ORLY 10-Q Quarter ended Sept. 30, 2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 000-21318

O'REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

Missouri

27-4358837

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

233 South Patterson Avenue

Springfield, Missouri 65802

(Address of principal executive offices, Zip code)

(417) 862-6708

(Registrant's telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

x

No

¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

x

No

¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

x

Accelerated Filer

¨

Non-Accelerated Filer

¨

Smaller Reporting Company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

¨

No

x

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income

4

Condensed Consolidated Statements of Comprehensive Income

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

16

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

25

ITEM 4 - CONTROLS AND PROCEDURES

25

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

26

ITEM 1A - RISK FACTORS

26

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

26

ITEM 6 - EXHIBITS

27

SIGNATURE PAGES

28

September 30, 2012

December 31, 2011

(Unaudited)

(Note)

Assets

Current assets:

Cash and cash equivalents

$

$

Accounts receivable, net

Amounts receivable from vendors

Inventory

Other current assets

Total current assets

Property and equipment, at cost

Less: accumulated depreciation and amortization

Net property and equipment

Notes receivable, less current portion

Goodwill

Other assets, net

Total assets

$

$

Liabilities and shareholders’ equity

Current liabilities:

Accounts payable

$

$

Self-insurance reserves

Accrued payroll

Accrued benefits and withholdings

Deferred income taxes

Income taxes payable

-

Other current liabilities

Current portion of long-term debt

Total current liabilities

Long-term debt, less current portion

Deferred income taxes

Other liabilities

Shareholders’ equity:

Common stock, $0.01 par value:

Authorized shares – 245,000,000

Issued and outstanding shares –

116,056,105 as of September 30, 2012, and

127,179,792 as of December 31, 2011

Additional paid-in capital

Retained earnings

Total shareholders’ equity

Total liabilities and shareholders’ equity

$

$

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2012

2011

2012

2011

Sales

$

$

$

$

Cost of goods sold, including warehouse and distribution expenses

Gross profit

Selling, general and administrative expenses

Operating income

Other income (expense):

Interest expense

Interest income

Write-off of asset-based revolving credit facility debt issuance costs

-

-

-

Termination of interest rate swap agreements

-

-

-

Other, net

Total other expense

Income before income taxes

Provision for income taxes

Net income

$

$

$

$

Earnings per share-basic:

Earnings per share

$

$

$

$

Weighted-average common shares outstanding – basic

Earnings per share-assuming dilution:

Earnings per share

$

$

$

$

Weighted-average common shares outstanding – assuming dilution

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2012

2011

2012

2011

Components of comprehensive income:

Net income

$

$

$

$

Reclassification adjustment for unrealized losses on cash flow hedges, net of tax, included in net income

-

-

-

Other comprehensive income

-

-

-

Total comprehensive income

$

$

$

$

For the Nine Months Ended

September 30,

2012

2011

(Note)

Operating activities:

Net income

$

$

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization of property, equipment and intangibles

Amortization of debt discount and issuance costs

Write-off of asset-based revolving credit facility debt issuance costs

-

Excess tax benefit from stock options exercised

Deferred income taxes

Share-based compensation programs

Other

Changes in operating assets and liabilities:

Accounts receivable

Inventory

Accounts payable

Income taxes payable

Other

Net cash provided by operating activities

Investing activities:

Purchases of property and equipment

Proceeds from sale of property and equipment

Payments received on notes receivable

Other

-

Net cash used in investing activities

Financing activities:

Proceeds from borrowings on asset-based revolving credit facility

-

Payments on asset-based revolving credit facility

-

Proceeds from the issuance of long-term debt

Payment of debt issuance costs

Principal payments on debt and capital leases

Repurchases of common stock

Excess tax benefit from stock options exercised

Net proceeds from issuance of common stock

Net cash used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

$

$

Supplemental disclosures of cash flow information:

Income taxes paid

$

$

Interest paid, net of capitalized interest

Note:  Certain prior period amounts have been reclassified to conform to current period presentation.

See accompanying Notes to condensed consolidating financial statements.

Level 1 – Observable inputs that reflect quoted prices in active markets.

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.

September 30, 2012

December 31, 2011

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

4.875% Senior Notes due 2021

$

$

$

$

4.625% Senior Notes due 2021

$

$

$

$

3.800% Senior Notes due 2022

$

$

$

-

$

-

Cost

Accumulated Amortization (Expense) Benefit

September 30, 2012

December 31, 2011

September 30, 2012

December 31, 2011

Amortizable intangible assets:

Favorable leases

$

$

$

$

Non-compete agreements

Total amortizable intangible assets

$

$

$

$

Unfavorable leases

$

$

$

$

September 30, 2012

December 31, 2011

Revolving Credit Facility

$

-

$

-

4.875% Senior Notes due 2021 ⁽¹⁾ , effective interest rate of 4.973%

4.625% Senior Notes due 2021 ⁽²⁾ , effective interest rate of 4.649%

3.800% Senior Notes due 2022 ⁽³⁾ , effective interest rate of 3.845%

-

Capital leases

Total debt and capital lease obligations

Current portion of long-term debt

Long-term debt, less current portion

$

$

⁽¹⁾ Net of unamortized original issuance discount of $2.9 million

⁽²⁾ Net of unamortized original issuance discount of $0.5 million

⁽³⁾ Net of unamortized original issuance discount of $1.1 million

Store Closure Liabilities

Administrative Office and Distribution Facilities Closure Liabilities

Balance at December 31, 2011:

$

$

Additions and accretion

Payments

Revisions to estimates

-

Balance at September 30, 2012:

$

$

Location and Amount of Loss Recognized in Income on Derivatives

Derivatives Designated as  Hedging Instruments

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Classification

2012

2011

2012

2011

Interest rate swap contracts

Other income (expense)

$

-

$

-

$

-

$

Balance at December 31, 2011

$

Warranty claims

Warranty accruals

Balance at September 30, 2012

$

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2012

2011

2012

2011

Shares repurchased

Average price per share

$

$

$

$

Total investment

$

$

$

$

Shares (in thousands)

Weighted-Average Exercise Price

Outstanding at December 31, 2011

$

Granted

Exercised

Forfeited

Outstanding at September 30, 2012

Exercisable at September 30, 2012

$

Risk-free interest rate – The United States Treasury rates in effect at the time the options are granted for the options’ expected life.

Expected life - Represents the period of time that options granted are expected to be outstanding.  The Company uses historical experience to estimate the expected life of options granted.

Expected volatility – Measure of the amount by which the Company’s stock price has historically fluctuated.

Expected dividend yield – The Company has not paid, nor does it have plans in the foreseeable future to pay, any dividends.

For the Nine Months Ended September 30,

2012

2011

Risk free interest rate

%

%

Expected life

Years

Years

Expected volatility

%

%

Expected dividend yield

-

%

-

%

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2012

2011

2012

2011

Compensation expense for stock options awarded

$

$

$

$

Income tax benefit from compensation expense related to stock options

$

$

$

$

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2012

2011

2012

2011

Compensation expense for shares issued under the ESPP

$

$

$

$

Income tax benefit from compensation expense related to shares issued under the ESPP

Compensation expense for restricted shares awarded

Income tax benefit from compensation expense related to restricted awards

$

$

$

$

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2012

2011

2012

2011

Numerator (basic and diluted):

Net income

$

$

$

$

Denominator:

Denominator for basic earnings per share - weighted-average shares

Effect of stock options ⁽¹⁾

Denominator for diluted earnings per share - weighted-average shares

Earnings per share-basic

$

$

$

$

Earnings per share-assuming dilution

$

$

$

$

Antidilutive common stock equivalents not included in the calculation of diluted earnings per share:

Stock options ⁽¹⁾

Weighted-average exercise price per share of antidilutive stock options ⁽¹⁾

$

$

$

$

⁽¹⁾ See Note 9 for further discussion on the terms of the Company's share-based compensation plans.

an overview of the key drivers of the automotive aftermarket industry ;

our results of operations for the quarters and nine month periods ended September 30, 2012 and 2011;

our liquidity and capital resources;

any contractual obligations to which we are committed;

our critical accounting estimates;

the inflation and seasonality of our business; and

recent accounting pronouncements that may affect our co mpany.

used oil and battery recycling

battery diagnostic testing

electrical and module testing

loaner tool program

drum and rotor resurfacing

custom hydraulic hoses

professional paint shop mixing and related materials

machine shops

Number of U.S. Miles Driven - The number of total miles driven in the U.S. heavily influences the demand for the repair and maintenance products sold within the automotive aftermarket.  Historically, the long-term trend in the total miles driven in the U.S. has steadily increased; however, according to the Department of Transportation, total miles driven in the U.S. have remained relatively flat since 2007 as the U.S. has experienced difficult macroeconomic conditions.  Historically, rapid increases in gasoline prices have negatively impacted U.S. total miles driven as consumers react to the increased expense by reducing travel.  We believe that as the U.S. economy recovers and gasoline prices remain stab l e, annual miles driven will return to historical growth rates and continue to drive demand for our industry.

Number of U.S. Registered Vehicles, New Light Vehicle Registrations and Average Vehicle Age - The total number of ve hicles on the road and the average age of the U.S. vehicle population also heavily influence the demand for products sold within the automotive aftermarket industry .  As reported by the Automotive Aftermarket Industry Association (“AAIA”), the total number of registered vehicles has increased 15 % over the past decade, from 209 million light vehicles in 200 1 to 241 million light vehicles in 201 1 . Annual n ew light vehicle registratio ns have declined 24 % over the past decade, from 17 million registrations in 2001 to 13 million registrations in 2011; however, the seasonally adjusted annual rate (the “SA A R”) of sales of light vehicles in the U.S. increased to 15 million as of September 30, 2012, indicating that the trend of declining new light vehicle registrations has reversed.  As reported by the AAIA, the average age of the U.S. vehicle popul ation has increased 21 % over the past decade, from 8.9 years in 200 1 to 10.8 years in 201 1 .  We believe this increase in average age can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher miles due to better quality power trains and interiors and exteriors; new car sales over the past three ye ars, which have been below historical levels; and the consumer’s willingness to invest in maintaining their higher-mileage, better built vehicles.  As the average age of the vehicle on the road increases, a larger percentage of miles are being driven by vehicles which are outside of a manufacturer warranty.  These out-of-warranty, older vehicles, generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles.  Based on this change in consumer sentiment surrounding the length of time older vehicles can be reliably driven at higher mileages, we believe consumers will continue to keep their vehicles even longer as the economy recovers, maintaining the trend of an aging vehicle population.

Unemployment - Unemployment rates and continued uncertainty surrounding the overall economic health of the U.S. have had a negative impact on consumer confidence and the level of consumer discretionary spending.  The annual U.S. unemployment rate over the past two years has remained at 30-year highs.  We believe macroeconomic uncertainties and the potential for future joblessness can motivate consumers to find ways to save money, which can be an important factor in the consumer’s decision to defer the purchase of a new vehicle and maintain their existing vehicle.  While the deferral of vehicle purchases has led to an increase in vehicle maintenance, long-term trends of high unemployment could continue to impede the growth of annual miles driven, as well as decrease consumer discretionary spending, both of which negatively impact demand for products sold in the automotive aftermarket industry .  As of September 30 , 2012, the U.S. unemployment rate decreased slightly t o 7.8 % from 8.5 % as of December 31, 2011, and 9.0 % as of September 30 , 2011.  We believe that as the economy recovers, unemployment will return to more historic levels and we will see a corresponding increase in commuter

traffic as unemployed individuals return to work.  Aided by these increased commuter miles, overall annual U.S. miles driven should begin to grow resulting in continued demand for automotive aftermarket products.

Increase in Sales for the Three Months Ended September 30, 2012, Compared to the Same Period in 2011

Increase in Sales for the Nine Months Ended September 30, 2012, Compared to the Same Period in 2011

Store sales:

Comparable store sales

$

$

Non-comparable store sales:

Sales for stores opened throughout 2011, excluding stores open at least one year that are included in comparable store sales

Sales in 2011 for stores that have closed

Sales for stores opened throughout 2012

Non-store sales:

Includes sales of machinery and sales to independent parts stores and Team Members

-

Total increase in sales

$