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, 2001 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 - - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 233 South Patterson Springfield, Missouri 65802 - - -------------------------------------------------------------------------------- (Address of principal executive offices, Zip code) (417) 862-6708 - - -------------------------------------------------------------------------------- (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 - 52,552,813 shares outstanding as of September 30, 2001.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES FORM 10-Q Quarter Ended September 30, 2001 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, 2001 2000 (Unaudited) (Note) (In thousands) Assets Current assets: Cash $ 33,279 $ 9,204 Short-term investments 500 500 Accounts receivable, net 39,109 32,673 Amounts receivable from vendors 34,766 29,175 Inventory 395,694 372,069 Refundable income taxes 10 92 Deferred income taxes 204 1,402 Other current assets 1,301 4,089 Total current assets 504,863 449,204 Property and equipment, at cost 365,038 323,021 Accumulated depreciation and amortization 96,357 76,167 Net property and equipment 268,681 246,854 Notes receivable 2,311 2,836 Other assets 14,135 17,101 Total assets $ 789,990 $ 715,995 Liabilities and shareholders' equity Current liabilities: Note payable to bank $ -- $ 35,000 Income taxes payable 15,529 1,011 Accounts payable 67,566 68,947 Accrued payroll 10,106 9,309 Accrued benefits & withholdings 13,843 9,360 Other current liabilities 17,540 15,184 Current deferred income taxes 619 -- Current portion of long-term debt 15,241 14,121 Total current liabilities 140,444 152,932 Long-term debt, less current portion 104,309 90,463 Deferred income taxes 6,936 4,086 Other liabilities 4,636 4,783 Shareholders' equity: Common stock, $0.01 par value: Authorized shares-90,000,000 Issued and outstanding shares- 52,552,813 shares at September 30, 2001, and 51,544,879 at December 31, 2000 526 515 Additional paid-in capital 250,079 230,600 Retained earnings 283,060 232,616 Total shareholders' equity 533,665 463,731 Total liabilities and shareholders' equity $ 789,990 $ 715,995 NOTE: The balance sheet at December 31, 2000, 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.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 (In thousands, except per share data) Product sales $ 293,996 $ 251,413 $ 813,735 $ 673,530 Cost of goods sold, including warehouse and distribution expenses 168,520 145,550 467,795 385,700 Gross profit 125,476 105,863 345,940 287,830 Operating, selling, general and administrative expenses 91,219 77,058 258,851 214,822 Operating income 34,257 28,805 87,089 73,008 Other expense, net (1,867) (2,076) (5,895) (4,530) Income before income taxes 32,390 26,729 81,194 68,478 Provision for income taxes 12,250 10,157 30,750 25,986 Net income $ 20,140 $ 16,572 $ 50,444 $ 42,492 Net income per common share $ 0.38 $ 0.32 $ 0.97 $ 0.83 Net income per common share - assuming dilution $ 0.38 $ 0.32 $ 0.96 $ 0.82 Weighted average common shares outstanding 52,404 51,301 51,942 51,085 Adjusted weighted average common shares outstanding - - - assuming dilution 53,205 51,856 52,563 51,551 See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, September 30, 2001 2000 (In thousands) Net cash provided by operating activities $ 72,264 $ 18,687 Investing activities: Purchases of property and equipment (46,465) (64,529) Proceeds from sale of property and equipment 6,755 1,066 Payments received on notes receivable 479 442 Investment in other assets (977) (1,677) Net cash used in investing activities (40,208) (64,698) Financing activities: Borrowings on notes payable to banks -- 7,130 Payments on notes payable to banks (35,000) (7,130) Proceeds from issuance of long-term debt 191,542 377,488 Payments on long-term debt (177,020) (331,747) Proceeds from issuance of common stock 12,483 3,129 Borrowings (payments) of other liabilities 14 (381) Net cash (used in) provided by financing activities (7,981) 48,489 Net increase in cash 24,075 2,478 Cash at beginning of period 9,204 9,791 Cash at end of period $ 33,279 $ 12,269 See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 2001 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, 2001, are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 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, 2000. 2. Acquisition On August 9, 2001, the Company announced the signing of a definitive agreement to acquire all of the outstanding stock of Mid-State Automotive Distributors, Inc ("Mid-State"). The transaction closed October 1, 2001. Under the terms of the agreement, the Company purchased all of the outstanding stock of Mid-State for $19.5 million in cash and assumed approximately $26.7 million in debt. Mid-State operates 85 stores and 4 distribution centers in Indiana, Kentucky, Tennessee, Mississippi, Alabama, Florida and Georgia. The results of operations of Mid-State will be included in the results of operations of the Company commencing on October 1, 2001. The acquisition expands the presence of O'Reilly to 16 states, adds distribution capacity and increases O'Reilly's store count by 85 new stores. 3. New Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other identifiable intangible assets will continue to be amortized over their useful lives or if they have indefinite lives, such identifiable intangible assets will not be amortized but will be subject to annual impairment tests. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the provisions of the Statements are not expected to have a material impact on the Company's financial condition or results of operations.
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 2001 increased by $42.6 million, or 16.9%, over product sales for the third quarter of 2000. Product sales for the first nine months of 2001 increased by $140.2 million, or 20.8% over product sales for the first nine months of 2000. These increases were primarily due to the opening of 32 net, new stores during the third quarter of 2001 and 92 net, new stores during the first nine months of 2001, in addition to a 6.7% and 9.3% increase in comparable store product sales for the third quarter and first nine months of 2001, respectively. At September 30, 2001, the Company operated 764 stores compared to 650 stores at September 30, 2000. Gross profit increased 18.5% from $105.9 million (or 42.1% of product sales) in the third quarter of 2000 to $125.5 million (or 42.7% of product sales) in the third quarter of 2001. Gross profit for the first nine months increased 20.2% from $287.8 million (or 42.7% of product sales) in 2000 to $345.9 million (or 42.5% of product sales) in 2001. The increase in gross profit dollars was primarily a result of the increase in the number of stores open during the third quarter and first nine months of 2001 compared to the same period of 2000, and increased sales levels at existing stores. Operating, selling, general and administrative expenses ("OSG&A expenses") increased $14.2 million from $77.1 million (or 30.6% of product sales) in the third quarter of 2000 to $91.2 million (or 31.0% of product sales) in the third quarter of 2001. OSG&A expenses increased $44.0 million from $214.8 million (or 31.9% of product sales) in the first nine months of 2000 to $258.9 million (or 31.8% of product sales) in the first nine months of 2001. The increase in OSG&A expenses resulted primarily from the addition of team members and resources in order to support the increased level of the Company's operations, higher fuel and utility costs, and increased rent expense due to the sale-leaseback transaction completed in December 2000. Other expense decreased by $209,000 in the third quarter of 2001 compared to the third quarter of 2000 and increased by $1.4 million for the first nine months of 2001 compared to the first nine months of 2000. The decrease in other expense in the third quarter of 2001 compared to the third quarter of 2000 is primarily due to an increase in interest income as a result of increased levels of cash. The overall increase in other expense in the first nine months of 2001 compared to the first nine months of 2000 is primarily due to increased interest expense resulting from a higher blended rate of interest paid on outstanding indebtedness. The Company's estimated provision for income taxes increased to $12.3 million for the third quarter of 2001 from $10.2 million for the third quarter of 2000 as a result of the Company's increased taxable income. The Company's effective tax rate was 37.8% and 38.0% of income before income taxes in the third quarter of 2001 and the first nine months of 2001, respectively. Principally, as a result of the foregoing, net income increased from $16.6 million or 6.6% of product sales in the third quarter of 2000 to $20.1 million or 6.9% of product sales in the third quarter of 2001. Net income increased from $42.5 million or 6.3% of product sales in the first nine months of 2000 to $50.4 million or 6.2% of product sales in the first nine months of 2001. Liquidity and Capital Resources Net cash provided by operating activities increased from $18.7 million for the first nine months in 2000 to $72.3 million for the first nine months of 2001. This increase was principally the result of increases in net income and income taxes payable, partially offset by increases in inventory, accounts receivable, amounts receivable from vendors and a decrease in accounts payable. The increase in income taxes payable is primarily due to the timing of third quarter estimated tax payments extended by changes in the tax law. The increase in inventory and accounts receivable are primarily due to the addition of new stores and increased sales levels in existing stores. The increase in amounts receivable from vendors and the decrease in accounts payable are primarily due to the timing of receipts and payments, respectfully. Net cash used in investing activities decreased from $64.7 million in the first nine months of 2000 to $40.2 million in the first nine months of 2001, primarily due to most of the Company's new stores in 2001 being funded through the synthetic lease facility as compared to 2000 in which new stores were funded by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) Liquidity and Capital Resources (Continued) Net cash used in financing activities was $8.0 million in the first nine months of 2001. Net cash provided by financing activities was $48.5 million in the first nine months of 2000. The decrease in cash provided by financing activities during the first nine months of 2001 compared to the first nine months of 2000 is primarily due to an overall reduction in the Company's indebtedness and as a result of the Company leasing a larger percentage of its new stores in 2001. For the first nine months of 2001, 92 net, new stores were opened. The Company plans to open an additional 28 stores during the remainder of 2001, plus the 85 stores acquired from Mid-State Automotive Distributors, Inc., effective October 1, 2001, for $19.5 million in cash and $26.7 million in assumed liabilities. The funds required for such planned expansions are expected to be provided by cash expected to be generated by operating activities, existing cash balances and the existing, available bank credit facilities. Management believes that the cash expected to be generated from operating activities, existing cash, existing bank credit facilities and trade credit will be sufficient to fund the Company's short and long-term capital and liquidity needs 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, the Company does not believe the 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. Forward-Looking Statements Certain statements contained in this press release are forward-looking statements. These statements discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking 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, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described in these forward-looking statements. Please refer to the Risk Factors sections of the Company's Form 10-K for the year ended December 31, 2000, for more details.
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 August 9, 2001, the Company announced the signing of a definitive agreement to acquire all of the outstanding stock of Mid-State Automotive Distributors, Inc ("Mid-State"). The transaction closed October 1, 2001. Under the terms of the agreement, the Company purchased all of the outstanding stock of Mid-State for $19.5 million in cash and assumed approximately $26.7 million in debt. Mid-State operates 85 stores and 4 distribution centers in Indiana, Kentucky, Tennessee, Mississippi, Alabama, Florida and Georgia. The results of operations of Mid-State will be included in the results of operations of the Company commencing on October 1, 2001. The acquisition expands the presence of O'Reilly to 16 states, adds distribution capacity and increases O'Reilly's store count by 85 new stores. 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 us during the quarter ended September 30, 2001.
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 13, 2001 /s/ David E. O'Reilly - - ----------------- --------------------------------------------------- Date David E. O'Reilly, Co-Chairman of the Board and Chief Executive Officer November 13, 2001 /s/ James R. Batten - - ----------------- --------------------------------------------------- Date James R. Batten, Vice-President of Finance and Chief Financial Officer
EXHIBIT INDEX Number Description Page 99.1 Certain Risk Factors, filed herewith. 14
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES Exhibit 99.1 - Certain Risk Factors The following factors could affect our actual results, including revenues, expenses and net income, and could cause them to differ from any forward-looking statements made by or on behalf of us. Competition We compete with a large number of retail and wholesale automotive aftermarket product suppliers. The distribution of automotive aftermarket products is a highly competitive industry, particularly in the more densely populated market areas served by us. 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 and have greater financial resources than us. 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. Our ability to accomplish this growth 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. No assurance can be given that our current growth rate can be maintained. Dependence Upon Key and Other Personnel The success of our Company has been largely dependent on the efforts of certain key personnel, including David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr., Rosalie O'Reilly Wooten, Ted F. Wise and Greg Henslee. The loss of the services of one or more of these individuals could have a material adverse effect on the business and results of operations. Additionally, in order to successfully implement and manage our growth strategy, we will be dependent upon our ability to continue to attract and retain qualified personnel. There can be no assurance that we will be able to continue to attract such personnel. 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.