10-QPeriod: Q2 FY2008

O REILLY AUTOMOTIVE INC Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 11, 2008For Securities:ORLY

Summary

O'Reilly Automotive, Inc. (ORLY) reported solid financial performance for the second quarter and first six months of 2008, demonstrating resilience amidst challenging economic conditions. Sales increased by 9.5% year-over-year for the quarter and 7.5% for the first six months, driven by comparable store sales growth, the addition of new stores, and the ongoing strategy to serve both do-it-yourself (DIY) customers and professional installers. Despite increased Selling, General, and Administrative (SG&A) expenses, primarily due to higher fuel and depreciation costs, the company managed to increase net income for the period. The most significant development during the period was the successful acquisition of CSK Auto Corporation on July 11, 2008, which was financed through a new $1.2 billion asset-based revolving credit facility. This acquisition, along with other strategic moves like refinancing debt and terminating a synthetic lease facility, positions ORLY for future growth and market share expansion. The company has also implemented interest rate swaps to mitigate the risk associated with its floating interest rate debt. While the integration of CSK presents certain risks, ORLY remains confident in its long-term growth prospects, supported by fundamental drivers in the automotive aftermarket such as increasing vehicle age and the potential for deferred maintenance. Operationally, the company saw improvements in gross profit margin due to favorable product mix and lower product acquisition costs. Cash flow from operations remained strong, increasing by 12.2% for the first six months of 2008 compared to the prior year, largely due to higher net income and a reduction in inventory investment. Management expresses confidence that existing cash, projected operating cash flows, and the new credit facility will be sufficient to meet its capital and liquidity needs.

Key Highlights

  • 1O'Reilly Automotive reported a 9.5% increase in sales for Q2 2008 to $704.4 million and a 7.5% increase for the first six months of 2008 to $1.35 billion, indicating continued revenue growth.
  • 2Net income for the second quarter of 2008 rose to $55.8 million ($0.48 per share) from $51.9 million ($0.45 per share) in Q2 2007, demonstrating improved profitability.
  • 3The company successfully completed the acquisition of CSK Auto Corporation on July 11, 2008, significantly expanding its market presence and product offerings.
  • 4A new $1.2 billion asset-based revolving credit facility was secured on July 11, 2008, to finance the CSK acquisition, refinance debt, and provide ongoing liquidity.
  • 5Comparable store sales increased by 3.4% in the second quarter of 2008, contributing positively to revenue growth.
  • 6Gross profit margin improved slightly to 45.0% in Q2 2008 from 44.7% in Q2 2007, driven by product mix and lower acquisition costs.
  • 7Cash flow from operations increased by 12.2% to $215.5 million for the first six months of 2008, indicating strong operational cash generation.

Frequently Asked Questions

For the three months ended June 30, 2008, O'Reilly Automotive, Inc. reported net sales of $704.4 million, an increase of 9.5% compared to $643.1 million in the same period of 2007. Net income for the quarter was $55.8 million, or $0.48 per diluted share, up from $51.9 million, or $0.45 per diluted share, in the prior year's quarter. For the six months ended June 30, 2008, net sales were $1.35 billion, a 7.5% increase over $1.26 billion in the same period of 2007. Net income for the six months was $102.1 million, or $0.88 per diluted share, compared to $100.3 million, or $0.87 per diluted share, in the prior year.

The most significant strategic development is the acquisition of CSK Auto Corporation, completed on July 11, 2008. This acquisition was financed by a new $1.2 billion asset-based revolving credit facility. Additionally, the company entered into interest rate swap transactions to hedge against floating interest rate risk on $250 million of its debt and terminated its synthetic lease facility by purchasing the underlying properties.

The acquisition of CSK significantly increased O'Reilly's debt. The company secured a $1.2 billion asset-based revolving credit facility to fund the acquisition and refinance existing debt. As of June 30, 2008, prior to the full impact of the acquisition, the company had $75 million in long-term debt. The company believes its current cash, projected operating cash flows, and the new revolving credit facility are sufficient to meet its capital and liquidity needs.

The company identifies several key risks. The integration of O'Reilly and CSK businesses is a complex and potentially disruptive process, with risks associated with combining operations, systems, cultures, and retaining key employees. Increased debt levels post-acquisition could adversely affect cash flow and financial flexibility. The company also notes that future sales of common stock, including those issued to CSK shareholders, could impact the stock price, and retaining and motivating key employees after the merger is crucial for success.