-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ar58/oeHeaXbfSYP/MVp19eqgAjBjwE5caWeBZ3gbX9G+vjTsys1ongHEOLB8wO5 Y2YuznnLixEdLJ163TCc+w== 0000898173-03-000043.txt : 20030808 0000898173-03-000043.hdr.sgml : 20030808 20030808155348 ACCESSION NUMBER: 0000898173-03-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: O REILLY AUTOMOTIVE INC CENTRAL INDEX KEY: 0000898173 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 440618012 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21318 FILM NUMBER: 03831939 BUSINESS ADDRESS: STREET 1: 233 S PATTERSON CITY: SPRINGFIELD STATE: MO ZIP: 65802 BUSINESS PHONE: 4178622674 MAIL ADDRESS: STREET 1: 233 SOUTH PATTERSON CITY: SPRINGFIELD STATE: MO ZIP: 65802 10-Q 1 secondqtr10q.txt O'REILLY AUTOMOTIVE, INC. 10-Q 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 June 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 - -------------------------------------------------------------------------------- (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 [ ] 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 - 53,933,788 shares outstanding as of June 30, 2003. As of that date, the aggregate market value of the voting stock held by non-affiliates of the Company was approximately $1,805,163,884 based on the last sale price of the common stock reported by the Nasdaq Stock Market (National Market). This report contains a total of 19 pages of which this page is number 1. O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES FORM 10-Q Quarter Ended June 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 7 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10 ITEM 4 - CONTROLS AND PROCEDURES 10 PART II - OTHER INFORMATION ITEM 5 - OTHER INFORMATION 11 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11 SIGNATURE PAGE 12 EXHIBIT INDEX 13 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) June 30, December 31, 2003 2002 ------------ ------------ (Unaudited) (Note) Assets Current assets: Cash $ 26,230 $ 29,333 Accounts receivable, net 56,344 45,421 Amounts receivable from vendors 47,192 42,918 Inventory 528,006 504,098 Deferred income taxes 3,681 5,040 Other current assets 5,020 4,235 ------------ ------------ Total current assets 666,473 631,045 Property and equipment, at cost 557,916 491,523 Accumulated depreciation and amortization 157,108 137,922 ------------ ------------ Net property and equipment 400,808 353,601 Notes receivable 1,820 1,880 Other assets 24,701 22,893 ------------ ------------ Total assets $ 1,093,802 $ 1,009,419 ============ ============ Liabilities and shareholders' equity Current liabilities: Accounts payable $ 142,750 $ 85,370 Accrued payroll 16,061 15,257 Accrued benefits & withholdings 22,330 19,165 Income taxes payable 18,133 9,798 Other current liabilities 19,476 17,150 Current portion of long-tem debt 475 682 ------------ ------------ Total current liabilities 219,225 147,422 Long-term debt, less current portion 135,317 190,470 Deferred income taxes 22,025 15,939 Other liabilities 7,103 5,064 Shareholders' equity: Common stock, $0.01 par value: Authorized shares-90,000,000 Issued and outstanding shares- 53,933,788 shares at June 30, 2003, and 53,371,242 at December 31, 2002 539 534 Additional paid-in capital 281,981 269,030 Retained earnings 427,612 380,960 ------------ ------------ Total shareholders' equity 710,132 650,524 ------------ ------------ Total liabilities and shareholders' equity $ 1,093,802 $ 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 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 Six Months Ended June 30, June 30, ----------------------- ---------------------- 2003 2002 2003 2002 ---------- ---------- ---------- --------- (In thousands, except per share data) Product sales $ 393,112 $ 343,181 $ 732,587 $ 638,670 Cost of goods sold, including warehouse and distribution expenses 227,399 198,995 425,928 368,456 ---------- ---------- ---------- ---------- Gross profit 165,713 144,186 306,659 270,214 Operating, selling, general and administrative expenses 120,987 106,417 228,592 203,807 ---------- ---------- ---------- ---------- Operating income 44,726 37,769 78,067 66,407 Other expense, net (1,652) (1,527) (3,415) (3,398) ---------- ---------- ---------- ---------- Income before income taxes 43,074 36,242 74,652 63,009 Provision for income taxes 16,150 13,695 28,000 23,820 ---------- ---------- ---------- ---------- Net income $ 26,924 $ 22,547 $ 46,652 $ 39,189 ========== ========== ========== ========== Net income per common share $ 0.50 $ 0.42 $ 0.87 $ 0.74 ========== ========== ========== ========== Weighted-average common shares outstanding 53,634 53,058 53,518 52,971 ========== ========== ========== ========== Net income per common share - assuming dilution $ 0.50 $ 0.42 $ 0.86 $ 0.73 Adjusted weighted-average common shares outstanding ========== ========== ========== ========== - assuming dilution 54,222 53,698 53,988 53,653 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. Page 4 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------ 2003 2002 ---------- ---------- (In thousands) Net cash provided by operating activities $ 112,955 $ 60,820 Investing activities: Purchases of property and equipment (67,599) (45,343) Proceeds from sale of property and equipment 471 1,294 Payments received on notes receivable 287 351 Investments in other assets (2,396) (118) ---------- ---------- Net cash used in investing activities (69,237) (43,816) Financing activities: Payments on notes payable to banks -- (5,000) Proceeds from issuance of long-term debt -- 76,125 Payments on long-term debt (55,361) (79,323) Proceeds from issuance of common stock 8,540 3,505 ---------- ---------- Net cash used in financing activities (46,821) (4,693) ---------- ---------- Net (decrease) increase in cash (3,103) 12,311 Cash at beginning of period 29,333 15,041 ---------- ---------- Cash at end of period $ 26,230 $ 27,352 ========== ==========
See notes to condensed consolidated financial statements. Page 5 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 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 six months ended June 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 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. The Company's pro forma information, is as follows: For the three months For the six months ended June 30, ended June 30, 2003 2002 2003 2002 ----------------------- ---------------------- (In thousands, except per share data) Net income as reported...................... $ 26,924 $ 22,547 $ 46,652 $ 39,189 ======== ======== ======== ======== Net income per common share, as reported.... $ 0.50 $ 0.42 $ 0.87 $ 0.74 ======== ======== ======== ======== Net income per common share - assuming dilution, as reported..................... $ 0.50 $ 0.42 $ 0.86 $ 0.73 ======== ======== ======== ======== Stock-based compensation expense as reported............................... -- -- -- -- Stock-based compensation expense under fair value method................... 2,200 1,657 4,192 3,182 -------- -------- -------- -------- Pro forma net income........................ $ 24,724 $ 20,890 $ 42,460 $ 36,007 ======== ======== ======== ======== Pro forma basic net income per share........ $ 0.46 $ 0.39 $ 0.76 $ 0.70 ======== ======== ======== ======== Pro forma net income per share- assuming dilution........................ $ 0.46 $ 0.39 $ 0.79 $ 0.67 ======== ======== ======== ========
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 June 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." Page 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Unless otherwise indicated, "we," "us," "our" and similar terms, as well as references to the "Company" or "O'Reilly" refer to O'Reilly Automotive, Inc. and its subsidiaries. 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 have 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: For the three months For the six months ended June 30, ended June 30, 2003 2002 2003 2002 ----------------------- ---------------------- (In thousands, except per share data) Net income as reported...................... $ 26,924 $ 22,547 $ 46,652 $ 39,189 ======== ======== ======== ======== Net income per common share, as reported.... $ 0.50 $ 0.42 $ 0.87 $ 0.74 ======== ======== ======== ======== Net income per common share - assuming dilution, as reported..................... $ 0.50 $ 0.42 $ 0.86 $ 0.73 ======== ======== ======== ======== Stock-based compensation expense as reported............................... -- -- -- -- Stock-based compensation expense under fair value method................... 2,200 1,657 4,192 3,182 -------- -------- -------- -------- Pro forma net income........................ $ 24,724 $ 20,890 $ 42,460 $ 36,007 ======== ======== ======== ======== Pro forma basic net income per share........ $ 0.46 $ 0.39 $ 0.76 $ 0.70 ======== ======== ======== ======== Pro forma net income per share- assuming dilution........................ $ 0.46 $ 0.39 $ 0.79 $ 0.67 ======== ======== ======== ========
Page 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) Results of Operations Product sales for the second quarter of 2003 were 393.1 million, an increase of $49.9 million or 14.6% over product sales for the second quarter of 2002. Product sales for the first six months of 2003 were $732.6 million, an increase of $93.9 million or 14.7% over product sales for the first six months of 2002. These increases are primarily due to the opening of 30 net, new stores during the second quarter of 2003 and 60 net, new stores during the first six months of 2003, in addition to a 6.9% and 6.6% increase in comparable store product sales for the second quarter and first six months of 2003, respectively. At June 30, 2003, we operated 1,041 stores compared to 929 stores at June 30, 2002. Gross profit increased 14.9% from $144.2 million (or 42.0% of product sales) in the second quarter of 2002 to $165.7 million (or 42.2% of product sales) in the second quarter of 2003. Gross profit for the first six months increased 13.5% from $270.2 million (or 42.3% of product sales) in 2002 to $306.7 million (or 41.9% 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 second quarter and first six months of 2003 compared to the same period of 2002, and increased sales levels at existing stores. The decrease in gross profit as a percentage of product sales in the first six months of 2003 compared to 2002, is primarily due to increased warehouse and delivery expenses resulting from the Company's remodeling of its Nashville and Knoxville, TN distribution centers. Operating, selling, general and administrative expenses ("OSG&A expenses") increased $14.6 million from $106.4 million (or 31.0% of product sales) in the second quarter of 2002 to $121.0 million (or 30.8% of product sales) in the second quarter of 2003. OSG&A expenses increased $24.8 million from $203.8 million (or 31.9% of product sales) in the first six months of 2002 to $228.6 million (or 31.2% of product sales) in the first six 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 expense increased by $125,000 in the second quarter of 2003 compared to the second quarter of 2002 and increased by $17,000 for the first six months of 2003 compared to the first six months of 2002. Our estimated provision for income taxes increased $2.5 million and $4.2 million for the second quarter and first six months of 2003 compared to 2002, respectively, as a result of our increased taxable income. Our effective tax rate was 37.5% of income before income taxes for the second quarter of 2003 and the first six months of 2003, compared with 37.8% for the same periods of 2002. Principally, as a result of the foregoing, net income increased from $22.5 million or 6.6% of product sales in the second quarter of 2002 to $26.9 million or 6.9% of product sales in the second quarter of 2003. Net income increased from $39.2 million or 6.1% of product sales in the first six months of 2002 to $46.7 million or 6.4% of product sales in the first six months of 2003. Liquidity and Capital Resources Net cash provided by operating activities increased from $60.8 million for the first six months in 2002 to $113.0 million for the first six months of 2003. This increase is principally the result of increased net income and an increase in accounts payable. The increase in accounts payable is primarily attributable to the timing of payments and more favorable payment terms from vendors. The increase in inventory and accounts receivable is primarily due to our increased product sales resulting from our continuing store growth. Net cash used in investing activities increased from $43.8 million during the first six months in 2002 to $69.2 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 $46.8 million in the first six months of 2003, compared to $4.7 million in the first six months of 2002. The increase in net cash used is primarily due to a reduction in long-term debt. Page 8 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 June 30, 2003, $35.0 million of the revolving credit facility was outstanding including amounts under letters of credit totaling $8.5 million. Accordingly, we have aggregate availability for additional borrowings of $106.5 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 June 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 June 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 six months of 2003, 60 net, new stores were opened. The Company plans to open 70 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. 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 9 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained within this 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, 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 sections of 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 with variable interest rates. 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 June 30, 2003, would have increased by approximately $175,000. 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 June 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 documented and communicated to the Company's management, including the officers, as appropriate to allow timely decisions regarding required disclosure. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Page 10 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index on page 15 hereof. Page 11 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. August 8, 2003 /s/ David E. O'Reilly - --------------- ----------------------------------------------------- Date David E. O'Reilly, Co-Chairman of the Board and Chief Executive Officer (Principal Executive Officer) August 8, 2003 /s/ James R. Batten - --------------- ----------------------------------------------------- Date James R. Batten, Vice-President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Page 12 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. 14 31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. 15 32.1 Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 16 32.2 Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 17 99.1 Certain Risk Factors, filed herewith. 18
Page 13 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 this 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 Form 10-K for the year ended December 31, 2002. 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 the Company's Form 10-K for the year ended December 31, 2002. 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. Sensitivity to Regional Economic and Weather Conditions All of our stores are located in the Central and Southern United States. In particular, approximately 36% 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. Page 14 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES Exhibit 99.1 - Certain Risk Factors (continued) 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 this Form 10-K and our Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders, a portion of which is incorporated herein. 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 15 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: August 8, 2003 /s/ David E. O'Reilly ----------------------------------------------------- David E. O'Reilly, Co-Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Page 16 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: August 8, 2003 /s/ James R. Batten ---------------------------------------------------- James R. Batten, Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Page 17 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 June 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 August 8, 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 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 June 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 August 8, 2003 This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose. Page 19 -----END PRIVACY-ENHANCED MESSAGE-----