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, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ____________________ Commission file number 0-21318 O'REILLY AUTOMOTIVE, INC. - - -------------------------------------------------------------------------------- (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 - 21,286,884 shares outstanding as of September 30, 1998
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES FORM 10-Q Quarter Ended September 30, 1998 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 PART II - OTHER INFORMATION 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 <TABLE> <CAPTION> <S> <C> <C> September 30, December 31, 1998 1997 ------------ ----------- (Unaudited) (Note) (In thousands, except share data) Assets Current assets: Cash and cash equivalents $ 1,584 $ 2,285 Short-term investments 1,000 1,000 Accounts receivable 26,459 12,469 Inventory 234,849 111,848 Deferred income 7,255 1,424 Other current assets 5,965 5,114 --------- --------- Total current assets 277,112 134,140 Property and equipment, at cost 241,591 137,533 Accumulated depreciation and amortization 78,354 29,093 --------- --------- 163,237 108,440 Other assets 13,717 5,037 --------- --------- Total assets $454,066 $247,617 ========= ========= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 40,090 $ 29,713 Income taxes payable 3,697 2,501 Other current liabilities 33,359 8,033 Current portion of long-term debt 7,098 130 --------- --------- Total current liabilities 84,244 40,377 Long-term debt, less current portion 160,474 22,641 Other liabilities 2,616 2,560 Stockholders' equity: Common stock, $.01 par value: Authorized shares- 30,000,000 Issued and outstanding shares - 21,286,884 in 1998 and 21,125,493 in 1997 213 211 Additional paid-in capital 79,916 77,077 Retained earnings 126,603 104,751 --------- -------- Total stockholders' equity 206,732 182,039 --------- -------- Total liabilities and stockholders' equity $454,066 $247,617 ========= ======== </TABLE> NOTE: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> <S> <C> <C> <C> <C> Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands, except per share data) Product sales $172,784 $ 87,517 $456,295 $238,437 Cost of goods sold, including warehouse and distribution expenses 103,439 50,986 270,080 138,000 Operating, selling, general and administrative expenses 53,910 26,064 146,199 72,549 -------- -------- -------- -------- 157,349 77,050 416,271 210,549 -------- -------- -------- -------- Operating income 15,435 10,467 40,016 27,888 Other income (expense), net (1,955) 76 (4,770) 313 -------- -------- -------- -------- Income before income taxes 13,480 10,543 35,246 28,201 Provision for income taxes 5,119 3,922 13,394 10,491 -------- -------- -------- -------- Net income $ 8,361 $ 6,621 $ 21,852 $ 17,710 ======== ======== ======== ======== Net income per share $0.39 $0.31 $1.03 $0.84 ======== ======== ======== ======== Net income per share - assuming dilution $0.38 $0.31 $1.00 $0.83 ======== ======== ======== ======== Weighted average common shares outstanding 21,256 21,081 21,209 21,019 ======== ======== ======== ======== Diluted weighted average common shares outstanding 21,883 21,347 21,744 21,221 ======== ======== ======== ======== </TABLE> See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> <S> <C> <C> Nine Months Ended September 30, --------------------------------- 1998 1997 ---------- ---------- (In thousands) Net cash provided by (used in) operating activities ($16,698) $14,225 Investing activities: Purchases of property and equipment (37,335) (25,070) Acquisition of Hi-Lo Automotive, Inc., net of cash acquired (49,296) -- Proceeds from sale of property and equipment 2,627 283 Other (455) (786) ---------- --------- Net cash used in investing activities (84,459) (25,573) Financing activities: Borrowings on notes payable to banks -- 11,200 Payments on notes payable to banks -- (500) Proceeds from issuance of long-term debt 145,241 -- Payments on long-term debt (46,217) (95) Proceeds from issuance of common stock 1,432 1,161 ----------- ---------- Net cash provided by financing activities 100,456 11,766 ----------- ----------- Net increase (decrease) in cash (701) 418 Cash at beginning of period 2,285 1,207 ----------- ----------- Cash at end of period $ 1,584 $ 1,625 =========== =========== </TABLE> See notes to condensed consolidated financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1998 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of O'Reilly Automotive, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the O'Reilly Automotive, Inc. and Subsidiaries' annual report on Form 10-K for the year ended December 31, 1997. 2. Debt In connection with the acquisition of Hi-Lo Automotive, Inc. ("Hi/LO") in January 1998, the Company replaced its lines of credit with new, unsecured credit facilities totaling $175 million. The facilities are comprised of a $125 million five-year revolving credit facility which includes a $5 million sublimit for the issuance of letters of credit and a $50 million five-year term loan facility. These credit facilities are guaranteed by the subsidiaries of the Company and currently bear interest at the London Interbank Offered Rate ("LIBOR") plus 0.875%. The Company is required to meet various financial covenants as defined in the credit agreement. 3. Segments of an Enterprise and Related Information In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), which is effective for years beginning after December 15, 1997. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements retroactively in 1998. Management has not completed its review of Statement 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's financial statements. 4. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, Statement 130 had no impact on the Company's net income or shareholders' equity as of September 30, 1998. 5. Restatement All share and per share information included in the financial statements as of September 30, 1997 and the three and nine months then ended has been restated to reflect the retroactive effect of the two-for-one stock split effected on August 31, 1997.
6. Business Acquisition Effective January 31, 1998, the Company acquired all of the outstanding common shares of Hi-Lo Automotive, Inc. and its subsidiaries for $47.8 million or $4.35 per common share. This acquisition has been accounted for as a purchase by recording the assets and liabilities of Hi/LO at their estimated fair values at the acquisition date. The consolidated results of operations of the Company include the operations of Hi/LO from the acquisition date. Unaudited Pro Forma consolidated results of operations assuming the purchase was made at the beginning of each period are shown below: (amounts in thousands, except per share data) <TABLE> <CAPTION> <S> <C> <C> Nine months ended September 30, ----------------------------------- 1998 1997 -------- -------- Net sales $474,064 $422,996 Net income $25,505 $19,643 Net income per share $1.09 $0.93 </TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Product sales for the third quarter of 1998 increased by $85.3 million, or 97.4%, over product sales for the third quarter of 1997 due to the additional sales from the acquired Hi-Lo Automotive, Inc. ("Hi/LO") stores and a 6.1% increase in comparable store product sales for the quarter (O'Reilly stores increased 9.3% and Hi/LO stores increased 2.2%). Product sales for the first nine months of 1998 increased by $217.9 million, or 91.4% over product sales for the first nine months of 1997 due the acquisition discussed above, the impact of opening of 10 net, new O'Reilly stores during the last quarter of 1997 and the opening of 36 net, new stores during the first three quarters of 1998, in addition to a 4.9% increase in comparable store product sales (O'Reilly stores increased 7.3% and Hi/LO stores increased 1.6%). At September 30, 1998, O'Reilly operated 477 stores compared to 249 stores at September 30, 1997. Gross profit increased 89.8% from $36.5 million (or 41.7% of product sales) in the third quarter of 1997 to $69.3 million (or 40.1% of product sales) in the third quarter of 1998. Gross profit for the first nine months increased 85.4% from $100.4 million (or 42.1% of product sales) in 1997 to $186.2 million or (40.8% of product sales) in 1998. The decrease in gross profit margin was due to inclusion of eight months of Hi/LO operations which currently has a higher cost of sales, offset partially by continued improvements in the Company's product acquisition programs and conversions in the product lines in the Hi/LO stores. Operating, selling, general and administrative expenses ("OSG&A expenses") increased $27.8 million from $26.1 million (or 29.8% of product sales) in the third quarter of 1997 to $53.9 million (or 31.2% of product sales) in the third quarter of 1998. OSG&A expenses increased $73.7 million from $72.5 million (or 30.4% of product sales) in the first nine months of 1997 to $146.2 million (or 32.0% of product sales) in the first nine months of 1998. OSG&A expenses increased in dollar amount and as a percent of product sales primarily from the Hi/LO acquisition and the addition of team members and resources in order to support the increased level of the Company's operations. Other income (expense), net, decreased by $2.0 million in the third quarter of 1998 compared to the third quarter of 1997 and by $5.1 million for the first nine months of 1998 compared to the first nine months of 1997. These decreases were primarily due to increased interest expense from higher balances on long-term debt principally resulting from the Hi/LO acquisition and growth in the scope of the Company's operations. The Company's estimated provision for income taxes increased from 37.2% of income before income taxes in the third quarter and the first nine months of 1997 to 38.0% in the same periods in 1998. The increase in the effective income tax rate was primarily due to changes in the mix of taxable income among the states in which the Company operates. Principally as a result of the foregoing, net income increased from $6.6 million or 7.6% of product sales in the third quarter of 1997 to $8.4 million or 4.8% of product sales in the third quarter of 1998 and from $17.7 million or 7.4% of product sales in the first nine months of 1997 to $21.9 million or 4.8% of product sales in the first nine months of 1998. Liquidity and Capital Resources Net cash of $16.7 million was used in operating activities for the first nine months of 1998 as compared to $7.7 million net cash provided by operating activities for the first nine months of 1997. This decrease was principally the result of increases in inventory, accounts receivable and other assets, as offset by increases in accounts payable and accruals. These increases are primarily due to the acquisition of Hi/LO and the addition of new stores and increased sales levels in existing and newly opened stores. Net cash used in investing activities has increased from $16.3 million in 1997 to $84.5 million in 1998 primarily due to the acquisition of Hi/LO and an increase in purchases of property and equipment as a result of the Company's accelerated store growth program. Cash provided by financing activities has increased from $9.3 million in the first nine months of 1997 to $100.5 million in the first nine months of 1998. The increase was primarily due to increased net borrowings under the Company's credit facilities during the first nine months of 1998. In order to fund the acquisition of Hi/LO, the Company's continuing store growth program, and the Company's working capital and general corporate needs, the Company replaced its lines of credit in January 1998 with new, unsecured, syndicated credit facilities totaling $175 million. The facilities are comprised of a $125 million five-year revolving credit facility which includes a $5 million sublimit for the issuance of letters of credit and a $50 million five-year term loan facility. In addition to the 189 stores acquired in the Hi/LO transaction and the 36 net new stores (43 new stores less the disposal in April 1998 of the seven Hi/LO stores located in California) opened in the first nine months of 1998, the Company plans to open an additional 14 stores in 1998. The funds required for such planned expansions will be provided by the existing cash and 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 both the short and long-term capital and liquidity needs of the Company for the foreseeable future. Inflation and Seasonality The Company has been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. As a result, management does not believe its operations have been materially affected by inflation. The Company's business is seasonal to some extent primarily as a result of the impact of weather conditions on store sales. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in the first and fourth quarters. Year 2000 Readiness The advent of the Year 2000 ("Y2K") poses certain technological challenges from a reliance in computer technologies on two digits rather than four digits to represent the calendar year (e.g. "98" for "1998"). Computer technologies programmed in this manner, if not corrected, could produce inaccurate or unpredictable results or system failures in connection with the transition from 1999 to 2000, when dates will have a lower two-digit number than dates in the prior century. The Company has completed the identification of all necessary internal software changes to ensure that it does not experience any loss of critical business functionality due to the Y2K problem. The Company has appointed an internal Y2K project manager and remediation team and has adopted a four phase approach of assessment, remediation, testing and contingency planning. The scope of the project includes all internal software, hardware, operating systems and assessment of risk to the business from vendors' preparedness with respect to the Y2K problems. The assessment of all internal systems has been completed, the remediation and testing phases are in progress, and contingency planning for certain information technology systems has begun. The Company believes 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 Y2K problem from internal systems. The Company is utilizing internal personnel to correct, replace, and test its software and plans to complete the Y2K project no later than June 30, 1999. The total cost of the Y2K project is estimated at $0.1 million. Of the total project cost, approximately $50,000 represents the purchase of replacements or upgrades of software and hardware, which will be capitalized. The remaining will be expensed as incurred during 1998 and 1999. As of the end of the Company's third quarter, the Company had spent approximately $25,000 on the Y2K project. Ongoing communications have been established with all significant vendors to monitor their progress in resolving their own issues related to the Y2K problem, most of which the Company believes, are making substantial progress. However, the most likely worst case scenario for the Company would entail failure of one or more of the Company's significant vendors to continue operations (even temporarily) following transition to the Year 2000. The Company cannot guarantee that its business partners will adequately address issues related to the Y2K problem in a timely manner or that the failure of its business partners to correct these issues would not have a material adverse effect on the Company. The Company has already begun to develop contingency plans in the event of a business interruption caused by the Y2K problem. Contingency plans are in place for some, but not all, of the Company's internal information technology systems. Elements of the Company's contingency plans will include: switching vendors, back-up systems that do not rely on computers, and the stockpiling of certain products in the months before the Year 2000. The cost and time estimated for the Year 2000 project are based on the Company's best current estimates. There can be no guarantee that these estimates will be achieved and that planned results will be achieved. Risk factors include, but are not limited to, the retention of internal personnel dedicated to the project, the timely delivery of software corrections from external vendors, and the successful completion of key business partners' Y2K projects. Forward-Looking Statements Certain statements contained in this quarterly report on Form 10-Q are forward-looking statements. These statements discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. The forward-looking statements are subject to risks, uncertainties and assumptions including, but not limited to competitive pressures, demand for the Company's products, the market for auto parts, the economy in general, inflation, consumer debt levels and the weather. Actual results may materially differ from anticipated results described in these forward-looking statements. Certain risks are discussed in Exhibit 99.1 hereto.
PART II - OTHER INFORMATION Item 5. Other information In October 1998, the Company announced it had entered into a definitive agreement to purchase the assets of Hinojosa Auto Parts ("Hinojosa") effective April 1, 1999. Under the terms of the agreement, the Company will purchase the inventory, fixtures, certain real estate and other assets for approximately $6 million. Additionally, the Company will not assume any liabilities of Hinojosa. Unless otherwise required by law, under applicable regulations of the Securities and Exchange Commission, proxies solicited by the Company in connection with its 1999 annual meeting of shareholders shall confer upon the individuals named therein discretionary voting authority to vote on matters the Company did not receive notice of by March 6, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Exhibit Index on page 12 hereof
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 16, 1998 /s/ David E. O'Reilly - - --------------------------- --------------------------------------- Date David E. O'Reilly, President and Chief Executive Officer November 16, 1998 /s/ James R. Batten - - --------------------------- --------------------------------------- Date James R. Batten, Vice-President of Finance and Chief Financial Officer November 16, 1998 /s/ Chris Stange - - --------------------------- --------------------------------------- Date Chris Stange, Corporate Controller and Principal Accounting Officer
EXHIBIT INDEX Number Description Page 27.1 Financial Data Schedule 13 99.1 Certain Risk Factors, filed herewith. 14