Item
2
.
Management's 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 “O’Reilly” refer to O’Reilly Automotive, Inc. and its subsidiaries.
In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results,
including
:
·
|
an overview of the key drivers of the automotive aftermarket
industry
;
|
·
|
our results of operations for the quarters and
nine
month periods ended
September
30, 2012 and 2011;
|
·
|
our liquidity and capital resources;
|
·
|
any contractual obligations to which we are committed;
|
·
|
our critical accounting estimates;
|
·
|
the inflation and seasonality of our business;
and
|
·
|
recent
accounting
pronouncements
that
may
affect our co
mpany.
|
The review of Management’s
D
iscussion and
A
nalysis
should be made in conjunction with our
condensed
consolidated financial statements, related notes and other financial information included elsewhere in this
quarterly
report.
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, integration 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 regulations, our increased debt levels, credit ratings on our public debt, our ability to hire and retain qualified employees, risks associated with the performance of acquired businesses such as CSK Auto Corporation
(“CSK”)
, 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, 2011, for additional factors that could materially affect our financial performance. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. We are one of the largest automotive aftermarket specialty retailers, selling our products to both do-it-yourself (“DIY”) customers and professional service providers
– our
“dual market strategy”. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment. Our extensive product line includes an assortment of products that are differentiated by quality and price 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.
Our stores off
er enhanced services and programs
to our customers, including those identified below:
·
|
used oil and battery recycling
|
·
|
battery diagnostic testing
|
·
|
electrical and module testing
|
·
|
drum and rotor resurfacing
|
·
|
professional paint shop mixing and related materials
|
Our strategy is to open new stores to achieve greater penetration into existing markets and expansion into new, contiguous markets. We plan to open 180 net, new stores in 2012. We typically open new stores either by (i) constructing a new facility or renovating an existing one on property we purchase or lease and stocking the new store with fixtures and inventory; (ii) acquiring an independently owned auto parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store; or (iii) purchasing multi-store chains. We believe our investment in store growth will be funded with the cash flows expected to be generated by our existing operations and through available borrowings under our existing credit facility. During the
three months
ended
September 30
, 2012, we opened
38
stores and
closed one
store
. During the nine months ended September 30, 2012
,
we opened
161
stores and closed
5
stores,
and as of that date, operated
3,896
stores
in 39 state
s.
Operating within the retail industry, we are influenced by a number of general macroeconomic factors including, but not limited to, fuel costs, unemployment rates, consumer preferences and spending habits, and competition. The difficult conditions that affected the overall macroeconomic environment in recent years continue to impact O’Reilly and the retail sector in general. We believe that the average consume
r’s tendency has been to “trade
down” to lower quality products during the recent challenging macroeconomic conditions. We have ongoing initiatives aimed at tailoring our product offering to adjust to customers’ changing preferences; however, we also continue to have initiatives focused on marketing and training to educate customers on the advantages of
“
purchasing up
”
on the value spectrum. We believe these ongoing initiatives targeted at marketing higher quality products will result in our customers’ willingness to return to
“
purchasing up
”
on the value spectrum in the future as the U.S. economy recovers; however, we cannot pr
edict whether, when, or the manner in which, these economic conditions will change.
We believe the key drivers of current and future demand of the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations, average vehicle age and unemployment.
·
|
Number of U.S. Miles Driven
- The number of total miles driven in the U.S. heavily influences the demand for the repair and maintenance products sold within the automotive aftermarket. Historically, the long-term trend in the total miles driven in the U.S. has steadily increased; however, according to the Department of Transportation, total miles driven in the U.S. have remained relatively flat since 2007 as the U.S. has experienced difficult macroeconomic conditions. Historically, rapid increases in gasoline prices have negatively impacted U.S. total miles driven as consumers react to the increased expense by reducing travel. We believe that as the U.S. economy recovers and gasoline prices
remain
stab
l
e, annual miles driven will return to historical growth rates and continue to drive demand for our industry.
|
·
|
Number of U.S. Registered Vehicles, New Light Vehicle Registrations and Average Vehicle Age
- The total number of ve
hicles on the road and the average age of the U.S. vehicle population also heavily influence the demand for products sold within the automotive aftermarket
industry
. As reported by the Automotive Aftermarket Industry Association (“AAIA”), the total number of registered vehicles has increased
15
% over the past decade, from
209
million light vehicles in 200
1
to
241
million light vehicles in 201
1
.
Annual n
ew light vehicle registratio
ns have declined
24
% over the past decade, from
17
million registrations in 2001 to
13
million registrations in 2011; however, the seasonally adjusted annual rate (the “SA
A
R”) of sales of light vehicles in the U.S. increased to
15
million as of
September
30, 2012, indicating that the trend of declining new light vehicle registrations has reversed. As reported by the AAIA, the average age of the U.S. vehicle popul
ation has increased
21
% over the past decade, from
8.9
years in 200
1
to
10.8
years in 201
1
. We believe this increase in average age can be attributed to better engineered and manufactured vehicles, which
can be reliably driven at higher miles due to better quality power trains and interiors and exteriors; new car sales over the past three ye
ars, which have been below historical levels; and the consumer’s willingness to invest in maintaining their higher-mileage, better built vehicles. As the average age of the vehicle on the road increases, a larger percentage of miles are being driven by vehicles which are outside of a manufacturer warranty. These out-of-warranty, older vehicles, generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles. Based on this change in consumer sentiment surrounding the length of time older vehicles can be reliably driven at higher mileages, we believe consumers will continue to keep their vehicles even longer as the economy recovers, maintaining the trend of an aging vehicle population.
|
·
|
Unemployment
- Unemployment rates and continued uncertainty surrounding the overall economic health of the U.S. have had a negative impact on consumer confidence and the level of consumer discretionary spending. The annual U.S. unemployment rate over the past two years has remained at 30-year highs. We believe macroeconomic uncertainties and the potential for future joblessness can motivate consumers to find ways to save money, which can be an important factor in the consumer’s decision to defer the purchase of a new vehicle and maintain their existing vehicle. While the deferral of vehicle purchases has led to an increase in vehicle maintenance, long-term trends of high unemployment could continue to impede the growth of annual miles driven, as well as decrease consumer discretionary spending, both of which negatively impact demand for products sold in the automotive aftermarket
industry
. As of
September 30
, 2012, the U.S. unemployment rate
decreased slightly t
o
7.8
% from
8.5
% as of December 31, 2011, and
9.0
% as of
September 30
, 2011. We believe that as the economy recovers, unemployment will return to more historic levels and we will see a corresponding increase in commuter
traffic as unemployed individuals return to work. Aided by these increased commuter miles, overall annual U.S. miles driven should begin to grow resulting in continued demand for automotive aftermarket products.
|
We remain confident in our ability to continue to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values of customer service and expense control.
RESULTS OF OPERATIONS
Sales:
Sales for the
three months
ended
September 30
, 2012, increased $
66
million to $
1.60
billion from $
1.54
billion for the same period one year ago, representing an increase of
4
%.
Sales for the nine months ended September 30, 2012, increased $
296
million to $
4.69
billion from $
4.40
billion for the same period one year ago, representing an increase of
7
%.
Comparable store sales for stores open at least one year increased
1.3
% and
4.8
% for the
three months
ended
September 30
, 2012 and 2011, respectively.
Comparable store sales for stores open at least one year increased
3.7
% and
4.9
% for the nine months ended September 30, 2012 and 2011, respectively.
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.
The following table presents the components of the increase in sales for the three and nine months ended September 30, 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Sales for the Three Months Ended September 30, 2012, Compared to the Same Period in 2011
|
|
|
Increase in Sales for the Nine Months Ended September 30, 2012, Compared to the Same Period in 2011
|
Store sales:
|
|
|
|
|
|
Comparable store sales
|
$
|
20
|
|
$
|
157
|
Non-comparable store sales:
|
|
|
|
|
|
Sales for stores opened throughout 2011, excluding stores open at least one year that are included in comparable store sales
|
|
16
|
|
|
76
|
Sales in 2011 for stores that have closed
|
|
(1)
|
|
|
(2)
|
Sales for stores opened throughout 2012
|
|
31
|
|
|
59
|
Non-store sales:
|
|
|
|
|
|
Includes sales of machinery and sales to independent parts stores and Team Members
|
|
-
|
|
|
6
|
Total increase in sales
|
$
|
66
|
|
$
|
296
|
We believe the increased sales achieved by our stores are the result of high levels of customer service, superior inventory availability, a broader selection of products offered 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 our stores, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers.
Our comparable store sales increase
s
for the
three and nine months ended September 30, 2012, were driven by an increase in average ticket values, partially offset by a decrease in DIY customer transaction counts. The improvement in average ticket values was a result of the continued growth of the higher priced, hard part categories, as a percentage of our total sales. The growth in the hard part categories is driven by the increase of professional service provider customer sales as a percentage of our total sal
es mix and the continued growth in DIY hard part sales, as consumers continue to maintain and repair their vehicles. Transaction counts
also
continue to be negatively impacted by better-engineered and more technically advanced vehicles, which have been manufactured in recent years. These vehicles require less frequent repairs as the component parts are more durable and last for longer periods of time; however, when repairs are required, the
cost of the repair is typically
greater.
In addition,
DIY customer transaction counts continue t
o be negatively impacted by macroeconomic pressures on disposable income, including sustained unemployment levels above historical averages. The strong increases in our professional service provider customer transaction counts
, driven by our acquired markets,
have been offset by the pressured DIY transaction counts.
We opened
37
and
156
net, new stores during the three
and nine
months ended
September 30
, 2012
, respectively
, compared to
50
and
137
net, new stores for the three
and nine
months ended September 30, 2011, respectively. As of September 30, 2012, we operated
3,896
stores in 39 states compared to
3,707
stores in 39 states at September 30, 2011. We anticipate total new store growth to be 180 net, new store openings in 2012 and 190 n
et, new store openings in 2013
.
Gross profit:
Gross profit for the
three months
ended
September 30
, 2012, increased to $
805
million (or
50.3
% of sales) from $
754
million (or
49.1
% of sales) for the same period one year ago, representing an increase of
7
%.
Gross profit for the nine months ended September 30, 2012, increased to $
2.35
billion (or
50.0
% of sales) from $
2.14
billion (or
48.7
% of sales) for the same period one year ago, representing an increase of
10
%. The increases in gross profit dollars were primarily a result of the increases in sales from new stores and the increases in comparable store sales at existing stores. The increases in gross profit as percentages of sales were primarily due to distribution center (“DC”) efficiencies, acquisition cost improvements, a more focused advertised price strategy and improved inventory shrinkage, partially offset by the impact of increased commercial sales as a percentage of the total sales mix. DC efficiencies are the result of continued leverage on our increased sales volumes and more tenured and experienced DC Team Members in our maturing DCs. In addition, during the current period, we increased our store-level inventories as a component of our focus on providing higher service levels. The costs to move this additional inventory into the stores were more efficient than routine restocking activity; as a result, we realize
d
a one-time benefit from capitalized distribution costs. This one-time capitalization of costs benefited gross margin for the three months ended September 30, 2012, by approximately 25 basis points, and we
do
not anticipate realizing this benefit in future periods. Acquisition cost improvements are the result of our ongoing negotiations with our vendors to improve our inventory purchase costs. The benefit to gross margin from a more focused advertised price strategy is the result of short duration, low margin promotions in the current period, which are designed to drive customer loyalty, build brand awareness and generate future business, but run for a shorter duration as compared to the same period one year ago. The improved inventory shrinkage is driven by our continued focus on inventory control and accountability through our distribution and store networks. Commercial sales typically carry a lower gross profit as a percentage of sales than DIY sales, as volume discounts are granted on wholesale transactions to professional service provider customers, therefore, creating pressure on our gross profit as a percentage of sales.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the three months ended
September
30, 2012, increased to $
542
million (or
33.9
% of sales) from $
513
million (or
33.4
% of sales) for the same period one year ago, representing an increase of
6
%. SG&A for the
nine
months ended
September
30, 2012, increased to $
1.59
billion (or
33.9
% of sales) from $
1.48
bil
lion (or
33.7
% of sales) for the same period one year ago, representing an increase of
7
%.
The increases in total SG&A dollars were primarily the result of additional employees, facilities and vehicles to support our increased store count. The increases in SG&A as percentages of sales were primarily the result of deleverage on soft comparable store sales.
Operating income:
As a result of the impacts discussed above, operating income for the
three months
ended
September 30
, 2012, increased to $
263
million (or
16.4
% of sales) from $
241
million (or
15.7
% of sales) for the same period one year ago, representing an increase of
9
%.
Operating income for the nine months ended September 30, 2012, increased to $
754
million (or
16.1
% of sales) from $
660
million (or
15.0
% of sales) for the same period one year ago, representing an increase of
14
%.
Other income and expense:
Total other expense for the
three months
ended
September 30
, 2012,
in
creased to $
9
million (or
0.6
% of sales) from $
6
million (or
0.4
% of sales) for the same period one year ago, representing a
n
in
crease of
55
%.
Total other expense for the nine months ended September 30, 2012, decreased to $
26
million (or
0.5
% of sales) from $
42
million (or
0.9
% of sales) for the same period one year ago, representing a decrease of
39
%. The increase in total other expense for the three months ended September 30, 2012, is the result of increased interest expense on higher average outstanding borrowings and increased amortization of debt issuance costs in the current period as compared to the same period one year ago. The decrease in total other expense for the nine months ended September 30, 2012, was primarily due to one-time charges related to our financing transactions that were completed in January of 2011 (discussed in detail below), partially offset by increased interest expense on higher average outstanding borrowings and increased amortization of debt issuance costs in the current period as compared to the same period one year ago.
Income taxes:
Our provision for income taxes for the
three months
ended
September 30
, 2012, increased to $
95
million (or
5.9
% of sales) from $
87
million (or
5.6
% of sales) for the same period one year ago, representing an increase of
9
%.
Our provision for income taxes for the nine months ended September 30, 2012, increased to $
276
million (or
5.9
% of sales) from $
234
million (or
5.3
% of sales) for the same period one year ago, representing an increase of
18
%. The increase in our provision for income taxes was due to the increase in our taxable income.
Our effective tax rate for the
three months
ended
September 30
, 2012, was
37.3
% of income before income taxes compared to
36.8
% for
the same period one year ago. Our effective tax rate for the nine months ended September 30, 2012, was
37.9
% of income before income taxes compared to
37.8
% for the same period one year ago. The increase in our effective tax rate for the three months ended September 30, 2012, was primarily due to benefits of employment tax credits taken during the three months ended September 30, 2011,
certain of
which were not available during the same period in the current year.
Net income:
As a result of the impacts discussed above, net income for the
three months
ended
September 30
, 2012, increased to $
159
million (or
9.9
% of sales) from $
148
million (or
9.7
% of sales) for the same period one year ago, representing an increase of
7
%.
As a result of the impacts discussed above, net income for the nine months ended September 30, 2012, increased to $
453
million (or
9.6
% of sales) from $
385
million (or
8.7
% of sales) for the same period one year ago, representing an increase of
18
%.
Earnings per share:
Our diluted earnings per common share for the
three months
ended
September 30
, 2012, increased
20
% to $
1.32
on
121
million shares versus $
1.10
for the same period one year ago on
135
million shares. The impact of
year-to-date
share repurchases on diluted earnings per share for the
three months
ended
September 30
, 2012, was an increase of approximately $
0.10
.
Our diluted earnings per common share for the nine months ended September 30, 2012, increased
30
% to $
3.60
on
126
million shares versus $
2.76
for the same period one year ago on
139
million shares. The impact of year-to-date share repurchases on diluted earnings per share for the nine months ended September 30, 2012, was an increase of approximately $
0.12
.
Adjustments for nonrecurring and non-operating events:
Our results for the nine months
ended
September 30
, 2011, included one-time charges associated with the financing transactions we completed in January of 2011, as discussed in Note 4 “Long-Term Debt”. The one-time charges included a non-cash charge to write off the balance of debt issuance costs related to our previous asset-based revolving credit facility in the amount of $
22
million ($
13
million, net of tax) and a charge related to the termination of our interest rate swap agreements in the amount of $
4
million ($
3
million, net of tax). The charges related to these financing transactions were included in “Other income (expense)” on our Condensed Consolidated Statements of Income for the
nine months ended
September 30
, 2011. The results discussed in the paragraph below are adjusted for these nonrecurring items for the
nine months
ended
September 30
, 2012 and 2011, and are reconciled in the table below.
Adjusted net income for the
nine months
ended
September 30
, 2012, increased
13
% to $
453
million (or
9.6
% of sales) from $
401
million (or
9.1
% of sales), for the same period one year ago. Adjusted diluted earnings per common share for the
nine months
ended
September 30
, 2012, increased
25
% to $
3.60
from $
2.88
, for the same period one year ago.
The table below outlines the impact of the charges related to the financing transactions for the
nine months
ended
September 30
, 2012 and 2011 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
Amount
|
% of Sales
|
|
Amount
|
% of Sales
|
GAAP net income
|
$
|
452,944
|
9.6
|
%
|
|
$
|
384,685
|
8.7
|
%
|
Write-off of asset-based revolving credit facility debt issuance costs, net of tax
|
|
-
|
-
|
%
|
|
|
13,458
|
0.3
|
%
|
Termination of interest rate swap agreements, net of tax
|
|
-
|
-
|
%
|
|
|
2,637
|
0.1
|
%
|
Non-GAAP adjusted net income
|
$
|
452,944
|
9.6
|
%
|
|
$
|
400,780
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
GAAP diluted earnings per common share
|
$
|
3.60
|
|
|
|
$
|
2.76
|
|
|
Write-off of asset-based revolving credit facility debt issuance costs, net of tax
|
|
-
|
|
|
|
|
0.10
|
|
|
Termination of interest rate swap agreements, net of tax
|
|
-
|
|
|
|
|
0.02
|
|
|
Non-GAAP adjusted diluted earnings per common share
|
$
|
3.60
|
|
|
|
$
|
2.88
|
|
|
Weighted-average common shares outstanding - assuming dilution
|
|
125,670
|
|
|
|
|
139,183
|
|
|
The financial information presented in the paragraph and table above is not derived in accordance with United States generally accepted accounting principles (“GAAP”). We do not, nor do we 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 financial results and estimates excluding the impact of the non-cash charge to write off the balance of debt issuance costs and the charge related to the termination of interest rate swap contracts, provide meaningful supplemental information to both management and investors, which is indicative of our core operations. We exclude these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the table above, a reconciliation to the most directly comparable GAAP measures.
LIQUIDITY
AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. The
primary
sources of our liquidity are funds generated from operations and borrowed under our unsecured revolving credit facility (the “Revolving Credit Facility”). Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our Revolving Credit Facility. We believe that cash expected to be provided by operating activities and availability under our Revolving Credit Facility will be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future. However, there can be no assurance that we will continue to generate cash flows at or above recent levels.
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the nine months ended September 30, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
Liquidity
|
2012
|
|
2011
|
Total cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
1,033,126
|
|
$
|
840,149
|
Investing activities
|
|
(211,626)
|
|
|
(237,972)
|
Financing activities
|
|
(760,347)
|
|
|
(355,181)
|
Increase in cash and cash equivalents
|
$
|
61,153
|
|
$
|
246,996
|
Operating activities:
The increase in cash provided by operating activities for the nine months ended September 30, 2012, compared to the same period in 2011, was primarily due to the increase in net income for the period (adjusted for the effect of non-cash depreciation and amortization charges and the one-time, non-cash charge to write off the balance of debt issuance costs in conjunction with the retirement of our ABL Credit Facility in January of 2011), a decrease in net inventory investment and increases in income taxes payable (adjusted for the effect of non-cash change in deferred income taxes and the excess tax benefit from stock options exercised) and other current liabilities. Net inventory investment reflects our investment in inventory, net of the amount of accounts payable to vendors. Our net inventory investment continues to decrease as a result of the impact of our enhanced vendor financing programs. Our vendor financing programs enable us to reduce overall supply chain costs and negotiate extended payment terms with our vendors. Our accounts payable to inventory ratio was 84.4% and 64.4% at September 30, 2012, and December 31, 2011, respectively, versus 59.3% and 44.3% at September 30, 2011, and December 31, 2010, respectively. The increase in income taxes payable, adjusted for the non-cash impacts discussed above, was the result of higher taxable income during the current period as compared to the same period one year ago. The increase in other current liabilities was primarily the result of an increase in payroll related accruals during the current period as compared to the same period one year ago, driven by the timing of pay period end dates and their corresponding payment dates, as well as the payment, in the third quarter of 2011, for the one-time monetary penalty to the D
epartment of Justice (“D
OJ
”)
for the legacy CSK DOJ investigation.
Investing activities:
The decrease in cash u
sed in investing activities during the nine months ended September 30, 2012, as compared to the same period in 2011 was primarily the result of decreased capital expenditures in the current period. The decrease in capital expenditures was primarily related to the mix of owned versus leased store openings during the current year as compared to the prior period. We have been able to find real estate with attractive lease factors during the current year and as a result, have opened a larger number of leased locations in the current year as compared to the prior period.
Opening a new store in a l
eased location require
s
a smaller capital investment than
opening
an owned location.
Financing activities:
The increase in net cash used in financing activities during the nine months ended September 30, 2012, as compared to the same period in 2011, was primarily attributable to greater net proceeds from the issuance of long-term debt during the nine months ended September 30, 2011, and an increase in the impact of repurchases of our common stock during the nine months ended September 30, 2012, in accordance with our Board-approved share repurchase program, partially offset by an increase in the net proceeds from the exercise of stock options issued under the Company’s incentive programs and the related excess tax benefits during the nine months ended September 30, 2012.
Unsecured revolving credit facility:
In January of 2011, and as amended in September of 2011, we entered into a new credit agreement (the “Credit Agreement”), for a five-year $
660
million unsecured revolving credit facility (the “Revolving Credit Facility”), arranged by Bank of America, N.A.,
which is scheduled to mature in September of 2016. The Credit Agreement includes a $
200
million sub-limit for the issuance of letters of credit and a $
75
million sub-limit for swing line borrowings under the Revolving Credit Facility. As described in the Credit Agreement governing the Revolving Credit Facility, we may, from time to time subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $
200
million. As of
September 30
, 2012, we had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amount of $
58
million, reducing the aggregate availability under the Revolving Credit Facility by that amount. As of
September 30
, 2012, we had no outstanding borrowings under the Revolving Credit Facility.
Senior Notes:
4.875% Senior Notes due 2021:
On January 14, 2011, we issued $
500
million aggregate principal amount of unsecured
4.875
% Senior Notes due 2021 (“
4.875
% Senior Notes due 2021”) at a price to the public of
99.297
% of their face value with United Missouri Bank, N.A. (“UMB”) as trustee. Interest on the
4.875
% Senior Notes due 2021 is payable on January 14 and July 14 of each year and is computed on the basis of a 360-day year.
4.625% Senior Notes due 2021:
On September 19, 2011, we issued $
300
million aggregate principal amount of unsecured
4.625
% Senior Notes due 2021 (“
4.625
% Senior Notes due 2021”) at a price to the public of
99.826
% of their face value with UMB as trustee. Interest on the
4.625
% Senior Notes due 2021 is payable on March 15 and September 15 of each year and is computed on the basis of a 360-day year.
3.800% Senior Notes due 2022:
On
August 21, 2012
, we issued $
300
million aggregate principal amount of unsecured
3.800
% Senior Notes due 2022 (“
3.800
% Senior Notes due 2022”) at a price to the public of
99.627
% of their face value with UMB as trustee. Interest on the
3.800
% Senior Notes due 2022 is payable on March 1 and September 1, beginning on March 1, 2013, of each year and is computed on the basis of a 360-day year.
The senior notes are guaranteed on a senior unsecured basis by each of our subsidiaries (“Subsidiary Guarantors”) that incurs or guarantees our obligations under our Revolving Credit Facility or certain of our other debt or any of our Subsidiary Guarantors. The guarantees are
joint and several and
full and unconditional
, subject to certain customary automatic release provisions, including release of the subsidiary guarantor’s guarantee under our Credit Agreement and certain other debt, or, in certain circumstances, the sale or other disposition of a majority of the voting power of the capital interest in, or of all or substantially all the property of, the subsidiary guarantor
. Each of the Subsidiary Guarantors is wholly-owned, directly or indirectly, by us and we have no independent assets or operations other than those of our subsidiaries. Our only direct or indirect subsidiaries that would not be Subsidiary Guarantors
would be minor subsidiaries.
Neither we, nor any of our Subsidiary Guarantors, are subject to any material or significant restrictions on our ability to obtain funds from our subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by applicable law. Each of our senior notes is subject to certain customary covenants, with which we complied as of
September 30
, 2012.
Debt covenants:
The indentures governing our senior notes contain covenants that limit our ability and the ability of certain of our subsidiaries to, among other things: (i) create certain liens on assets to secure certain debt; (ii) enter into certain sale and leaseback transactions; and (iii) merge or consolidate with another company or transfer all or substantially all of our or its property, in each case as set forth in the indentures. These covenants are, however, subject to a number of important limitations and exceptions.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage ratio of
2.00
times through December 31, 2012;
2.25
times thereafter through December 31, 2014; and
2.50
times thereafter through maturity; and a maximum adjusted consolidated leverage ratio of
3.00
times through maturity. The consolidated leverage ratio includes a calculation of adjusted debt to adjusted earnings before interest, taxes, depreciation, amortization, rent and stock-based compensation expense (“EBITDAR”). Adjusted debt includes, without limitation, outstanding debt, outstanding letters of credit and six-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that we should default on any covenant contained within the Credit Agreement, certain actions may be taken against us, including but not limited to, possible termination of credit extensions, immediate acceleration of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from our lenders. We had a fixed charge coverage ratio of
4.97
times and
4.79
times as of
September 30,
2012 and 2011, respectively, and an adjusted
consolidated leverage
ratio of
1.85
times and
1.80
times as of
September 30
, 2012 and 2011, respectively, remaining in compliance with all covenants under the Credit Agreement. Under our current financing
p
lan
, we have targeted an adjusted consolidated leverage ratio range of 2.
0
0 times to 2.25 times.
The table below outlines the calculations of the fixed charge coverage ratio and adjusted debt to adjusted
consolidated leverage
ratio covenants, as defined in the Credit Agreement governing the Revolving Credit Facility, for the twelve months ended
September 30
, 2012 and 2011 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
GAAP net income
|
$
|
575,932
|
|
$
|
490,445
|
|
Add:
|
|
|
|
|
|
|
Interest expense
|
|
38,181
|
|
|
26,198
|
|
Rent expense
|
|
238,307
|
|
|
229,121
|
|
Provision for income taxes
|
|
350,500
|
|
|
297,000
|
|
Depreciation expense
|
|
174,967
|
|
|
161,857
|
|
Amortization expense
|
|
668
|
|
|
1,595
|
|
Non-cash share-based compensation
|
|
21,270
|
|
|
17,395
|
|
Write-off of asset-based revolving credit facility debt issuance costs
|
|
-
|
|
|
21,626
|
|
Non-GAAP adjusted net income (EBITDAR)
|
$
|
1,399,825
|
|
$
|
1,245,237
|
|
|
|
|
|
|
|
|
Interest expense
|
$
|
38,181
|
|
$
|
26,198
|
|
Capitalized interest
|
|
5,343
|
|
|
4,523
|
|
Rent expense
|
|
238,307
|
|
|
229,121
|
|
Total fixed charges
|
$
|
281,831
|
|
$
|
259,842
|
|
|
|
|
|
|
|
|
Fixed charge coverage ratio
|
|
4.97
|
|
|
4.79
|
|
|
|
|
|
|
|
|
GAAP debt
|
$
|
1,096,025
|
|
$
|
797,766
|
|
Stand-by letters of credit
|
|
57,578
|
|
|
68,081
|
|
Discount on senior notes
|
|
4,490
|
|
|
3,785
|
|
Six-times rent expense
|
|
1,429,842
|
|
|
1,374,726
|
|
Non-GAAP adjusted debt
|
$
|
2,587,935
|
|
$
|
2,244,358
|
|
|
|
|
|
|
|
|
Adjusted consolidated leverage ratio
|
|
1.85
|
|
|
1.80
|
|
T
he fixed charge coverage ratio and adjusted
consolidated leverage
ratio discussed and presented in the table above are not derived in accordance with U.S. GAAP. We do not, nor do we 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 our fixed charge coverage ratio and adjusted
consolidated leverage ratio
provides meaningful supplemental information to both management and investors that reflects the required covenants under our credit agreement. We include these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the table above, a reconciliation to the most directly comparable GAAP measures.
Share repurchase program:
Under
our
share repurchase program, as approved by
our
Board of Directors,
we
may, from time to time, repurchase shares of
our
common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.
We
may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice.
Our
Board of Directors approved resolutions to increase the authorization under the share repurchase program by an additional $
500
million
on June 1, 2012, and an additional $500 million on
August 10, 2012
, raising the cumulative authorization under the share repurchase program to $
2.5
billion. The additional $
500
million authorization
s are
effective for a three-year period, beginning on
June 1, 2012 and
August
1
0
, 2012
respectively
.
The following table identifies shares of our common stock that have been repurchased as part of our publicly announced repurchase program (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2012
|
2011
|
|
2012
|
2011
|
Shares repurchased
|
|
6,359
|
|
8,162
|
|
|
12,647
|
|
14,074
|
Average price per share
|
$
|
84.76
|
$
|
61.51
|
|
$
|
89.62
|
$
|
59.69
|
Total investment
|
$
|
538,972
|
$
|
502,067
|
|
$
|
1,133,328
|
$
|
839,979
|
As of
September
30, 2012,
we
had $
390
million remaining under
our
share repurchase program.
Subsequent to the end of the third quarter and through the date of this filing, we have repurchased an additional
1.6
million shares of our common stock under our share repurchase program at an average price of $
83.68
for a total investment of $
136.6
million.
We have
repurchased a total of
30.2
million shares of
our
common stock under
our
share repurchase program since the inception of the program in January of 2011 through
November 8
, 2012, at an average price of $
74.49
, for a
total
aggregate investment of $
2.2
billion.
CONTRACTUAL OBLIGATIONS
On May 30, 2012, our Rights Agreement, dated May 7, 2002, expired in accordance with its terms and
,
accordingly
,
there are no longer preferred share rights associated with our common shares.
The
3.800
% Senior Notes due 2022 issued on August 21, 2012, in the aggregate principal amount of $
300
million, were issued at a price to the public of
99.627
% of their face value and mature on S
eptember 1, 2022. Interest on the
3.800
% Senior Notes due 2022 accrues at a rate of
3.800
% per annum and is payable on March 1 and September 1 of each year, commencing on March 1, 2013.
Other than the change
s
discussed above, t
here have been no material changes to the contractual obligations to which we are committed since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in accordance with
U.S.
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
condensed
consolidated financial statements are prepared.
There have been no material changes in the
critical accounting estimates
since those
discussed in our Annual Report on Form 10-K for the year ended December 31, 20
1
1
.
INFLATION AND SEASONALITY
We have been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition cost increased due to base commodity price increases industry
wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe our operations have been materially, adversely affected by inflation.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
RECENT
ACCOUNTING
PRONOUNCEMENTS
No recent accounting pronouncements or changes in accounting pronouncements have occurred since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011, that are of material significance, or have potential material significance, to us
.
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 Securit
ies
and Exchange Commission’s 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.