10-QPeriod: Q2 FY2009

O REILLY AUTOMOTIVE INC Quarterly Report for Q2 Ended Jun 30, 2009

Filed August 7, 2009For Securities:ORLY

Summary

O'Reilly Automotive, Inc. (ORLY) reported solid financial results for the quarter and six months ended June 30, 2009, demonstrating strong sales growth primarily driven by the acquisition of CSK Auto Corporation. Despite an increase in expenses and interest costs associated with the acquisition and integration, the company managed to improve its gross profit margin due to favorable product mix, lower acquisition costs, and distribution efficiencies. The company's balance sheet shows growth in assets and liabilities, reflecting the significant impact of the CSK acquisition. While operational cash flow saw a decrease, this was largely due to increased inventory investment, and overall liquidity appears managed through its credit facility. Key areas for investor focus include the continued successful integration of CSK, the management of increased debt levels, and the company's ability to sustain comparable store sales growth amidst a challenging economic environment. The company also highlighted initiatives to manage product quality differentiation and its strategy to expand store footprint. Legal matters related to the CSK acquisition are being actively managed, with significant reserves in place, and management believes these will not materially impact the company's financial position.

Financial Highlights

25 data points
Beta

Revenue

$1.25B

48.2% Gross Margin

Net Income

$85.52M

6.8% Net Margin

EPS (Diluted)

$0.04

Cash & Equivalents

$41.02M

Free Cash Flow

-$13.70M

Financial Statements
Beta
Revenue$1.25B
Cost of Revenue$647.61M
Gross Profit$603.77M
SG&A Expenses$454.09M
Operating Income$149.68M
Interest Expense$10.96M
Net Income$85.52M
EPS (Basic)$0.04
EPS (Diluted)$0.04
Shares Outstanding (Basic)2.04B
Shares Outstanding (Diluted)2.06B

Key Highlights

  • 1Total sales for the six months ended June 30, 2009, increased by 79% to $2.42 billion, primarily driven by the acquisition of CSK Auto Corporation.
  • 2Gross profit increased by 89% to $1.15 billion for the six months ended June 30, 2009, with gross profit margin improving to 47.5% from 44.8% in the prior year period.
  • 3Selling, general, and administrative expenses (SG&A) increased by 99% to $883 million for the six months ended June 30, 2009, largely due to the integration costs of CSK.
  • 4Net income for the six months ended June 30, 2009, rose by 46% to $148 million, with diluted earnings per share (EPS) increasing to $1.08 from $0.88 in the prior year.
  • 5Net cash provided by operating activities decreased to $152.8 million for the six months ended June 30, 2009, from $215.5 million in the prior year, mainly due to increased inventory investment at acquired CSK stores.
  • 6The company's total assets grew to $4.57 billion as of June 30, 2009, from $4.19 billion as of December 31, 2008, reflecting the ongoing impact of the CSK acquisition.
  • 7The company has $676.3 million in outstanding borrowings under its $1.2 billion asset-based revolving credit facility as of June 30, 2009, with $445.8 million in aggregate availability for additional borrowings.

Frequently Asked Questions

The acquisition of CSK Auto Corporation significantly boosted O'Reilly's top-line revenue, with total sales for the six months ended June 30, 2009, increasing by 79% to $2.42 billion. While this acquisition also led to a substantial increase in operating expenses and interest costs due to integration efforts and financing, the company has managed to improve its gross profit margin through synergies and operational efficiencies.

As of June 30, 2009, O'Reilly had total debt and capital lease obligations of approximately $796.6 million. The company had $676.3 million drawn on its $1.2 billion asset-based revolving credit facility, leaving $445.8 million in availability. While operating cash flow decreased due to inventory investments, the company has access to its credit facility for liquidity.

The company is managing several legal matters stemming from the CSK acquisition, including ongoing DOJ investigations into CSK's historical accounting practices and legacy litigation. O'Reilly has reserved $21 million for assumed liabilities related to these investigations and indemnity obligations. While these matters are complex and subject to uncertainties, management currently believes they will not have a material adverse effect on the company's consolidated financial condition, results of operations, or cash flows.

The decrease in net cash provided by operating activities was primarily due to an increase in net inventory investment at the acquired CSK stores. CSK branded average per-store inventory increased significantly. O'Reilly is actively managing its inventory, stating that its sophisticated systems for monitoring product life cycles and adjusting inventory volumes have historically been successful in mitigating obsolescence.