O REILLY AUTOMOTIVE INC quarterly report, Q2 FY2012

O’Reilly Automotive, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2012; filed August 8, 2012. O’Reilly is a U.S. specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional customers.

Business Context and Operations

Operated 3,859 stores in 39 states at June 30, 2012, compared with 3,657 stores a year earlier.
Opened 50 stores in the second quarter and 123 stores during the first six months, net of four closures. Management planned 180 net new stores for full-year 2012.
Comparable-store sales increased 2.5% in the quarter and 4.9% year to date, driven by higher average ticket values and professional-service-provider sales, partially offset by lower DIY transaction counts.

Financial Performance

Metric	Three Months Ended June 30	Six Months Ended June 30
Sales	$1.563 billion, up 6%	$3.092 billion, up 8%
Gross profit	$780 million; 49.9% margin	$1.542 billion; 49.9% margin
Operating income	$244 million; 15.6% margin	$491 million; 15.9% margin
Net income	$146 million, up 9%; 9.3% margin	$294 million, up 24%; 9.5% margin
Diluted EPS	$1.15, up 20%	$2.29, up 37%

Quarterly gross margin improved from 48.6% to 49.9%; year-to-date margin improved from 48.5% to 49.9%.
Operating margin increased from 15.0% to 15.6% for the quarter and from 14.6% to 15.9% year to date.
SG&A increased 8% in both periods, reflecting additional employees, facilities and vehicles, higher store staffing, and advertising timing.
Interest expense increased to $9.1 million for the quarter and $18.3 million year to date, compared with $6.3 million and $11.5 million, respectively, in the prior periods.
Effective tax rates were 37.8% for the quarter and 38.2% year to date.

Cash Flow, Balance Sheet, Debt and Liquidity

Six-month operating cash flow was $691.5 million, compared with $561.5 million in the prior-year period.
Capital expenditures were $151.3 million, producing investing cash outflow of $147.2 million.
Financing cash outflow was $538.1 million, principally due to $594.5 million of share repurchases.
Cash and cash equivalents were $367.7 million at June 30, 2012, compared with $361.6 million at December 31, 2011.
Total debt and capital lease obligations were $797.4 million, consisting primarily of $500 million of 4.875% senior notes and $300 million of 4.625% senior notes, both due 2021.
The $660 million unsecured revolving credit facility had no borrowings outstanding and $57.8 million of letters of credit, leaving availability reduced by those letters of credit. The facility matures in September 2016.
The company remained in compliance with debt covenants. Fixed-charge coverage was 4.99 times against a 2.00-times minimum, and adjusted consolidated leverage was 1.65 times against a 3.00-times maximum.

Material Changes Versus Prior Comparable Period

Sales increased $84 million in the quarter and $230 million year to date, supported by new stores and comparable-store growth.
Gross profit and margins improved due to distribution-center efficiencies, vendor cost improvements and shorter-duration promotional activity.
Net income growth benefited from operating leverage and the absence of prior-year financing-related charges.
The first six months of 2011 included a $21.6 million pre-tax write-off of debt issuance costs and a $4.2 million charge for terminating interest-rate swaps. No comparable charges were recorded in 2012.
Weighted-average diluted shares declined to 127.2 million in the quarter and 128.3 million year to date, from 139.7 million and 141.3 million, respectively, due largely to repurchases.
The board increased cumulative share-repurchase authorization by $500 million to $2 billion on June 1, 2012. The company repurchased 6.3 million shares for $594.4 million during the first six months, with $429.3 million remaining under the program at June 30.

Outlook, Commentary, Risks and Unusual Items

Management expected 180 net new stores in 2012 and stated that operating cash flow and revolver availability should fund foreseeable capital and liquidity needs.
Management identified vehicle miles driven, the number and age of vehicles, new vehicle registrations, unemployment, fuel costs, consumer spending and competition as important demand factors.
Risks include macroeconomic weakness, elevated unemployment, reduced DIY activity, product demand, competition, inflation, employee retention, regulation, weather, increased debt and execution of acquired-business integration, including CSK.
The company had $13.9 million reserved at June 30, 2012, for potential CSK-related indemnification obligations tied to legacy governmental investigations and litigation. Insurance coverage and final costs remain uncertain.
Store and facility closure reserves totaled $12.0 million at June 30, 2012. Related lease obligations may extend through April 2023.
Management stated that ordinary-course litigation, after insurance and reserves, was not expected to have a material adverse effect, but particular periods could be affected by resolution of the CSK-related matter.
The May 30, 2012 expiration of the company’s Rights Agreement eliminated preferred share rights associated with common shares.
No material changes to reported risk factors, critical accounting estimates, market risks or accounting pronouncements were disclosed.

Important Facts for Investors to Verify

Whether comparable-store sales and DIY transaction trends improve while the company continues rapid store expansion.
The sustainability of the 49.9% gross margin and the effect of staffing, advertising and distribution costs on SG&A leverage.
Cash generation relative to capital expenditures, inventory growth and continued share repurchases.
Remaining revolver availability, debt-covenant headroom and the effect of rent and letters of credit on adjusted leverage.
Future costs, insurance recovery and resolution timing for the $13.9 million CSK-related indemnification reserve.
Whether the planned 180 net store openings are achieved without weakening returns or liquidity.