Item 1. Business
O'Reilly 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 ("DIY") customers and professional installers. At December 31, 2000, we operated 672 stores in Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and Illinois. Our stores carry an extensive product line consisting of:
o new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake shoes and pads, chassis parts and engine parts; o maintenance items, such as oil, antifreeze, fluids, engine additives and appearance products; o accessories, such as floor mats and seat covers; and o a complete line of autobody paint and related materials, automotive tools and professional service equipment.
We do not sell tires or perform automotive repairs or installations.
We were founded in 1957 by Charles F. O'Reilly and his son, Charles H. "Chub" O'Reilly, Sr. (one of our current directors), and initially operated from a single store in Springfield, Missouri. The O'Reilly family has managed the Company since our inception.
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our growth and expansion strategies.
See "Risk Factors" beginning on page 11 for a description of certain risks relevant to our business. These risk factors include, among others, risks related to competition in the automotive aftermarket business, our growth strategy, our acquisition strategy, our sensitivity to regional economic and weather conditions, our dependence upon key and other personnel and the significant voting control held by our principal shareholders.
Competitive Advantages
Proven Ability to Execute Dual Market Strategy. We have an established track record of serving both do-it-yourself ("DIY") customers and professional installers. We believe our ability to execute a dual market strategy is a competitive advantage, which enables us to:
o target a larger base of consumers of automotive aftermarket parts; o capitalize on our existing retail and distribution infrastructure; o profitably operate both in large markets and less densely populated geo- graphic areas which typically attract fewer competitors; and o enhance service levels offered to our DIY customers by offering a broad selection of stock keeping units ("SKUs") and extensive product knowledge required by professional installers.
We have been committed to a dual market strategy for over 20 years and from the mid-1980's through 1997 derived approximately 50% of our product sales from our DIY customers and approximately 50% from our professional installer customers. Prior to our acquisition of Hi-Lo Automotive, Inc. ("Hi/LO"), Hi/Lo derived approximately 65% of its sales from DIY customers and approximately 35% from professional installers. For 2000, we derived approximately 57% of our product sales from our DIY customers and approximately 43% from our professional installer customers. As a result of our historical success in executing our dual market strategy and our over 106 full-time sales representatives dedicated solely to calling upon and selling to the professional installer, we believe we will increase the former Hi/LO stores' sales to professional installers and have a competitive advantage over our retail competitors who have only recently entered and begun focusing on the professional installer market.
Superior Customer Service. We seek to attract new DIY and professional installer customers and to retain existing customers by offering superior customer service, the key elements of which include:
o superior in-store service through highly-motivated, technically pro- ficient store personnel ("Professional Parts People") using advanced point-of-sale systems; o an extensive selection of products; o attractive stores in conve- nient locations; and o competitive pricing, with a low price guarantee.
Technically Proficient Professional Parts People. Our highly proficient Professional Parts People provide us with a significant competitive advantage, particularly over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be technically knowledgeable, particularly with respect to hard parts, in order to better serve the technically-oriented professional installers with whom they interact on a daily basis. Such technical proficiency also enhances the customer service we provide to our DIY customers, who appreciate the expert assistance provided by our Professional Parts People.
Strategic Distribution Systems. We believe that the geographic concentration of our store network in nine contiguous states (Missouri, Iowa, Nebraska, Kansas, Oklahoma, Texas, Louisiana, Arkansas and Illinois) and the strategic locations of our seven distribution centers enable us to maintain optimum inventory levels throughout our store network. In addition, our inventory management and distribution systems electronically link each of our stores to a distribution center, providing for efficient inventory control and management. Our distribution system provides each of our stores with same day or overnight access to over 100,000 SKUs, many of which are hard to find items not typically stocked by other parts retailers. We believe the availability of a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business.
Experienced Management Team. Our management team has a demonstrated ability to successfully execute our business plan, including the identification and integration of strategic acquisitions. We have experienced eight consecutive years of record revenues and earnings growth. We have a strong senior management team comprised of 40 professionals who average 19 years of experience with O'Reilly. In addition, our 70 district managers average over 10 years of experience with us.
Growth and Expansion Strategies
Aggressively Open New Stores. We intend to continue to aggressively open new stores in order to achieve greater penetration in existing markets and to expand into new, contiguous markets. We plan to open approximately 120 stores in 2001 and approximately 145 stores in 2002. All of the sites for our proposed 2001 store openings and a majority of the sites for our proposed 2002 store openings have been identified. In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in areas such as management, advertising and distribution.
Until 1986, our expansion was targeted to markets with populations of less than 100,000. We entered into a more densely populated market in August 1986 with the opening of the first of 29 stores in the greater Kansas City, Missouri, market area. Of the 101 net new stores opened in 2000, 63 are located in Texas, 13 are located in Iowa, 3 in Nebraska, 8 in Louisiana, 10 in Arkansas, and 4 in Oklahoma. While we have faced, and expect to continue to face, more aggressive competition in the more densely populated markets, we believe that we have competed effectively, and that we are well positioned to continue to compete effectively, in such markets and achieve our goal of continued sales and profit growth within these markets. We also believe that because of our dual market strategy, we are better able to operate stores in less densely populated areas within our regional market which would not otherwise support a national or regional chain store selling to one portion of the market or the other. Consequently, we expect to continue to open new stores in less densely populated market areas.
To date, we have experienced no significant difficulties in locating suitable store sites for construction of new stores or identifying suitable acquisition candidates for conversion to O'Reilly stores. We typically open new stores either (i) by constructing a new store at a site which is purchased or leased and stocking the new store with fixtures and inventory, or (ii) by acquiring an independently owned parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store. Store sites are strategically located in clusters within geographic areas, which complement our distribution system in order to achieve economies of scale in management, advertising, and distribution costs. Other key factors we consider in the site selection process include population density and growth patterns, age and per capita income, vehicle traffic counts, the number and type of existing automotive repair facilities, auto parts stores, and other competitors within a pre-determined radius, and the operational strength of such competitors. When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve further economies of scale.
Same store growth through increased sales and profitability is also an important part of our growth strategy. To achieve improved sales and profitability at existing O'Reilly stores, we continually strive to improve upon the service provided to our customers. We believe that while competitive pricing is essential in the competitive environment of the automotive aftermarket business, it is customer satisfaction (whether of the DIY consumer or professional installer), resulting from superior customer service that generates increased sales and profitability.
Selectively Pursue Strategic Acquisitions. Although the automotive aftermarket industry is still highly fragmented, we believe the ability of national and regional specialty retail chains, such as O'Reilly, to operate more efficiently than smaller independent operators or mass merchandisers will result in continued industry consolidation. Thus, we intend to selectively pursue acquisition targets that will strengthen our position as a leading automotive products retailer.
Effective January 31, 1998, we acquired Hi/LO, a specialty retailer and supplier of automotive aftermarket products headquartered in Houston, Texas. Following the acquisition, we sold seven Hi/LO stores located in California. Of the 182 stores remaining after such sale, 165 are located in Texas and 17 are located in Louisiana. Through the Hi/LO acquisition, we also acquired a 425,000 square foot distribution center located in Houston. The Hi/LO operations are contiguous to our other operations, thereby creating a natural geographic extension of our business. In addition, Hi/LO was experienced in serving professional installers, deriving approximately 35% of its revenues from such customers. We acquired Hi/LO for a cash purchase price of approximately $49.3 million. At the time of the acquisition, Hi/LO had $43.2 million of existing debt, which we assumed.
We have continued to realize the benefits of the completed integration of the 182 net stores we acquired through the acquisition of Hi/LO. We have updated the products offered at the former Hi/LO stores with a product mix consistent with our existing stores, converted these stores to our Management Information Systems and, in some cases, renovated or relocated the former Hi/LO stores. Furthermore, we intend to continue to pursue business in the professional installer market and benefit from increased leverage in purchasing and reduced overhead expenses.
Continually Enhance Store Design and Location. Our current prototype store design features enhancements such as greater square footage, higher ceilings, more convenient interior store layouts, brighter lighting, increased parking availability and dedicated counters to serve professional installers, each designed to increase product sales and operating efficiencies and enhance customer service. We continually update the location and condition of our store network through systematic renovation and relocation of our existing stores to conform with our prototype store design. We believe that our ability to consistently achieve growth in same store product sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best serve our customers.
Products and Purchasing
Our stores offer DIY and professional installer customers a wide selection of brand name and private label products for domestic and imported automobiles, vans and trucks. We do not sell tires or perform automotive repairs or installations. Our merchandise generally consists of nationally recognized, well-advertised, name brand products such as AC Delco, Moog, Wagner, Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol, Valvoline, STP, BWD, Cardone, Wix, Armor All and Turtle Wax. In addition to name brand products, our stores carry a wide variety of high-quality private label products under the Parts Master(R) name brand and our O'Reilly Auto Parts(R), SuperStart(R), BrakeBest(R), Ultima(R) and Omnispark(R) proprietary name brands. Because most of our private label products are produced by nationally recognized manufacturers in accordance with our specifications, we believe that the private label products are generally of equal or, in some cases, better quality than comparable name brand products, a characteristic which is important to our professional installer clientele. We further believe that the private label products are packaged attractively to promote customer interest and are generally priced below comparable name brand products carried in our stores.
We purchase automotive products from approximately 400 vendors, the five largest of which accounted for approximately 24% of our total purchases in 2000. Our largest vendor in 2000 accounted for approximately 5% of our total purchases and the next four largest vendors each accounted for 4-5% of such purchases. We have no long-term contractual purchase commitments with any of our vendors, nor have we experienced difficulty in obtaining satisfactory alternative sources of supply for automotive parts. We believe that alternative supply sources exist at substantially similar costs, for substantially all automotive products that we sell. It is our policy to take advantage of early payment and seasonal purchasing discounts offered by our vendors, and to utilize extended dating terms available from vendors due to volume purchasing. We consider our relationships with our suppliers to be good.
Store Network
Store Locations. As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and less densely populated areas which would not otherwise support a national or regional chain selling to just one portion of the automotive aftermarket. The following table sets forth the geographic distribution of our stores:
Our stores on average carry approximately 23,000 SKUs and average approximately 6,700 total square feet in size. Our stores are served primarily by the nearest distribution center, but also have access to the broader selection of inventory available at one of our 43 Master Inventory Stores, which on average carry approximately 37,000 SKUs and average approximately 8,700 square feet in size. Master Inventory Stores, in addition to serving DIY and professional installer customers in their markets, also provides our other stores within their area access to a greater selection of SKUs on a same day basis.
We believe that our stores are "destination stores" generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity. Consequently, most of our stores are freestanding buildings situated on or near major traffic thoroughfares, and offer ample parking and easy customer access.
Store Layout. We utilize a computer-assisted "plan-o-grammed" store layout system to provide a uniform and consistent merchandise presentation; however, some variation occurs in order to meet the specific needs of a particular market area. Merchandise is arranged to provide easy customer access and maximum selling space, keeping high-turnover products and accessories within view of the customer. Aisle displays are generally used to feature high-demand or seasonal merchandise, new items and advertised specials.
Store Automation. To enhance store level operations and customer service, we use IBM AS/400 computer systems in all of our stores. These systems are linked with the IBM AS/400 computers located in each of our distribution centers. Our point-of-sale terminals use bar code scanning technology to price our merchandise and provide immediate access to our electronic catalog to display parts and pricing information by make, model and year of vehicle. This system speeds transaction times, reduces register lines and provides enhanced customer service. Moreover, our store automation systems capture sales information which assists in store management, strategic planning, inventory control and distribution efficiency.
New Store Site Selection. In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in management, advertising and distribution. Other key factors we consider in the site selection process include:
o population density and growth patterns; o age and per capita income; o vehicle traffic counts; o the number and type of existing automotive repair facilities; and o the number of auto parts stores and other competitors within a pre-determined radius and the operational strength of such competitors.
When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve further economies of scale. After opening this initial cluster of new stores, we seek to begin penetrating the less densely populated surrounding areas. This strategy enables us to achieve additional distribution and advertising efficiencies in each market.
Distribution System
The following table sets forth the distribution centers we currently operate:
In addition, adjacent to the Springfield, Missouri, distribution center, we operate a 36,000 square foot bulk merchandise warehouse used for the distribution of bulk products such as motor oil, antifreeze, batteries, lubricants and other fast moving bulk products, and an 18,000 square foot returned goods processing facility. We also operate a 22,500 square foot bulk warehouse in McAllen, Texas, that serves the surrounding distribution centers with bulk motor oil.
Our distribution centers are equipped with highly automated conveyor systems, which expedite the movement of our products to loading areas for shipment to individual stores on a nightly basis. The distribution centers utilize computer-assisted technology to electronically receive orders from computers located in each of our stores. In addition to the bar code system employed in our stores, we have established a satellite-based data interchange system among those stores in which high-speed data transmission technology is not readily available, the distribution center, which services such stores and our corporate headquarters.
We believe that our distribution system assists us in lowering our inventory-carrying costs, improving our store in-stock positions, and controlling and managing our inventory. Moreover, we believe that our expanding network of distribution centers allows us to more efficiently service existing stores, as well as new stores planned for opening in contiguous market areas. Our distribution center expansion strategy also complements our new store opening strategy by supporting newly established clusters of stores located in the regions surrounding each distribution center. As part of our continuing efforts to enhance our distribution network, in 2001 we plan to:
o initiate full utilization of the Little Rock and Dallas distribution centers to be served by all stores in those surrounding areas o implement improvement plans to increase inventory turnover in all dis- tribution centers o finalize implementation of a new warehouse management system in the Des Moines and Oklahoma City distribution centers, which will enhance the efficiency of our distribution network.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY customers through an extensive advertising program, which includes direct mail and newspaper, radio and television advertising in selected markets. We believe that our advertising and promotional activities have resulted in significant name recognition in each of our market areas. Newspaper and radio advertisements are generally directed towards specific product and price promotions, frequently in connection with specific sale events and promotions. To promote sales to car enthusiasts, who we believe on an individual basis spend more on automotive products than the public generally, we sponsor seven nationally televised races and over 50 motorsports races and car shows at over 65 racetracks in nine states, including the NASCAR All-Star Dirt Series, the O'Reilly Chili Bowl, the World of Outlaws Series, the NASCAR Craftsmen Truck Series, as well as three National Hotrod Racing Association races in Houston and Dallas. We have found that the more progressive marketing concepts utilized in the DIY portion of our business can also be applied to increase sales to our professional installer customers.
Marketing to the Professional Installer. We have over 106 full-time O'Reilly sales representatives strategically located in the more densely populated market areas that we serve, and each is dedicated solely to calling upon and selling to the professional installer. Our First Call program, which is our commitment to the professional customer, includes a dedicated sales force, sales and promotions directed to the professional installer and overnight delivery service. Moreover, each district manager and store manager throughout our store network calls upon existing and potential new professional installer customers on a regular basis. Our First Call marketing strategy, with respect to professional installers, emphasizes our ability to offer:
o prompt delivery using small trucks or vans operated by most of our stores; o a separate counter in most of our stores dedicated exclusively to serving professional installers; o trade credit for qualified professional installers; o broad inventory of merchandise and competitive pricing; o a professional installer computer system that connects directly to our inventory system; and o seminars concerning topics of interest to professional installers, such as technical updates, safety and general business management.
Marketing to the Independently Owned Parts Store. Along with the operation of the distribution centers and the distribution of automotive products to the O'Reilly stores, Ozark Automotive Distributors, Inc. ("Ozark") also sells automotive products to independently owned parts stores whose retail stores are generally located in areas not serviced by an O'Reilly store. We generally do not compete with any independently owned parts store to which we sell automotive products, but have, on occasion, acquired the business assets of an independently owned parts store supplied by Ozark. Ozark operates its own separate marketing program to independently owned parts stores through a staff of three.
Of the approximately 62 independently owned parts stores currently purchasing Automotive Products from Ozark, 60 participate in the Auto Value(R) program through Ozark. As a participant in this program, an independently owned parts store which meets certain minimum financial and operational standards is permitted to indicate its Auto Value(R) membership through the display of the Auto Value(R) logo, which is owned by The Alliance, Inc. (formerly known as Auto Value Associates, Inc.), a non-profit buying group consisting of 67 members as of December 31, 2000, including O'Reilly, engaged in the distribution or sale of automotive products. Additionally, we provide advertising and promotional assistance to Auto Value(R) stores purchasing Automotive Products from Ozark, as well as marketing and sales support. In return for a commitment to purchase Automotive Products from Ozark, we offer assistance to an Auto Value(R) independently owned parts store by providing loan guarantees and financing secured by inventory, furniture and fixtures, making available computer software for inventory control and performing certain accounting and bookkeeping functions.
Management Structure
Each of our stores is staffed with a store manager and an assistant manager, in addition to the parts specialists and support staff required to meet the specific needs of each store. Each of our 70 district managers has general supervisory responsibility for an average of 10 stores within such manager's district.
Each district manager receives comprehensive training on a bi-monthly basis, focusing on management techniques, new product announcements, advanced automotive systems and our policies and procedures. In turn, the information covered at such bi-monthly meetings is discussed in full by district managers at bi-monthly meetings with their store managers. All assistant managers and manager trainees are required to successfully complete a six-month manager training program, which includes classroom and field training, as a prerequisite to becoming a store manager. This program covers operations extensively, as well as principles of successful management. Shortly after becoming a store manager, all managers attend a manager development program, at the office headquarters, which includes 72 hours of classroom training. Upon returning to the stores, managers are given continuous field training throughout their management experience.
We provide financial incentives to our district managers, store managers, assistant managers and sales specialists through an incentive compensation program. Under our incentive compensation program, base salary is augmented by incentive compensation based upon the achievement of sales and profitability goals. We believe that our incentive compensation program significantly increases the motivation and overall performance of our Professional Parts People and our ability to attract and retain qualified management and other personnel.
Most of our current senior management, district managers and store managers were promoted to their positions from within the Company. Our senior management team averages 19 years of experience with the Company and district managers have an average length of service with the Company of over 10 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is essential in providing superior service both to DIY and professional installer customers. Each of our Professional Parts People is required to be technically proficient in the workings and application of automotive products due to the significant portion of our business represented by the professional installer. In addition, we have found that the typical DIY customer often seeks assistance from sales persons, particularly in connection with the purchase of hard parts. We believe that the ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression during a customer's visit to our store and is a significant factor in generating repeat DIY business.
We screen prospective employees, whom we refer to as team members, to identify highly motivated individuals either with experience in automotive parts or repairs, or an aptitude for automotive knowledge. Each person who becomes a team member first participates in an intensive two-day orientation program designed to introduce the team member to our culture and his or her job duties before being assigned specific job responsibilities. The successful completion of additional training is required before a team member is deemed qualified as a parts specialist and thus able to work at the parts counter of one of our stores. All new counter people are required to successfully complete a six-month basic automotive systems training course and are then enrolled in a six-month advanced automotive systems course for certification by the National Institute for Automotive Service Excellence ("ASE"), which administers national exams for various automotive specialties and requires ASE certified specialists to take recertification exams every five years.
Each of our stores participates in our sales specialist training program. Under this program, selected team members complete two days of extensive sales call training for business development, after which these team members will spend one day per week calling on existing and new professional installer customers. Additionally, each team member engaged in such sales activities will participate in quarterly advanced training programs for sales and business development.
Customer Service
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations with a wide selection of automotive products. We believe that the satisfaction of DIY and professional installer customers is substantially dependent upon our ability to provide, in a timely fashion, the specific automotive product requested. Accordingly, each O'Reilly store carries a broad selection of automotive products designed to cover a wide range of vehicle specifications. We continuously refine the inventory levels carried in our stores, based in large part on the sales movement shown by our computerized inventory control system and on management's assessment of the changes and trends in the marketplace.
Pricing
We believe that a competitive pricing policy is essential within product categories in order to compete successfully. Product pricing is generally established to meet the pricing policies of competitors in the market area served by each store. Most automotive products that we sell are priced at discounts to the manufacturer suggested prices, and additional savings are offered through volume discounts and special promotional pricing. Consistent with our low price guarantee, each of our stores will match any verifiable price on any in-stock product of the same or comparable quality offered by any of our competitors.
Competition
We compete in both the DIY and professional installer portions of the automotive aftermarket. We compete primarily with:
o national and regional retail automotive parts chains (such as AutoZone, Inc., Advance Auto Parts and The Pep Boys-Manny, Moe and Jack, Inc.); o independently owned parts stores; o wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as NAPA and CarQuest); o automobile dealers; and o mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc.).
We compete on the basis of customer service, which includes merchandise selection and availability, price, helpfulness of store personnel and store layout and location.
Team Members
As of December 31, 2000, we had 8,937 full-time team members and 1,871 part-time team members, of whom 8,125 were employed at our stores, 1,914 were employed at our distribution centers and 769 were employed at our corporate and administrative headquarters. Our team members are not subject to a collective bargaining agreement. We consider our relations with our team members to be excellent, and strive to promote good relations with our team members through various programs designed for such purposes.
Servicemarks and Trademarks
We have registered the servicemarks O'Reilly Automotive(R), O'Reilly Auto Parts(R), and Parts Payoff(R) and the trademarks SuperStart(R), BrakeBest(R), Omnispark(R), First Call(R), Ultima(R), and Master Pro(R). Further, we are licensed to use the registered trademarks and servicemarks Auto Value(R) and Parts Master(R) owned by The Alliance (formerly Auto Value Associates) in connection with our marketing program. We believe that our business is not otherwise dependent upon any patent, trademark, servicemark or copyright.
Regulations
Although subject to various laws and governmental regulations relating to our business, including those related to the environment, we do not believe that compliance with such laws and regulations has a material adverse effect on our operations. Further, we are unaware of any failure to comply with any such laws and regulations that could have a material adverse effect on our operations. We can not give any assurance, however, that we will not incur significant expenses in the future in order to comply with any such law or regulation.
Risk Factors
Some of the information in this Form 10-K contains and future reports and press releases and other public information may contain forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," and "continue" or similar words. These "forward-looking statements" are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (See Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.) You should read statements that contain these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future results of operations or of our financial condition; or (3) state other "forward-looking" information. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors listed in this section, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-K could have a material adverse effect on our business, operating results and financial condition.
The Automotive Aftermarket Business is Highly Competitive
Both the DIY and professional installer portions of our business are highly competitive, particularly in the more densely populated areas that we serve. Some of our competitors are larger than we are and have greater financial resources. In addition, some of our competitors are smaller than we are overall but have a greater presence than we do in a particular market. For a list of our principal competitors, see the "Business--Competition" section of Item 1 of this Form 10-K.
We Cannot Assure Future Growth
We believe that our ability to open additional stores at an accelerated rate will be a significant factor in achieving our growth objectives for the future. Failure to achieve our growth objectives may negatively impact the trading price of our common stock. Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel and general business and economic conditions. We cannot be sure that our growth plans for 2001 and beyond will be achieved. For a discussion of our growth strategies, see the "Business--Growth and Expansion Strategies" section of Item 1 of this Form 10-K.
Acquisitions May Not Lead to Expected Growth
We acquired certain assets of Gateway Auto Supply in April 2000, KarPro Auto Parts in October 2000, and Rankin Automotive Group in November 2000. We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth to differ from our expectations. For example: (1) we may not be able to continue to identify suitable acquisition candidates or to acquire additional companies at favorable prices or on other favorable terms; (2) our management's attention may be distracted; (3) we may fail to retain key acquired personnel; (4) we may assume unanticipated legal liabilities and other problems; and (5) we may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize economic, operational and other benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States. In particular, approximately 40% of our stores are located in Texas. Therefore, our business is sensitive to the economic and weather conditions of these regions. Unusually severe or inclement weather tends to reduce sales, particularly to DIY customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key personnel, including David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr., Rosalie O'Reilly Wooten, Ted F. Wise and Greg L. Henslee. Our business and results of operations could be materially adversely affected by the loss of the services of one or more of these individuals. Additionally, our successful implementation and management of our growth and expansion strategies will depend on our ability to continue to attract and retain qualified personnel. We cannot be sure that we will be able to continue to attract such personnel. For a further discussion of our management and personnel, see the "Business" section of Item 1 and Item 4a of this Form 10-K and our Proxy Statement on Schedule 14A for the 2001 Annual Meeting of Shareholders, a portion of which is incorporated herein.
Significant Voting Control is held by the O'Reilly Family
As of the date of this Form 10-K the O'Reilly family beneficially owns approximately 19.2% of the outstanding shares of our common stock. As a result, the O'Reilly family acting together will continue to be able to exercise significant voting control over the Company, including the election of our directors and on any other matter being voted on by our shareholders, including any merger, sale of assets or other change in control.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to volatile fluctuations based on general economic and market conditions. The market price for our common stock may also be affected by our ability to meet analysts' expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business.
Shares Eligible for Future Sale
All of the shares of common stock currently held by our affiliates may be sold in reliance upon the exemptive provisions of Rule 144 of the Securities Act of 1933, as amended, subject to certain volume and other conditions imposed by such rule. We cannot predict the effect, if any, that future sales of shares of common stock or the availability of such shares for sale will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of common stock, or the perception that such sales might occur, could adversely affect the prevailing market price of the common stock.
Item 2.
Item 2. Properties
The following table provides certain information regarding our administrative offices and distribution centers and offices as of December 31, 2000:
Of the 672 stores that we operated at December 31, 2000, 225 stores were owned, 385 stores were leased from unaffiliated parties and 62 stores were leased from one of two real estate investment partnerships and a limited liability corporation formed by the O'Reilly family. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses, and an original term of 10 years, subject to one or more renewals at our option. The original terms of 27 stores leased from unaffiliated parties expire prior to the end of 2001. We have entered into separate master lease agreements with each of the affiliated real estate investment partnerships for the occupancy of the stores covered thereby. Such master lease agreements expired on December 31, 1998, and were renewed through December 31, 2004. We believe that the lease agreements with the affiliated real estate investment partnerships are on terms comparable to those obtainable from third parties.
We believe that our present facilities are in good condition, are adequately insured and together with those under construction, are suitable and adequate for the conduct of our current operations.
Item 3.
Item 3. Legal Proceedings
We are currently involved in a lawsuit as a result of a complaint filed against Hi/LO in May 1997. The plaintiff in this lawsuit sought to certify a class action on behalf of persons or entities in the States of Texas, Louisiana and California that have purchased a battery from Hi/LO since May 1990. The complaint alleges that Hi/LO offered and sold "old," "used" and "out of warranty" batteries as if the batteries were new, resulting in claims for violations of deceptive trade practices, breach of contract, negligence, fraud, negligent misrepresentation and breach of warranty. The plaintiff is seeking, on behalf of the class, an unspecified amount of compensatory and punitive damages,
as well as attorneys' fees and pre- and post-judgment interest. On July 27, 1998, the Trial Court certified this class. We appealed the decision to certify the class in the Court of Appeals for the Ninth District of Texas. On February 25, 1999, the Court of Appeals issued an opinion affirming the Trial Court's decision to certify the class. At that time, we appealed the opinion by seeking a mandamus from the Supreme Court of Texas. On April 6, 1999, the Supreme Court of Texas asked the plaintiff to file a response, which was filed on April 14, 1999. On May 3, 1999, we filed a reply to that response. On June 6, 2000, the Supreme Court of Texas denied the appeal for a mandamus. On January 15, 2001, we reached a favorable verbal settlement with the plaintiffs' counsel. The settlement documents are currently being prepared and will be subject to the approval of the Trial Court. We believe that this lawsuit will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
In addition, we and our subsidiaries are involved in various other legal proceedings incidental to the conduct of our business. Although we cannot ascertain the amount of liability that we may incur from any of these matters, we do not currently believe that, in the aggregate, they will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 2000.
Item 4a. Executive Officers of the Company
The following paragraphs discuss information about executive officers of the Company who are not also directors:
Ted F. Wise, age 50, Co-President, has been an O'Reilly team member for 30 of his 50 years. He began his O'Reilly career in sales in 1970, was promoted to store manager in 1973, and became the Company's first district manager in 1977. He continued his progression through the ranks as Operations Manager, Vice President, Senior Vice President focusing on Operations and Sales, and Executive Vice President. In July 1999, he was promoted to President of Sales, Operations and Real Estate.
Greg L. Henslee, age 40, Co-President, has been with the O'Reilly organization for 15 years. His O'Reilly career started as a Parts Specialist, and during his first five years served in several positions in retail store operations, including District Manager. From there he advanced to Computer Operations Manager, and over the past ten years, he has served as Director of Computer Operations/Loss Prevention, Vice President of Store Operations and as Senior Vice President. He has been in his current position as President of Merchandise, Distribution, Information Systems and Loss Prevention since July 1999.
James R. Batten, CPA, age 38, has served as Chief Financial Officer and Treasurer since March 1994 and, in addition, as Vice-President of Finance since October 1997. Mr. Batten served as our Finance Manager from January 1993 until being elected to his current position. From September 1986 until joining us in January 1993, Mr. Batten was employed by the accounting firm of Whitlock, Selim & Keehn.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
Common Stock Market Prices and Dividends on page 36 of the Annual Shareholders' Report for the year ended December 31, 2000, under the captions, "Market Prices and Dividend Information" and "Number of Shareholders," are incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
Selected Financial Data on pages 13 and 14 of the Annual Shareholders' Report for the year ended December 31, 2000, under the caption "Selected Consolidated Financial Data," is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 through 19 of the Annual Shareholders' Report for the year ended December 31, 2000, under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations," is incorporated herein by reference.
Item 7(A). Quantitative And Qualitative Disclosures About Market Risk
The Company's level of exposure to market risk through derivative financial instruments and other financial instruments is not material.
Item 8.
Item 8. Financial Statements And Supplementary Data
The Company's consolidated financial statements, the notes thereto and the report of Ernst & Young LLP, independent auditors, on pages 20 through 33 of the Annual Shareholders' Report for the year ended December 31, 2000, under the captions, "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Report of Independent Auditors," are incorporated herein by this reference.
Item 9.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the Company's Proxy Statement on Schedule 14A for the 2001 Annual Meeting of Shareholders ("the Proxy Statement") under the caption "Election of Class I Directors" is incorporated here by this reference. The Proxy Statement is being filed with the Securities and Exchange Commission within 120 days of the end of the Company's most recent fiscal year end. The information regarding executive officers called for by item 401 of Regulation S-K is included in Part I as Item 4A, in accordance with General Instruction G(3) to Form 10-K, for the executive officers of the Company who are not also directors.
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 included in the Company's Proxy Statement under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" is incorporated here by this reference.
Item 11.
Item 11. Executive Compensation
The material in the Proxy Statement under the caption "Executive Compensation" other than the material under the caption "Report of the Compensation Committee" is incorporated here by this reference.
Item 12.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The material in the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" is incorporated here by this reference.
Item 13.
Item 13. Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with Insiders and Others" is incorporated here by this reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule And Reports On Form 8-K
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive, Inc. and Subsidiaries included in the Annual Shareholders' Report of the registrant for the year ended December 31, 2000, are incorporated here by this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended December 31,2000, 1999, and 1998
Notes to Consolidated Financial Statements for the years ended December 31, 2000, 1999, and 1998
Report of Independent Auditors
(a) 2. Financial Statement Schedule-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statement schedule of O'Reilly Automotive, Inc. and subsidiaries is included in Item 14(d):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) 3. Management Contracts and Compensatory Plans or Arrangements
Each of the Company's management contracts and compensatory plans or arrangements is identified in the Exhibit Index on Page E-1.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of the fiscal year ended December 31, 2000.
(c) Exhibits
See Exhibit Index.
(d) Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
O'REILLY AUTOMOTIVE, INC. (Registrant)
Date: March 30, 2001 By /s/ David E. O'Reilly ----------------------------- David E. O'Reilly Co-Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/David E. O'Reilly Director, Co-Chairman of March 30, 2001 - ------------------------------------ the Board and Chief David E. O'Reilly Executive Officer (principal executive officer)
/s/Lawrence P. O'Reilly Director, Co-Chairman of March 30, 2001 - ------------------------------------ Chief Operating Officer Lawrence P. O'Reilly
/s/Charles H. O'Reilly, Jr, Director and Vice- March 30, 2001 - ------------------------------------ Chairman of the Board Charles H. O'Reilly, Jr.
/s/Rosalie O'Reilly Wooten Director and Executive March 30, 2001 - ------------------------------------ Vice-President Rosalie O'Reilly Wooten
/s/ Charles H. O'Reilly, Sr. Director and March 30, 2001 - ------------------------------------ Chairman Emeritus Charles H. O'Reilly, Sr.
/s/Ted F. Wise Co-President March 30, 2001 - ------------------------------------ Ted F. Wise
/s/Greg Henslee Co-President March 30, 2001 - ------------------------------------ Greg Henslee
/s/James R. Batten Vice-President of March 30, 2001 - ------------------------------------ Finance James R. Batten Chief Financial Officer and Treasurer (principal financial officer)
/s/ Jay D. Burchfield Director March 30, 2001 - ------------------------------------ Jay D. Burchfield
/s/ Joe C. Greene Director March 30, 2001 - ------------------------------------ Joe C. Greene
/s/ Paul R. Lederer Director March 30, 2001 - ------------------------------------ Paul R. Lederer
EXHIBIT INDEX Exhibit Number Description
2.1* Plan of Reorganization Among the Registrant, Greene County Realty Co.("Greene County Realty") and Certain Shareholders.
2.2 Agreement and Plan of Merger, dated as of December 23, 1997, by and among O'Reilly Automotive, Inc., Shamrock Acquisition, Inc. and Hi/LO Automotive, Inc., filed as Exhibit (c)(1) to the Registrant's Tender Offer Statement on Schedule 14D-1 dated December 23, 1997, are incorporated here by this reference.
3.1* Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3 Restated Articles of Incorporation of the Registrant, as Amended, filed as Exhibit 3.3 to the Registrant's quarterly report on Form 10-Q for the quarter ended September 30,1999, are incorporated here by this reference.
4.1* Form of Stock Certificate for Common Stock.
10.1*(a) Form of Employment Agreement between the Registrant and David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr. and Rosalie O'Reilly Wooten.
10.2* Lease between the Registrant and O'Reilly Investment Company.
10.3* Lease between the Registrant and O'Reilly Real Estate Company.
10.4(a) Form of Retirement Agreement between the Registrant and David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr. and Rosalie O'Reilly Wooten, filed as Exhibit 10.4 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1997, is incorporated here by this reference.
10.7(a) O'Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-73892, is incorporated here by this reference.
10.8*(a) O'Reilly Automotive, Inc. 1993 Stock Option Plan.
10.9*(a) O'Reilly Automotive, Inc. Stock Purchase Plan.
10.10*(a) O'Reilly Automotive, Inc. Director Stock Option Plan.
10.11* Commercial and Industrial Real Estate Sale Contract between Westing- house Electric Corporation and Registrant.
10.12* Form of Assignment, Assumption and Indemnification Agreement between Greene County Realty and Shamrock Properties, Inc.
10.13 Loan commitment and construction loan agreement between the Regi- strant and Deck Enterprises, filed as Exhibit 10.13 to the Regi- strant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1993, are incorporated here by this reference.
10.14 Lease between the Registrant and Deck Enterprises, filed as Exhibit 10.14 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1993, is incorporated here by this reference.
10.15 Amended Employment Agreement between the Registrant and Charles H. O'Reilly, Jr., filed as Exhibit 10.17 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1996, is incorporated here by this reference.
10.16 O'Reilly Automotive, Inc. Performance Incentive Plan, filed as Exhibit 10.18 (a) to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1996, is incorporated here by this reference.
EXHIBIT INDEX (continued)
10.17(a) Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated here by this reference.
10.18 Credit Agreement between the Registrant and NationsBank, N.A., dated October 16, 1997, filed as Exhibit 10.17 to the Registrant's Quar- terly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated here by this reference.
10.19 Credit Agreement between the Registrant and NationsBank, N.A., dated January 27, 1998, filed as Exhibit 10.20 to the Registrant's Quar- terly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated here by this reference.
10.20(a) Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.21 to the Registrant's Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, is in- corporated here by this reference.
10.21(a) First Amendment to the O'Reilly Automotive, Inc. Directors' Stock Option Plan, filed as Exhibit 10.22 to the Registrant's Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated here by this reference.
10.22(a) O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as Ex- hibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated here by this reference.
10.23 Trust Agreement between the Registrant's Deferred Compensation Plan and Bankers Trust, dated February 2, 1998, filed as Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated here by this reference.
13.1 Portions of the 2000 Annual Report to Shareholders, filed herewith.
21.1 Subsidiaries of the Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith.
- --------------------
* Previously filed as Exhibit of same number to the Registration Statement of the Registrant on Form S-1, File No. 33-58948, and incorporated here by this reference.
(a) Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of operations and liquidity and capital resources should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this annual report.
We are 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 ("DIY") customers and professional installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories, and a complete line of autobody paint and related materials, automotive tools and professional service equipment.
Beginning in January 2000, we calculate same-store product sales based on the change in product sales for stores open at least one year. We also calculate same-store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in both same-store product sales based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees.
Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of product sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of store payroll, store occupancy, advertising expenses, other store expenses and general and administrative expenses, including salaries and related benefits of corporate team members, administrative office occupancy expenses, data processing, professional expenses and other related expenses.
Results of Operations
The following table sets forth certain income statement data as a percentage of product sales for the years indicated:
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
2000 Compared to 1999
Product sales increased $136.3 million, or 18.1% from $754.1 million in 1999 to $890.4 million in 2000, due to 101 net additional stores opened during 2000, and a $28.0 million, or 4.0% increase in same-store product sales for stores opened in both full periods. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales.
Gross profit increased 17.6% from $325.3 million (or 43.1% of product sales) in 1999 to $382.7 million (or 43.0% of product sales) in 2000.
Operating, selling, general and administrative expenses increased $44.3 million from $248.4 million (or 32.9% of product sales) in 1999 to $292.7 million (or 32.9% of product sales) in 2000. The increase in these expenses in dollar amount was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition of employees and facilities to support the increased level of our operations.
Other expense, net, increased by $3.0 million from $3.9 million in 1999 to $6.9 million in 2000. The increase was primarily due to interest expense on increased borrowings under our credit facility.
Provision for income taxes increased from $27.4 million in 1999 (37.5% effective tax rate) to $31.5 million in 2000 (37.8% effective tax rate). The increase in the dollar amount was primarily due to the increase of income before income taxes. The nominal increase in the effective tax rate was primarily due to changes in the apportionment of sales between states with differing tax rates.
Principally as a result of the foregoing, net income in 2000 was $51.7 million (or 5.8% of product sales), an increase of $6.1 million (or 13.3%) from net income in 1999 of $45.6 million (or 6.1% of product sales).
1999 Compared to 1998
Product sales increased $137.8 million, or 22.4% from $616.3 million in 1998 to $754.1 million in 1999, due to 80 net additional stores opened during 1999, and a $56.4 million, or 9.6% increase in same-store product sales. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales.
Gross profit increased 26.2% from $257.9 million (or 41.8% of product sales) in 1998 to $325.3 million (or 43.1% of product sales) in 1999. The increase in gross profit margin was primarily attributable to the continued improvements in our product acquisition programs and improved buying power due to the number of net new stores opened in 1999.
Operating, selling, general and administrative expenses increased $47.4 million from $201.0 million (or 32.6% of product sales) in 1998 to $248.4 million (or 32.9% of product sales) in 1999. The increase in these expenses in dollar amount and as a percentage of sales primarily resulted from higher costs for employee medical and workers' compensation benefits, the continued conversion of Hi-Lo Automotive, Inc. ("Hi/LO") stores and distribution center, as well as the addition of employees and facilities to support the increased level of our operations.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Other expense, net, decreased by $3.1 million from $7.0 million in 1998 to $3.9 million in 1999. The decrease was primarily due to the decrease in interest expense as a result of repayments of indebtedness under our syndicated credit facility with a portion of the net proceeds of our secondary offering.
Our provision for income taxes was 37.5% and 38.4%, respectively, of income before income taxes in 1999 and 1998. The decrease in the effective tax rate primarily related to a higher percentage of our sales occurring in states with lower income tax rates.
Principally as a result of the foregoing, net income in 1999 was $45.6 million (or 6.1% of product sales), an increase of $14.9 million (or 48.3%) from net income in 1998 of $30.8 million (or 5.0% of product sales).
Liquidity and Capital Resources
Net cash provided by operating activities was $5.8 million in 2000 and $29.7 million in 1999. Net cash used in operating activities was $19.1 million in 1998. The decrease in cash provided by operating activities in 2000 compared to 1999 is the result of an increase in inventory and to a lesser extent, increases in accounts receivable and amounts receivable from vendors, partially offset by increases in net income, accounts payable and accrued payroll. The increase in net cash provided by operating activities in 1999 compared to 1998 is the result of increases in net income, accrued payroll, other current liabilities and a larger tax benefit resulting from stock option exercises, offset by increases in amounts receivable from vendors and inventory.
Net cash used in investing activities was $40.5 million in 2000, $77.8 million in 1999 and $100.8 million in 1998. The decrease in cash used in 2000 was primarily due to the sale of 90 properties for $52 million in a sale-leaseback transaction. The decrease in cash used in 1999 was due to the Hi/LO acquisition in 1998 and an increase in payments received on notes receivable, partially offset by increased purchases of property and equipment. The increase in cash used in 1998 was primarily due to the purchase of Hi/LO and increased capital expenditures.
On December 29, 2000, we completed a sale-leaseback transaction. Under the terms of the transaction, we sold 90 properties, including land, buildings and improvements, for $52.3 million. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one initial ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial term will be approximately $5.5 million annually and is included in the table of future minimum annual rental commitments under non-cancelable operating leases. Proceeds from the transaction were used to reduce outstanding borrowings under our Revolving Credit Facility.
Capital expenditures were $82.0 million in 2000, $86.0 million in 1999 and $57.7 million in 1998. These expenditures were primarily related to the opening of new stores, as well as the relocation or remodeling of existing stores. We opened 101, 80 and 50 net stores in 2000, 1999 and 1998, respectively. We remodeled or relocated 8 stores in both 2000 and in 1999, and 18 stores in 1998. Two new distribution centers were acquired; one in October 2000, located in Little Rock, Arkansas, and the other in December 1999, located in Dallas, Texas.
On December 15, 2000, we entered into a $50 million Synthetic Operating Lease Facility ("Synthetic Facility" or "the Facility") with a group of financial institutions. Under the Facility, the Lessor acquires land to be developed for O'Reilly Auto Parts stores and funds our development thereof as the Construction Agent and Guarantor. We subsequently lease the property from the lessor for an initial term of five years with two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee and purchase options on the properties. It also contains a provision for an event of default whereby the Lessor, among other things, may require us to purchase any or all of the properties. We plan to utilize the Facility to finance a portion of our planned store growth for 2001. Funding under the Facility at December 31, 2000, totaled $1.0 million.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. The costs associated with the opening of a new store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000 to $1.1 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, we estimate that the average cost to acquire such a business and convert it to one of our stores is approximately $400,000. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings under our existing credit facilities and the Synthetic facility.
On November 4, 1999, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend to all shareholders of record as of November 15, 1999. The stock dividend was paid on November 30, 1999.
In March 1999, we sold 7,002,000 shares of common stock through a secondary public offering. The net proceeds from that offering, which amounted to $124.6 million, were used to repay a portion of our outstanding indebtedness under our bank credit facilities and to fund our expansion.
In order to fund the Hi/LO acquisition, our continuing store expansion program, and our working capital and general corporate needs, we replaced our lines of credit in January 1998 with an unsecured, five-year syndicated credit facility totaling $175 million. The facility was reduced to $165 million in 1999 and further reduced to $152.5 million in 2000. The facility is comprised of a $125 million revolving loan, a $5 million sublimit for the issuance of letters of credit and a $27.5 million term loan. This credit facility is guaranteed by our subsidiaries. At December 31, 2000, the effective interest rate on the revolving and term loan portions, which each mature on January 27, 2003, was 7.0% per annum. At December 31, 2000, $50.2 in borrowings was available under this credit facility.
We believe that our existing cash, short-term investments, cash expected to be provided by operating activities, available bank credit facilities and trade credit will be sufficient to fund both our short- and long-term capital needs for the foreseeable future.
Inflation and Seasonality
We succeeded, 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. 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 store sales. 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.
Quarterly Results
The following table sets forth certain quarterly unaudited operating data for fiscal 2000 and 1999. The unaudited quarterly information includes all adjustments which management considers necessary for a fair presentation of the information shown.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
The unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report, and the other financial information included here.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 2000. We do not anticipate that the adoption of SFAS No. 133 will have a significant effect on the financial position or the results of our operations.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Balance Sheets
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Statements Of Shareholders' Equity
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. ("the Company") is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies and accessories to both the "DIY" customer and the professional installer throughout Arkansas, Illinois, Iowa, Kansas, Louisiana, Missouri, Nebraska, Oklahoma and Texas.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes sales upon shipment of products.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States ("GAAP"), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Cost has been determined using the last-in, first-out ("LIFO") method. If the first-in, first-out ("FIFO") method of costing inventory had been used by the Company, inventory would have been $369,869,000 and $291,077,000 as of December 31, 2000, and 1999, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist primarily of amounts due the Company for changeover merchandise, rebates and other allowances.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on straight-line and accelerated methods over the estimated useful lives of the assets. Service lives for property and equipment generally range from three to forty years. Leasehold improvements are amortized over the terms of the underlying leases. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average rates paid for long-term borrowings. Total interest costs capitalized for the years ended December 31, 2000, 1999 and 1998, were $1,354,000, $1,134,000 and $1,213,000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. The liability method provides that deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $12,150,000, $9,428,000 and $8,326,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Financial Instrument
The Company utilizes interest rate swap agreements to manage interest rate risk on its floating rate debt. During 1998, the Company entered into an interest-rate swap agreement to modify the interest characteristics of its outstanding long-term debt from a floating rate to a fixed rate basis. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from the counterparty is included in other liabilities or assets. The fair value of the swap agreement is not recognized in the consolidated financial statements and approximates its carrying cost.
Pre-opening Costs
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to operations as incurred.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock options because, as discussed in Note 11, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Concentration of Credit Risk
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Generally, the Company does not require security when trade credit is granted to customers. Credit losses are provided for in the Company's consolidated financial statements and consistently have been within management's expectations.
The Company has provided long-term financing to a company, through a note receivable, for the construction of an office building which is leased by the Company (see Note 7). The note receivable, amounting to $2,066,000 and $2,137,000 at December 31, 2000 and 1999, respectively, bears interest at 6% and is due in August 2017.
The carrying value of the Company's financial instruments, including cash, short-term investments, accounts receivable, accounts payable and long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value.
Reclassifications
The reclassifications of certain amounts have been made to the 1999 and 1998 consolidated financial statements to conform to the 2000 presentation.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as deferred by SFAS No. 137, which is required to be adopted in years beginning after June 15, 2000. The Company does not anticipate that the adoption of SFAS No. 133 will have a significant effect on its financial position or results of operations.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 2--ACQUISITION
Effective January 31, 1998, the Company acquired 100% of the outstanding capital stock of Hi-Lo Automotive, Inc. and its subsidiaries ("Hi/LO"). Hi/LO was a specialty retailer supplying automotive aftermarket tools, supplies and accessories principally throughout Texas and Louisiana. The purchase price was approximately $49.3 million, including acquisition costs. The purchase price was financed with long-term borrowings under the Company's credit facility. The acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations of Hi/LO have been included in the Company's results of operations since the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values. The excess of net assets acquired over the purchase price, which totaled approximately $9.7 million, has been applied as a reduction to the acquired property and equipment. Additional purchase liabilities recorded included approximately $5,622,000 for severance and certain costs associated with the closure and consolidation of certain acquired stores, none of which remained on the balance sheet at December 31, 1999.
The following unaudited pro forma financial information presents the combined historical results of the Company and Hi/LO as if the acquisition had occurred at January 1, 1998, after giving effect to certain adjustments, including the application of the excess of net assets acquired over the purchase price to the acquired property and equipment and resulting effect on depreciation, increased interest expense on long-term debt related to the acquisition, and the related income tax effects.
------------ (In thousands, except per share data) Product sales $ 634,072 Net income $ 29,443 Net income per share - assuming dilution $ 0.68
The pro forma combined results are not necessarily indicative of the results that would have occurred if the acquisition had been completed as of January 1, 1998.
NOTE 3--SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as available-for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and are carried at cost, which approximates fair market value. At December 31, 2000, and 1999, short-term investments consisted of preferred equity securities.
NOTE 4--RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto Parts stores under six-year operating lease agreements with O'Reilly Investment Company and O'Reilly Real Estate Company, partnerships in which certain shareholders of the Company are partners. Generally, these lease agreements provide for renewal options for an additional six years at the option of the Company. Additionally, the Company leases certain land and buildings related to its O'Reilly Auto Parts stores under 15-year operating lease agreements with O'Reilly-Wooten 2000 LLC, which is owned by certain shareholders of the Company. Generally, these lease agreements provide for renewal options for two additional five-year terms at the option of the Company (see Note 7). Rent expense under these operating leases totaled $2,671,000, $2,647,000 and $2,158,000 in 2000, 1999 and 1998, respectively.
NOTE 5--NOTE PAYABLE TO BANK
At December 31, 2000, the Company had available short-term unsecured bank lines of credit providing for maximum borrowings of $10 million, all of which was outstanding at December 31, 2000, and $5 million of which was outstanding at December 31, 1999. The lines of credit bear interest at LIBOR plus 0.50% (7.25% at December 31, 2000). Additionally, at December 31, 2000, the Company had available a short-term line of credit in the amount of $25 million, all of which was outstanding at December 31, 2000. This line of credit was paid in full on January 9, 2001. The line of credit bears interest at LIBOR plus 0.75% (7.45% at December 31, 2000). The weighted-average interest rate for all lines of credit for the years ended December 31, 2000, and 1999 was 7.2% and 6.7%, respectively.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 6--LONG-TERM DEBT
At December 31, 2000, the Company had available an unsecured credit facility providing for maximum borrowings of $152.5 million. The facility is comprised of a revolving credit facility of $125 million, and a term loan of $27.5 million. At December 31, 1999, the Company had available a credit facility providing for maximum borrowings of $165 million. The facility was comprised of a $125 million revolving credit facility and a $40 million term loan. At December 31, 2000, and 1999, $74,755,000 and $61,560,000, respectively, of the revolving credit facility and $27.5 million and $40 million, respectively, of the term loan were outstanding. The credit facility, which bears interest at LIBOR plus 0.50% (7.0% at December 31, 2000), expires in January 2003.
During 2000 and 1999, the Company leased certain computer equipment under capitalized leases. The lease agreements are three-year terms expiring from 2001 to 2003. At December 31, 2000, the monthly installments under these agreements were approximately $180,000. The present value of the future minimum lease payments under these agreements totaled $2,232,000 and $3,362,000 at December 31, 2000, and 1999, respectively, which has been classified as long-term debt in the accompanying consolidated financial statements. During 2000 and 1999, the Company purchased $800,000 and $2,676,000, respectively, of assets under capitalized leases.
Additionally, the Company has various unsecured notes payable to individuals, amounting to $97,000 and $140,000, at December 31, 2000, and 1999, respectively. The notes bear interest at rates ranging from 7.75% to 9.0% and are due in monthly installments of approximately $1,500 including interest. Only one note remained at December 31, 2000, which matures in 2008.
Indirect borrowings under letters of credit provided by a $5,000,000 sublimit of the revolving credit facility totaled $648,510 and $1,275,000 at December 31, 2000, and 1999, respectively. These letters of credit reduced availability of borrowings at December 31, 2000, and 1999.
Principal maturities of long-term debt for each of the next five years ending December 31 are as follows (amounts in thousands):
2001 $ 14,121 2002 11,715 2003 78,684 2004 13 2005 14 Thereafter 37 --------- $ 104,584
Cash paid by the Company for interest during the years ended December 31, 2000, 1999 and 1998 amounted to $8,240,000, $6,134,000, and $8,509,000, respectively.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 7--COMMITMENTS
Lease Commitments
During 1999, the Company entered into a Master Lease Agreement with O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company) related to the sale and leaseback of certain properties. The transaction closed on January 4, 1999, with a purchase price of approximately $5.5 million. The lease calls for an initial term of 15 years with two five-year renewal options.
On December 29, 2000, the Company completed a sale-leaseback transaction. Under the terms of the transaction, the Company sold 90 properties, including land, buildings and improvements, for $52.3 million. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one initial ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial term will be approximately $5.5 million annually and is included in the table of future minimum annual rental commitments under non-cancelable operating leases. Proceeds from the transaction were used to reduce outstanding borrowings under the Company's Revolving Credit Facility.
On December 15, 2000, the Company entered into a $50 million Synthetic Operating Lease Facility ("the Facility") with a group of financial institutions. Under the Facility, the Lessor acquires land to be developed for O'Reilly Auto Parts stores and funds the development thereof by the Company as the Construction Agent and Guarantor. The Company subsequently leases the property from the Lessor for an initial term of five years with two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee and purchase options on the properties. It also contains a provision for an event of default whereby the Lessor, among other things, may require the Company to purchase any or all of the properties. The Company plans to utilize the Facility to finance a portion of its planned store growth for 2001. Funding under the Facility at December 31, 2000, totaled $1.0 million.
The Company also leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. At December 31, 2000, future minimum rental payments under all of the Company's operating leases for each of the next five years and in the aggregate are as follows (amounts in thousands):
Related Non-related Parties Parties Total
2001 $ 2,032 $ 19,823 $ 21,855 2002 1,957 18,239 20,196 2003 1,160 16,874 18,034 2004 1,001 15,436 16,437 2005 665 13,273 13,938 Thereafter 5,575 112,305 117,880 --------- --------- --------- $ 12,390 $ 195,950 $ 208,340 ========= ========= =========
Rental expense amounted to $16,219,000, $14,122,000 and $13,862,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
Other Commitments
The Company had construction commitments, which totaled approximately $7.0 million, at December 31, 2000.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 8--LEGAL PROCEEDINGS
The Company is currently involved in litigation as a result of a complaint filed against Hi/LO in May 1997. The plaintiff in this lawsuit sought to certify a class action on behalf of persons or entities in the states of Texas, Louisiana and California that have purchased a battery from Hi/LO since May 1990. The complaint alleges that Hi/LO offered and sold "old," "used" and "out of warranty" batteries as if the batteries were new, resulting in claims for violations of deceptive trade practices, breach of contract, negligence, fraud, negligent misrepresentation and breach of warranty. The plaintiff is seeking, on behalf of the class, an unspecified amount of compensatory and punitive damages, as well as attorneys' fees and pre- and post-judgment interest. On July 27, 1998, the Trial Court certified this class. The Company appealed the decision to certify the class in the Court of Appeals for the Ninth District of Texas. On February 25, 1999, the Court of Appeals issued an opinion affirming the Trial Court's decision to certify the class. At that time, the Company appealed the opinion by seeking a mandamus from the Supreme Court of Texas. On April 6, 1999, the Supreme Court of Texas asked the plaintiff to file a response, which was filed on April 14, 1999. On May 3, 1999, the Company filed a reply to that response. On June 6, 2000, the Supreme Court of Texas denied the appeal for a mandamus. On January 15, 2001, the Company reached a favorable verbal settlement with the plaintiffs' counsel. The settlement documents are currently being prepared and will be subject to the approval of the Trial Court.
The Company believes that this lawsuit will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
In addition, the Company is involved in various other legal proceedings incidental to the conduct of its 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, they will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
NOTE 9--INTEREST RATE RISK MANAGEMENT
The Company entered into an interest rate swap agreement to effectively convert a portion of its floating rate long-term debt to a fixed rate basis, thereby reducing the impact of interest rate changes on future income. Pursuant to this pay-fixed swap agreement, the Company agreed to exchange, at specified intervals, the difference between the fixed and the floating interest amounts calculated on the notional amount of the swap agreement which totaled $50 million, $50 million and $100 million, respectively, at January 27, 2000, December 31, 1999, and 1998. The Company's fixed interest rate under the swap agreement was 5.66% and the counterparty's floating rate was 6.20% at January 27, 2000, and December 31, 1999. The swap agreement expired on January 27, 2000.
NOTE 10--EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit sharing and savings plan that covers substantially all employees who are 21 years of age with at least six months of service. Employees may contribute up to 15% of their annual compensation subject to Internal Revenue Code maximum limitations. The Company has agreed to make matching contributions equal to 50% of the first 2% of each employee's contribution and 25% of the next 2% of each employee's contribution. Additional contributions to the plan may be made as determined annually by the Board of Directors. After three years of service, Company contributions and earnings thereon vest at the rate of 20% per year. Company contributions charged
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 10--EMPLOYEE BENEFIT PLANS (continued)
to operations amounted to $2,454,000 in 2000, $2,618,000 in 1999 and $1,818,000 in 1998. Company contributions, in the form of common stock, to the profit sharing and savings plan to match employee contributions during the years ended December 31 were as follows:
Year Market Contributed Shares Value --------------------------------------------- 2000 49,891 $ 724,000 1999 29,481 658,000 1998 31,438 514,000
Profit sharing contributions accrued at December 31, 2000, 1999, and 1998 funded in the next year through the issuance of shares of the Company's common stock were as follows:
Year Market Funded Shares Value -------------------------------------------- 2000 132,890 $ 1,919,000 1999 60,640 1,300,000 1998 72,386 1,070,000
The Company also sponsors an unfunded non-contributory defined benefit health care plan, which provides certain health benefits to retired employees. According to the terms of this plan, retirees' annual benefits are limited to $1,000 per employee starting at age 66 for employees with 20 or more years of service. Post-retirement benefit costs for each of the years ended December 31, 2000, 1999, and 1998 amounted to $12,000.
Additionally, the Company has adopted a stock purchase plan under which 1,000,000 shares of common stock are reserved for future issuance. Under the plan, substantially all employees and non-employee directors have the right to purchase shares of the Company's common stock monthly at a price equal to 85% of the fair market value of the stock. Under the plan, 147,315 shares were issued at a weighted- average price of $12.83 per share during 2000, 78,927 shares were issued at a weighted-average price of $18.90 per share during 1999, and 74,632 shares were issued at a weighted-average price of $15.05 per share during 1998.
The Company has in effect a performance incentive plan for the Company's senior management under which 400,000 shares of restricted stock are reserved for future issuance. Under the plan, 12,164 shares, 6,796 shares and 5,358 shares were issued during 2000, 1999, and 1998, respectively.
NOTE 11--STOCK OPTION PLANS
The Company has a stock option plan under which incentive stock options or non-qualified stock options may be granted to officers and key employees. An aggregate of 6,000,000 shares of common stock is reserved for future issuance under this plan. The exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and the options will expire no later than 10 years from the date of grant. Options granted pursuant to the plan become exercisable no sooner than six months from the date of grant. In the case of a shareholder owning more than 10% of the outstanding stock of the Company, the exercise price of an incentive option may not be less than 110% of the fair market value of the stock on the date of grant, and such options
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11--STOCK OPTION PLANS (continued)
will expire no later than 10 years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by any individual in any calendar year may not exceed $100,000. A summary of outstanding stock options is as follows:
Number Price per Share of Shares -------------------------------------- Outstanding at December 31, 1997 $ 4.38 - 14.00 2,672,400 Granted 12.38 - 22.91 823,750 Exercised 4.38 - 16.07 (238,600) Canceled 4.38 - 20.88 (68,700) Forfeitures 4.38 (5,000) ---------- Outstanding at December 31, 1998 5.94 - 22.91 3,183,850 Granted 18.44 - 26.75 1,148,000 Exercised 5.94 - 18.75 (948,620) Canceled 6.75 - 26.38 (35,750) Forfeitures 6.07 (1,000) ---------- Outstanding at December 31, 1999 6.07 - 26.75 3,346,480 Granted 10.56 - 24.38 581,250 Exercised 6.07 - 22.75 (361,875) Canceled 10.00 - 25.88 (206,625) ---------- Outstanding at December 31, 2000. $ 8.00 - 26.75 3,359,230 ==========
Options to purchase 1,729,033, 1,171,888, and 855,100 shares of common stock were exercisable at December 31, 2000, 1999, and 1998, respectively.
The Company also maintains a stock option plan for non-employee directors of the Company under which 300,000 shares of common stock are reserved for future issuance. All director stock options are granted at fair market value on the date of grant and expire on the earlier of termination of service to the Company as a director or seven years. Options granted under this plan become exercisable six months from the date of grant. A summary of outstanding stock options is as follows:
Number Price per Share of Shares -------------------------------------- Outstanding at December 31, 1997 $ 4.38 - 9.10 60,000 Granted 13.50 20,000 Exercised 4.38 (10,000) Canceled - - ---------- Outstanding at December 31, 1998 6.56 - 13.50 70,000 Granted 23.91 20,000 Exercised - - Canceled - - ---------- Outstanding at December 31, 1999 6.56 - 23.91 90,000 Granted 12.44 20,000 Exercised 6.56 - 6.75 (20,000) Canceled - - ---------- Outstanding at December 31, 2000 $ 9.09 - 23.91 90,000 ==========
All options under this plan were exercisable at December 31, 2000, 1999, and 1998.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11--STOCK OPTION PLANS (CONTINUED)
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee and non-employee director stock options under the fair value method of that SFAS.
The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999, and 1998, respectively; risk-free interest rates of 5.02%, 6.54% and 4.74%; volatility factors of the expected market price of the Company's common stock of .442, .247, and 221; and weighted-average expected life of the options of 8.9, 8.0 and 8.0 years. The Company assumed a 0% dividend yield over the expected life of the options. The weighted-average fair values of options granted during the years ended December 31, 2000, 1999, and 1998 were $9.24, $10.22 and $6.44, respectively. The weighted-average remaining contractual life at December 31, 2000, for all outstanding options under the Company's stock option plans is 7.1 years. The weighted-average exercise price for all outstanding options under the Company's stock option plans was $16.12 at December 31, 2000.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of applying SFAS No. 123 for pro forma disclosures are not likely to be representative of the effects on reported net income or losses for future years. The Company's pro forma information follows:
2000 1999 1998 -------------------------------------- (In thousands, except per share data)
Pro forma net income $ 48,177 $ 43,501 $ 29,242 ====================================== Pro forma basic net income per share $ 0.94 $ 0.89 $ 0.69 ====================================== Pro forma net income per share - assuming dilution $ 0.93 $ 0.88 $ 0.67 ======================================
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 12--INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income per common share:
Years ended December 31, 2000 1999 1998 -------------------------------------- (In thousands, except per share data)
Numerator (basic and diluted): Net income $ 51,708 $ 45,639 $ 30,772 ======================================
Denominator: Denominator for basic income per common share - weighted-average shares 51,168 48,674 42,476 Effect of stock options (Note 11). 560 1,041 728 ---------------------------------------
Denominator for diluted income per common share - Adjusted weighted-average shares and assumed conversion 51,728 49,715 43,204 =======================================
Basic net income per common share $ 1.01 $ 0.94 $ 0.72 =======================================
Net income per common share - assuming dilution $ 1.00 $ 0.92 $ 0.71 =======================================
NOTE 13--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows at December 31:
2000 1999 -------------------------- (In thousands) Deferred tax assets: Current: Allowance for doubtful accounts............... $ 51 $ 226 Other accruals................................. 2,960 3,586 -------------------------- 3,011 3,812 Noncurrent: Other...............................................834 1,306 -------------------------- Total deferred tax assets.................3,845 5,118
Deferred tax liabilities: Current: Inventory carrying value....................... 1,609 2,036
Noncurrent: Property and equipment................... 4,920 2,521
Total deferred tax liabilities 6,529 4,557 -------------------------- Net deferred tax assets (liabilities) $ (2,684) $ 561 ==========================
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 13--INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
Current Deferred Total ---------------------------------------------- (In thousands)
2000: Federal $ 25,120 $ 2,946 $ 28,066 State 3,086 299 3,385 ---------------------------------------------- $ 28,206 $ 3,245 $ 31,451 ==============================================
1999: Federal $ 19,934 $ 4,959 $ 24,893 State 1,996 496 2,492 ---------------------------------------------- $ 21,930 $ 5,455 $ 27,385 ============================================== 1998: Federal $ 10,386 $ 6,852 $ 17,238 State 1,156 777 1,933 ---------------------------------------------- $ 11,542 $ 7,629 $ 19,171 ==============================================
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows:
2000 1999 1998 ------------------------------------ (In thousands)
Federal income taxes at statutory rate $ 29,106 $ 25,558 $ 17,480 State income taxes, net of federal tax benefit 2,200 1,625 1,256 Other items, net 145 202 435 ------------------------------------ $ 31,451 $ 27,385 $ 19,171 ====================================
The tax benefit associated with the exercise of non-qualified stock options has been reflected as additional paid-in capital in the accompanying consolidated financial statements.
During the years ended December 31, 2000, 1999, and 1998, cash paid by the Company for income taxes amounted to $24,244,000, $17,151,000 and $16,229,000, respectively.
NOTE 14--STOCK SPLIT
On November 8, 1999, the Company's Board of Directors declared a two-for-one stock split to be effected in the form of a 100% stock dividend payable to all shareholders of record as of November 15, 1999. The stock dividend was paid on November 30, 1999. Accordingly, this stock split has been recognized by reclassifying $254,000, the par value of the additional shares resulting from the split, from retained earnings to common stock.
All share and per share information included in the accompanying consolidated financial statements has been restated to reflect the retroactive effect of the stock split for all periods presented.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 15--PUBLIC OFFERING OF COMMON STOCK
In March 1999, the Company completed a secondary public offering of 7,002,000 shares of common stock. Pursuant to this offering, the Company issued 7,002,000 shares of common stock resulting in net proceeds to the Company of $124,570,000. A portion of the proceeds was used to repay the Company's outstanding indebtedness under its bank credit facilities. The remaining portion of the proceeds was used to fund the Company's expansion.
NOTE 16--QUARTERLY FINANCIAL DATA--UNAUDITED
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Report Of Independent Auditors
The Board of Directors and Shareholders O'Reilly Automotive, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of O'Reilly Automotive, Inc. and Subsidiaries as of December 31, 2000, and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of O'Reilly Automotive, Inc. and Subsidiaries at December 31, 2000, and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri February 23, 2001
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Shareholder Information
CORPORATE ADDRESS
233 South Patterson Springfield, Missouri 65802 417/862-3333 Web site - www.oreillyauto.com
REGISTRAR AND TRANSFER AGENT
UMB Bank 928 Grand Boulevard Kansas City, Missouri 64141-0064
Inquiries regarding stock transfers, lost certificates or address changes should be directed to UMB Bank at the above address.
INDEPENDENT AUDITORS
Ernst and Young LLP One Kansas City Place Kansas City, Missouri 64105-2143
LEGAL COUNSEL
Gallop Johnson & Neuman, L.C. 101 South Hanley Road, Suite 1600 St. Louis, Missouri 63105
Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606
ANNUAL MEETING
The annual meeting of shareholders of O'Reilly Automotive, Inc. will be held at 10:00 a.m. local time on May 8, 2001, at the University Plaza Convention Center, 333 John Q. Hammons Parkway in Springfield, Missouri. Sharedholders of record as of February 28, 2001, will be entitled to vote at this meeting.
FORM 10-K REPORT
The Form 10-K Report of O'Reilly Automotive, Inc. filed with the Securities and Exchange Commission and our quarterly press releases are available without charge to shareholders upon written request. These requests and other investor contacts should be directed to James R. Batten, Vice President of Finance/Chief Financial Officer, at the corporate address.
TRADING SYMBOL
The Company's common stock is traded on The Nasdaq Stock Market (National Market) under the symbol ORLY.
NUMBER OF SHAREHOLDERS
As of February 28, 2001, O'Reilly Automotive, Inc. had approximately 19,500 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by security position listings.
ANALYST COVERAGE
The following analysts provide research coverage of O'Reilly Automotive, Inc.
Credit Suisse First Boston - Gary Balter William Blair & Co. - Ellen Baras A.G. Edwards - Mark Johnson Merrill Lynch - Douglas Neviera Advest - Brett Jordan Smith Moore & Co. - John Rast
MARKET PRICES AND DIVIDEND INFORMATION
The prices in the table below represent the high and low sales price for O'Reilly Automotive, Inc. common stock as reported by the Nasdaq Stock Market.
The common stock began trading on April 22, 1993. No cash dividends have been declared since 1992, and the Company does not anticipate paying any cash dividends in the forseeable future.
2000 1999 - -------------------------------------------------------------------------------- High Low High Low - --------------------------------------------------------------------------------
First Quarter $ 22-1/8 $ 8-1/4 $ 26-3/8 $ 12-5/8 Second Quarter 15-7/16 11-3/4 25-3/4 20 Third Quarter 16-1/8 13-1/8 27-5/16 17-7/8 Fourth Quarter 27-1/4 14 24-3/8 19-7/16 For the Year 27-1/4 8-1/4 27-5/16 17-7/8
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation
Ozark Automotive Distributors, Inc. Missouri Greene County Realty Co. Missouri O'Reilly II Aviation, Inc. Missouri Hi-Lo Automotive, Inc. Delaware
One hundred percent of the capital stock of each of the above listed subsidiaries is directly owned by O'Reilly Automotive, Inc.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 23.1 - Consent of Ernst & Young LLP, independent auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K) of O'Reilly Automotive, Inc. and Subsidiaries of our report dated February 23, 2001, included in the 2000 Annual Report to Shareholders of O'Reilly Automotive, Inc.
Our audits also included the consolidated financial statement schedule of O'Reilly Automotive, Inc. and Subsidiaries listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-61632, Form S-8 No. 33-73892 and Form S-8 No. 33-91022) of O'Reilly Automotive, Inc. of our report dated February 23, 2001, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of O'Reilly Automotive, Inc. for the year ended December 31, 2000.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri March 27, 2001