarter of 1999 compared to
the third quarter of 1998 and decreased by $1.4 million for the first nine
months of 1999 compared to the first nine months of 1998. The overall decrease
in other expense is due to the repayment of a significant amount of our debt in
the first quarter of 1999, thereby reducing interest expense.
Our estimated provision for income taxes increased from 38.0% of income before
income taxes in the third quarter and the first nine months of 1998 to 38.1% and
38.2%, respectively in the same periods 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 $8.4
million or 4.8% of product sales in the third quarter of 1998 to $13.4 million
or 6.4% of product sales in the third quarter of 1999 and from $21.9 million or
4.8% of products sales in the first nine months of 1998 to $33.8 million or 5.9%
of product sales in the first nine months of 1999.
Liquidity and Capital Resources
Net cash of $33.5 million was provided by operating activities for the first
nine months of 1999 as compared to $16.7 million of cash used by operating
activities for the first nine months of 1998. This increase was principally the
result of improved operating results and increases in income taxes payable,
offset by increases in inventory and accounts receivable. These increases are
the result of the addition of new stores 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 $84.5 million in 1998
to $46.4 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 $100.5 million in the
first nine months of 1998 to $13.9 million in the first nine months of 1999. The
decrease was primarily due to the substantial reduction of debt with the funds
generated by the secondary offering in the first quarter of 1999, as well as the
scheduled principal payments on debt. Additionally, cash provided by operations
has funded growth without having to increase our use of the credit facilities.
Aside from the 50 net, new stores opened in the first nine months of 1999, we
plan to open an additional 30 net new stores during the 4th quarter of 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.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
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.
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 utilized internal personnel to correct, replace and test our software for the
Year 2000 project. The total cost of the project was approximately $200,000. Of
the total project cost, approximately $25,000 represented the purchase of
replacements or upgrades of software and hardware, which were capitalized. We
expensed the remaining portion of the project cost as incurred during 1999.
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.
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.
Page 8
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 5. Other information
On November 8, 1999, the Company announced the declaration by its Board
of Directors, at its third quarter meeting held Thursday, November 4,
1999, of a two-for-one stock split in the form of a 100% stock dividend
to all shareholders of record of its common stock as of the close of
business on November 15, 1999. Each shareholder entitled to the
dividend will receive one additional share of the Company's common
stock for every one share of common stock held. The Company anticipates
that the additional shares resulting from the dividend will be made
available to the shareholders on or about November 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index on page 11 hereof.
(b) No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1999.
Page 9
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.
November 15, 1999 /s/ David E. O'Reilly
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Date David E. O'Reilly, Chief Executive Officer
November 15, 1999 /s/ James R. Batten
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Date James R. Batten, Vice-President of Finance
and Chief Financial Officer
Page 10
EXHIBIT INDEX
Number Description Page
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3.3 Restated Articles of Incorporation, as amended 12
27.1 Financial Data Schedule 20
99.1 Certain Risk Factors, filed herewith. 21
Page 11