01—Abstract
Summary
Summary of the 10-K filed March 25, 1999. Cited figures are marked; the original filing is the authoritative source.
O'Reilly Automotive (ORLY) closed 1998 as a much larger company after acquiring Hi/LO Automotive in January 1998 for about $49.3 milliona in cash, plus $43.2 million of assumed debt.
Product sales rose 94.8% to $616.3 millionb, driven by 182 acquired Hi/LO stores, 50 net new openings, and a 6.8% increase in same-store sales. Net income grew 33.0% to $30.8 million, but the net margin fell to 5.0% from 7.3%, reflecting lower gross margin from the Hi/LO integration and sharply higher interest expense of $8.1 million, up from $0.1 million in 1997. Diluted EPS was $1.42, up from $1.09.
The balance sheet and cash flow reflect the expansion. Inventory more than doubled to $246.0 millionc, and operating cash flow was negative $19.1 million. Long-term debt rose to $170.2 million from $22.6 million, and shareholders' equity reached $218.4 million.
The company planned a secondary offering of 3,000,000 company shares (3,340,000 total) in March 1999, with proceeds used to repay credit facility debt. The company also plans about 80 new stores in 1999 and roughly 100 in 2000, which will require continued capital spending and working capital.
Key risks include geographic concentration (about 35% of stores in Texas and all in the Central and Southern U.S.), dependence on key family members, O'Reilly family control of about 33% of shares, the Year 2000 remediation program (budgeted at about $100,000d with completion targeted for September 1999), and a pending class action over Hi/LO battery sales that the company intends to contest. Management believes the legal matter will not be materially adverse.
02—Key points
Key Highlights
- Product sales up 94.8% to $616.3 million in 1998, driven largely by the Hi/LO acquisition (182 net stores) and 50 net new stores, plus 6.8% same-store sales growth.
- Net income rose 33.0% to $30.8 million, and diluted EPS increased to $1.42 from $1.09.
- Net margin compressed to 5.0% from 7.3%, as gross margin fell to 41.8% from 42.5% and interest expense jumped to $8.1 million from $0.1 million.
- Total debt rose sharply: long-term debt increased to $170.2 million from $22.6 million, mainly to fund the Hi/LO acquisition and store expansion.
- Operating cash flow was negative $19.1 million in 1998, due to a $53.3 million inventory build and a $21.7 million increase in vendor receivables.
- Store count reached 491 at year-end, with plans for about 80 openings in 1999 (including the Hinojosa acquisition, about 10 stores for $6 million) and about 100 in 2000.
- A secondary offering of 3,000,000 company shares was registered in March 1999, with proceeds earmarked to repay credit facility borrowings.
03—Questions
Frequently Asked Questions
How did the Hi/LO acquisition affect O'Reilly's 1998 financial results?
The January 1998 Hi/LO acquisition for about $49.3 million in cash added 182 net stores and a 425,000 square foot Houston distribution center. It drove most of the 94.8% increase in product sales to $616.3 million. It also lowered gross margin to 41.8% from 42.5%, because the acquired operations carried higher cost of sales, and it contributed to higher SG&A and interest expense.
Why did net margin decline even though net income grew?
Net income rose 33.0% to $30.8 million, but sales grew faster, so net margin fell to 5.0% from 7.3%. Several factors contributed: lower gross margin from the Hi/LO integration, operating expenses rising to 32.6% of sales from 30.8%, and other expense swinging to net expense of $7.0 million, mainly interest on new debt.
What are the main risks for investors?
Key risks include competition from larger chains such as AutoZone and Advance Auto Parts, dependence on regional economic and weather conditions (about 35% of stores are in Texas), reliance on key O'Reilly family members, and family control of about 33% of shares, which limits takeover possibilities. The company also faces execution risk on its aggressive store expansion and acquisitions, a pending Hi/LO battery class action it intends to contest, and Year 2000 remediation risk.
How is O'Reilly funding its expansion and reducing debt?
The company replaced its credit lines in January 1998 with a $173 million syndicated facility, which was increased by $35 million in January 1999. It expects to fund expansion with operating cash flow, borrowings, and proceeds from the March 1999 secondary offering of 3,000,000 company shares. Proceeds are planned to repay indebtedness under the credit facility. Management believes these sources will be sufficient for both short- and long-term capital needs.
04—Continue