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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, 2003
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
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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 [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
Common stock, $0.01 par value - 54,279,497 shares outstanding as of September
30, 2003. As of that date, the aggregate market value of the voting stock held
by non-affiliates of the Company was approximately $1,997,485,489 based on the
last sale price of the common stock reported by the Nasdaq Stock Market
(National Market).
This report contains a total of 20 pages of which this page is number 1.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2003
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 8
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
ITEM 4 - CONTROLS AND PROCEDURES 12
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION 12
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE PAGE 13
EXHIBIT INDEX 14
Page 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2003 2002
------------ ------------
(Unaudited) (Note)
Assets
Current assets:
Cash $ 33,045 $ 29,333
Accounts receivable, net 55,870 45,421
Amounts receivable from vendors, net 51,715 42,918
Inventory 538,463 504,098
Deferred income taxes 5,514 5,040
Other current assets 4,719 4,235
------------ ------------
Total current assets 689,326 631,045
Property and equipment, at cost 589,309 491,523
Accumulated depreciation and amortization 167,071 137,922
------------ ------------
Net property and equipment 422,238 353,601
Notes receivable 1,793 1,880
Other assets, net 27,260 22,893
------------ ------------
Total assets $ 1,140,617 $ 1,009,419
============ ============
Liabilities and shareholders' equity
Current liabilities:
Income taxes payable $ 23,950 $ 9,798
Accounts payable 154,767 85,370
Accrued payroll 15,327 15,257
Accrued benefits and withholdings 28,881 19,165
Other current liabilities 25,701 17,150
Current portion of long-tem debt 407 682
------------ ------------
Total current liabilities 249,033 147,422
Long-term debt, less current portion 110,216 190,470
Deferred income taxes 25,237 15,939
Other liabilities 7,133 5,064
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares-90,000,000
Issued and outstanding shares-
54,279,497 shares at September 30, 2003,
and 53,371,242 at December 31, 2002 543 534
Additional paid-in capital 291,310 269,030
Retained earnings 457,145 380,960
------------ ------------
Total shareholders' equity 748,998 650,524
------------ ------------
Total liabilities and shareholders' equity $ 1,140,617 $ 1,009,419
============ ============
NOTE: The balance sheet at December 31, 2002, has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States.
Page 3
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(In thousands, except per share data)
Product sales $ 412,182 $ 359,579 $ 1,144,769 $ 998,249
Cost of goods sold, including warehouse and distribution expenses 236,529 207,383 662,457 575,839
----------- ----------- ----------- -----------
Gross profit 175,653 152,196 482,312 422,410
Operating, selling, general and administrative expenses 127,291 111,473 355,883 315,280
----------- ----------- ----------- -----------
Operating income 48,362 40,723 126,429 107,130
Other expense, net (1,179) (1,972) (4,594) (5,370)
----------- ----------- ----------- -----------
Income before income taxes 47,183 38,751 121,835 101,760
Provision for income taxes 17,650 14,655 45,650 38,475
----------- ----------- ----------- -----------
Net income $ 29,533 $ 24,096 $ 76,185 $ 63,285
=========== =========== =========== ===========
Net income per common share $ 0.55 $ 0.45 $ 1.42 $ 1.19
=========== =========== =========== ===========
Weighted-average common shares outstanding 54,090 53,187 53,711 53,044
=========== =========== =========== ===========
Net income per common share - assuming dilution $ 0.54 $ 0.45 $ 1.40 $ 1.18
=========== =========== =========== ===========
Adjusted weighted-average common shares outstanding
- assuming dilution 54,864 53,715 54,282 53,675
=========== =========== =========== ===========
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,
-----------------------
2003 2002
---------- ----------
(In thousands)
Net cash provided by operating activities $ 172,119 $ 105,124
Investing activities:
Purchases of property and equipment (100,047) (72,610)
Proceeds from sale of property and equipment 1,099 1,446
Payments received on notes receivable 313 585
Investments in other assets (5,238) (1,844)
---------- ----------
Net cash used in investing activities (103,873) (72,423)
Financing activities:
Payments on notes payable to banks -- (5,000)
Proceeds from issuance of long-term debt -- 149,640
Payments on long-term debt (80,530) (166,546)
Proceeds from issuance of common stock 15,996 6,045
---------- ----------
Net cash used in financing activities (64,534) (15,861)
---------- ----------
Net increase in cash 3,712 16,840
Cash at beginning of period 29,333 15,041
---------- ----------
Cash at end of period $ 33,045 $ 31,881
========== ==========
See notes to condensed consolidated financial statements.
Page 5
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
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 accounting principles generally accepted in the United States
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 accounting principles generally accepted in the United
States 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 nine months
ended September 30, 2003, are not necessarily indicative of the results that may
be expected for the year ended December 31, 2003. 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, 2002.
2. Stock-based Compensation
The Company has elected to use the intrinsic value method of accounting for
stock options issued under our stock option plans and accordingly does not
record an expense for such stock options. For purposes of pro forma disclosures
under the fair value method, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information, is as follows:
Three months Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
--------------------- --------------------
(In thousands, except per share data)
Net income, as reported...................... $ 29,533 $ 24,096 $ 76,185 $ 63,285
===================== =====================
Net income per common share, as reported..... $ 0.55 $ 0.45 $ 1.42 $ 1.19
===================== =====================
Net income per common share - assuming
dilution, as reported...................... $ 0.54 $ 0.45 $ 1.40 $ 1.18
===================== =====================
Stock-based compensation expense,
as reported................................ $ - $ - $ - $ -
===================== =====================
Stock-based compensation expense
under fair value method.................... $ 2,322 $ 1,740 $ 6,563 $ 4,922
===================== =====================
Pro forma net income......................... $ 27,211 $ 22,356 $ 69,622 $ 58,363
===================== =====================
Pro forma basic net income per share......... $ 0.50 $ 0.42 $ 1.30 $ 1.10
===================== =====================
Pro forma net income per share-
assuming dilution.......................... $ 0.50 $ 0.42 $ 1.28 $ 1.09
===================== =====================
3. Synthetic Lease Facility
On June 26, 2003, we completed an amended and restated master agreement to our
$50 million Synthetic Operating Lease Facility ("the Facility") with a group of
financial institutions. The terms of the amended and restated Facility provide
for an initial lease period of five years, a residual value guarantee of
approximately $44.2 million at September 30, 2003 and purchase options on the
properties. The Facility 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. One additional renewal period of five years may be requested
from the lessor, although the lessor is not obligated to grant such renewal. The
amended and restated Facility has been accounted for as an operating lease under
the Financial Accounting Standards Board Statement 13 and related
Interpretations.
Page 6
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
4. Income Per Common Share
The following table sets forth the computation of basic and diluted income per
common share:
Three months Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
--------------------- --------------------
(In thousands, except per share data)
Numerator (basic & diluted):
Net Income ............................... $ 29,533 $ 24,096 $ 76,185 $ 63,285
===================== =====================
Denominator:
Denominator for basic income per common
share-weighted-average shares .......... 54,090 53,187 53,711 53,044
Effect of stock options .................. 774 528 571 631
--------------------- ---------------------
Denominator for diluted income per common
share-adjusted weighted-average shares
and assumed conversion .................. 54,864 53,715 54,282 53,675
===================== =====================
Basic net income per common share ........... $ 0.55 $ 0.45 $ 1.42 $ 1.19
===================== =====================
Net income per common share - assuming
dilution, ................................. $ 0.54 $ 0.45 $ 1.40 $ 1.18
===================== =====================
Page 7
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.
Critical Accounting Policies and Estimates
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 more
significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
o Cost of goods sold - Cost of goods sold includes estimates of shortages
that are adjusted upon physical inventory counts in subsequent periods and
estimates of amounts due from vendors for certain merchandise allowances,
warranties and rebates. These estimates are consistent with historical
experience.
o Operating, selling, general and administrative expense ("OSG&A") -
Operating, selling, general and administrative expense includes estimates
for worker's compensation and other general liability obligations, some of
which are partially self-insured. Such estimates are partially based on
estimates of certain claim costs and historical experience.
o Credit operations - Allowance for doubtful accounts is estimated based on
historical loss ratios and consistently has been within management's
expectations.
o Revenue - We recognize sales upon shipment of the products.
o Stock-based compensation - We have elected to use the intrinsic value
method of accounting for stock options issued under our stock option plans
and accordingly do not record an expense for such stock options. For
purposes of pro forma disclosures under the fair value method, the
estimated fair value of the options is amortized to expense over the
options' vesting period. Our pro forma information, is as follows:
Three months Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
--------------------- --------------------
(In thousands, except per share data)
Net income, as reported...................... $ 29,533 $ 24,096 $ 76,185 $ 63,285
===================== =====================
Net income per common share, as reported..... $ 0.55 $ 0.45 $ 1.42 $ 1.19
===================== =====================
Net income per common share - assuming
dilution, as reported...................... $ 0.54 $ 0.45 $ 1.40 $ 1.18
===================== =====================
Stock-based compensation expense,
as reported................................ $ - $ - $ - $ -
===================== =====================
Stock-based compensation expense
under fair value method.................... $ 2,322 $ 1,740 $ 6,563 $ 4,922
===================== =====================
Pro forma net income......................... $ 27,211 $ 22,356 $ 69,622 $ 58,363
===================== =====================
Pro forma basic net income per share......... $ 0.50 $ 0.42 $ 1.30 $ 1.10
===================== =====================
Pro forma net income per share-
assuming dilution.......................... $ 0.50 $ 0.42 $ 1.28 $ 1.09
===================== =====================
Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Results of Operations
Product sales for the third quarter of 2003 were $412.2 million, an increase of
$52.6 million or 14.6% over product sales for the third quarter of 2002. Product
sales for the first nine months of 2003 were $1.14 billion, an increase of
$146.5 million or 14.7% over product sales for the first nine months of 2002.
These increases are primarily due to the opening of 33 net, new stores during
the third quarter of 2003 and 93 net, new stores during the first nine months of
2003, in addition to a 8.3% and 7.2% increase in comparable store product sales
for the third quarter and first nine months of 2003, respectively. At September
30, 2003, we operated 1,074 stores compared to 958 stores at September 30, 2002.
Gross profit increased 15.4% from $152.2 million (or 42.3% of product sales) in
the third quarter of 2002 to $175.7 million (or 42.6% of product sales) in the
third quarter of 2003. Gross profit for the first nine months increased 14.2%
from $422.4 million (or 42.3% of product sales) in 2002 to $482.3 million (or
42.1% of product sales) in 2003. The increase in gross profit dollars is
primarily a result of the increase in the number of stores open during the third
quarter and first nine months of 2003 compared to the same period of 2002, and
increased sales levels at existing stores. The increase in gross profit as a
percentage of product sales in the third quarter 2003 compared to 2002, is
primarily due to a reduction in the cost of merchandise from our vendors. The
decrease in gross profit as a percentage of product sales for the first nine
months of 2003 compared to 2002, is primarily due to increased warehouse and
delivery expenses resulting from the Company's remodeling of it's Nashville and
Knoxville, TN distribution centers, which occured in the first and second
quarters of 2003.
Operating, selling, general and administrative expenses ("OSG&A expenses")
increased $15.8 million from $111.5 million (or 31.0% of product sales) in the
third quarter of 2002 to $127.3 million (or 30.9% of product sales) in the third
quarter of 2003. OSG&A expenses increased $40.6 million from $315.3 million (or
31.6% of product sales) in the first nine months of 2002 to $355.9 million (or
31.1% of product sales) in the first nine months of 2003. 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 decrease in OSG&A as a
percentage of product sales is primarily due to economies of scale achieved and
the result of management's efforts to increase labor productivity.
Other expenses decreased by $793,000 in the third quarter of 2003 compared to
the third quarter of 2002 and decreased by $776,000 for the first nine months of
2003 compared to the first nine months of 2002. The decreases in both periods
being compared were primarily due to decreases in interest expense.
Our estimated provision for income taxes increased $3.0 million and $7.2 million
for the third quarter and first nine months of 2003 compared to 2002,
respectively, as a result of our increased taxable income. Our effective tax
rate was 37.4% and 37.5% of income before income taxes for the third quarter and
first nine months of 2003 respectively, compared with 37.9% and 37.8% for the
same periods of 2002, respectively.
Principally, as a result of the foregoing, net income increased from $24.1
million or 6.7% of product sales in the third quarter of 2002 to $29.5 million
or 7.2% of product sales in the third quarter of 2003. Net income increased from
$63.3 million or 6.3% of product sales in the first nine months of 2002 to $76.2
million or 6.7% of product sales in the first nine months of 2003.
Liquidity and Capital Resources
Net cash provided by operating activities increased from $105.1 million for the
first nine months in 2002 to $172.1 million for the first nine months of 2003.
This increase was principally the result of increased net income and increases
in accounts payable and income taxes payable, partially offset by increases in
inventory, accounts receivable and amounts receivable from vendors. The increase
in accounts payable is primarily attributable to the timing of payments and more
favorable payment terms from vendors. The increase in income taxes payable is
primarily due to the timing of payments. The increases in inventory and
receivables are primarily due to our increased product sales resulting from our
continuing store growth.
Net cash used in investing activities increased from $72.4 million during the
first nine months in 2002 to $103.9 million for the comparable period in 2003,
primarily due to the increased purchases of property and equipment resulting
from new store growth.
Net cash used in financing activities was $64.5 million in the first nine months
of 2003, compared to $15.9 million in the first nine months of 2002. The
increase in net cash used in financing activities is primarily due to a
reduction in long-term debt.
Page 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
We have available an unsecured, three-year syndicated revolving credit facility
in the amount of $150 million. The credit facility is guaranteed by all of our
subsidiaries and may be increased to a total of $200 million at any time prior
to January 29, 2004, subject to availability of such additional credit from
either existing banks within the syndicate or other banks. At September 30,
2003, $10.0 million of the revolving credit facility was outstanding.
Additionally, letters of credit totaling $9.8 million were outstanding at
September 30, 2003. Accordingly, we have aggregate availability for additional
borrowings of $130.2 million under the credit facility. The credit facility,
which bears interest at LIBOR plus a spread ranging from 0.875% to 1.375% (2.00%
at September 30, 2003), expires in July 2005.
On June 26, 2003, we completed an amended and restated master agreement to our
$50 million Synthetic Operating Lease Facility ("the Facility") with a group of
financial institutions. The terms of the amended and restated Facility provide
for an initial lease period of five years, a residual value guarantee of
approximately $44.2 million at September 30, 2003, and purchase options on the
properties. The Facility 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. One additional renewal period of five years may be requested
from the lessor, although the lessor is not obligated to grant such renewal. The
amended and restated Facility has been accounted for as an operating lease under
the Financial Accounting Standards Board Interpretation 46, "Consolidation of
Variable Interest Entities."
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.
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 bear 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.
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,
exclusive of the cost of inventory. 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 nine months of 2003, 93 net, new stores were opened. The Company
plans to open 34 additional stores during the remainder of 2003. 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.
New Accounting Standards
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor. Under the new guidance, cash consideration
received from a vendor should be classified as a reduction of cost of sales. If
the consideration received represents a payment for assets delivered to the
vendor, it should be classified as revenue. If the consideration is a
reimbursement of a specific, incremental, identifiable cost incurred in selling
the vendor's product, the cost should be characterized as a reduction of that
cost incurred. The guidance is effective for fiscal periods beginning after
December 15, 2002. The adoption of this guidance did not have a significant
impact on our consolidated financial position or results of operations.
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.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
Internet Address and Access to SEC Filings
Our Internet address is www.oreillyauto.com. Interested readers can access the
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, through the www.sec.gov. Such reports are generally available on the
day they are filed. Additionally, the Company will furnish interested readers
upon request and free of charge, a paper copy of such reports.
Forward-Looking Statements
We claim the protection of the safe-harbor for forward-looking statements
contained in 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 based on estimates, projections, beliefs
and assumptions and are not guarantees of future events and results. Such
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 and
regulations, our ability to hire and retain qualified employees, risks
associated with the integration of acquired businesses, 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 section in Exhibit 99.1 and the Company's Form 10-K for the
year ended December 31, 2002, for more details.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk to the extent we borrow against our credit
facility because of its variable interest rate. Assuming the current level of
borrowings at variable rates and assuming a two-percentage point change in the
average interest rates under these borrowings, it is estimated that our interest
expense for the quarter ended September 30, 2003, would have increased by
approximately $50,000. In the event of an adverse change in interest rates,
management would likely take actions that would mitigate our exposure to
interest rate risk particularly if our borrowing levels increase to any
significant extent; however, due to the uncertainty of the actions that would be
taken and their possible effects, this analysis assumes no such action. Further,
this analysis does not consider the effects of the change in the level of
overall economic activity that could exist in such an environment.
ITEM 4. CONTROLS AND PROCEDURES
(a) As of September 30, 2003, an evaluation was carried out by management,
under the supervision and with the participation of our chief executive
officer and chief financial officer, of the effectiveness of Company's
disclosure controls and procedures. Based on such evaluation, our chief
executive officer and our chief financial officer concluded that the
disclosure controls and procedures are effective to ensure that the
information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, (1)
is recorded, processed, summarized and reported within the time period
specified in the SEC's rules and forms and that the information required to
be discussed by the Company in the reports that it files and submits under
the Securities Exchange Act of 1934, as amended, and (2) is accumulated and
communicated to the Company's management, including the officers, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the Company's internal control over financial
reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Page 11
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor. Under the new guidance, cash consideration
received from a vendor should be classified as a reduction of cost of sales. If
the consideration received represents a payment for assets delivered to the
vendor, it should be classified as revenue. If the consideration is a
reimbursement of a specific, incremental, identifiable cost incurred in selling
the vendor's product, the cost should be characterized as a reduction of that
cost incurred. The guidance is effective for fiscal periods beginning after
December 15, 2002. The adoption of this guidance did not have a significant
impact on our consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index on page 13 hereof.
(b) Forms 8-K: The Company did not file any Forms 8-K during the quarter for
which this quarterly report is filed.
Page 12
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 7, 2003 /s/ David E. O'Reilly
- ---------------- -----------------------------------------------------
Date David E. O'Reilly, Co-Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
November 7, 2003 /s/ James R. Batten
- ---------------- -----------------------------------------------------
Date James R. Batten, Vice-President of Finance and Chief
Financial Officer (Principal Financial and Accounting
Officer)
Page 13
EXHIBIT INDEX
Number Description Page
- ------ -------------------------------------------------------------- ----
31.1 Certificate of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. 15
31.2 Certificate of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith. 16
32.1 Certificate of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith. 17
32.2 Certificate of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith. 18
99.1 Certain Risk Factors, filed herewith. 19
Page 14
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.1 - CEO Certification
CERTIFICATIONS
I, David E. O'Reilly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O'Reilly Automotive,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 7, 2003 /s/ David E. O'Reilly
- ----------------------- -----------------------------------------------------
David E. O'Reilly, Co-Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
Page 15
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 31.2 - CFO Certification
CERTIFICATIONS
I, James R. Batten, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O'Reilly Automotive,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 7, 2003 /s/ James R. Batten
- ----------------------- ------------------------------------------------
James R. Batten, Vice President of Finance and
Chief Financial Officer (Principal Financial and
Accounting Officer)
Page 16
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.1 - CEO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
David E. O'Reilly, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ David E. O'Reilly
- -----------------------------------------
David E. O'Reilly
Chief Executive Officer
November 7, 2003
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
Page 17
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.2 - CFO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
James R. Batten, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ James R. Batten
- -------------------------------------
James R. Batten
Chief Financial Officer
November 7, 2003
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
Page 18
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 99.1 - Certain Risk Factors
Some of the information in this Form 10-Q contains and future reports and press
releases and other public information may contain forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. These
"forward-looking statements" are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (See Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934.) You should read statements that contain these words carefully because
they: (1) discuss our future expectations; (2) contain projections of our future
results of operations or of our financial condition; or (3) state other
"forward-looking" information. We believe it is important to communicate our
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or over which we have no control.
The risk factors listed in this exhibit, as well as any cautionary language in
this Form 10-Q, 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, risks associated with the
integration of acquired business, weather, terrorist activities, war and the
threat of war. Actual results may materially differ from anticipated results
described in these forward-looking statements. You should be aware that the
occurrence of the events described in these risk factors and elsewhere in our
annual report on Form 10-K for the year ended December 31, 2002 (the "2002 Form
10-K") could have a material adverse effect on our business, operating results
and financial condition.
Competition
We compete with a large number of retail (DIY) and wholesale (professional
installers) automotive aftermarket product suppliers. The distribution of
automotive aftermarket products is a highly competitive industry, particularly
in the more densely populated market areas that we serve. 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 than we are and have greater
financial resources. In addition, some of our competitors are smaller than we
are overall but have a greater presence than we do in a particular market. For a
list of our principal competitors, see the "Competition" section of Item 1 to
the Company's our 2002 Form 10-K.
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.
Failure to achieve our growth objectives may negatively impact the trading price
of our common stock. Our ability to accomplish our growth objectives 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.
We cannot be sure that our growth plans for 2003 and beyond will be achieved.
For a discussion of our growth strategies, see the "Growth and Expansion
Strategies" section of Item 1 to our 2002 Form 10-K.
Acquisitions May Not Lead to Expected Growth
We expect to continue to make acquisitions as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth to differ
from our expectations. For example: (1) we may not be able to continue to
identify suitable acquisition candidates or to acquire additional companies at
favorable prices or on other favorable terms; (2) our management's attention may
be distracted; (3) we may fail to retain key acquired personnel; (4) we may
assume unanticipated legal liabilities and other problems; and (5) we may not be
able to successfully integrate the operations (accounting and billing functions,
for example) of businesses we acquire to realize economic, operational and other
benefits.
Page 19
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 99.1 - Certain Risk Factors (continued)
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States. In
particular, approximately 34.9% of our stores are located in Texas. Therefore,
our business is sensitive to the economic and weather conditions of these
regions. Unusually severe or inclement weather tends to reduce sales,
particularly to DIY customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key personnel,
including David E. O'Reilly, Lawrence P. O'Reilly, Ted F. Wise and Greg L.
Henslee. One key person, Lawrence P. O'Reilly retired from his operational
duties in February 2003, but will continue to serve on the Board of Directors.
Our business and results of operations could be materially adversely affected by
the loss of the services of one or more of these individuals. Additionally, our
successful implementation and management of our growth and expansion strategies
will depend on our ability to continue to attract and retain qualified
personnel. We cannot be sure that we will be able to continue to attract such
personnel. For a further discussion of our management and personnel, see the
''Business'' section of Item 1 and Item 4a of our 2002 Form 10-K and our Proxy
Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders.
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.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to volatile
fluctuations based on general economic and market conditions. The market price
for our common stock may also be affected by our ability to meet analysts'
expectations. Failure to meet such expectations, even slightly, could have an
adverse effect on the market price of our common stock. In addition, stock
market volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business.
Shares Eligible for Future Sale
All of the shares of common stock currently held by our affiliates may be sold
in reliance upon the exemptive provisions of Rule 144 of the Securities Act of
1933, as amended, subject to certain volume and other conditions imposed by such
rule. We cannot predict the effect, if any, that future sales of shares of
common stock or the availability of such shares for sale will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock, or the perception that such sales might occur, could
adversely affect the prevailing market price of the common stock.
Page 20