Table
of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2008
OR
o
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
OREILLY AUTOMOTIVE, INC.
(Exact name of registrant
as specified in its charter)
Missouri
|
|
44-0618012
|
(State or other
jurisdiction
of incorporation or
organization)
|
|
(I.R.S. Employer
Identification No.)
|
233 South Patterson
Springfield, Missouri 65802
(Address of principal
executive offices, Zip code)
(417) 862-6708
(Registrants 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
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
x
|
Accelerated filer
o
|
Non-accelerated filer
o
|
Smaller reporting company
o
|
|
|
(Do not check if a smaller
reporting company)
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2of the
Exchange Act).
Yes
o
No
x
Indicate the number of shares outstanding of each of the issuers
classes of common stock as of the latest practicable date:
Common stock, $0.01 par value 134,520,479 shares outstanding as of October 31, 2008.
Table
of Contents
OREILLY AUTOMOTIVE, INC. AND
SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2008
TABLE OF CONTENTS
2
Table
of Contents
PART I - FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OREILLY AUTOMOTIVE, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except
share data)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
(Note)
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
26,410
|
|
$
|
47,555
|
|
Accounts
receivable, net
|
|
108,661
|
|
84,242
|
|
Amounts
receivable from vendors
|
|
56,935
|
|
48,263
|
|
Inventory
|
|
1,517,744
|
|
881,761
|
|
Deferred income
taxes
|
|
50,751
|
|
|
|
Other current
assets
|
|
41,848
|
|
40,483
|
|
Total current assets
|
|
1,802,349
|
|
1,102,304
|
|
|
|
|
|
|
|
Property and
equipment, at cost
|
|
1,860,550
|
|
1,479,779
|
|
Accumulated
depreciation and amortization
|
|
455,813
|
|
389,619
|
|
Net property and
equipment
|
|
1,404,737
|
|
1,090,160
|
|
|
|
|
|
|
|
Notes
receivable, less current portion
|
|
22,877
|
|
25,437
|
|
Deferred income
taxes
|
|
30,733
|
|
|
|
Goodwill
|
|
655,886
|
|
50,447
|
|
Other assets
|
|
108,565
|
|
11,389
|
|
Total assets
|
|
$
|
4,025,147
|
|
$
|
2,279,737
|
|
|
|
|
|
|
|
Liabilities
and shareholders equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
757,080
|
|
$
|
380,683
|
|
Self-insurance
reserve
|
|
62,034
|
|
29,967
|
|
Accrued payroll
|
|
72,933
|
|
23,739
|
|
Accrued benefits
and withholdings
|
|
31,170
|
|
13,496
|
|
Deferred income
taxes
|
|
|
|
6,235
|
|
Other current
liabilities
|
|
121,729
|
|
49,536
|
|
Current portion
of long-term debt
|
|
8,257
|
|
25,320
|
|
Total current
liabilities
|
|
1,053,203
|
|
528,976
|
|
|
|
|
|
|
|
Long-term debt,
less current portion
|
|
657,131
|
|
75,149
|
|
Deferred income
taxes
|
|
|
|
27,241
|
|
Other
liabilities
|
|
124,320
|
|
55,894
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
Common stock,
$0.01 par value:
|
|
|
|
|
|
Authorized
shares 245,000,000
|
|
|
|
|
|
Issued and
outstanding shares 134,470,192 as of September 30, 2008, and
115,260,564 as of December 31, 2007
|
|
1,345
|
|
1,153
|
|
Additional
paid-in capital
|
|
890,221
|
|
441,731
|
|
Retained
earnings
|
|
1,299,911
|
|
1,156,393
|
|
Accumulated
other comprehensive loss
|
|
(984
|
)
|
(6,800
|
)
|
Total
shareholders equity
|
|
2,190,493
|
|
1,592,477
|
|
Total
liabilities and shareholders equity
|
|
$
|
4,025,147
|
|
$
|
2,279,737
|
|
See Notes to Condensed Consolidated
Financial Statements
Note: The
balance sheet at December 31, 2007, has been derived from the audited
consolidated 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.
3
Table
of Contents
OREILLY
AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands,
except per share data)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,111,272
|
|
$
|
661,778
|
|
$
|
2,461,922
|
|
$
|
1,918,031
|
|
Cost of goods
sold, including warehouse and distribution expenses
|
|
604,066
|
|
368,077
|
|
1,349,125
|
|
1,067,864
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
507,206
|
|
293,701
|
|
1,112,797
|
|
850,167
|
|
Selling, general
and administrative expenses
|
|
414,735
|
|
210,985
|
|
857,782
|
|
608,701
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
92,471
|
|
82,716
|
|
255,015
|
|
241,466
|
|
Other income
(expense), net:
|
|
|
|
|
|
|
|
|
|
Debt prepayment
costs
|
|
(7,157
|
)
|
|
|
(7,157
|
)
|
|
|
Interim facility
commitment fee
|
|
(4,150
|
)
|
|
|
(4,150
|
)
|
|
|
Interest expense
|
|
(10,860
|
)
|
(1,081
|
)
|
(13,070
|
)
|
(2,569
|
)
|
Other
|
|
845
|
|
1,837
|
|
3,280
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
71,149
|
|
83,472
|
|
233,918
|
|
242,993
|
|
Provision for
income taxes
|
|
29,750
|
|
30,385
|
|
90,400
|
|
89,600
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,399
|
|
$
|
53,087
|
|
$
|
143,518
|
|
$
|
153,393
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
common share
|
|
$
|
0.31
|
|
$
|
0.46
|
|
$
|
1.18
|
|
$
|
1.34
|
|
Net income per
common share assuming dilution
|
|
$
|
0.31
|
|
$
|
0.46
|
|
$
|
1.18
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
132,196
|
|
114,946
|
|
121,133
|
|
114,508
|
|
Adjusted
weighted-average common shares outstanding assuming dilution
|
|
133,081
|
|
116,306
|
|
122,073
|
|
115,989
|
|
See Notes to Condensed
Consolidated Financial Statements
4
Table
of Contents
OREILLY
AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
$
|
289,297
|
|
$
|
281,908
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
Cash component
of acquisition price of CSK Automotive, Inc., net of cash acquired
|
|
(32,529
|
)
|
|
|
Purchases of
property and equipment
|
|
(260,224
|
)
|
(219,630
|
)
|
Proceeds from
sale of property and equipment
|
|
1,675
|
|
1,834
|
|
Payments
received on notes receivable
|
|
3,866
|
|
3,857
|
|
Investment in
other assets
|
|
(1,550
|
)
|
(2,536
|
)
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
(288,762
|
)
|
(216,475
|
)
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
Proceeds from
issuance of long-term debt
|
|
547,750
|
|
16,450
|
|
Payment of debt
issuance costs
|
|
(43,123
|
)
|
|
|
Principal
payments on long-term debt and capital lease obligations
|
|
(535,880
|
)
|
(26,382
|
)
|
Debt prepayment
costs
|
|
(7,157
|
)
|
|
|
Issuance cost of
equity exchanged in CSK acquisition
|
|
(1,216
|
)
|
|
|
Net proceeds
from issuance of common stock
|
|
16,441
|
|
18,209
|
|
Tax benefit of
stock options exercised
|
|
1,525
|
|
6,170
|
|
Other
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
Net cash (used
in) provided by financing activities
|
|
(21,680
|
)
|
14,447
|
|
|
|
|
|
|
|
Net (decrease)
increase in cash and cash equivalents
|
|
(21,145
|
)
|
79,880
|
|
Cash and cash
equivalents at beginning of period
|
|
47,555
|
|
29,903
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
26,410
|
|
$
|
109,783
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure
|
|
|
|
|
|
Issuance of common stock to acquire CSK
|
|
$
|
412,237
|
|
$
|
|
|
Fair value of
converted CSK stock options and restricted stock
|
|
$
|
5,727
|
|
$
|
|
|
See Notes to
Condensed Consolidated Financial Statements
5
Table
of Contents
OREILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30,
2008
1.
Basis of
Presentation
The accompanying
unaudited condensed consolidated financial statements of OReilly Automotive, Inc.
and Subsidiaries (the Company) have been prepared in accordance with United
States generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
months ended September 30, 2008, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2008. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007.
2.
Business
Combination
On July 11, 2008,
the Company completed the acquisition of CSK Auto Corporation (CSK), one of
the largest specialty retailers of auto parts and accessories in the Western
United States and one of the largest such retailers in the United States, based
on store count. Pursuant to the merger agreement, each share of CSK common
stock outstanding immediately prior to the merger was canceled and converted
into the right to receive 0.4285 of a share of OReilly common stock and $1.00
in cash, without interest and less any applicable withholding taxes. To fund
the transaction, the Company entered into a Credit Agreement for a $1.2 billion
asset-based revolving credit facility arranged by Bank of America, N.A. and
Lehman Brothers Inc., which the Company used to refinance debt, fund the cash
portion of the acquisition, pay for other transaction-related expenses and
provide liquidity for the combined Company going forward. The results of CSKs
operations have been included in the Companys consolidated financial statements
since the acquisition date.
At the date of the
acquisition, CSK had 1,342 stores in 22 states, operating under four brand
names: Checker Auto Parts, Schucks Auto Supply, Kragen Auto Parts and Murrays
Discount Auto Parts. This acquisition allowed the Company to enter into twelve
new states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Michigan,
Nevada, New Mexico, Oregon, Utah and Washington, and a number of new markets.
As of September 30, 2008, the Company had merged 16 CSK stores into existing
OReilly locations, closed three CSK stores and opened one new CSK store.
Purchase Price Allocation
The acquisition
was accounted for under the purchase method of accounting with OReilly
Automotive, Inc. as the acquiring entity in accordance with SFAS No. 141,
Business Combinations (SFAS No. 141). Accordingly, the consideration
paid by the Company to complete the acquisition has been allocated
preliminarily to the assets acquired and liabilities assumed based upon their
estimated fair values as of the date of the acquisition. The allocation of
purchase price is based upon certain external valuations and other analyses
that have not been completed as of the date of this filing. Accordingly, the
purchase price allocations are preliminary and are subject to future
adjustments during the maximum one-year allocation period as defined in SFAS No. 141.
The preliminary purchase
price of CSKs acquired operations as of the date of acquisition was comprised
of (in thousands):
OReilly stock
exchanged for CSK shares
|
|
$
|
412,237
|
|
Cash payment to
CSK shareholders
|
|
42,388
|
|
CSK shares
purchased by OReilly prior to merger
|
|
21,724
|
|
Fair value of
options and unvested restricted stock exchanged
|
|
5,727
|
|
Direct costs of
the acquisition
|
|
10,568
|
|
Total purchase
price
|
|
$
|
492,644
|
|
The value of the OReilly stock exchanged for CSK shares was
calculated by multiplying the number of OReilly shares exchanged in the merger
of 18,104,371, by the average close price of OReilly stock prior to the
acquisition date of $22.77. The fair value of options exchanged in the merger
was $4.8 million, based on CSKs 3.69 million outstanding options on July 11,
2008, multiplied by the exchange ratio adjusted to reflect the $1.00 per share
cash consideration, was determined using a Black-Scholes valuation model with
the following weighted-average assumptions and resulted in a weighted-average
fair value of $2.73 per share:
Risk free
interest rate
|
|
2.5
|
%
|
Expected life
|
|
2.3Years
|
|
Expected
volatility
|
|
29.4
|
%
|
Expected dividend
yield
|
|
0
|
%
|
6
Table
of Contents
The fair value of 0.09 million shares of CSKs unvested
restricted stock outstanding at July 11, 2008, of $0.9 million was
calculated by multiplying the number of OReilly shares exchanged, by the
$22.77, the average close price of OReilly stock prior to the acquisition
date. Direct costs of the acquisition include investment-banking fees, legal and
accounting fees, and other external costs directly related to the acquisition.
The preliminary purchase
price allocations as of the date of acquisition are as follows (in thousands):
Inventory
|
|
$
|
559,092
|
|
Other current
assets
|
|
76,851
|
|
Property and
equipment
|
|
127,674
|
|
Goodwill
|
|
604,899
|
|
Deferred income
taxes
|
|
125,373
|
|
Other intangible
assets
|
|
65,270
|
|
Other assets
|
|
9,622
|
|
Total assets
acquired
|
|
$
|
1,568,781
|
|
|
|
|
|
Senior credit
facility
|
|
$
|
343,921
|
|
Term loan
facility
|
|
86,700
|
|
Capital lease
obligations
|
|
15,036
|
|
Other current
liabilities
|
|
463,992
|
|
6
3
/
4
% senior exchangeable notes
|
|
103,920
|
|
Other
liabilities
|
|
62,568
|
|
Total
liabilities assumed
|
|
1,076,137
|
|
Net assets
acquired
|
|
$
|
492,644
|
|
Preliminary estimated
fair values of intangible assets acquired as of the date of acquisition are as
follows (in thousands):
|
|
Intangible assets
|
|
Weighted-Average
Useful Lives
(in years)
|
|
Trademarks and
trade names
|
|
$
|
13,000
|
|
1.4
|
|
Favorable
property leases
|
|
52,270
|
|
10.7
|
|
Total intangible
assets
|
|
$
|
65,270
|
|
|
|
The estimated values of
operating leases with unfavorable terms compared with current market conditions
totaled approximately $49.9 million. These liabilities have an estimated
weighted average useful life of approximately 7.7 years and are included in
other liabilities. Favorable and unfavorable lease assets and liabilities will
be amortized to rent expense over their expected lives which approximates the
period of time that the favorable or unfavorable lease terms will be in effect.
Trademarks and trade names have preliminary useful lives of one to three years
and will be amortized coinciding with the anticipated conversion of CSK store
brands to the OReilly brand over that period. See Note 3 Goodwill and Other
Intangible Assets.
The allocation of
the purchase price includes $35.7 million of accrued liabilities for estimated
costs to exit certain activities of CSK, including $31.3 million of employee
separation costs and $4.1 million of exit costs associated with the planned
closure of 33 CSK stores and other facilities. The employee separation costs
include anticipated payments, as required under various pre-existing employment
arrangements with CSK employees at the time of acquisition, related to the
planned involuntarily termination of employees performing overlapping or
duplicative functions which the Company expects to occur within the first two
years after the acquisition date. Management began to formulate an exit plan
prior to the completion of the acquisition. As of September 30, 2008,
management of the Company had not finalized all exit plans related to the CSK
acquisition and expects to finalize the plans within the first year after the
acquisition date, which may result in adjustments to the allocation of the
acquisition purchase price that may impact other current liabilities and
goodwill.
The CSK senior
credit facility and term loan facility required repayment upon merger or
acquisition and the entire amounts outstanding under both facilities were
repaid by the Company on the July 11, 2008, acquisition date.
The excess of the
preliminary purchase price over the estimated fair values of tangible and
identifiable intangible assets acquired and liabilities assumed was recorded as
goodwill. Goodwill is not amortizable for financial statement purposes.
7
Table of Contents
Unaudited Pro Forma Financial
Information
The following pro forma financial information presents
the combined historical results of the combined Company as if the acquisition
had occurred as of the beginning of the respective periods (in thousands,
except per share data):
|
|
Pro Forma Results of
Operations for the
Three Months Ended
September 30, 2008
|
|
Pro Forma Results
of Operations for the
Nine Months Ended
September 30, 2008
|
|
Pro Forma Results of
Operations for the
Three Months Ended
September 30, 2007
|
|
Pro Forma Results of
Operations for the Nine
Months Ended
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,136,603
|
|
$
|
3,378,562
|
|
$
|
1,129,311
|
|
$
|
3,330,004
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,163
|
|
$
|
136,496
|
|
$
|
49,745
|
|
$
|
147,070
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
common share
|
|
$
|
0.31
|
|
$
|
1.02
|
|
$
|
0.37
|
|
$
|
1.11
|
|
Net income per
common share-assuming dilution
|
|
$
|
0.30
|
|
$
|
1.01
|
|
$
|
0.37
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
134,163
|
|
133,819
|
|
133,050
|
|
132,612
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted-average common shares outstanding assuming dilution
|
|
135,048
|
|
134,759
|
|
134,718
|
|
134,400
|
|
This pro forma
information is not intended to represent or be indicative of actual results had
the acquisition occurred as of the beginning of each period, nor is it
necessarily indicative of future results and does not reflect potential
synergies, integration costs, or other such costs or savings. Certain pro forma
adjustments have been made to net income to give effect to: estimated charges
to conform CSKs method of accounting for inventory to LIFO, adjustments to
selling, general and administrative expenses to remove the amortization on
eliminated CSK historical identifiable intangible assets and deferred
liabilities, expenses to amortize the value of identified intangibles acquired
in the acquisition (primarily trade names, trademarks and leases), rent and
depreciation adjustments to reflect OReillys purchase of properties under its
synthetic lease facility, adjustments to interest expense to reflect the
elimination of preexisting OReilly and CSK debt, estimated interest expense on
OReillys new asset-based credit facility and other minor adjustments. The pro
forma information presented above for the three and nine months ended September 30,
2008, includes certain acquisition related charges, net of tax, of $4.4 million,
$2.6 million, and $5.3 million for debt prepayment costs, interim facility
commitment fees, and the acceleration of CSKs stock options and restricted
stock as a result of the change in control, respectively. The pro forma information for the three and
nine months ended September 30, 2007, has not been adjusted to give effect
to these charges.
3.
Goodwill
and Other Intangible Assets
Goodwill is reviewed
annually for impairment, or more frequently if events or changes in business
conditions indicate that impairment may exist. During the three and nine months
ending September 30, 2008, the Company recorded goodwill of approximately
$604.9 million in connection with the acquisition of CSK. See Note 2 Business
Combination. The Company did not record goodwill impairment during the three
or nine months ended September 30, 2008. For the three and nine months
ended September 30, 2008, the Company recorded amortization expense of
$4.3 million and $4.4 million, respectively, related to amortizable intangible
assets, which are included in other assets on the accompanying condensed
consolidated balance sheets.
The components of the Companys amortizable and unamortizable intangible
assets were as follows on September 30, 2008 and December 31,
2007 (in thousands):
|
|
Cost
|
|
Accumulated Amortization
|
|
|
|
September
30, 2008
|
|
December
31, 2007
|
|
September
30, 2008
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable
intangible assets
|
|
|
|
|
|
|
|
|
|
Favorable leases
|
|
$
|
52,270
|
|
$
|
|
|
$
|
1,757
|
|
$
|
|
|
Trade names and
trademarks
|
|
13,000
|
|
|
|
2,505
|
|
|
|
Other
|
|
819
|
|
731
|
|
509
|
|
394
|
|
Total
amortizable intangible assets
|
|
$
|
66,089
|
|
$
|
731
|
|
$
|
4,771
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable
intangible assets
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
655,886
|
|
$
|
50,447
|
|
|
|
|
|
Total
unamortizable intangible assets
|
|
$
|
655,886
|
|
$
|
50,447
|
|
|
|
|
|
8
Table of Contents
In addition, the Company
has recorded a liability for the preliminary estimated values of operating
leases with unfavorable terms totaling approximately $49.9 million in the other
liabilities section of the condensed consolidated balance sheet. These leases
have an estimated weighted average useful life of approximately 7.7 years. During
the three and nine months ending September 30, 2008, the Company
recognized an amortized benefit of $1.9 million related to these unfavorable
operating leases.
The change in the net goodwill for the nine
months ended September 30, 2008 is as follows:
Balance at
December 31, 2007
|
|
$
|
50,447
|
|
Acquisition of
CSK Automotive, Inc.
|
|
604,899
|
|
Other
|
|
540
|
|
Balance at
September 30, 2008
|
|
$
|
655,886
|
|
4.
Long-Term Debt
Outstanding long-term
debt was a follows on September 30, 2008, and December 31, 2007, (in
thousands):
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Capital leases
|
|
$
|
18,218
|
|
$
|
469
|
|
Series 2001-B
Senior Notes
|
|
|
|
25,000
|
|
Series 2006-A
Senior Notes
|
|
|
|
75,000
|
|
6
3
/
4
% Senior Exchangeable Notes
|
|
103,570
|
|
|
|
FILO revolving
credit facility
|
|
125,000
|
|
|
|
Tranche A
revolving credit facility
|
|
418,600
|
|
|
|
Total debt and
capital lease obligations
|
|
665,388
|
|
100,469
|
|
Current
maturities of debt and capital lease obligations
|
|
8,257
|
|
25,320
|
|
Total long-term
debt and capital lease obligations
|
|
$
|
657,131
|
|
$
|
75,149
|
|
On July 11, 2008, in connection with the acquisition of
CSK (see Note 2 Business Combination), the Company entered into a Credit
Agreement for a five-year $1.2 billion asset-based revolving credit facility
arranged by Bank of America, N.A. (BA) and Lehman Brothers Inc., which the
Company used to refinance debt, fund the cash portion of the acquisition, pay
for other transaction-related expenses and provide liquidity for the combined
Company going forward.
The Credit Agreement is comprised of a five-year $1.075
billion tranche A revolving credit facility and a five-year $125 million
first-in-last-out revolving credit facility (FILO tranche) both of which mature
on July 11, 2013. On the date of the transaction, the amount of the
borrowing base available, as described in the Credit Agreement, under the
credit facility was $1.050 billion of which the Company borrowed $588 million. The
Company used borrowings under the credit facility to repay certain existing
debt of CSK, repay the Companys $75 million 2006-A Senior Notes and purchase
all of the properties that had been leased under the Companys synthetic lease
facility. As of September 30, 2008 the amount of the borrowing base
available under the credit facility was $1.087 billion of which the Company had
outstanding borrowings of $544 million. The available borrowings under the
credit facility are also reduced by stand-by letters of credit issued by the
Company primarily to satisfy the requirements of workers compensation, general
liability and other insurance policies. As of September 30, 2008, the
Company had stand-by letters of credit outstanding in the amount of $62.1
million and the aggregate availability for additional borrowings under the
credit facility was $480.9 million.
Borrowings under the tranche A revolver currently bear
interest, at our option, at a rate equal to either a base rate plus 1.50% per
annum or LIBOR plus 2.50% per annum, with each rate being subject to adjustment
based upon certain excess availability thresholds. Borrowings under the FILO
tranche currently bear interest, at our option, at a rate equal to either a
base rate plus 2.75% per annum or LIBOR plus 3.75% per annum, with each rate
being subject to adjustment based upon certain excess availability thresholds. The
base rate is equal to the higher of the prime lending rate established by BA
from time to time and the federal funds effective rate as in effect from time
to time plus 0.50%, subject to adjustment based upon remaining available
borrowings. Fees related to unused capacity under the credit facility are
assessed at a rate of 0.50% of the remaining available borrowings under the
facility, subject to adjustment based upon remaining unused capacity. In
addition, the Company paid customary commitment fees, letter of credit fees,
underwriting fees and other administrative fees in respect to the credit
facility.
On July 24, 2008,
the Company entered into interest rate swap transactions with Branch Banking
and Trust Company (BBT), BA and SunTrust Bank (SunTrust). The Company
entered into the interest rate swap transactions to mitigate the risk
associated with its floating interest rate based on LIBOR on an aggregate of
$250 million of its debt that is outstanding under the Credit Agreement, dated
as of July 11, 2008, with BA as administrative agent, and the other
parties thereto (the Credit Facility). Each interest rate swap has an
effective date of August 1, 2008, and maturity dates of (i) August 1,
2010, for the BBT Swap, (ii) August 1, 2011, for the BA Swap and (iii) August 1,
2011, for the SunTrust Swap. The Company is required to make certain monthly
fixed rate payments calculated on notional amounts of (i) $100
9
Table
of Contents
million for the BBT Swap,
(ii) $75 million for the BA Swap and (iii) $75 million for the
SunTrust Swap, while the applicable counter party is obligated to make certain
monthly floating rate payments to the Company referencing the same notional
amount. The interest rate swap transactions effectively fix the annual interest
rate payable on these notional amounts of our debt which may exist under the
Credit Facility to (i) 3.425% for the BBT Swap, (ii) 3.83% for the BA
Swap and (iii) 3.83% for the SunTrust Swap, plus an applicable margin
under the terms of the Credit Facility.
On October 14,
2008, the Company entered into interest rate swap transactions with BBT, BA and
SunTrust to mitigate the risk associated with the Companys floating interest
rate which is based on LIBOR on an additional $150 million of the Companys
debt that is outstanding under its Credit Agreement, dated as of July 11,
2008. See Note 14 Subsequent Events.
On July 11, 2008,
the Company agreed to become a guarantor, on a subordinated basis, of the $100
million principal amount of 6
3
/
4
%
Exchangeable Senior Notes due 2025 (the Notes) originally issued by CSK
pursuant to an Indenture (the Original Indenture), dated as of December 19,
2005, as amended and supplemented by the First Supplemental Indenture (the First
Supplemental Indenture) dated as of December 30, 2005, and the Second
Supplemental Indenture, dated as of July 27, 2006, (the Second Supplemental
Indenture) by and between CSK Auto Corporation, CSK Auto, Inc. and The
Bank of New York Mellon Trust Company, N.A., as trustee.
The 6
3
/
4
%
Notes are exchangeable into cash and shares of the Companys common stock. The
Notes bear interest at 6.75% per year until December 15, 2010, and 6.5%
until maturity on December 15, 2025. Prior to their stated maturity, the 6
3
/
4
% Notes are exchangeable by the holders
only under certain circumstances. In the event of an exchange, each $1,000
Principal Amount of the Notes shall be exchangeable into 25.97 shares of common
stock of OReilly and $60.61 in cash.
The noteholders may require the Company to repurchase
some or all of the notes for cash at a repurchase price equal to 100% of the
principal amount of the notes being repurchased, plus any accrued and unpaid
interest on December 15, 2010; December 15, 2015; or December 15,
2020, or on any date following a fundamental change as described in the
indenture. The Company may redeem some or all of the notes for cash at a
redemption price of 100% of the principal amount plus any accrued and unpaid
interest on or after December 15, 2010, upon at least 35 calendar days
notice.
5.
Synthetic
Lease Facility
On July 11,
2008, the Company, in connection with the acquisition of CSK, purchased all the
properties included in its Synthetic Operating Lease Facility in the amount of
$49.3 million, thus terminating the facility. The purchase was funded through
borrowings under a new asset-based revolving credit facility. See Note 4 Long-Term
Debt and Note 2 Business Combination.
6.
Store Closing
Costs
The Company maintains
reserves for closed stores and other properties that are no longer being
utilized in current operations and accounts for these costs in accordance with
SFAS No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities
. The Company provides
for closed property operating lease liabilities using a discount rate to
calculate the present value of the remaining noncancelable lease payments and
lease termination fees after the closing date, net of estimated sublease
income. The closed property lease liabilities are expected to be paid over the
remaining lease terms. The Company estimates sublease income and future cash
flows based on the Companys experience and knowledge of the market in which
the closed property is located, the Companys previous efforts to dispose of
similar assets and existing economic conditions. Adjustments to closed property
reserves are made to reflect changes in estimated sublease income or actual
exit costs from original estimates. Adjustments are made for changes in
estimates in the period in which the changes become known.
In connection with the
acquisition of CSK, the Company recorded $4.1 million of exit costs associated
with the planned closure of 33 CSK stores and other facilities and assumed CSKs
existing closed stores liabilities of $3.0 million related to 127 locations
that were closed prior to the Companys acquisition of CSK. The estimates of
exit costs associated with planned closures of CSK stores are preliminary and
subject to adjustment.
Following is a summary of store closure reserves at September 30,
2008 and 2007 (in thousands):
|
|
Nine Months
Ended September
30, 2008
|
|
Nine Months
Ended September
30, 2007
|
|
Balance at
December 31
|
|
$
|
1,841
|
|
$
|
2,264
|
|
|
|
|
|
|
|
CSK liabilities
assumed, as of July 11, 2008
|
|
2,984
|
|
|
|
Planned CSK
closures
|
|
4,140
|
|
|
|
Additions
|
|
251
|
|
300
|
|
Usage
|
|
(721
|
)
|
(537
|
)
|
Adjustments
|
|
134
|
|
(49
|
)
|
Balance at
September 30
|
|
$
|
8,629
|
|
$
|
1,978
|
|
10
Table
of Contents
7.
Derivative
Instruments
On July 24, 2008, the Company entered into
interest rate swap transactions with BBT, BA and SunTrust to mitigate cash flow
risk associated with the floating interest rate based on LIBOR on an aggregate
of $250 million of the debt outstanding under the Credit Agreement, dated as of
July 11, 2008. The swap transactions have been designated as cash flow
hedges with interest payments designed to perfectly match the interest payments
for borrowings under the Credit Agreement that correspond to notional amounts
of the swaps. In accordance with FASB No. 133,
Accounting
for Derivative Instruments and Hedging Activities
, the fair value of
the Companys outstanding hedges are recorded as an asset or liability in the
accompanying condensed consolidated balance sheets at September 30, 2008. Changes
in fair market value are recorded in other comprehensive income (loss), and any
changes resulting from ineffectiveness of the hedge transactions would be
recorded in current earnings; however, ineffectiveness is not expected during
the life of the swap. The fair value of the swap transactions at September 30,
2008, was a payable of $1.6 million ($1.0 million net of tax). The net amount
is included as a component of other comprehensive loss.
8.
Fair Value
Measurements
The Company adopted SFAS No. 157
at the beginning of its 2008 fiscal year. SFAS No. 157 clarifies the
definition of fair value, describes the method used to appropriately measure
fair value in accordance with generally accepted accounting principles and
expands fair value disclosure requirements. This statement applies whenever
other accounting pronouncements require or permit fair value measurements.
The fair value hierarchy
established under SFAS No. 157 prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurement) and
the lowest priority to unobservable inputs (level 3 measurement). The three
levels of the fair value hierarchy defined by SFAS No. 157 are as follows:
·
Level 1 Quoted
prices are available in active markets for identical assets or liabilities as
of the reporting date. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
·
Level 2
Pricing inputs are other than quoted prices in active markets included in level
1, which are either directly or indirectly observable as of the reporting date.
Level 2 includes those financial instruments that are valued using models or
other valuation methodologies. These models are primarily industry-standard
models that consider various assumptions, including time value, volatility
factors, and current market and contractual prices for the underlying
instruments, as well as other relevant economic measures. Substantially all of
these assumptions are observable in the marketplace throughout the full term of
the instrument, can be derived from observable data or are supported by
observable levels at which transactions are executed in the marketplace.
·
Level 3
Pricing inputs include significant inputs that are generally less observable
from objective sources. These inputs may be used with internally developed
methodologies that result in managements best estimate of fair value from the
perspective of a market participant.
The fair value of the
interest rate swap transactions are based on the discounted net present value
of the swap using third party quotes (level 2). Changes in fair market value
are recorded in other comprehensive income (loss), and changes resulting from
ineffectiveness are recorded in current earnings.
9.
Other
Comprehensive Loss
Unrealized holding gains on
available-for-sale securities, consisting of the Companys investment in CSK
common stock prior to the Companys completion of the acquisition of CSK, as
well as unrealized losses from interest rate swaps that qualify as cash flow
hedges are included in accumulated other comprehensive income (loss). The adjustment to accumulated other
comprehensive loss for the nine months ended September 30, 2008, totaled
$9.3 million with a corresponding tax liability of $3.5 million resulting in a
net of tax effect of $5.8 million.
Changes in accumulated other
comprehensive income (loss) for the nine months ended September 30, 2008
consist of the following (in thousands):
|
|
Unrealized
Gains on
Securities
|
|
Unrealized
Losses on
Cash Flow
Hedges
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
$
|
(6,800
|
)
|
$
|
|
|
$
|
(6,800
|
)
|
Period change
|
|
6,800
|
|
(984
|
)
|
5,816
|
|
Balance at
September 30, 2008
|
|
$
|
|
|
$
|
(984
|
)
|
$
|
(984
|
)
|
11
Table
of Contents
Comprehensive income for the three and nine months ended September 30,
2008 was $39.9 million and $149.3 million, respectively. Comprehensive income for the three and nine
months ended September 30, 2007 was $53.1 million and $153.4 million,
respectively.
10.
Stock-based Employee
Compensation Plans
In accordance with Statement of Financial Accounting Standards No. 123R,
Share Based Payment
(SFAS No. 123R),
the Company recognizes share-based compensation expense based on the fair value
of the awards. Share-based payments
include stock option awards issued under the Companys employee stock option
plan, director stock option plan, stock issued through the Companys employee
stock purchase plan and stock awarded to employees through other benefit
programs.
Stock Options
The Companys employee stock-based incentive plan provides for the
granting of stock options for the purchase of common stock of the Company to directors
and certain key employees of the Company.
Options are granted at an exercise price that is equal to the market
value of the Companys common stock on the date of the grant. Director options granted under the plan
expire after seven years and are fully vested after six months. Employee options granted under the OReilly
plan expire after ten years and typically vest 25% a year, over four
years. The Company records compensation
expense for the grant date fair value of option awards evenly over the vesting
period under the straight-line method.
On July 11, 2008, the Company, in connection with the acquisition
of CSK Auto Corporation (CSK), assumed all of CSKs stock option plans. Employee options granted under these CSK
plans became 100% vested upon the change in control and were converted into
options to purchase common stock of OReilly as part of the purchase
consideration in the acquisition of CSK.
The converted CSK options expire seven years after the date of the
original grant. The following table
summarizes the stock option transactions during the first nine months of 2008:
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding at
December 31, 2007
|
|
6,459,840
|
|
$
|
23.30
|
|
Granted
|
|
4,598,825
|
|
26.31
|
|
Exchanged CSK
options
|
|
1,742,270
|
|
29.05
|
|
Exercised
|
|
(633,577
|
)
|
21.02
|
|
Forfeited
|
|
(424,770
|
)
|
30.83
|
|
Outstanding at
September 30, 2008
|
|
11,742,588
|
|
$
|
25.19
|
|
Exercisable at
September 30, 2008
|
|
6,082,255
|
|
$
|
22.89
|
|
The Company recognized stock option compensation costs of approximately
$2.6 million and $5.5 million for the three and nine months ended September 30,
2008, respectively, and stock option compensation costs of approximately $1.6
million and $4.2 million for the three and nine months ended September 30,
2007, respectively. The Company
recognized a corresponding income tax benefit of approximately $1.0 million and
$2.1 million for the three and nine months ended September 30, 2008,
respectively, and a corresponding income tax benefit of approximately $0.6
million and $1.6 million for the three and nine months ended September 30,
2007, respectively.
The fair value of each stock option grant is estimated on the date of
the grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of
assumptions, including expected volatility, expected life, the risk free rate
and the expected dividend yield.
Expected volatility is based upon the historical volatility of the
Companys stock. Expected life
represents the period of time that options granted are expected to be
outstanding. The Company uses historical
data and experience to estimate the expected life of options granted. The risk free interest rates for periods within
the contractual life of the options are based on the United States Treasury
rates in effect for the expected life of the options.
The following weighted-average assumptions were used for grants issued
during the first nine months of 2008 and 2007 respectively:
|
|
2008
|
|
2007
|
|
Risk free
interest rate
|
|
2.9
|
%
|
4.6
|
%
|
Expected life
|
|
4.1Years
|
|
4.5Years
|
|
Expected
volatility
|
|
32.5
|
%
|
34.1
|
%
|
Expected
dividend yield
|
|
0
|
%
|
0
|
%
|
The weighted-average
grant-date fair value of options granted during the first nine months of 2008,
exclusive of the options converted in connection with the acquisition of CSK,
was $8.06 compared to $12.28 for the first nine months of 2007. The remaining unrecognized
12
Table
of Contents
compensation cost related
to unvested awards at September 30, 2008, was $46.3 million and the
weighted-average period of time over which this cost will be recognized is 3.4
years.
Other Employee Benefit Plans
The Company sponsors other share-based employee benefit plans,
including a contributory profit sharing and savings plan; an employee stock
purchase plan, which permits all eligible employees to purchase shares of the
Companys common stock at 85% of the fair market value; and a performance incentive
plan, under which the Companys senior management is awarded shares of
restricted stock that vest equally over a three-year period. Compensation expense recognized under these
plans is measured based on the market price of the Companys common stock on
the date of award and is recorded over the vesting period. During the three and nine months ended September 30,
2008, the Company recorded approximately $2.0 million and $5.7 million of
compensation cost for benefits provided under these plans and a corresponding
income tax benefit of approximately $0.8 million and $2.2 million
respectively. During the three and nine
months ended September 30, 2007, the Company recorded approximately $2.0
million and $5.9 million of compensation cost for benefits provided under these
plans and recognized a corresponding income tax benefit of approximately $0.7
million and $2.2 million, respectively.
11.
Income Per Common
Share
The following table sets forth the computation of basic and diluted
income per common share for the three and nine months ended September 30:
|
|
For the three months ended
September 30,
|
|
For the nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
Numerator (basic
and diluted):
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,399
|
|
$
|
53,087
|
|
$
|
143,518
|
|
$
|
153,393
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for
basic income per common share - weighted-average shares
|
|
132,196
|
|
114,946
|
|
121,133
|
|
114,508
|
|
Effect of stock
options
|
|
885
|
|
1,360
|
|
940
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for
diluted income per common share - adjusted weighted-average shares and
assumed conversion
|
|
133,081
|
|
116,306
|
|
122,073
|
|
115,989
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
per common share
|
|
$
|
0.31
|
|
$
|
0.46
|
|
$
|
1.18
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
common share-assuming dilution
|
|
$
|
0.31
|
|
$
|
0.46
|
|
$
|
1.18
|
|
$
|
1.32
|
|
12.
Legal Matters
OReilly Litigation
OReilly is currently
involved in litigation incidental to the ordinary conduct of the Companys
business. Although the Company cannot ascertain the amount of liability that it
may incur from any of these matters, it does not currently believe that, in the
aggregate, these matters will have a material adverse effect on its consolidated
financial position, results of operations or cash flows. In addition, OReilly is involved in
resolving the governmental investigations that were being conducted against CSK
prior to its acquisition by OReilly.
Further detail regarding such matters is described below.
CSK
Pre-Acquisition Matters: CSK Fiscal 2006
Audit Committee Investigation and Restatement of CSK Consolidated Financial
Statements
As disclosed in CSKs
prior SEC filings including its Form 10-Q of May 5, 2008, CSKs Audit
Committee-led investigation and restatement process resulted in previously
reported legal, accounting consultant and audit expenses. CSK incurred approximately $2.8 million of
legal expenses related to its response to the governmental investigations
associated with the matters that were reviewed in the Audit Committee-led
investigation and the defense of the securities class action lawsuit for the
period from February 4, 2008 (the day after CSKs last filed 10-K) through
July 11, 2008 (closing of the acquisition under the Merger
Agreement.) The legal, accounting
consultant and audit expenses incurred by CSK before July 12, 2008, were
incurred prior to OReillys acquisition of CSK and are not reflected in the
OReillys consolidated financial statements.
OReilly expects to continue to incur ongoing legal expenses related to
the governmental investigations, as described below, and has reserved $3.7
million as an assumed liability in the Companys preliminary allocation of the
purchase price of CSK. OReilly has
incurred approximately $0.3 million of such legal costs related to the
government investigations in period from the closing date through September 30,
2008.
Securities
Class Action Litigation
As previously described
in CSKs Form 10-Q of May 5, 2008, a settlement agreement relating to
pending securities class action litigation was preliminarily approved on April 22,
2008. The settlement amount was
$10.0 million in cash and 178,010 shares of CSK common stock. This
settlement was approved by the court on July 1, 2008, the litigation was
dismissed with prejudice pursuant to the settlement, and judgment was entered
on the same date. Prior to the closing of OReillys acquisition of CSK, the
cash amount was paid and the CSK common
stock were issued in settlement and then the common stock was subsequently
acquired by OReilly as part of the transaction.
Governmental
Investigations
Beginning
in June 2006, the SEC has been conducting an investigation related to
certain historical accounting practices of CSK.
On May 1, 2008, CSK received a notification from the Staff of the
Pacific Regional Office (the Staff) of the SEC relating to that
investigation. The notification commonly
referred to as a Wells Notice, indicates that the Staff is considering
recommending to the SEC that the SEC bring an enforcement action against CSK
alleging that it violated certain provisions of the federal securities laws,
including Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder the antifraud provisions. On June 6, 2008, CSK made its Wells
Submission. On September 4, 2008,
under applicable procedures, CSK made a written submission disagreeing with the
Staffs recommendation. On November 6,
2008, the Staff informed OReilly that the Commission agrees with the Staff and
has authorized the Staff to bring charges against CSK, including charges that
CSK violated the antifraud provisions.
OReilly intends to try to resolve CSKs pre-merger matters with the
Staff and the Commission but cannot predict whether and when it will be able to
reach a resolution.
In addition, the
U.S. Attorneys office in Phoenix (the USAO) and the U.S. Department of
Justice in Washington, D.C. (the DOJ) have opened an investigation
related to these historical accounting practices of CSK. At this time, OReilly
is cooperating with requests from the DOJ to resolve CSKs pre-merger matters.
These
regulatory proceedings are subject to many uncertainties, and, given their
complexity and scope, their final outcome cannot be predicted at this time. It
is possible that in a particular quarter or annual period the Companys results
of operations and cash flow could be materially affected by an ultimate
unfavorable resolution of these regulatory proceedings depending, in part, upon
the results of operations or cash flow for such period. However, at this time,
management believes that the ultimate outcome of all of these regulatory
proceedings that are pending, after consideration of applicable reserves and
potentially available insurance coverage benefits, should not have a material
adverse effect on the Companys consolidated financial condition and liquidity.
13
Table
of Contents
13.
Recent Accounting
Pronouncements
In September 2006,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS
No. 157), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 for financial assets and liabilities, as well
as any other assets and liabilities that are carried at fair value on a
recurring basis in financial statements, are effective for financial statements
issued for fiscal years beginning after November 15, 2007 (fiscal year
2008 for the Company). FASB Staff Position FAS 157-2,
Effective Date of FASB Statement No.
157, delayed the
effective date of SFAS No. 157 for most nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15,
2008 (fiscal year 2009 for the Company). The implementation of SFAS No. 157
for financial assets and financial liabilities, effective January 1, 2008,
did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows. The Company does not
anticipate the implementation of SFAS No. 157 as it relates to
nonfinancial assets and liabilities will have a material impact on its
consolidated financial position, results of operations or cash flows.
In February 2007,
the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159).
SFAS No. 159 permits entities to choose to measure selected financial
assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. The provisions of SFAS No. 159 are
effective as of the beginning of the Companys 2008 fiscal year. As the Company elected not to measure any
eligible items using the fair value option in accordance with SFAS No. 159,
the adoption of SFAS No. 159 did not have a material impact on the Companys
consolidated financial position, results of operations or cash flows.
In December 2007,
the FASB issued SFAS No. 141,
Business Combinations
(revised 2007)
(SFAS No. 141(R)). SFAS No. 141(R) applies
to any transaction or other event that meets the definition of a business
combination. Where applicable, SFAS No. 141(R) establishes
principles and requirements for how the acquirer recognizes and measures
identifiable assets acquired, liabilities assumed, noncontrolling interest in
the acquiree and goodwill or gain from a bargain purchase. In
addition, SFAS No. 141(R) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This statement is to be applied
prospectively for fiscal years beginning after December 15, 2008.
The Company is in the process of evaluating the potential future impact, if
any, of SFAS No. 141(R) on its consolidated financial position,
results of operations or cash flows.
In March 2008,
the FASB issued Statement No. 161,
Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(SFAS No. 161), which requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires entities to
disclose additional information about the amounts and location of derivatives
located within the financial statements, how the provisions of
FASB Statement No. 133
have been applied, and the
impact that hedges have on an entitys financial position, financial
performance and cash flows. SFAS No. 161
is effective for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged.
The Company will adopt the provisions of SFAS No. 161 beginning
with the Companys March 2009 interim consolidated financial statements.
14.
Subsequent Events
On October 14, 2008,
the Company entered into interest rate swap transactions with BBT, BA and
SunTrust. The Company entered into the
transactions to mitigate the risk associated with the Companys floating
interest rate which is based on LIBOR on an additional $150 million of the
Companys debt that is outstanding under its Credit Agreement, dated as of July 11,
2008. Each interest rate swap has an
effective date
14
Table
of Contents
of October 17,
2008. The Company is required to make
certain monthly fixed rate payments calculated on the notional amount of each
swap and the applicable counterparty is obligated to make certain monthly
floating rate payments to the Company referencing the same notional
amounts. The interest rate swap
transactions effectively fix the annual interest rate payable on these notional
amounts of the Companys debt, which may exist under the Credit Facility, to
rates ranging between 2.99% and 3.56%, plus an applicable margin under the
terms of the Credit Facility. The
applicable notional amount, effective index rate (excluding the addition of the
applicable margin) and expiration date for each swap transaction are as
follows:
Counterparty
|
|
Notional
Amount
|
|
Effective
index rate
|
|
Expiration Date
|
|
|
|
(in thousands)
|
|
|
|
|
|
BBT
|
|
$
|
25,000
|
|
2.99
|
%
|
October 17, 2010
|
|
BBT
|
|
25,000
|
|
3.01
|
|
October 17, 2010
|
|
BA
|
|
25,000
|
|
3.05
|
|
October 17, 2010
|
|
SunTrust
|
|
25,000
|
|
2.99
|
|
October 17, 2010
|
|
BA
|
|
50,000
|
|
3.56
|
|
October 17, 2011
|
|
|
|
|
|
|
|
|
|
|
15
Table
of Contents
ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, we, us, our and similar terms, as
well as references to the Company or OReilly refer to OReilly Automotive, Inc.
and its subsidiaries.
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. You can identify these statements by
forward-looking words such as expect, believe, anticipate, should, plan,
intend, estimate, project, will or similar words. In addition, statements contained within this
quarterly report that are not historical facts are forward-looking statements,
such as statements discussing 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 or implied in these forward-looking
statements. Please refer to the Risk
Factors section of our annual report on Form 10-K for the year ended December 31,
2007, for additional factors that could materially affect our financial
performance.
Overview
OReilly Automotive, Inc.
is one of the largest specialty retailers of automotive aftermarket parts,
tools, supplies, equipment and accessories in the United States, selling our
products to both do-it-yourself customers and professional installers. At September 30, 2008, we operated 3,277
stores in 38 states. Our stores carry an
extensive line of products consisting of new and remanufactured automotive hard
parts and accessories and a complete line of auto body paint and related
materials, automotive tools and professional service equipment. We do not sell tires or perform automotive
repairs or installations.
We view the following factors to be the key drivers of current and
future demand for the products we sell:
Number of miles driven and number
of registered vehicles
the total number of miles driven in
the U.S. heavily influences the demand for the repair and maintenance products
we sell. The long-term trend in the
number of vehicles on the road and the total miles driven in the U.S. has exhibited
steady growth over the past decade.
Since 1998, the total number of miles driven in the United States has
increased at an annual rate of approximately 1.6%. The total number of vehicles on the road has
increased from 197 million registered light vehicles in 1998 to 241 million in
2007. Total number of miles driven
remained relatively unchanged in 2007, and has declined in the first eight
months of 2008 by 3.3%, as many consumers responded to rising fuel prices and
other economic constraints in part by curtailing automobile usage. We believe that the decrease in miles driven
in 2008 is a short-term trend and that long-term miles driven will increase
because of the increasing number of vehicles on the road.
Average vehicle age
changes in the average age of vehicles on the road impacts demand for
automotive aftermarket products. As the
average age of a vehicle increases, the vehicle goes through more routine
maintenance cycles requiring replacement parts such as brakes, belts, hoses,
batteries, and filters. The sales of
these products are a key component of our business. The average age of the vehicle population has
increased over the past decade from 8.9 years for passenger cars and 8.3 years
for light trucks in 1998 to 10.4 and 9.0 years, respectively, in 2007. We expect that consumers will continue to
choose to keep their vehicles longer and drive them at higher mileages and that
the increasing trend in average vehicle age will continue.
Unperformed maintenance
according to estimates compiled
by the Automotive Aftermarket Industry Association, the annual amount of
unperformed or underperformed maintenance in the United States totaled $60
billion for 2008. This metric represents
the degree to which routine vehicle maintenance recommended by the manufacturer
is not being performed. Consumer
decisions to avoid or defer maintenance affect demand for our products and the
total amount of unperformed maintenance represents potential future demand. We believe that challenging macroeconomic
conditions in 2007 and the first nine months of 2008 contributed to the amount
of unperformed maintenance.
Product quality differentiation
we provide our customers with an assortment of products that are
differentiated by quality for most of the product lines we offer. For many of our product offerings, this
quality differentiation reflects good, better, and best
alternatives. Our sales and total gross
margin dollars are highest for the best quality category of products. Consumers willingness to select products at
a higher point on the value spectrum is a driver of sales and profitability in
our industry. We believe that the
average consumers tendency has been to trade-down to lower quality products
during the recent challenging economic conditions. We have ongoing initiatives targeted to
marketing higher quality products to our customers and expect our customers to
be more willing to return to purchasing up on the value spectrum in the future.
16
Table of Contents
We recorded net sales of
$2.46 billion for the nine months ended September 30, 2008, an increase of
28% compared to $1.92 billion in the first nine months of 2007. We recorded diluted earnings per common share
of $1.18 for the nine months ended September 30, 2008, down from $1.32 for
the first nine months of 2007. Selling,
General and Administrative expenses increased to $858 million for the first
nine months of 2008 from $609 million for the same period a year ago. While the current economic conditions have
affected our short-term results, we believe that the impact of current economic
conditions on consumer demand is not permanent, and we remain confident that the
long-term drivers of demand in the automotive aftermarket business will be
positive.
Our strategy continues to
be to expand market share by aggressively entering new markets, expanding our
store base in our current markets, integrating recently acquired stores to our
dual-market strategy and increasing the productivity of our existing
stores. We feel that our dual market
strategy, of targeting both the do-it-yourself retail customer and commercial
installer, positions the company extremely well to grow our share of the
automotive aftermarket business. We
continue to remain focused on profitable expansion of our store base through
entry into geographic regions contiguous to our existing markets, incremental
store growth in compelling markets within our current regions and selective
acquisitions including the acquisition of CSK.
Our strategy for integrating the CSK acquisition and executing our
dual-market strategy in the Western United States includes an expansion of CSKs
distribution network and inventory offerings.
We believe our investments in store growth and our distribution network
will be funded with the cash flows generated by our existing operations and
through available borrowings under our credit agreement.
Recent Developments
On July 11, 2008, we
completed the acquisition of CSK Auto Corporation (CSK), one of the largest
specialty retailers of auto parts and accessories in the Western United States
and one of the largest such retailers in the United States, based on store
count. Pursuant to the merger agreement,
each share of CSK common stock outstanding immediately prior to the merger was
canceled and converted into the right to receive 0.4285 of a share of OReilly
common stock and $1.00 in cash, without interest and less any applicable
withholding taxes. To fund the
transaction, we entered into a Credit Agreement for a $1.2 billion asset-based
revolving credit facility arranged by Bank of America, N.A. and Lehman Brothers
Inc., which we used to refinance debt, fund the cash portion of the
acquisition, pay for other transaction-related expenses and provide liquidity
for our combined Company going forward.
The results of CSKs operations have been included in our consolidated
financial statements since the acquisition date.
At the date of the
acquisition, CSK had 1,342 stores in 22 states, operating under four brand
names: Checker Auto Parts, Schucks Auto
Supply, Kragen Auto Parts and Murrays Discount Auto Parts. This acquisition allowed us to enter into
twelve new states: Alaska, Arizona,
California, Colorado, Hawaii, Idaho, Michigan, Nevada, New Mexico, Oregon, Utah
and Washington, and a number of new markets. As of September 30, 2008, we
have merged 16 CSK stores into existing OReilly locations, closed three CSK
stores and opened one new CSK store.
Critical Accounting Policies and Estimates
The preparation of our
financial statements in accordance with accounting policies generally accepted
in the United States (GAAP) requires the application of certain estimates and
judgments by management. Management
bases its assumptions, estimates, and adjustments on historical experience,
current trends and other factors believed to be relevant at the time the
consolidated financial statements are prepared.
Management believes that the following policies are critical due to the
inherent uncertainty of these matters and the complex and subjective judgments
required to establish these estimates.
Management continues to review these critical accounting policies and
estimates to ensure that the consolidated financial statements are presented
fairly in accordance with GAAP. However,
actual results could differ from our assumptions and estimates and such
differences could be material.
·
Vendor concessions
We receive concessions from our vendors
through a variety of programs and arrangements, including co-operative
advertising, allowances for warranties, merchandise allowances 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 material
vendor concessions are recognized as a reduction to the cost of inventory. Amounts receivable from vendors also include
amounts due to us relating to vendor purchases and product returns. Management regularly reviews amounts
receivable from vendors and assesses the need for a reserve for uncollectible
amounts based on our evaluation of our vendors financial position and
corresponding ability to meet their financial obligations. Based on our historical results and current
assessment, we have not recorded a reserve for uncollectible amounts in our
consolidated financial statements, and we do not believe there is a reasonable
likelihood that our ability to collect these amounts will differ from our
expectations. The eventual ability of
our vendors to pay us the obliged amounts could differ from our assumptions and
estimates, and we may be exposed to losses or gains that could be material.
·
Self-Insurance Reserves
We use a combination of insurance
and self-insurance mechanisms to provide for potential liabilities from workers
compensation, general liability, vehicle liability, property loss, and employee
health care benefits. With the exception
of employee health care benefit liabilities, which are limited by the design of
these plans, we obtain third-party insurance coverage to limit our exposure for
any individual claim. When estimating
our self-insurance liabilities, we consider a number of factors, including
historical claims experience and trend-lines, projected medical and legal
inflation, and growth patterns and exposure forecasts. The assumptions made by management as they
relate to each of these factors represent our judgment as to the most
17
Table of Contents
probable
cumulative impact of each factor to our future obligations. Our calculation of self-insurance liabilities
requires management to apply judgment to estimate the ultimate cost to settle
reported claims and claims incurred but not yet reported as of the balance
sheet date and the application of alternative assumptions would result in a
different estimate of these liabilities.
Actual claim activity or development may vary from our assumptions and
estimates, which may result in material losses or gains. As we obtain additional information that
affects the assumptions and estimates we used to recognize liabilities for
claims incurred in prior accounting periods, we adjust our self-insurance
liabilities to reflect the revised estimates based on this additional
information. If self-insurance reserves were changed 10% from our estimated
reserves at September 30, 2008, the financial impact would have been
approximately $6.2 million or 2.5% of pretax income for the nine months ended September 30,
2008.
·
Accounts receivable
Management estimates the allowance for
doubtful accounts based on historical loss ratios and other relevant
factors. Actual results have
consistently been within managements expectations, and we do not believe there
is a reasonable likelihood that there will be a material change in the future
that will require a significant change in the assumptions or estimates we use
to calculate our allowance for doubtful accounts. However, if actual results differ from our
estimates, we may be exposed to losses or gains. If the allowance for doubtful accounts were
changed 10% from our estimated allowance at September 30, 2008, the
financial impact would have been approximately $0.6 million or 0.3% of pretax
income for the nine months ended September 30, 2008.
·
Taxes
We operate within multiple taxing jurisdictions and
are subject to audit in these jurisdictions.
These audits can involve complex issues, which may require an extended
period of time to resolve. We regularly
review our potential tax liabilities for tax years subject to audit. The amount of such
liabilities is based on various factors, such as differing interpretations of
tax regulations by the responsible tax authority, experience with previous tax
audits and applicable tax law rulings. Changes
in our tax liability may occur in the future as our assessments change based on
the progress of tax examinations in various jurisdictions and/or changes in tax
regulations. In managements opinion,
adequate provisions for income taxes have been made for all years
presented. The estimates of our
potential tax liabilities contain uncertainties because management must use
judgment to estimate the exposures associated with our various tax positions and
actual results could differ from our estimates.
Alternatively, we could have applied assumptions regarding the eventual
outcome of the resolution of open tax positions that would differ from our
current estimates but that would still be reasonable given the nature of a
particular position. Our judgment
regarding the most likely outcome of uncertain tax positions has historically
resulted in an estimate of our tax liability that is greater than actual
results. While our estimates are subject
to the uncertainty noted in the preceding discussion, our initial estimates of
our potential tax liabilities have historically not been materially different
from actual results except in instances where we have reversed liabilities that
were recorded for periods that were subsequently closed with the applicable
taxing authority. The accounting for our
tax reserves changed with the adoption of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (FIN 48) on January 1,
2007.
·
Share-based compensation
Effective January 1, 2006,
we adopted Statement of Financial Accounting Standards No. 123R,
Share Based Payment
(SFAS
No. 123R), under the modified prospective method. Under this application, we record share-based
compensation expense for all awards granted on or after the date of adoption
and for the portion of previously granted awards that remain unvested at the
date of adoption. Currently, our
share-based compensation relates to stock option awards, employee share purchase
plan discounts, restricted stock awards and shares contributed directly to
other employee benefit plans.
Under SFAS No. 123R,
we use a Black-Scholes option-pricing model to determine the fair value of
stock options. The Black-Scholes model includes various assumptions, including
the expected life of stock options, the expected volatility and the expected
risk-free interest rate. These assumptions reflect our best estimates,
but they involve inherent uncertainties based on market conditions generally outside
our control. Since our adoption of SFAS No. 123R,
share-based compensation cost would not have been materially impacted by the
variability in the range of reasonable assumptions we could have applied to
value option award grants, but we anticipate that share-based compensation cost
could be materially impacted by the application of alternate assumptions in
future periods. Also, under SFAS No. 123R,
we are required to record share-based compensation expense net of estimated
forfeitures. Our forfeiture rate
assumption used in determining share-based compensation expense is estimated
based on historical data. The actual
forfeiture rate and corresponding share-based compensation expense could differ
from those estimates.
·
Inventory Obsolescence and Shrink
Inventory, which consists of automotive hard parts, maintenance items,
accessories and tools is stated at the lower of cost or market. The extended nature of the life cycle of our
products is such that the risk of obsolescence of our inventory is
minimal. The products that we sell
generally have application in our markets for a relatively long period of time
in conjunction with the corresponding vehicle population. We have developed sophisticated systems for
monitoring the life cycle of a given product and, accordingly, have
historically been very successful in adjusting the volume of our inventory in
conjunction with a decrease in demand.
We do record a reserve to reduce the carrying value of our inventory
through a charge to cost of sales in the isolated instances where we believe
that the market value of a product line is lower than our recorded cost. This reserve is based on our assumptions
about the marketability of our existing inventory and is subject to uncertainty
to the extent that we must estimate, at a given point in time, the market value
of inventory that will be sold in future periods. Ultimately, our projections could differ from
actual results and could result in a material impact to our stated inventory
balances. We have historically not had
to materially adjust
18
Table of Contents
our obsolescence
reserves due to the factors discussed above and do not anticipate that we will
experience material changes in our estimates in the future.
We also record a reserve to reduce the carrying value of our perpetual
inventory to account for quantities in our perpetual records above the actual
existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results
of our extensive and frequent cycle counting programs and periodic, full
physical inventories at our stores and distribution centers. To the extent that our estimates do not
accurately reflect the actual inventory shrinkage, we could potentially
experience a material impact to our inventory balances. We have historically been able to provide a
timely and accurate measurement of shrink and have not experienced material
adjustments to our estimates. If
unrecorded shrink were changed 10% from the estimate that we recorded based on
our historical experience at September 30, 2008, the financial impact
would have been approximately $0.6 million or 0.3% of pretax income for the
nine months ended September 30, 2008.
Results
of Operations
Sales increased $449
million, or 68% from $662 million in the third quarter of 2007, to $1.11
billion in the third quarter of 2008.
Sales for the first nine months of 2008 were $2.46 billion, an increase
of $544 million or 28% over sales for the first nine months of 2007. The following table presents the components
of the increase in sales for the three and nine months ended September 30,
2008:
|
|
Increase in Sales
For Three Months
Ended
September 30, 2008
compared to the
same period in 2007
|
|
Increase in Sales
For Nine Months
Ended
September 30, 2008
compared to the
same period in 2007
|
|
|
|
(in millions)
|
|
OReilly stores:
|
|
|
|
|
|
Comparable store
sales
|
|
$
|
9.4
|
|
$
|
27.9
|
|
Stores opened
throughout 2007, excluding stores open at least one year that are included in
comparable store sales
|
|
19.5
|
|
84.1
|
|
Sales of stores
opened throughout 2008
|
|
21.3
|
|
34.1
|
|
Non-store sales
including machinery, sales to independent parts storesand team members
|
|
0.6
|
|
(0.8
|
)
|
CSK stores:
|
|
|
|
|
|
Sales of stores
acquired in acquisition of CSK
|
|
398.7
|
|
398.7
|
|
Total
increase in sales
|
|
$
|
449.5
|
|
$
|
543.9
|
|
Comparable store sales
for OReilly stores open at least one year increased 1.5% for both the third
quarter and first nine months of 2008.
Comparable store sales for CSK stores open at least one year decreased
4.3% for the portion of CSKs sales in the third quarter since the July 11,
2008, acquisition by OReilly.
Consolidated comparable store sales for stores open at least one year
decreased 0.8% for the third quarter of 2008 and increased 0.5% for the first
nine months of 2008. Comparable store
sales are calculated based on the change in sales of stores open at least one
year and exclude sales of specialty machinery, sales to independent parts
stores and sales to team members. In an
effort to provide a better understanding of non-store sales that are excluded
from the calculation of comparable store sales and their impact on total
revenue, the following table presents quarterly results for these sales (in
millions):
|
|
2008
|
|
2007
|
|
2006
|
|
For the quarter ended:
|
|
|
|
|
|
|
|
March 31
|
|
$
|
16
|
|
$
|
17
|
|
$
|
16
|
|
June 30
|
|
19
|
|
19
|
|
19
|
|
September 30
|
|
21
|
|
18
|
|
18
|
|
December 31
|
|
|
|
16
|
|
16
|
|
For the year ended December 31:
|
|
$
|
56
|
|
$
|
70
|
|
$
|
69
|
|
We believe that
the increased sales achieved by our stores are the result of superior inventory
availability, offering a broader selection of products in most stores, a
targeted promotional and advertising effort through a variety of media and
localized promotional events, continued improvement in the merchandising and
store layouts of most stores, compensation programs for all store team members
that provide incentives for performance and our continued focus on serving
professional installers. We opened 37
and 131 stores in the three and nine months ended September 30, 2008,
respectively. At September 30,
2008, we operated 3,277 stores compared to 1,774 stores at September 30,
2007. Due to the acquisition of CSK, we
anticipate new store unit growth will be 150 new stores in 2008, excluding
store acquisition and consolidation related to the acquisition of CSK.
19
Table of Contents
Gross profit increased
$214 million, or 73% from $294 million (or 44.4% of sales) in the third quarter
of 2007 to $507 million (or 45.6% of sales) in the third quarter of 2008. Gross profit for the first nine months
increased 31% to $1.11 billion (or 45.2% of sales) in 2008, from $850 million
(or 44.3% of sales) in 2007. The
increase in gross profit dollars was primarily the result of the increase in
sales resulting from the acquisition of CSK and the increase in the number of
stores open during the third quarter and first nine months of 2008 compared to
the same period in 2007 and increased sales levels at existing stores. The increase in gross profit as a percentage
of sales is the result of improved product mix, lower product acquisition cost
and distribution system improvements. We
improved our product mix by continuing to implement strategies to differentiate
our merchandise selections at each store based on customer demand and vehicle
demographics in the stores market and through ongoing Team Member training
initiatives focused on selling products with greater gross margin
contribution. Additionally, gross margin
percentage improved as a result of the inclusion of CSK sales. Gross margin percentages on CSK sales are
higher than core OReilly primarily because a greater proportion of CSK sales
are made to DIY customers (which typically have higher gross margin
percentages) and market conditions that are specific to CSK markets. Product acquisition costs improved due to
increased production by our suppliers in lower-cost foreign countries and
improved negotiating leverage with our vendors as a result of our growth. Additionally, minor acquisition cost
synergies resulting from the CSK acquisition contributed to the improved
product acquisition costs. Improvements
in our distribution system were the result of capital projects designed to
create operating expense efficiencies.
We anticipate these trends to continue at a moderate rate throughout the
remainder of 2008, with more significant improvements resulting from continued
product acquisition synergies relating to the CSK acquisition.
Selling, general and
administrative expenses (SG&A expenses) increased $204 million, or 97%
from $211 million (or 31.9% of sales) in the third quarter of 2007 to $415
million (or 37.3% of sales) in the third quarter of 2008. SG&A expenses increased $249 million, or
41% from $609 million (or 31.7% of sales) in the first nine months of 2007 to
$858 million (or 34.8% of sales) in the first nine months of 2008. The dollar increase in SG&A expenses
resulted primarily from the acquisition of CSK and from additional team members
and resources to support our increased store count. The increase in SG&A expenses as a
percentage of sales in the third quarter and for the first nine months of 2008
was primarily due to the addition of the CSK store base which has a higher
expense structure than the core OReilly store base, $2.5 million of non-cash
amortization of CSK trade names and trade marks and partial de-leverage of
fixed SG&A expenses on low comparable store sales increases.
Interest expense
increased $9.8 million, from $1.1 million (or 0.2% of sales) during the third
quarter of 2007 to $10.9 million (or 1.0% of sales) in the third quarter of
2008. Interest expense for the first
nine months of 2008 increased $10.5 million, from $2.6 million (or 0.1% of
sales) in 2007 to $13.1 million (or 0.5% of sales) for the same period in 2008. The increase in interest expense for the
third quarter and first nine months of 2008 is the result of borrowings under
our new asset-based revolving credit facility that were used to fund the CSK
acquisition as well as amortization of a portion of the debt issuance costs. Other income (expense) for the third quarter
included one-time charges of $4.2 million for interim financing facility
commitment fees related to the CSK acquisition and $7.2 million of debt
prepayment costs resulting from the payoff of our existing senior notes and
synthetic lease facility.
Our estimated provision for income taxes decreased $0.6
million to $29.8 million for the third quarter 2008 compared to $30.4 million
for the same period in 2007. Our
provision for income taxes increased $0.8 million to $90.4 million for the first
nine months of 2008 compared to $89.6 million for the first nine months of
2007. Our effective tax rate was 41.8%
of income before income taxes for the third quarter of 2008 versus 36.4% for
the same period in 2007. Our effective
tax rate for the first nine months of 2008 was 38.6% versus 36.9% for the same
period in 2007. These increases are the
result of our acquisition of CSK and the generally higher effective tax rates
in most states where CSK stores are located.
In addition we incurred a one-time charge to adjust tax liabilities in
the amount $3.1 million relating to the acquisition.
Our diluted earnings per common share for the third quarter
of 2008 decreased 33% to $0.31 on 133.1 million shares compared to $0.46 for
the third quarter of 2007 on 116.3 million shares. Our diluted earnings per common share for the
first nine months of 2008 decreased 11% to $1.18 on 122.1 million shares
compared to $1.32 a year ago on 116.0 million shares. Our third quarter results included charges
related to the July 11, 2008, acquisition of CSK. These charges included one-time costs for the
prepayment and extinguishment of existing OReilly debt, commitment fees for an
unused interim financing facility, a one-time adjustment to tax liabilities
resulting from the acquisition of CSK and a non-cash charge to amortize the
value assigned to CSKs trade names and trademarks, which will be amortized
over the next one to three years coinciding with the anticipated conversion of
CSK store locations. Adjusted diluted
earnings per share, excluding the impact of acquisition related charges, was
$0.40 and $1.27 for the third quarter and first nine months of 2008, reflecting
decreases of 13% and 4%, respectively, from the same periods a year ago. The impact of the individual acquisition
related charges was as follows:
|
|
Net Income
|
|
Diluted Earnings Per Share
|
|
|
|
Three Months
Ended
September 30,
2008
|
|
Nine Months
Ended
September 30,
2008
|
|
Three Months
Ended
September 30,
2008
|
|
Nine Months
Ended
September 30,
2008
|
|
|
|
(in thousands, except per share data)
|
|
Net income
excluding acquisition-related charges
|
|
$
|
53,055
|
|
$
|
155,174
|
|
$
|
0.40
|
|
$
|
1.27
|
|
Acquisition
related charges, net of tax:
|
|
|
|
|
|
|
|
|
|
Debt prepayment
costs
|
|
4,412
|
|
4,412
|
|
0.03
|
|
0.04
|
|
Interim facility
commitment fees
|
|
2,558
|
|
2,558
|
|
0.02
|
|
0.02
|
|
Adjustments to
tax liabilities
|
|
3,142
|
|
3,142
|
|
0.02
|
|
0.02
|
|
Amortization of
trade names and trademarks
|
|
1,544
|
|
1,544
|
|
0.02
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
Net income and
diluted EPS
|
|
$
|
41,399
|
|
$
|
143,518
|
|
$
|
0.31
|
|
$
|
1.18
|
|
20
Table of Contents
The acquisition-related adjustments to EPS in the above
paragraph and table present certain financial information not derived in
accordance with United States generally accepted accounting principles (GAAP). We do not, and do not suggest investors
should, consider such non-GAAP financial measures in isolation from, or as a
substitute for, GAAP financial information.
We believe that the presentation of adjusted net income and earnings per
share excluding the acquisition-related charges provides meaningful
supplemental information to both management and investors that is indicative of
the Companys ongoing core operations.
Management excludes these items in judging its performance and believes
this non-GAAP information is useful to gain an understanding of the recurring
factors and trends affecting our business.
Material limitations of these non-GAAP measures are that such measures
do not reflect actual GAAP amounts, debt prepayment costs and interim facility
commitment fees include actual cash outlays, adjustments to existing tax
liabilities reflect future cash outlays, and amortization of acquisition-related
trade names and trademarks reflect charges to net income and earnings per share
that will recur over the estimated useful lives of the assets ranging from one
to three years. We compensate for such limitations by presenting, in the table
above, the accompanying reconciliation to the most directly comparable GAAP
measures.
Liquidity
and Capital Resources
Net cash provided by
operating activities increased from $281.9 million for the first nine months in
2007 to $289.3 million for the first nine months of 2008. This increase was principally due to
increased income before depreciation and amortization and a decrease in
accounts receivable from vendors partially offset by an increase in net
inventory investment. Net inventory
investment reflects our investment in inventory net of the amount of accounts
payable to vendors. The increase in net
inventory investment is the result of our initiative to increase the per store
inventory levels at our newly acquired CSK stores.
Net cash used in investing activities increased from $216.5
million during the first nine months in 2007 to $288.8 million for the
comparable period in 2008, principally due to payments made in association with
the acquisition and closing of CSK and an increase in capital expenditures from
the purchase of properties previously leased under our synthetic lease facility
on July 11, 2008.
Net cash used in
financing activities for the first nine months of 2008 was $21.7 million
compared to net cash provided by financing activities of $14.4 million during
the same period of 2007. The increase in
cash used in financing activities is primarily the result of the payment of
outstanding principal balances on existing debt, debt issuance costs and
prepayment costs in association with the financing of the acquisition of CSK
partially offset by the proceeds from borrowings under our asset-based credit
facility.
On July 11, 2008, in connection with the acquisition of
CSK, we entered into a Credit Agreement for a five-year $1.2 billion
asset-based revolving credit facility arranged by Bank of America, N.A. and
Lehman Brothers Inc., which we used to refinance debt, fund the cash portion of
the acquisition, pay for other transaction-related expenses and provide
liquidity for the combined Company going forward. This facility replaced a previous unsecured,
five-year syndicated revolving credit facility in the amount of $100 million.
The Credit Agreement is comprised of a $1.075 billion tranche
A revolving credit facility and a $125.0 million first-in-last-out revolving
credit facility (FILO tranche). On the
date of the transaction, the amount of the borrowing base available, as
described in the Credit Agreement, under the credit facility was $1.05 billion
of which we borrowed $588 million. We
used borrowings under the credit facility to repay certain existing debt of
CSK, repay our $75 million 2006-A Senior Notes and purchase all of the
properties that had been leased under our synthetic lease facility. We believe that cash expected to be provided
by operating activities and our asset-based revolving credit facility will be
sufficient to fund both our short-term and long-term capital and liquidity
needs for the foreseeable future.
Borrowings under the tranche A revolver initially bear
interest, at our option, at a rate equal to either a base rate plus 1.50% per
annum or LIBOR plus 2.5% per annum, with each rate being subject to adjustment
based upon certain excess availability thresholds. Borrowings under the FILO tranche are
expected to bear interest, at our option, at a rate equal to either a base rate
plus 2.75% per annum or LIBOR plus 3.75% per annum, with each rate being
subject to adjustment based upon certain excess availability thresholds. The base rate is equal to the higher of the
prime lending rate established by Bank of America from time to time and the
federal funds effective rate as in effect from time to time plus 0.50%. Fees related to unused capacity under the
credit facility are assessed at a rate of 0.5% of the remaining available borrowings
under the facility, subject to adjustment based upon remaining unused
capacity. In addition, we paid customary
commitment fees, letter of credit fees, underwriting fees and other
administrative fees in respect of the credit facility.
On July 24, 2008, we
entered into interest rate swap transactions with Branch Banking and Trust
Company (BBT), Bank of America, N.A. (BA) and SunTrust Bank (SunTrust). We entered into the interest rate swap
transactions to mitigate the risk associated with our floating interest rate
based on LIBOR on an aggregate of $250 million of our debt that is outstanding
under our Credit Agreement, dated as of July 11, 2008. Each interest rate swap has an effective date
of August 1, 2008 and maturity dates of (i) August 1, 2010 for
the BBT Swap,
21
Table of Contents
(ii) August 1,
2011 for the BA Swap and (iii) August 1, 2011 for the SunTrust Swap.
We are required to make certain monthly fixed rate payments calculated on
notional amounts of (i) $100 million for the BBT Swap, (ii) $75
million for the BA Swap and (iii) $75 million for the SunTrust Swap, while
the applicable counter party is obligated to make certain monthly floating rate
payments to us referencing the same notional amount. The interest rate swap
transactions effectively fix the annual interest rate payable on these notional
amounts of our debt which may exist under the Credit Facility to (i) 3.425%
for the BBT Swap, (ii) 3.83% for the BA Swap and (iii) 3.83% for the
SunTrust Swap, plus an applicable margin under the terms of the Credit
Facility.
On October 14,
2008 we entered into additional interest rate swap transactions with BBT, BA
and SunTrust. We entered into the
transactions to mitigate the risk associated with our floating interest rate,
which is based on LIBOR on an additional $150 million of our debt that is
outstanding under our Credit Agreement, dated as of July 11, 2008. Each interest rate swap has an effective date
of October 17, 2008. We are
required to make certain monthly fixed rate payments calculated on the notional
amount of each swap and the applicable counterparty is obligated to make
certain monthly floating rate payments to us referencing the same notional
amounts. The interest rate swap
transactions effectively fix the annual interest rate payable on these notional
amounts of our debt, which may exist under the Credit Facility, to rates
ranging between 2.99% and 3.56%, plus an applicable margin under the terms of
the Credit Facility. The applicable
notional amount, effective interest rate and expiration date for each swap
transaction are as follows:
Counterparty
|
|
Notional
Amount
(in thousands)
|
|
Effective
index rate
|
|
Expiration Date
|
|
BBT
|
|
$
|
25,000
|
|
2.99
|
%
|
October 17, 2010
|
|
BBT
|
|
25,000
|
|
3.01
|
|
October 17, 2010
|
|
BA
|
|
25,000
|
|
3.05
|
|
October 17, 2010
|
|
SunTrust
|
|
25,000
|
|
2.99
|
|
October 17, 2010
|
|
BA
|
|
50,000
|
|
3.56
|
|
October 17, 2011
|
|
|
|
|
|
|
|
|
|
|
On July 11, 2008, OReilly agreed to become a guarantor, on a
subordinated basis, of the $100 million principal amount of 6 3/4% Exchangeable
Senior Notes due 2025 (the Notes) originally issued by CSK pursuant to an
Indenture (the Original Indenture), dated as of December 19, 2005, as amended
and supplemented by the First Supplemental Indenture (the First Supplemental
Indenture) dated as of December 30, 2005, and the Second Supplemental
Indenture, dated as of July 27, 2006, (the Second Supplemental Indenture) by
and between CSK Auto Corporation, CSK Auto, Inc. and The Bank of New York
Mellon Trust Company, N.A., as trustee.
The 6 3/4% Notes are exchangeable into cash and shares
of our common stock. The Notes bear
interest at 6.75% per year until December 15, 2010, and 6.5% until
maturity on December 15, 2025. Prior to their stated maturity, the 6 3/4%
Notes are exchangeable by the holders only under certain circumstances. In the event of an exchange, each $1,000
Principal Amount of the Notes shall be exchangeable into 25.97 shares of our
common stock and $60.61 in cash.
The noteholders may require us to repurchase some or
all of the notes for cash at a repurchase price equal to 100% of the principal
amount of the notes being repurchased, plus any accrued and unpaid interest on December 15,
2010; December 15, 2015; or December 15, 2020, or on any date
following a fundamental change as described in the indenture. We may redeem some or all of the notes for
cash at a redemption price of 100% of the principal amount plus any accrued and
unpaid interest on or after December 15, 2010, upon at least 35-calendar
days notice.
Our plan to
integrate the acquisition of CSK will require significant capital expenditures,
principally for investments to upgrade CSKs distribution network, convert
store signage, fixtures and point-of-sale equipment to the OReilly model and
to upgrade inventory offerings.
Additionally, our continuing store expansion requires significant
capital expenditures and working capital principally for inventory requirements. The costs associated with opening a new store
(including the cost of land acquisition, improvements, fixtures, net inventory
investment and computer equipment) are estimated to average approximately $1.2
to $1.4 million; however, such costs may be significantly reduced where we
lease, rather than purchase, the store site.
We plan to finance the CSK acquisition and our expansion program through
cash expected to be provided from operating activities and available borrowings
under our asset-based revolving credit facility.
During the first
nine months of 2008, we opened 131 net new stores. We plan to open approximately 19 additional
stores during the remainder of 2008, bringing the total net new stores in 2008
to 150. The funds required for such
planned expansions are expected to be provided by cash generated from operating
activities and our asset-based revolving credit facility.
Contractual
Obligations
At September 30, 2008, we had long-term debt with
maturities of less than one year of $8.3 million and long-term debt with
maturities over one year of $657.1 million, representing a total increase in
all outstanding debt of $564.9 million from September 30, 2007. On July 11, 2008, we repaid our Series 2001-A
Senior Notes that were issued for $75 million on May 16, 2001 using
available cash on hand and borrowings under our asset-based revolving credit
facility. These notes, along with the Series 2001-B
Senior Notes, which were repaid on May 16, 2008 using available cash on
hand, were part of a $100 million private placement of two series of unsecured
senior notes. We had
22
Table of Contents
contractual commitments, with aggregate maturities of both
less than and greater than twelve months, under our operating leases in the
amount of $1.35 billion at September 30, 2008. This amount includes $809 million in
operating lease obligations acquired in connection with the acquisition of CSK
on July 11, 2008. In addition, we
have $22.9 million in future contractual obligations under interest rate swap
agreements that were in place as of September 30, 2008.
New
Accounting Standards
In September 2006,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS
No. 157), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 for financial assets and liabilities, as well
as any other assets and liabilities that are carried at fair value on a
recurring basis in financial statements, are effective for financial statements
issued for fiscal years beginning after November 15, 2007 (fiscal year
2008 for us). FASB Staff Position FAS 157-2,
Effective
Date of FASB Statement No.
157, delayed the effective date of
SFAS No. 157 for most nonfinancial assets and nonfinancial liabilities
until fiscal years beginning after November 15, 2008 (fiscal year 2009 for
us). The implementation of SFAS No. 157 for nonfinancial assets and
financial liabilities, effective January 1, 2008, did not have a material
impact on our consolidated financial position, results of operations or cash
flows. We do not anticipate SFAS No. 157 will have a material impact
on our consolidated financial position, results of operations or cash flows.
In February 2007,
the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159).
SFAS No. 159 permits entities to choose to measure selected financial
assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. The provisions of SFAS No. 159 are
effective as of the beginning of our 2008 fiscal year. As we elected not to measure any eligible
items using the fair value option in accordance with SFAS No. 159, the
adoption of SFAS No. 159 did not have a material impact on our
consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141,
Business Combinations (revised 2007)
(SFAS
No. 141(R)). SFAS No. 141(R) applies to any
transaction or other event that meets the definition of a business
combination. Where applicable, SFAS No. 141(R) establishes
principles and requirements for how the acquirer recognizes and measures
identifiable assets acquired, liabilities assumed, noncontrolling interest in
the acquiree and goodwill or gain from a bargain purchase. In
addition, SFAS No. 141(R) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This statement is to be applied
prospectively for fiscal years beginning after December 15, 2008. We
are in the process of evaluating the potential future impact, if any, of SFAS No. 141(R) on
our consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
(SFAS
No. 161), which requires entities that utilize derivative instruments to
provide qualitative disclosures about their objectives and strategies for using
such instruments, as well as any details of credit-risk-related contingent
features contained within derivatives.
SFAS No. 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of
FASB Statement No. 133
has been applied, and the impact that hedges have on an entitys financial
position, financial performance and cash flows.
SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. We will adopt the provisions of SFAS No. 161
beginning with our March 2009 interim consolidated financial statements.
Inflation
and Seasonality
We attempt to mitigate the effects of merchandise cost
increases principally by adjustments to our retail prices. We will also take 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 that our operations have been materially
affected by inflation. Our business is
somewhat seasonal, primarily as a result of the impact of weather conditions on
customer buying patterns. 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 our 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
Security and Exchange Commissions website at www.sec.gov. Such reports are generally available on the
day they are filed. Additionally, we
will furnish interested readers upon request and free of charge, a paper copy
of such reports.
23
Table of Contents
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are subject to
interest rate risk to the extent we borrow against our credit facilities with
variable interest rates. In the event of
an adverse change in interest rates and to the extent that we have amounts
outstanding under our asset-based credit facility, management would likely take
further actions that would mitigate our exposure to interest rate risk,
particularly if our borrowing levels increase to any significant extent. We have interest rate exposure with respect
to the $543.6 million outstanding balance on our variable interest rate debt at
September 30, 2008; however, from time to time, we have entered into
interest rate swaps to reduce this exposure.
On July 24, 2008 and on October 14, 2008, we reduced our
exposure to changes in interest rates by entering into interest rate swap
contracts (the Swaps) with a total notional amount of $400 million. The Swaps represent contracts to exchange a
floating rate for fixed interest payments periodically over the life of the
agreement without exchange of the underlying notional amount. The notional amount of the swap is used to
measure interest to be paid or received and does not represent the amount of
exposure to credit loss. The Swaps have
been designated as cash flow hedges. If
interest rates increased or decreased by 100 basis points, annualized interest
expense and cash payments for interest would increase or decrease by
approximately $1.4 million ($0.9 million after tax), based on our
exposure to interest rate changes on variable rate debt that is not covered by
the Swaps. This analysis does not
consider the effects of the change in the level of overall economic activity
that could exist in an environment of adversely changing interest rates.
ITEM
4. CONTROLS AND PROCEDURES
The Companys 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 Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(b) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of September 30, 2008.
Based on such review and evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that the Companys disclosure controls
and procedures were effective as of September 30, 2008, to ensure that the
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act (a) is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commissions rules and forms and (b) is accumulated and
communicated to the Companys management, including the principal executive and
principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING
On July 11, 2008,
the Company completed its acquisition of CSK Auto Corporation (CSK), at which
time CSK became a wholly owned subsidiary of the Company. The Company considers the transaction
material to results of operations, cash flows and financial position from the
date of the acquisition through September 30, 2008 and believes the
internal controls and procedures of CSK will have a material effect on the
Companys internal control over financial reporting. See Note 2 Business Combination to the
Condensed Consolidated Financial Statements included in Item 1 for discussion
of the acquisition and related financial data.
The Company is currently
in the process of evaluating the internal controls and procedures of CSK. Further, the Company is in the process of
integrating CSK operations. The Company
anticipates a successful integration of operations and internal controls over
financial reporting, but will face significant challenges in integrating procedures
and operations in a timely and efficient manner and retaining key
personnel. Management will continue to
evaluate its internal control over financial reporting as it executes
integration activities, however, integration activities could materially affect
the Companys internal control over financial reporting in future periods.
Except for the CSK
acquisition, there were no other material changes in the Companys internal
control over financial reporting during the third quarter of 2008 that have
materially affected or are reasonably likely to materially affect the Companys
internal controls over financial reporting.
24
Table of Contents
PART II
- OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
Please refer to Note 12 Legal
Matters in the notes to the Condensed Consolidated Financial Statements
included in Item 1 of Part I above, which is incorporated herein by
reference.
ITEM 1A.
RISK FACTORS
Other than the risk
factors discussed below, in relation to the acquisition of CSK, there have been
no material changes in the risk factors discussed in our Annual Report on Form 10-K
for the year ended December 31, 2007.
Following the acquisition of CSK, the risk factors listed below are
believed to be material:
The integration of the
businesses and operations of OReilly and CSK involves risks, and the failure
to integrate successfully the businesses and operations in the expected time
frame may adversely affect the future results of the combined company.
The failure of the combined company to meet the
challenges involved in integrating the operations of OReilly and CSK
successfully or to otherwise realize any of the anticipated benefits of the
merger could seriously harm our results of operations. Our ability to realize
the benefits of the merger will depend in part on the timely integration of
organizations, operations, procedures, policies and technologies, as well as
the harmonization of differences in the business cultures of the two companies
and retention of key personnel. The integration of the companies will be a
complex, time-consuming and expensive process that, even with proper planning
and implementation, could significantly disrupt the businesses of OReilly and
CSK. The challenges involved in this integration include the following:
·
implementing OReilly distribution, point
of sale and inventory management systems;
·
combining respective product offerings;
·
preserving customer, supplier and other
important relationships of both OReilly and CSK and resolving potential
conflicts that may arise;
·
minimizing the diversion of management
attention from ongoing business concerns;
·
addressing differences in the business
cultures of OReilly and CSK to maintain employee morale and retain key
employees; and
·
coordinating and combining geographically
diverse operations, relationships and facilities, which may be subject to
additional constraints imposed by distance and local laws and regulations.
We may not successfully
integrate the operations of OReilly and CSK in a timely manner, or at all, and
we may not realize the anticipated benefits or synergies of the merger to the
extent, or in the time frame, anticipated. The anticipated benefits and
synergies are based on projections and assumptions, not actual experience, and
assume a successful integration. In addition to the integration risks discussed
above, our ability to realize these benefits and synergies could be adversely
affected by practical or legal constraints on our ability to combine
operations. If we fail to manage the integration of these businesses
effectively, our growth strategy and future profitability could be negatively
affected, and we may fail to achieve the intended benefits of the merger.
Our
increased debt levels could adversely affect our cash flow and prevent us from
fulfilling our obligations.
Upon consummation of the
offer, we entered into a new credit facility, which significantly increased our
outstanding indebtedness and interest expense.
Our substantial debt could have important consequences, such as:
·
requiring us to dedicate a substantial
portion of our cash flow from operations and other capital resources to
principal and interest, thereby reducing our ability to fund working capital,
capital expenditures and other cash requirements;
·
increasing our vulnerability to adverse
economic and industry conditions;
·
limiting our flexibility in planning for,
or reacting to, changes and opportunities in our industry, which may place us
at a competitive disadvantage;
·
limiting our ability to incur additional
debt on acceptable terms, if at all; and
·
exposing us to fluctuations in interest
rates.
In addition, the terms of
the financing obligations include restrictions, such as affirmative and
negative covenants, conditions to borrowing, subsidiary guarantees and asset
and stock pledges. A failure to comply with these restrictions could result in
a default under the financing obligations or could require us to obtain waivers
from our lenders for failure to comply with these restrictions. The occurrence
of a default that remains uncured or the inability to secure a necessary
consent or waiver could have a material adverse effect on our business,
financial condition or results of operations.
Risks related to the
combined company and unanticipated fluctuations in the combined companys
quarterly operating results could affect the combined companys stock price.
25
Table of Contents
We believe that quarter-to-quarter comparisons
of our financial results are not necessarily meaningful indicators of the
future operating results of the combined company and should not be relied on as
an indication of future performance. If the combined companys quarterly
operating results fail to meet the expectations of analysts, the trading price
of our common stock following the offer and the merger could be negatively
affected. We cannot be certain that the business strategy of the combined
company will be successful or that it will successfully manage these risks. If
we fail to adequately address any of these risks or difficulties, our business
would likely suffer.
In order to be successful,
we will need to retain and motivate key employees, which may be more difficult
in light of uncertainty regarding the merger, and failure to do so could
seriously harm the company.
In order to be successful, we will need to
retain and motivate executives and other key employees. Experienced management
and technical personnel are in high demand and competition for their talents is
intense. Employee retention may be a particularly challenging issue in
connection with the merger. Employees of OReilly or CSK may experience
uncertainty about their future role with the combined company until or after
strategies with regard to the combined company are announced or executed. We
also must continue to motivate employees and keep them focused on our
strategies and goals, which may be particularly difficult due to the potential
distractions of the merger.
26
Table of Contents
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
OTHER INFORMATION
None.
27
Table of Contents
ITEM
6. EXHIBITS
Exhibits:
Number
|
|
Description
|
|
Page
|
|
|
|
|
|
2.2
|
|
Agreement and Plan of
Merger, dated April 1, 2008, between OReilly Automotive, Inc., OC
Acquisition Company and CSK Auto Corporation, filed as Exhibit 2.1 to
the Registrants Current Report on Form 8-K dated April 7, 2008, is
incorporated herein by this reference.
|
|
|
10.1
|
|
Credit Agreement, dated
as of July 11, 2008, among OReilly Automotive, Inc., as the lead
Borrower itself and the other Borrowers from time to time party thereto, the
Guarantors from time to time party thereto, Bank of America N.A., as
Administrative Agent, Collateral Agent, L/C Issuer, and Swing Line Lender,
the Lenders from time to time party thereto, and the other agents party
thereto, filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated July 11, 2008, is incorporated herein by this
reference.
|
|
|
31.1
|
|
Certificate of the
Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
31.2
|
|
Certificate of the
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
32.1
|
|
Certificate of the
Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
32.2
|
|
Certificate of the
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
28
Table of Contents
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.
|
|
OREILLY AUTOMOTIVE, INC.
|
|
|
|
November 10,
2008
|
|
/s/ Greg Henslee
|
Date
|
|
Greg
Henslee, Co-President and Chief Executive
Officer (Principal Executive Officer)
|
|
|
|
|
|
|
November 10,
2008
|
|
/s/ Thomas McFall
|
Date
|
|
Thomas
McFall, Executive Vice President of Finance and
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
|
29
Table of Contents
INDEX TO EXHIBITS
Number
|
|
Description
|
|
Page
|
|
|
|
|
|
2.2
|
|
Agreement and Plan of
Merger, dated April 1, 2008, between OReilly Automotive, Inc., OC
Acquisition Company and CSK Auto Corporation, filed as Exhibit 2.1 to
the Registrants Current Report on Form 8-K dated April 7, 2008, is
incorporated herein by this reference.
|
|
|
10.1
|
|
Credit Agreement, dated
as of July 11, 2008, among OReilly Automotive, Inc., as the lead
Borrower itself and the other Borrowers from time to time party thereto, the
Guarantors from time to time party thereto, Bank of America N.A., as Administrative
Agent, Collateral Agent, L/C Issuer, and Swing Line Lender, the Lenders from
time to time party thereto, and the other agents party thereto, filed as
Exhibit 10.1 to the Registrants Current Report on Form 8-K dated
July 11, 2008, is incorporated herein by this reference.
|
|
|
31.1
|
|
Certificate of the
Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
31.2
|
|
Certificate of the
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, filed herewith.
|
|
|
32.1
|
|
Certificate of the
Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
32.2
|
|
Certificate of the
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, filed herewith.
|
|
|
30
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