Page 1 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, 2002 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 - 52,931,556 shares outstanding as of March 31, 2002. Page 1
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES FORM 10-Q Quarter Ended March 31, 2002 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 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 12 EXHIBIT INDEX 13 Page 2
PART I Financial Information ITEM 1. Financial Statements O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2002 2001 (Unaudited) (Note) (In thousands) Assets Current assets: Cash $ 20,391 $ 15,041 Short-term investments 500 500 Accounts receivable, net 46,244 41,486 Amounts receivable from vendors 39,906 38,440 Inventory 462,061 447,793 Refundable income taxes 7 168 Deferred income taxes -- 3,908 Other current assets 4,422 3,327 ------------ ----------- Total current assets 573,531 550,663 Property and equipment, at cost 413,249 392,365 Accumulated depreciation and amortization 111,226 103,361 ------------ ----------- Net property and equipment 302,023 289,004 Notes receivable 2,227 2,557 Other assets 17,002 14,635 ------------ ----------- Total assets $ 894,783 $ 856,859 ============ =========== Liabilities and shareholders' equity Current liabilities: Note payable to bank $ 3,000 $ 5,000 Income taxes payable 4,497 -- Accounts payable 72,351 61,875 Accrued payroll 11,178 12,866 Accrued benefits & withholdings 16,878 14,038 Current deferred income taxes 1,353 -- Other current liabilities 21,101 15,514 Current portion of long-tem debt 8,069 11,843 ------------ ----------- Total current liabilities 138,427 121,136 Long-term debt, less current portion 168,145 165,618 Deferred income taxes 8,578 9,141 Other liabilities 4,609 4,673 Shareholders' equity: Common stock, $0.01 par value: Authorized shares-90,000,000 Issued and outstanding shares- 52,931,556 shares at March 31, 2002, and 52,850,713 at December 31, 2001 529 528 Additional paid-in capital 258,885 256,795 Retained earnings 315,610 298,968 ------------ ----------- Total shareholders' equity 575,024 556,291 ------------ ----------- Total liabilities and shareholders' equity $ 894,783 $ 856,859 NOTE: The balance sheet at December 31, 2001, 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. Page 3
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, ----------------------------- 2002 2001 ----------- ----------- (In thousands, except per share data) Product sales $ 295,489 $ 239,063 Cost of goods sold, including warehouse and distribution expenses 169,461 136,637 ----------- ----------- Gross profit 126,028 102,426 Operating, selling, general and administrative expenses 97,390 80,694 ----------- ----------- Operating income 28,638 21,732 Other expense, net (1,871) (1,842) ----------- ----------- Income before income taxes 26,767 19,890 Provision for income taxes 10,125 7,573 ----------- ----------- Net income $ 16,642 $ 12,317 =========== =========== Net income per common share $ 0.31 $ 0.24 =========== =========== Weighted-average common shares outstanding 52,884 51,591 =========== =========== Net income per common share - assuming dilution $ 0.31 $ 0.24 =========== =========== Adjusted weighted-average common shares outstanding - assuming dilution 53,607 52,047 =========== =========== NOTE: The income statement at March 31, 2001, has been derived from the quarterly results section of the Form 10-K for the year ended December 31, 2001, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Page 4
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, March 31, 2002 2001 ---------- ---------- (In thousands) Net cash provided by operating activities $ 27,961 $ 8,562 Investing activities: Purchases of property and equipment (21,428) (11,923) Proceeds from sale of property and equipment 165 104 Payments received on notes receivable 172 156 Reductions (additions) to other assets 381 (720) ---------- ---------- Net cash used in investing activities (20,710) (12,383) Financing activities: Payments on notes payable to banks (2,000) (25,000) Proceeds from issuance of long-term debt 61,150 82,485 Payments on long-term debt (62,398) (52,865) Proceeds from issuance of common stock 1,347 1,037 Payment on other liabilities -- 499 ---------- ---------- Net cash (used in) provided by financing activities (1,901) 6,156 ---------- ---------- Net increase in cash 5,350 2,335 Cash at beginning of period 15,041 9,204 ---------- ---------- Cash at end of period $ 20,391 $ 11,539 See notes to condensed consolidated financial statements. Page 5
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2002 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 months ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. 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, 2001. 2. Reclassifications Certain reclassifications have been made to the 2001 condensed consolidated financial results in order to conform to the 2002 presentation. These reclassifications were the result of the Company implementing new financial software and were deemed immaterial by management. Page6
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. The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the business activities of our company. To aid in that understanding, management has identified our "critical accounting policies." These policies have the potential to have a significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgments and/or estimates of management in their application due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature. A summary of these critical accounting policies can be found in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2001 Annual Report on Form 10-K. In particular, the accounting for, and analysis with respect to, areas such as costs of goods sold, operating, selling, general and administrative expenses and credit operations are discussed. Results of Operations Product sales for the first quarter of 2002 increased by $56.4 million, or 23.6%, over product sales for the first quarter of 2001. This increase was due to the opening of 24 net, new stores during the first quarter of 2002, in addition to a 3.6% increase in comparable store product sales. At March 31, 2002, we operated 899 stores compared to 702 stores at March 31, 2001. Gross profit increased 23.0% from $102.4 million (or 42.9% of product sales) in the first quarter of 2001 to $126.0 million (or 42.7% of product sales) in the first quarter of 2002. The increase in gross profit dollars was a result of the addition of 24 net, new stores and increased sales levels at existing stores. Operating, selling, general and administrative expenses ("OSG&A expenses") increased $16.7 million from $80.7 million (or 33.8% of product sales) in the first quarter of 2001 to $97.4 million (or 33.0% of product sales) in the first quarter of 2002. The dollar increase in OSG&A expenses resulted from the addition of team members and resources in order to support the increased level of our operations, the continuing conversion of the 82 net, newly acquired stores from Mid-State Automotive Distributors, Inc. ("Mid-State") during the fourth quarter of 2001, increased worker's compensation expense and increased rent expense. Other expense increased by $29,000 in the first quarter of 2002 compared to the first quarter of 2001. The overall increase in other expense is due to increased interest expense. Our estimated provision for income taxes increased to $10.1 million for the first three months of 2002 as a result of our increased taxable income. Our effective tax rate of 37.8% was generally consistent with the effective tax for the quarter ended March 31, 2001, of 38%. Principally, as a result of the foregoing, net income increased from $12.3 million or 5.1% of product sales in the first quarter of 2001 to $16.6 million or 5.6% of product sales in the first quarter of 2002. Liquidity and Capital Resources Net cash provided by operating activities increased from $8.6 million for the first three months in 2001 to $28.0 million for the first three months of 2002. This increase was principally the result of increased net income and an increase in accounts payable, partially offset by increases in accounts receivable and inventory. The change in accounts payable was primarily attributable to the timing of payments. The increase in inventory and accounts receivable is primarily due to our continuing store growth. Net cash used in investing activities has increased from $12.4 million during the first three months in 2001 to $20.7 million for the comparable period in 2002, primarily due to the conversion of the 82 net, new stores acquired from Mid-State resulting in increased purchases of property and equipment. Net cash used in financing activities was $1.9 million in the first three months of 2002 compared to net cash provided by financing activities of $6.2 million in the first three months of 2001. The increase in cash used in the first three months of 2002 compared to cash provided in the first three months of 2001 was 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 2002. Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) We maintain an unsecured, five-year syndicated credit facility, currently comprised of a revolving credit facility of $125 million and a term loan of $15 million. The credit facility is guaranteed by all of our subsidiaries. At March 31, 2002, $64.0 million of the revolving credit facility and $11.3 million of the term loan was outstanding. Accordingly, we have aggregate availability of $61.0 million under the credit facility for additional borrowings. The credit facility, which bears interest at LIBOR plus 0.50% (2.41% at March 31, 2002), expires in January 2003. On December 15, 2000, we entered into a $50 million Synthetic Operating Lease Facility ("the Facility") with a group of financial institutions. Under the Facility, the lessor acquires land to be developed for O'Reilly Auto Parts stores and funds our development thereof as the Construction Agent and Guarantor. We subsequently lease the property from the lessor for an initial term of five years and have the option to request up to two additional successive renewal periods of five years each from the lessor, although the lessor is not obligated to grant us either renewal period. The Facility provides for a residual value guarantee of approximately $36.6 million at December 31, 2001, and purchase options on the properties. It also contains a provision for an event of default whereby the lessor, among other things, may require us to purchase any or all of the properties. We are utilizing the Facility to finance a portion of our store growth. Funding under the Facility at December 31, 2001, and 2000, totaled $43.0 million and $1.0 million, respectively. On December 29, 2000, we completed a sale-leaseback transaction. Under the terms of the transaction, we sold 90 properties, including land, buildings and improvements, for $52.3 million. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial term is approximately $5.5 million annually and is included in the table of future minimum annual rental commitments under non-cancelable operating leases. Proceeds from the transaction were used to reduce outstanding borrowings under our revolving credit facility. On May 16, 2001, we completed a $100 million private placement of two series of unsecured senior notes ("Senior Notes"). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bears interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series. Proceeds from the transaction were used to reduce outstanding borrowings under our revolving credit facility. In August 2001, we completed a sale-leaseback with O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company). The transaction closed on September 1, 2001, with a purchase price of approximately $5.6 million for nine O'Reilly Auto Parts stores and did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with three five-year renewal options. Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. The costs associated with the opening of a new store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000 to $1.1 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, we estimate that the average cost to acquire such a business and convert it to one of our stores is approximately $400,000. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings under our existing credit facilities. For the first three months of 2002, 24 net, new stores were opened. The Company plans to open 76 additional stores during the remainder of 2002. The funds required for such planned expansions are expected to be provided by operating activities and the existing and available bank credit facilities. We believe that our existing cash, short-term investments, cash expected to be provided by operating activities, available bank credit facilities and trade credit will be sufficient to fund both our short-term 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. Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) 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. Forward-Looking Statements Certain statements contained in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" section of this report are forward-looking statements, as such term is defined under the Private Securities Litigation Reform Act of 1995. 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, 2001, for more details and the risk factors set forth as exhibit 99.1 of this report. Page9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK On March 22, 2002, the Company entered into a receive-fixed, pay-float interest rate swap agreement ("Reverse Swap") to effectively convert a portion of its fixed rate long-term debt to a floating rate basis, thereby taking advantage of historically low floating interest rates. Pursuant to this Reverse Swap agreement, the Company agreed to exchange, at specified intervals, the difference between the fixed and the floating interest amounts calculated on the notional amount of the Reverse Swap agreement, which totaled $37.5 million, at March 31, 2002. The Company's floating interest rate under the Reverse Swap agreement was 1.95% and the counterparty's fixed interest rate was 5.07% at March 31, 2002. The Company has determined that the Reverse Swap is a perfectly matched derivative under the guidelines of the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) Our Annual Meeting of the Shareholders was held on May 7, 2002. Of the 52,857,496 shares entitled to vote at such meeting, 47,618,630 shares were present at the meeting in person or by proxy. (b) The three individuals listed below were elected as Class III Directors, and with respect to each such Director, the number of shares voted for and withheld were as follows: Number of Shares Voted Name of Nominee For Withheld ----------------- ----------- ---------- David E. O'Reilly 39,069,089 8,549,541 Jay D. Burchfield 46,035,839 1,582,791 Paul R. Lederer 46,040,026 1,578,604 The individuals listed below are Directors 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 Item 5. Other Information There is no other information to report as of March 31, 2002. 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 March 31, 2002. Page 10
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 14, 2002 /s/ David E. O'Reilly - ----------------------------- -------------------------------------- Date David E. O'Reilly, Co-Chairman of the Board and Chief Executive Officer May 14, 2002 /s/ James R. Batten - ----------------------------- -------------------------------------- Date James R. Batten, Vice-President of Finance and Chief Financial Officer Page 11
EXHIBIT INDEX Number Description Page ------ ----------- ---- 99.1 Certain Risk Factors, filed herewith. 13 Page 12
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. Two of our key personnel, Charles H. O'Reilly, Jr. and Rosalie O'Reilly-Wooten have retired from their operational duties, but both will continue to serve on the Board of Directors. 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. Page 13