Edgar Filing: O REILLY AUTOMOTIVE INC

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 June 30, 2006

( )	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 0-21318

O'REILLY AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)

Missouri	44-0618012
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

233 South Patterson
Springfield, Missouri 65802
(Address of principal executive offices, Zip code)

(417) 862-6708
(Registrant's telephone number, including area code)

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 a check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

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

Yes o

No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Common stock, $0.01 par value – 113,394,091 shares outstanding as of June 30, 2006.

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

Quarter Ended June 30, 2006

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Page

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Income		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS	11

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
	MARKET RISK	15

ITEM 4 - CONTROLS AND PROCEDURES

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

ITEM 1A – RISK FACTORS

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

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5 – OTHER INFORMATION

ITEM 6 - EXHIBITS

SIGNATURE PAGE

Page 2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2006		December 31, 2005
		(Unaudited)		(Note)
Assets
Current assets:
Cash and cash equivalents	$	55,247	$	31,384
Accounts receivable, net		82,612		73,849
Amounts receivable from vendors, net		62,334		57,224
Inventory		800,459		726,390
Other current assets		15,211		22,845
Total current assets		1,015,863		911,692

Property and equipment, at cost		1,108,717		992,899
Accumulated depreciation and amortization		300,867		274,533
Net property and equipment		807,850		718,366

Notes receivable, less current portion		32,532		29,062
Other assets, net		60,081		60,827
Total assets	$	1,916,326	$	1,719,947

Liabilities and shareholders' equity
Current liabilities:
Income taxes payable	$	9,360	$	--
Accounts payable		358,090		292,667
Accrued payroll		20,323		19,356
Accrued benefits and withholdings		47,287		49,794
Deferred income taxes		3,119		2,451
Other current liabilities		48,374		47,137
Current portion of long-term debt		265		75,313
Total current liabilities		486,818		486,718

Long-term debt, less current portion		100,678		25,461
Deferred income taxes		44,809		42,516
Other liabilities		22,319		19,483

Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares – 245,000,000
Issued and outstanding shares – 113,394,091 at June 30, 2006, and 112,389,002 at
December 31, 2005		1,134		1,124
Additional paid-in capital		386,371		360,325
Retained earnings		874,197		784,320
Total shareholders’ equity		1,261,702		1,145,769
Total liabilities and shareholders’ equity	$	1,916,326	$	1,719,947

NOTE: The condensed consolidated balance sheet at December 31, 2005, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See “Notes to Condensed Consolidated Financial Statements.”

Page 3

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)




	Three months ended June 30,				Six months ended June 30,
	2006		2005			2006	2005
	(In thousands, except per share data)
Sales	$	591,199	$	521,209	$	1,127,746	$	987,448
Cost of goods sold, including warehouse and distribution expenses		330,271		292,239		633,390		562,309

Gross profit		260,928		228,970		494,356		425,139
Operating, selling, general and administrative expenses		182,692		160,843		351,154		303,431

Operating income		78,236		68,127		143,202		121,708
Other income (expense), net		162		195		(290)		(473)
Income before income taxes		78,398		68,322		142,912		121,235
Provision for income taxes		29,085		25,399		53,035		45,099
Net income	$	49,313	$	42,923	$	89,877	$	76,136

Net income per common share	$	0.44	$	0.39	$	0.80	$	0.68
Net income per common share-assuming dilution:	$	0.43	$	0.38	$	0.78	$	0.67

Weighted-average common shares outstanding - basic		113,253		111,448		112,890		111,174
Adjusted weighted-average common shares outstanding – assuming dilution		115,196		113,138		114,908		112,827

See “Notes to Condensed Consolidated Financial Statements.”

Page 5

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2006		2005
	(In thousands)

Net cash provided by operating activities	$	123,800	$	118,752

Investing activities:
Purchases of property and equipment		(119,436)		(102,494)
Proceeds from sale of property and equipment		465		665
Payments received on notes receivable		2,341		2,231
Advance on notes receivable		--		(518)
Acquisition, net of cash acquired		--		(62,909)
(Investment in) reduction of other assets		(808)		1,388
Net cash used in investing activities		(117,438)		(161,637)

Financing activities:
Proceeds from issuance of long-term debt		75,000		--
Principal payments on long-term debt		(75,775)		(306)
Tax benefit of stock options exercised		6,026		--
Proceeds from issuance of common stock		12,250		10,615
Net cash provided by financing activities		17,501		10,309

Net increase (decrease) in cash and cash equivalents		23,863		(32,576)
Cash and cash equivalents at beginning of period		31,384		69,028

Cash and cash equivalents at end of period	$	55,247	$	36,452

See “Notes to Condensed Consolidated Financial Statements.”

Page 6

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”) have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005.

2.	Reclassifications

The Company made certain reclassifications to prior periods to conform to current year presentation.

3.	Stock-based Employee Compensation Plans

In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) and supersedes the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), using the modified prospective method and began recognizing compensation expense for its share-based payments based on the fair value of the awards. Share-based payments include stock option awards issued under the Company’s employee stock option plans, director stock option plan, stock issued through the Company’s employee stock purchase plan and stock awarded to employees through other benefit programs. Prior to January 1, 2006, the Company accounted for share based payments using the intrinsic value based recognition method in accordance with APB No. 25. Under the intrinsic value method in accordance with APB No. 25, the exercise price of the Company’s stock options equaled the market price of the underlying stock on the date of grant, thus no compensation expense for stock option awards was recognized.

Stock Options

The employee stock option plans provide for the granting of stock options to certain key employees of the Company to purchase stock. A total of 24,000,000 shares have been authorized for issuance under these plans. Options are granted at an exercise price that is equal to the market value of the Company’s common stock on the date of the grant. Options granted under the plans expire after ten years and typically vest 25% a year, over four years. A summary of the shares subject to currently issued and outstanding stock options under these plans is as follows:

	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Terms (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	6,883,042	$	17.67
Granted	614,750		32.74
Exercised	(722,988)		13.36
Forfeited	(137,600)		25.55
Outstanding at June 30, 2006	6,637,204	$	19.58	7.12	$	78,100,000
Exercisable at June 30, 2006	5,963,204	$	18.11	6.83	$	77,999,000

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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

June 30, 2006

3.	Stock-based Employee Compensation Plans (continued)

Stock Options (continued)

The Company also maintains stock option plans for non-employee directors of the Company under which 1,000,000 shares of common stock have been authorized for issuance under these plans. Options are granted at an exercise price that is equal to the market value of the Company’s common stock on the date of the grant. Options granted under the plan expire after seven years and vest fully after six months. A summary of the shares subject to currently issued and outstanding stock options under these plans is as follows:

	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Terms (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	190,000	$	15.32
Granted	25,000		34.92
Exercised	(25,000)		13.73
Forfeited	--		--
Outstanding at June 30, 2006	190,000	$	18.11	6.84	$	2,578,000
Exercisable at June 30, 2006	165,000	$	15.56	6.38	$	2,578,000

In the fourth quarter of 2005, the Board of Directors approved the accelerated vesting of all unvested stock options previously awarded to employees and executive officers. Option awards granted subsequent to the Board’s action are not included in the acceleration and will vest equally over the service period established in the award, typically four years. The primary purpose of the accelerated vesting was to enable the Company to avoid recognizing future compensation expense associated with these options upon the adoption of SFAS No. 123R in the first quarter of 2006. As a result of the vesting acceleration, options to purchase approximately 4.2 million shares of O’Reilly Common Stock became exercisable immediately. O’Reilly’s Board of Directors took this action with the belief that it was in the best interest of shareholders as it would reduce the Company’s reported non-cash compensation expense in future periods.

At June 30, 2006, approximately 12,137,000 and 400,000 shares were reserved for future issuance under the employee stock option plans and director stock option plans, respectively. The Company recognized stock option compensation costs of approximately $874,000 and $1,108,000 for the three and six months ended June 30, 2006, respectively. The Company recognized a corresponding income tax benefit of approximately $325,000 and $412,000 for the three and six months ended June 30, 2006, respectively. For purposes of pro forma disclosures required under SFAS No. 123 for the three months and six months ended June 30, 2005, the estimated fair value of the stock options was assumed to be amortized to expense over the stock options’ vesting periods. The pro forma effects of recognizing estimated compensation expense under the fair value method on net income and earnings per common share were as follows (in thousands, except per share data):

	Three months ended June 30, 2005		Six months ended June 30, 2005
	Three months ended June 30, 2005		Six months ended June 30, 2005
Net income, as reported	$	42,923	$	76,136
Add stock-based compensation expense, net of tax, as reported		922		2,464
Deduct stock-based compensation expense determined under the fair value based method for all awards, net of tax		(2,528)		(5,884)
Pro forma net income	$	41,317	$	72,716
Pro forma basic net income per share	$	0.37	$	0.65
Pro forma net income per share- assuming dilution	$	0.37	$	0.64

Page 8

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

June 30, 2006

3.	Stock-based Employee Compensation Plans (continued)

Stock Options (continued)

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model. Expected volatility is an input of the Black-Scholes model and is based upon the historical volatility of the Company’s stock. Expected life represents the period of time that options granted are expected to be outstanding. The Company uses historical data and experience to estimate the expected life of options granted. The risk free interest rate for periods within the contractual life of the options are based on the US Treasury rates in effect for the expected life of the options. The following weighted-average assumptions were used for grants issued for the first six months of 2006 and 2005:

	2006		2005
Risk free interest rate	3.80	%	3.88	%
Expected life	4.8	Years	4.0	Years
Expected volatility	35.2	%	35.7	%
Expected dividend yield	0	%	0	%

The weighted-average grant-date fair value of options granted during the first six months of 2006 was $12.02. The total intrinsic value of options exercised during the first six months of 2006 was $13,329,000. The remaining unrecognized compensation cost related to unvested awards at June 30, 2006, was $5,789,000 and the weighted-average period of time over which this cost will be recognized is 3.2 years.

Employee Stock Purchase Plan

The Company’s employee stock purchase plan permits all eligible employees to purchase shares of common stock at 85% of the fair market value of the stock. Participants may authorize the Company to withhold up to 5% of their annual salary. The stock purchase plan authorizes up to 2,600,000 shares to be granted. During the six months ended June 30, 2006, the Company issued 79,495 shares under the purchase plan at a weighted average price of $28.31 per share. SFAS No. 123R requires compensation expense to be recognized based on the discount between the grant date fair value and the employee purchase price for shares sold to employees. During the three and six months ended June 30, 2006, the Company recorded approximately $209,000 and $397,000 of compensation cost related to employee share purchases, respectively. The Company recognized a corresponding income tax benefit of approximately $78,000 and $148,000 during the three and six months ended June 30, 2006, respectively. At June 30, 2006, approximately 485,000 shares were reserved for future issuance.

Other Employee Benefit Plans

The Company sponsors a contributory profit sharing and savings plan that covers substantially all employees who are at least 21 years of age with at least six months of service. 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 4% of each employee’s contribution. The Company also makes additional profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The Company’s matching and profit sharing contributions under this plan are funded in the form of shares of common stock. A total of 3,200,000 shares of common stock have been authorized for issuance under this plan. During the three and six months ended June 30, 2006, the Company recorded approximately $1,422,000 and $3,178,000 of compensation cost for contributions to this plan, respectively. During the three and six months ended June 30, 2006, the Company recognized a corresponding income tax benefit of approximately $531,000 and $1,182,000, respectively. During the three and six months ended June 30, 2005, the Company recorded approximately $ 1,389,000 and $2,877,000 of compensation cost for contributions to this plan, respectively. During the three and six months ended June 30, 2005, the Company recognized a corresponding income tax benefit of approximately $516,000 and $1,070,000, respectively. The compensation cost recorded in the first six months of 2006 includes matching contributions made in the first six months of 2006 and profit sharing contributions accrued in the first six months of 2006 to be funded with issuance of shares of common stock in 2007. The Company issued 159,846 shares in the first six months of 2006 to fund matching and profit sharing contributions at an

Page 9

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

June 30, 2006

3.	Stock-based Employee Compensation Plans (continued)

Other Employee Benefit Plans (continued)

average grant date fair value of $33.21. A portion of these shares related to profit sharing contributions accrued in prior periods. At June 30, 2006, approximately 105,000 shares were reserved for future issuance under this plan.

The Company has in effect a performance incentive plan for the Company’s senior management under which the Company awards shares of restricted stock that vest equally over a three-year period and are held in escrow until such vesting has occurred. Shares are forfeited when an employee ceases employment. A total of 800,000 shares of common stock have been authorized for issuance under this plan. Shares awarded under this plan are valued based on the market price of the Company’s common stock on the date of grant and compensation cost is recorded over the vesting period. The Company recorded approximately $ 108,000 and $200,000 of compensation cost for this plan for the three and six months ended June 30, 2006, respectively. The Company recognized a corresponding income tax benefit of approximately $40,000 and $74,000 for the three and six months ended June 30, 2006, respectively. For the three and six months ended June 30, 2005, the Company recorded approximately $ 79,000 and $133,000 of compensation cost for contributions to this plan, respectively. The Company recognized a corresponding income tax benefit of approximately $30,000 and $50,000 for the three and six months ended June 30, 2005. The remaining unrecognized compensation cost related to unvested awards at June 30, 2006 was $752,000. The Company awarded 18,536 shares under this plan in the first six moths of 2006 with an average grant date fair value of $33.12. Compensation cost for shares awarded in the first six months of 2006 will be recognized over the three-year vesting period. Changes in the Company’s restricted stock for the six months ended June 30, 2006 were as follows:

	Shares	Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2005	15,052	$	22.68
Granted during the period	18,536		33.12
Vested during the period	--		--
Forfeited during the period	--		--
Non-vested at June 30, 2006	33,588	$	28.44

At June 30, 2006, approximately 659,000 shares were reserved for future issuance under this plan.

4.	Synthetic Lease Facility

On June 26, 2003, we completed an amended and restated master agreement to our $50 million Synthetic Operating Lease Facility, relating to our properties leased from SunTrust Equity Funding, LLC (the “Synthetic Lease”), with a group of financial institutions. The terms of the Synthetic Lease provide for an initial lease period of five years, a residual value guarantee of approximately $42.2 million at June 30, 2006, and purchase options on the properties. The Synthetic Lease 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. One additional renewal period of five years may be requested from the lessor, although the lessor is not obligated to grant such renewal. The Synthetic Lease has been accounted for as an operating lease under the provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 13 and related interpretations, including FASB Interpretation No. 46.

5.	Long-Term Debt

On May 15, 2006, the Company entered into a private placement agreement (the “Private Placement Agreement”) that allows for the issuance of an aggregate of $300 million in unsecured senior notes (the “Senior Notes”), issuable in series. On May 15, 2006, the Company completed the private placement of $75 million of the first series of Senior Notes (the “Series 2006-A Senior Notes”) under the Private Placement Agreement. The Series 2006-A Senior Notes were issued for $75 million, are due May 15, 2016 and bear interest at 5.39% per year. Proceeds from the Series 2006-A Senior Notes transaction were used to repay certain existing debt of the Company, including $75 million of 7.72% Series 2001-A Senior Notes due May 15, 2006.

Page 10

O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

June 30, 2006

6.	Income Per Common Share

The following table sets forth the computation of basic and diluted income per common share for the quarters ended June 30:


	For the three months ended June 30,				For the six months ended June 30,
	2006		2005		2006		2005
	(In thousands, except per share data)
Numerator (basic and diluted):
Net income	$	49,313	$	42,923	$	89,877	$	76,136

Denominator:
Denominator for basic income per common share– weighted-average shares		113,253		111,448		112,890		111,174
Effect of stock options		1,943		1,690		2,018		1,653

Denominator for diluted income per common share- adjusted weighted-average shares and assumed conversion		115,196		113,138		114,908		112,827

Basic net income per common share	$	0.44	$	0.39		0.80		0.68

Net income per common share-assuming dilution	$	0.43	$	0.38		0.78		0.67

7.	Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R. In April 2005, the SEC adopted a rule permitting implementation of SFAS No. 123R at the beginning of the first fiscal year commencing after June 15, 2005. Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. The Company was required to adopt SFAS No. 123R beginning in its quarter ended March 31, 2006. Under the provisions of SFAS No. 123R, the Company had the choice of adopting the fair-value-based method of expensing of stock options using (a) the “modified prospective method”, whereby the Company recognizes the expense only for periods beginning after December 31, 2005, or (b) the “modified retrospective method”, whereby the Company recognizes the expense for all years and interim periods since the effective date of SFAS No. 123. The Company adopted SFAS No. 123R using the modified prospective method. See Note 2, “Stock-Based Employee Compensation Plans”, for information regarding expensing of stock options in 2006 and for pro forma information regarding the Company’s expensing of stock options during 2005.

In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN No. 48”) which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is in the process of determining the effect, if any, the adoption of FIN No. 48 will have on the Company’s consolidated financial statements.

Page 11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” or “O'Reilly” refer to O'Reilly Automotive, Inc. and its subsidiaries.

Critical Accounting Policies and Estimates

The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the business activities of our company. To aid in that understanding, management has identified our “critical accounting policies.” These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

•	Vendor concessions – We receive concessions from our vendors through a variety of programs and arrangements, including co-operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred. All other vendor concessions are recognized as a reduction of cost of sales when recognized in the consolidated statement of income. Amounts receivable from vendors also include amounts due to the Company for changeover merchandise and product returns. Amounts receivable from vendors are regularly reviewed by management and reserves for uncollectible amounts are provided for in our consolidated financial statements. We do not believe there is a reasonable likelihood that uncollectible amounts will exceed management’s expectations. However, actual results could differ from our assumptions and estimates and we may be exposed to losses or gains that could be material.
•	Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability, vehicle liability, property loss, and employee health care benefits. With the exception of employee health care benefit liabilities, which are limited by the design of these plans, we obtain third-party insurance coverage to limit our exposure. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, and growth patterns and exposure forecasts. Our calculation of these liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. Actual claim activity or development may vary from our assumptions and estimates, which may result in material losses or gains.
•	Accounts receivable – Management estimates the allowance for doubtful accounts based on historical loss ratios and other relevant factors. Actual results have consistently been within management’s expectations and we do not believe that there is a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate our allowance for doubtful accounts. However, if actual results differ from our estimates, we may be exposed to losses or gains that could be material.
•	Taxes – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax years subject to audit. Changes in our tax liability occurred in 2005 and may occur in the future as our assessments change based on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s opinion, adequate provisions for income taxes have been made for all years presented. However, the estimates of our potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated with our various tax positions. Actual results could differ from our estimates and such differences could be material.

Page 13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Critical Accounting Policies and Estimates (continued)

•

Stock-based compensation – Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share Based Payment,” under the modified prospective method. Accordingly, prior period amounts have not been restated. Under this application, the Company records stock-based compensation expense for all awards granted on or after the date of adoption and for the portion of previously granted awards that remain unvested at the date of adoption. Currently, the Company’s stock-based compensation relates to stock option awards, employee share purchase plan discounts, restricted stock awards and shares contributed directly to other employee benefit plans.

Under SFAS No. 123R, the Company uses a Black-Scholes option-pricing model to determine the fair value of its stock options. The Black-Scholes model includes various assumptions, including the expected life of stock options, the expected volatility and the expected risk free interest rate. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. If the Company uses different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods. Also, under SFAS No. 123R, the Company is required to record stock-based compensation expense net of estimated forfeitures. The Company’s forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates.

Results of Operations

Sales for the second quarter of 2006 were $591 million, an increase of $70 million or 13.4% over sales for the second quarter of 2005. Sales for the first six months of 2006 were $1,127 million, an increase of $140 million or 14.2% over sales for the first six months of 2005. These increases are primarily due to new stores opened in the past twelve months, and a 3.5% and 3.6% increase in comparable store sales for the second quarter and first six months of 2006, respectively. Comparable store sales are calculated based on the change in sales of stores open at least one year. Percentage increase in comparable store sales is calculated based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. We believe the comparable store sales increase is primarily attributable to 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, continued improvement in the merchandising and store layouts of most stores, and compensation programs for all store team members that provide incentives for performance. At June 30, 2006, we operated 1,555 stores compared to 1,399 stores at June 30, 2005.

Gross profit increased 14.0% to $261 million (or 44.1% of sales) in the second quarter of 2006 from $229 million (or 43.9% of sales) in the second quarter of 2005. Gross profit for the first six months increased 16.3% to $494 million (or 43.8% of sales) in 2006, from $425 million (or 43.1% of sales) in 2005. The increase in gross profit dollars is primarily a result of the increase in the number of stores open during the second quarter and first six months of 2006 compared to the same periods in 2005, and increased sales levels at existing stores. The increase in gross profit as a percentage of sales is primarily due to improvements in distribution and product acquisition costs.

Operating, selling, general and administrative expenses (“OSG&A expenses”) increased $22 million to $183 million (or 30.9% of sales) in the second quarter of 2006 from $161 million (or 30.9% of sales) in the second quarter of 2005. OSG&A expenses increased $48 million to $351 million (or 31.1% of sales) in the first six months of 2006, from $303 million (or 30.7% of sales) in the first six months of 2005. The dollar increase in OSG&A expenses resulted primarily from additional team members and resources to support the increased store count. The increase in OSG&A as a percentage of sales in the first six months of 2006 was primarily due to increased energy and fuel costs.

Our estimated provision for income taxes increased $3.7 million and $7.9 million for the second quarter and first six months of 2006, respectively, compared to comparable periods in 2005, as a result of our increased taxable income. Our effective tax rate was 37.1% of income before income taxes for the second quarter and the first six months of 2006, compared to 37.2% for comparable periods in 2005.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)

Liquidity and Capital Resources

Net cash provided by operating activities decreased to $124 million for the first six months of 2006, from $125 million for the first six months in 2005. The slight decrease was principally the result of increased investment in inventories to support new store growth partially offset by an increase in accounts payable.

Net cash used in investing activities decreased to $117 million for the first six months in 2006 from $168 million during the first six months in 2005. This decrease is primarily due to the acquisition of Midwest Auto Parts in the second quarter of 2005, partially offset by increased investment in new store property and equipment in 2006.

Net cash provided by financing activities was $18 million provided by the first six months of 2006, compared to $10 million in the first six months of 2005. The increase in net cash provided is primarily due to increased proceeds from the issuance of common stock and the tax benefit resulting from the exercise of stock options. In accordance with our current year adoption of SFAS No. 123R, the excess tax benefit from the exercise of stock options is reflected as cash provided by financing activities. For the six months ended June 30, 2005, these excess tax benefits totaled $4 million and are included with net cash provided by operating activities in our 2005 consolidated statement of cash flow. Additionally, we received proceeds of $75 million from the issuance of 5.39% Series 2006-A Senior Notes. The full amount of these proceeds was used to repay $75 million of 7.72% Series 2001-A Senior Notes.

We have available an unsecured, five-year syndicated revolving credit facility in the amount of $100 million. The credit facility may be increased to a total of $200 million, subject to availability of such additional credit from either existing banks within the credit facility or other banks. At June 30, 2006, no borrowings were outstanding on the credit facility; however, letters of credit totaling $27 million were outstanding resulting in $73 million of availability. The revolving credit facility, which bears interest at LIBOR plus a spread ranging from 0.50% to 1.0% (5.8451% at June 30, 2006), expires in July 2010.

Our continuing store expansion program requires significant capital expenditures and investment in inventory. 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, exclusive of the cost of inventory. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings under our existing credit facilities.

During the first six months of 2006, 85 net, new stores were opened. The Company plans to open 85 to 90 additional stores during the remainder of 2006. The funds required for such planned expansions are expected to be provided by operating activities and our existing credit facility.

We believe that our existing cash, short-term investments, cash expected to be provided by operating activities, credit facility and trade credit will be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)

New Accounting Standards

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees. In April 2005, the SEC adopted a rule permitting implementation of SFAS No. 123R at the beginning of the first fiscal year commencing after June 15, 2005. Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. The Company was required to adopt SFAS No. 123R beginning in its quarter ended March 31, 2006. Under the provisions of SFAS No. 123R, the Company had the choice of adopting the fair-value-based method of expensing of stock options using (a) the “modified prospective method”, whereby the Company recognizes the expense only for periods beginning after December 31, 2005, or (b) the “modified retrospective method”, whereby the Company recognizes the expense for all years and interim periods since the effective date of SFAS No. 123. The Company adopted SFAS No. 123R using the modified prospective method. See Note 2, “Stock-Based Employee Compensation Plans”, for information regarding expensing of stock options in 2006 and for pro forma information regarding the Company’s expensing of stock options for year ended 2005.

Inflation and Seasonality

We attempt to mitigate 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.

Internet Address and Access to SEC Filings

Our Internet address is www.oreillyauto.com. Interested readers can access the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Security and Exchange Commission’s website at www.sec.gov. Such reports are generally available on the day they are filed. Additionally, the Company will furnish interested readers upon request and free of charge, a paper copy of such reports.

Forward-Looking Statements

We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “expect,” “believe,” “anticipate,” “should,” “plan,” “intend,” “estimate,” “project,” “will” or similar words. In addition, statements contained within this annual report that are not historical facts are forward-looking statements, such as statements discussing among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2005, for additional factors that could materially affect our financial performance.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk to the extent we borrow against our revolving credit facility with variable interest rates. Since no amounts were outstanding under the revolving credit facility at June 30, 2006, changes in interest rates would not have any effect. In the event of an adverse change in interest rates and assuming the Company had amounts outstanding under the credit facility, management would likely take actions that would mitigate our exposure to interest rate risk particularly if our borrowing levels increase to any significant extent; however, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2006, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures as required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of June 30, 2006, to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to the Company's management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the second quarter of 2006 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

None.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)	Our Annual Meeting of the Shareholders was held on May 9, 2006. Of the 112,425,511 shares entitled to vote at such meeting, 101,815,951 shares were present at the meeting in person or by proxy.

(b)	The individuals listed below were elected as a Class I Director, and with respect to each such Director, the number of shares voted for and withheld were as follows:

	Number of Shares
Name of Nominee	Voted For	Withheld
Charles H. O’Reilly, Jr.	67,047,361	34,768,590
John Murphy	96,465,310	5,350,641
Ronald Rashkow	100,329,018	1,486,933

The individuals listed below are Directors whose term of office continued after the meeting:

Jay D. Burchfield

Joe C. Greene

Paul R. Lederer

David E O’Reilly

Lawrence P. O’Reilly

Rosalie O’Reilly - Wooten

(c)	In addition to the election of three Class I Directors, the following matters were voted upon:

(i)	Ernst & Young LLP was ratified as independent auditor for the fiscal year ending December 31, 2006. The number of shares voted for, against and abstained were as follows:

Number of Shares
Voted For	Voted Against	Abstained
100,282,333	1,470,777	62,841

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits:

Number	Description	Page

31.1	Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.	19
31.2	Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.	20
32.1	Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.	21
32.2	Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.	22

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SIGNATURES

Pursuant to the requirements 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.

August 9, 2006		/s/ Greg Henslee
Date		Greg Henslee, Chief Executive Officer (Principal Executive Officer) and Co-President


August 9, 2006		/s/ Thomas McFall
Date		Thomas McFall, Senior Vice-President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

Exhibit 31.1 – CEO Certification

CERTIFICATIONS

I, Greg Henslee, certify that:

1. I have reviewed this quarterly report on Form 10-Q of O’Reilly Automotive, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2006	/s/ Greg Henslee
	Greg Henslee, Co-President and
	Chief Executive Officer (Principal Executive Officer)

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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

Exhibit 31.2 – CFO Certification

CERTIFICATIONS

I, Thomas McFall, certify that:

1. I have reviewed this quarterly report on Form 10-Q of O’Reilly Automotive, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2006	/s/ Thomas McFall
	Thomas McFall, Senior Vice President of Finance
	and Chief Financial Officer (Principal Financial and
	Accounting Officer)

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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

Exhibit 32.1 – CEO Certification

O’REILLY AUTOMOTIVE, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg Henslee, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Greg Henslee

Greg Henslee

Chief Executive Officer

Principle Executive Officer

August 9, 2006

This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose.

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O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

Exhibit 32.2 – CFO Certification

O’REILLY AUTOMOTIVE, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas McFall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Thomas McFall

Thomas McFall

Chief Financial Officer

Principal Financial and Accounting Officer

August 9, 2006

This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose.

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