10-Q 1 firstqtr10q2004.txt O'REILLY AUTOMOTIVE INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 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) Not applicable ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 Exchange Act). Yes [X] No [ ] Common stock, $0.01 par value - 54,784,667 shares outstanding as of March 31, 2004. As of that date, the aggregate market value of the voting stock held by non-affiliates of the Company was approximately $2,193,578,067 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 March 31, 2004 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 11 ITEM 4 - CONTROLS AND PROCEDURES 11 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 STATEMENTS O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, December 31, 2004 2003 ------------ ------------ (Unaudited) (Note) Assets Current assets: Cash and cash equivalents $ 45,337 $ 21,094 Accounts receivable, net 58,068 52,235 Amounts receivable from vendors, net 47,673 50,695 Inventory 561,914 554,309 Deferred income taxes 427 4,753 Other current assets 9,219 4,399 ------------ ------------ Total current assets 722,638 687,485 Property and equipment, at cost 663,294 626,142 Accumulated depreciation and amortization 185,550 177,084 ------------ ------------ Net property and equipment 477,744 449,058 Notes receivable, less current portion 23,377 24,313 Other assets, net 29,218 26,736 ------------ ------------ Total assets $ 1,252,977 $ 1,187,592 ============ ============ Liabilities and shareholders' equity Current liabilities: Income taxes payable $ 14,214 $ 6,872 Accounts payable 216,536 176,513 Accrued payroll 16,883 17,307 Accrued benefits and withholdings 31,343 27,368 Other current liabilities 17,833 16,883 Current portion of long-term debt 833 925 ------------ ------------ Total current liabilities 297,642 245,868 Long-term debt, less current portion 100,823 120,977 Deferred income taxes 32,578 29,448 Other liabilities 7,129 7,014 Shareholders' equity: Common stock, $0.01 par value: Authorized shares-90,000,000 Issued and outstanding shares- 54,784,667 shares at March 31, 2004, and 54,664,976 at December 31, 2003 548 547 Additional paid-in capital 306,084 302,691 Retained earnings 508,173 481,047 ------------ ------------ Total shareholders' equity 814,805 784,285 ------------ ------------ Total liabilities and shareholders' equity $ 1,252,977 $ 1,187,592 ============ ============
NOTE: The balance sheet at December 31, 2003, 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 for complete financial statements. See notes to condensed consolidated financial statements. Page 3 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, ------------------------ 2004 2003 ---------- ---------- (In thousands, except per share data) Product sales $ 403,294 $ 339,475 Cost of goods sold, including warehouse and distribution expenses 233,956 198,529 ---------- ---------- Gross profit 169,338 140,946 Operating, selling, general and administrative expenses 125,566 107,605 ---------- ---------- Operating income 43,772 33,341 Other expense, net (446) (1,763) ---------- ---------- Income before income taxes 43,326 31,578 Provision for income taxes 16,200 11,850 ---------- ---------- Net income $ 27,126 $ 19,728 ========== ========== Net income per common share - basic $ 0.50 $ 0.37 ========== ========== Weighted-average common shares outstanding - basic 54,694 53,402 ========== ========== Net income per common share - assuming dilution $ 0.49 $ 0.37 ========== ========== Adjusted weighted-average common shares outstanding - assuming dilution 55,381 53,753 ========== ==========
See notes to condensed consolidated financial statements. Page 4 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, ------------------------ 2004 2003 ---------- ---------- (In thousands) Net cash provided by operating activities $ 82,012 $ 57,344 Investing activities: Purchases of property and equipment (40,078) (32,189) Proceeds from sale of property and equipment 667 71 Payments received on notes receivable 936 173 Investments in other assets (1,428) (1,974) ---------- ---------- Net cash used in investing activities (39,903) (33,919) Financing activities: Principal payments on long-term debt (20,246) (35,204) Net proceeds from issuance of common stock 2,380 2,190 ---------- ---------- Net cash used in financing activities (17,866) (33,014) ---------- ---------- Net increase (decrease) in cash and cash equivalents 24,243 (9,589) Cash and cash equivalents at beginning of period 21,094 29,333 ---------- ---------- Cash and cash equivalents at end of period $ 45,337 $ 19,744 ========== ==========
See notes to condensed consolidated financial statements. Page 5 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2004 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 three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. 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, 2003. 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 for the quarters ended March 31, is as follows: 2004 2003 --------------------- (In thousands, except per share data) Net income as reported....................... $ 27,126 $ 19,728 Stock-based compensation expense as reported................................ - - Stock-based compensation expense under fair value method.................... 2,896 2,031 --------------------- Pro forma net income......................... $ 24,230 $ 17,697 ===================== Pro forma basic net income per share......... $ 0.44 $ 0.33 ===================== Pro forma net income per share- assuming dilution.......................... $ 0.44 $ 0.33 =====================
3. Synthetic Lease Facility On June 26, 2003, we completed an amended and restated master agreement relating to our properties leased from SunTrust Equity Funding, LLC ("the Facility"). 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 March 31, 2004, 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 agreement with SunTrust Equity Funding, LLC has been recorded and disclosed as an operating lease in accordance with Financial Accounting Standards Board Statement No. 13 and Financial Interpretation No. 46 and 46R Page 6 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) March 31, 2004 4. Income Per Common Share The following table sets forth the computation of basic and diluted income per common share for the quarters ended March 31: 2004 2003 ---------------------- Numerator (basic and diluted): Net income..................................... $ 27,126 $ 19,728 ====================== Denominator: Denominator for basic income per common share-weighted-average shares............... 54,694 53,402 Effect of stock options........................ 687 351 ---------------------- Denominator for diluted income per common share-adjusted weighted-average shares and assumed conversion...................... 55,381 53,753 ====================== Basic net income per common share.................... $ 0.50 $ 0.37 ====================== Net income per common share-assuming dilution....................................... $ 0.49 $ 0.37 ======================
5. Recent Accounting Pronouncements In January 2003 and as revised in December 2003, FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation 46") and FASB Interpretation No. 46R. Interpretations 46 and 46R require companies with a variable interest in a variable interest entity to apply this guidance as of the beginning of the first reporting period after December 31, 2003. The application of the guidance could result in the consolidation of a variable interest entity. The Company's adoption of Interpretations 46 and 46R did not have a material effect on the Company's financial position or results of operations. 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 warehouse and distribution expenses and estimates of amounts due from vendors for certain merchandise allowances 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 medical, worker's compensation and other general liability obligations, which are partially based on estimates of certain claim costs and historical experience. o Accounts receivable - Allowance for doubtful accounts is estimated based on historical loss ratios and consistently has been within management's expectations. o Revenue - Over-the-counter retail sales are recorded when the customer takes possession of merchandise. Sales to professional installers, also referred to as "commercial sales", are recorded upon delivery of merchandise to the customer, generally at the customer's place of business. Wholesale sales to other retailers, also referred to as "jobber sales" are recorded upon shipment of merchandise. All sales are recorded net of estimated allowances and discounts. o Vendor concessions - The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising, devaluation programs, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred. All other vendor concessions are recognized as a reduction of cost of sales when recognized in the consolidated statement of income. 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 for the years ended March 31, is as follows: 2004 2003 --------------------- (In thousands, except per share data) Net income as reported....................... $ 27,126 $ 19,728 Stock-based compensation expense as reported................................ - - Stock-based compensation expense under fair value method.................... 2,896 2,031 --------------------- Pro forma net income......................... $ 24,230 $ 17,697 ===================== Pro forma basic net income per share......... $ 0.44 $ 0.33 ===================== Pro forma net income per share- assuming dilution.......................... $ 0.44 $ 0.33 =====================
Page 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) Results of Operations Product sales increased $63.8 million, or 18.8% from $339.5 million in the first quarter of 2003, to $403.3 million in the first quarter of 2004. This increase was primarily due to the opening of 23 net, new stores during the first quarter of 2004, in addition to a 12.4% increase in comparable store product sales for the first quarter of 2004. At March 31, 2004, we operated 1,132 stores compared to 1,011 stores at March 31, 2003. Gross profit increased $28.4 million, or 20.1% from $140.9 million (or 41.5% of product sales) in the first quarter of 2003, to $169.3 million (or 42.0% of product sales) in the first quarter of 2004. The increase in gross profit dollars was primarily a result of the increase in sales resulting from the increase in the number of stores open during the first quarter of 2004 compared to the same period in 2003, and increased sales levels at existing stores. The increase in gross profit as a percentage of product sales was primarily a result of a change in our product sales mix. Operating, selling, general and administrative expenses ("OSG&A expenses") increased $18.0 million, or 16.7% from $107.6 million (or 31.7% of product sales) in the first quarter of 2003 to $125.6 million (or 31.1% of product sales) in the first quarter of 2004. 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 was primarily due to economies of scale achieved and the result of management's efforts to increase labor productivity. Other expense, net decreased by $1.3 million in the first quarter of 2004 compared to the first quarter of 2003. The overall decrease in other expense was primarily due to a decrease in interest expense as a result of a decrease in average borrowings. Our estimated provision for income taxes increased $4.4 million to $16.2 million for the first quarter of 2004 compared to the same period in 2003, as a result of our increased taxable income. Our effective tax rate was 37.4% of income before income taxes for the first quarter of 2004 and 37.5% for the first quarter of 2003. Principally, as a result of the foregoing, net income increased from $19.7 million (or 5.8% of product sales) in the first quarter of 2003 to $27.1 million (or 6.7% of product sales) in the first quarter of 2004. Liquidity and Capital Resources Net cash provided by operating activities increased from $57.3 million for the first three months in 2003 to $82.0 million for the first three months of 2004. This increase was principally the result of increased net income and an increase in accounts payable, income taxes payable and accrued benefits and withholdings, partially offset by increases in accounts receivable, inventory and other current assets. The increase in accounts payable was primarily attributable to the timing of payments and more favorable payment terms from vendors. The increases in accounts receivable and inventory are primarily due to our continuing store growth. Net cash used in investing activities increased from $33.9 million during the first three months in 2003 to $39.9 million for the comparable period in 2004, primarily due to the increased purchases of property and equipment for new store growth. Net cash used in financing activities decreased from $33.0 million in the first three months of 2003 to $17.9 million in the first three months of 2004, primarily due to a decrease in principal payments on long-term debt. 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, subject to availability of such additional credit from either existing banks within the syndicate or other banks. At March 31, 2004, none of the revolving credit facility was outstanding. Additionally, letters of credit totaling $13.8 million were outstanding at March 31, 2004. Accordingly, we have aggregate availability for additional borrowings of $136.2 million under the revolving credit facility. The revolving credit facility, which bears interest at LIBOR plus a spread ranging from 0.875% to 1.375% (2.00% at March 31, 2004), expires in July 2005. Page 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) 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. During the first three months of 2004, 23 net, new stores were opened. The Company plans to open 117 additional stores during the remainder of 2004. 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 January 2003 and as revised in December 2003, FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation 46") and FASB Interpretation No. 46R. Interpretations 46 and 46R require companies with a variable interest in a variable interest entity to apply this guidance as of the beginning of the first reporting period after December 31, 2003. The application of the guidance could result in the consolidation of a variable interest entity. The Company's adoption of Interpretations 46 and 46R did not have a material effect on the Company's 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. 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. Page 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.) 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 filing 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, 2003, 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 revolving credit facility with variable interest rates. Since no amounts were outstanding under the revolving credit facility at March 31, 2004, changes in interest rates would not have any effect. In the event of an adverse change in interest rates and assuming the Company had amounts outstanding under the credit facility, 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 The Company's management, under the supervision and with the participation of our chief executive officer and chief financial officer, has reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2004. Based on such review and evaluation, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of March 31, 2004, 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, (a) is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and (b) is accumulated and communicated to the Company's management, including the officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in the Company's internal control over financial reporting during the first quarter of 2004 that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION In January 2003 and as revised in December 2003, FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation 46") and FASB Interpretation No. 46R. Interpretations 46 and 46R require companies with a variable interest in a variable interest entity to apply this guidance as of the beginning of the first reporting period after December 31, 2003. The application of the guidance could result in the consolidation of a variable interest entity. The Company's adoption of Interpretations 46 and 46R did not have a material effect on the Company's financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index on page 14 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. May 4, 2004 /s/ David E. O'Reilly ----------- -------------------------------------------------------- Date David E. O'Reilly, Co-Chairman of the Board and Chief Executive Officer (Principal Executive Officer) May 4, 2004 /s/ James R. Batten ----------- -------------------------------------------------------- Date James R. Batten, Executive 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 14 Sarbanes-Oxley Act of 2002, filed herewith. 31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the 15 Sarbanes-Oxley Act of 2002, filed herewith. 32.1 Certificate of the Chief Executive Officer pursuant to Section 906 of the 16 Sarbanes-Oxley Act of 2002, filed herewith. 32.2 Certificate of the Chief Financial Officer pursuant to Section 906 of the 17 Sarbanes-Oxley Act of 2002, filed herewith. 99.1 Certain Risk Factors, filed herewith. 18
Page 13 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: May 4, 2004 /s/ David E. O'Reilly ------------------ ----------------------------------------------- David E. O'Reilly, Co-Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Page 14 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: May 4, 2004 /s/ James R. Batten ------------------ ----------------------------------------------- James R. Batten, Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Page 15 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 March 31, 2004, 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 May 4, 2004 This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose. Page 16 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 March 31, 2004, 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 May 4, 2004 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 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, 2003 (the "2003 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 our 2003 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 2004 and beyond will be achieved. For a discussion of our growth strategies, see the "Growth and Expansion Strategies" section of Item 1 to our 2003 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 18 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 33.6% of our stores are located in Texas. Therefore, our business is sensitive to the economic and weather conditions of this region. 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, Ted F. Wise, Greg L. Henslee and Jim Batten. 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 2003 Form 10-K and our Proxy Statement on Schedule 14A for the 2004 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 19