MOVING FORWARD
WITH OUR WINNING PROCESS.
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PROGRESS
IN MOTION
O’Reilly Automotive
233 South Patterson
Springfield, Missouri 65802
417.862.3333
www.oreillyauto.com
O’Reilly Automotive 2009 Annual Report
FINANCIAL HIGHLIGHTS
In thousands, except earnings per share data and operating data
years ended December 31
Sales
Operating Income
Net Income
Working Capital
Total Assets
Total Debt
Shareholders’ Equity
Net Income Per Common Share
(assuming dilution)
Weight-Average Common Share
(assuming dilution)
Stores At Year-End
Same-Store Sales Gain
2009
2008
2007
2006
2005
$ 4,847,062
537,619
307,498
995,344
4,781,471
790,748
2,685,865
$ 3,576,553
335,617
186,232
821,932
4,193,317
732,695
2,282,218
$ 2,522,319
305,151
193,988
573,328
2,279,737
100,469
1,592,477
2.23
1.48
1.67
137,882
3,421
125,413
3,285
116,080
1,830
$ 2,283,222
282,315
178,085
566,892
1,977,496
110,479
1,364,096
1.55
115,119
1,640
$ 2,045,318
252,524
164,266
424,974
1,718,896
100,774
1,145,769
1.45
113,385
1,470
4.6%
1.5%
3.7%
3.3%
7.5%
During 2009, we continued to convert our acquired CSK stores to the O’Reilly systems. We are very optimistic with the potential to
improve the sales performance of these acquired stores by implementing our proven dual market strategy in these new markets.
Operating Income
(In thousands)
Same-Store Sales
(Percent)
538
7.5
336
305
282
253
4.6
3.7
3.3
1.5
Earnings Per Share
(Assuming dilution)
2.23
1.55
1.45
1.67
1.48
‘05 ‘06 ‘07 ‘08 ‘09
‘05 ‘06 ‘07 ‘08 ‘09
‘05 ‘06 ‘07 ‘08 ‘09
We were able to increase operating margins
18% by focusing on expense control and
hard work and by continually adapting
the product mix in each of our stores to
meet the needs of our customers.
O’Reilly’s proven dual market strategy and
commitment to providing the best customer
service in the industry resulted in a 4.6%
same store sales increase.
Our strong vendor relationships and solid
sales results from both our “core” O’Reilly
as well as acquired CSK stores led to a 51%
increase in diluted earnings per share.
SHAREHOLDER INFORMATION
Corporate Address
233 South Patterson
Springfield, Missouri 65802
417-862-3333
www.oreillyauto.com
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Inquiries regarding stock transfers, lost certificates or
address changes should be directed to Computershare
Investor Services at the above address.
Independent Registered Public Accounting Firm
Ernst & Young LLP
One Kansas City Place
1200 Main Street, Suite 2000
Kansas City, Missouri 64105-2143
Annual Meeting
The annual meeting of shareholders of O’Reilly Automotive,
Inc. will be held at 10 a.m. Central time on May 4, 2010,
at the Double Tree Hotel, 2431 North Glenstone Ave in
Springfield, Missouri. Shareholders of record as of
February 26, 2010, 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 Thomas
McFall, Executive Vice President of Finance and Chief
Financial Officer, at the corporate address.
Trading Symbol
The Company’s common stock is traded on The Nasdaq
Global Select Market under the symbol ORLY.
Number of Shareholders
As of February 26, 2010, O’Reilly Automotive, Inc. had
approximately 71,000 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.:
BB&T Capital Markets
Anthony Cristello
Morgan Stanley
Gregory Melich
Wachovia Securities
Peter Benedict
Credit Suisse
Gary Balter
Deutsche Bank
Research
Michael Baker
Friedman, Billings, &
Ramsey Investment
Stephen Chick
Goldman Sachs
Research
Matthew J. Fassler
JPMorgan Securities
Christopher Horvers
BAS-ML
Alan Rifkin
Raymond James &
Associates
Dan Wewer
William Blair &
Company
Jack Murphy
RBC Capital Markets
Scot Ciccarelli
Gabelli & Company
Brian Sponheimer
Rochdale Securities
Jaison Blair
Longbow Research
Mark Becks
Sanford Berstein
Colin McGranahan
Sidoti & Company
Scott Stember
Stifel Nicolaus
& Company,
Incorportated
David Schick
Oppenheimer &
Co. Inc.
Brian Nagel
Robert W. Baird & Co.
Craig R. Kennison
Wedbush Morgan
Securities
Camilo Lyon
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 Global Select 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 foreseeable future.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the Year
2009
2008
High
Low
High
Low
$ 35.63
38.85
42.22
40.26
42.22
$ 27.0
35.1
36.1
33.7
27.0
$ 32.68
30.50
30.38
31.18
32.68
$ 24.08
22.32
21.92
20.00
20.00
1
O’Reilly Automotive 2009 Annual Report
IT ALL BEGINS - AND ENDS - WITH OUR CUSTOMERS.
WHETHER IT IS FOR A PROFESSIONAL INSTALLER OR A
DO-IT-YOURSELF CUSTOMER, OUR OPERATION IS A DYNAMIC
SERIES OF STEPS THAT WORK TOGETHER IN CONTINUAL MOTION,
EACH FINELY-TUNED AND CONNECTED TO THE NEXT. THROUGH
OUR EXISTING LOCATIONS, NEW STORE EXPANSION, AND MOST
RECENTLY, THE ACQUISITION OF CSK AUTOMOTIVE, THE O’REILLY
BRAND CONTINUES TO GROW. WE’RE ADDING MORE STORES,
MORE PARTS, AND MORE TEAM MEMBERS TO SERVE MORE
CUSTOMERS. EVERY STEP OF OUR BUSINESS PROCESS BEGINS
AND ENDS WITH OUR CUSTOMERS IN MIND. WE ARE ABSOLUTELY
COMMITTED TO DELIVERING THE RIGHT PART AT THE RIGHT
PRICE AT THE RIGHT TIME WITH INDUSTRY-LEADING SERVICE.
STRATEGY
IN MOTION
P.2
SALES
IN MOTION
P.5
SERVICE
IN MOTION
P.8
DISTRIBUTION
IN MOTION
P.10
2
O’Reilly Automotive 2009 Annual Report
STRATEGY
IN MOTION
2
3
Strategic Distribution Centers
O’Reilly has strategically deployed
inventory at 20 regional distribution
centers across the country to
provide a higher level of service
to our network of stores and
installer customers.
Professional Parts People
Each of the 45,000 members
of Team O’Reilly is dedicated to
providing our professional and
do-it-yourself customers with
solutions to their automotive
parts needs and outstanding
customer service.
1 Dual Market Strategy
Our ability to execute our dual-
market strategy is the result of our
52-year sustained commitment
to building relationships and
providing our customers with the
best parts availability and service.
3
O’Reilly Automotive 2009 Annual Report
LETTER TO OUR SHAREHOLDERS
We are pleased to deliver another year of record profits and earnings
per share to our shareholders. Our continued success was the result
of the contributions of our 45,000 team members who embrace
our culture and execute our proven business model every day. The
O’Reilly Culture of honesty, hard work, professionalism and excellent
customer service has been our foundation since the Company
began in 1957 and remains the backbone of the strong and dynamic
Company we are today. Our goal is to profitably grow our market
share in existing markets and enter new markets via new store growth
and acquisitions. We accomplish this growth by providing a higher
level of service than our competitors to both the installer and do-it-
yourself markets (our Dual Market Strategy). In 2009, we successfully
executed our strategy by growing market share in the historic O’Reilly
stores, aggressively opening new stores and continuing the successful
integration our 2008 acquisition of CSK Auto Corporation.
Growing Market Share in Existing Markets
When we purchased CSK in 2008, many were concerned that the
acquisition would cause a loss of focus in our existing markets. In
2009, the core O’Reilly stores proved this concern was misplaced
by generating a 6.7% comparable store sales increase. This strong
performance was driven by both internal and external factors. The
store and DC operational teams in historic O’Reilly markets, which
in large part have not been involved in the integration of CSK, have
continued to successfully execute our Dual Market Strategy and
represent the driving force behind the strong comparable store
sales. From an external standpoint, the aftermarket auto parts
industry benefited from the historically low new car and truck sales
and a shift in consumer behavior toward being more proactive in
repairing and maintaining their existing cars. We anticipate that
consumers will continue to retain their cars at higher mileages and
will be more willing to invest in maintaining their vehicles as they
find that the engineering improvements in cars built in the past
ten years enables cars to be reliable at much higher mileages. With
current forecasts predicting that the economy and jobs market will
recover slowly, we continue to see the macroeconomic environment
as a positive tailwind throughout 2010 and beyond.
New Store Growth
We opened 150 new stores in 2009 and continue to see great
opportunity for profitable new store growth. The fragmented
nature of the automotive aftermarket combined with the advantage
of scale of a large chain makes new store growth an attractive capital
investment for our Company. As part of our strategy to build our
store base in contiguous geographic regions, our new store openings
in 2009 were principally in the markets serviced by our newer
distribution centers (DCs). In 2010, we again plan to open 150 stores.
While new stores continue to offer an attractive return on invested
capital, our 2010 target is below our historic new store opening rate
because we believe our capital investments are best deployed on the
conversions and enhancements that will drive results in the acquired
CSK stores. Beyond 2010, we anticipate increasing our annual new
store openings to capitalize on the attractive opportunities we see
in both the markets within the distribution reach of the historic
O’Reilly footprint as well as CSK markets which will have enhanced
distribution capacity for significant growth.
Acquisition of Existing Parts Store Chains
Our 2008 acquisition of 1,342 CSK stores represented a huge
commitment to expanding our brand. The motivation behind the
Comparison of Five-Year
Cumulative Return
O’Reilly Auto Parts
Standard and Poor’s S&P 500
NASDAQ Retail Trade Stocks
NASDAQ US Market
100
169
102
97
84
‘04
‘05
‘06
‘07
‘08
‘09
4
O’Reilly Automotive 2009 Annual Report
acquisition was to increase the scale of our business in attractive
west coast markets by purchasing a chain that complemented the
existing O’Reilly geographic footprint, giving us the opportunity
to improve the underperforming CSK stores, drive down product
acquisition costs and realize operating expense efficiencies.
On the synergy front, we have exceeded our expectations.
Initially, we anticipated $100 million of annual synergies comprised
of $25 million of operating expense synergies and $75 million of
product acquisition synergies. We are on target to realize the $25
million of annual operating expense synergies starting in 2011 when
we are fully off the legacy CSK systems, although a large portion of
those annual synergies will be realized in 2010. We have exceeded
our product acquisition synergy expectations and anticipate
achieving annual run rate savings of $90 million beginning in 2010.
Prior to our purchase in 2008, CSK’s performance had struggled
for many years due to the chain being under-managed and under-
capitalized. We view the keys to maximizing the performance at
the acquired stores as falling into two main categories: Culture
and Parts Availability. Measuring the impact of a strong corporate
culture is impossible, but it was obvious to us that the acquired
stores needed better support and direction. Fully instilling the
O’Reilly Culture will be a process that takes several years, but a
clear indication of its power is the positive comparable store sales
generated by the acquired CSK stores in every full quarter since
the acquisition - even in the several quarters before we were able to
enhance the parts availability in the stores.
Measuring the progress of our Parts Availability initiatives is a
much more tangible item and falls into two main categories: Store
Stocking Levels and Distribution Capabilities. At the time of our
acquisition, the average CSK store contained 13,000 stock-keeping
units (skus), many of which were non-core automotive items, while
a typical O’Reilly store carries 22,000 skus heavily focused on hard
parts. By the end of 2009, all of the acquired stores’ hard-parts
inventories had been reset to align with historic O’Reilly levels and
the non-core items had been largely removed from the stores.
A robust Distribution Capability is a cornerstone of the O’Reilly
Dual Market Strategy. Same-day or five night a week access to a deep
selection of hard-to-find hard parts is critical to being a successful
supplier to professional installer customers. Prior to the acquisition,
CSK stores received warehouse shipments once a week which
helps explain why only 10% of their sales mix was to installers.
Growing the installer business closer to the historic O’Reilly 50/50
mix requires a much more robust distribution network. Based on
store density and geography, we identified four locations where
new distribution centers were needed to execute our Dual Market
Strategy allowing us to deeply penetrate the installer market. As
these new DCs come on-line and provide same-day or five night
a week delivery to the stores they support, our ability to grow
the installer business increases substantially - the ramp up of the
comparable store sales of the stores converted to our distribution
network to date demonstrates the significant opportunity.
Looking forward to 2010, we remain confident in our ability to
successfully execute our business model in all of our markets. We
are pleased with the progress we have made on the CSK integration,
and we are excited about the prospects for significant market share
gains in the Western United States as we complete the majority of
the remaining integration work in 2010. We are very grateful for
your continued support and are excited about the opportunities
ahead as we remain focused on making O’Reilly the dominant
supplier of auto parts in all of our markets.
Sincerely,
Greg Henslee
Chief Executive Officer
and Co-President
Ted Wise
Chief Operating Officer
and Co-President
Tom McFall
Chief Financial Officer
and Executive Vice
President
Experienced Management Team
O’Reilly has a long history of strong leadership. Our current executive
management team brings more than 195 years of combined automotive
aftermarket industry experience to work for the company. Their goal this
year has been the successful conversion of former CSK stores and the
expansion of our distribution network.
Seated: Ted Wise, David O’Reilly
Standing: Tom McFall, Mike Swearengin, Jeff Shaw, Greg Johnson, Greg Henslee
5
O’Reilly Automotive 2009 Annual Report
SALES
IN MOTION
Sales
(In billions)
Superior inventory availability, a targeted
promotional and advertising effort and continued
improvements in our merchandising and store
layouts led to more than $4 billion in sales.
.75
4.8
‘99
‘01
‘03
‘05
‘07
‘09
6
O’Reilly Automotive 2009 Annual Report
Our mission is to be the dominate supplier of auto parts
in the markets we serve. We accomplish this by executing
our dual-market strategy – serving the automotive needs of
both do-it-yourselfer customers and professional installers.
The acquisition of CSK gives us the springboard to expand
this proven strategy into the western half of the United
States and enables us to help thousands of new customers
repair and maintain their vehicles.
Investing in our people and the tools they need to
provide top-notch customer service is the catalyst that
drives our dynamic and profitable growth. Our professional
parts people are dedicated to ensuring customers have
everything they need to get the job done when they leave
our stores. Our “Never Say No,” price match programs, and
our in-house Customer Service Department help our team
members make sure we provide our customers with a one-
stop shopping experience for their automotive needs. This
attention to service helps us maintain customer loyalty and
build customer referrals.
Market Factors
The fundamental drivers in our industry remain strong. During challenging
economic conditions, our customers are more willing to maintain and repair
their current vehicle rather than purchase a new vehicle. This increase in the
average age of vehicles on the road drives demand for our products.
251
MILLION
Vehicle Population
2.9
TRILLION
Miles Driven
10
YEARS
Average Age
of Vehicles
O’Reilly’s Market Reach
With stores in 38 states, O’Reilly is expanding our consistent, proven
approach of growing market share and gaining new customers. Our goal
is to be the dominant supplier of auto parts in the markets we serve.
3,421 STORES
in 38 states
Distribution Centers
Western Expansion
Acquired CSK
Stores in each state
Texas
California
Missouri
Georgia
Washington
Arizona
Tennessee
Illinois
Oklahoma
Alabama
Minnesota
Arkansas
Colorado
521
477
177
143
139
129
129
125
109
105
100
96
87
Louisiana
North Carolina
Indiana
Mississippi
Michigan
Iowa
Kansas
Ohio
Wisconsin
Utah
Kentucky
South Carolina
Nevada
80
77
74
71
67
65
65
63
55
54
54
50
45
Oregon
New Mexico
Florida
Idaho
Nebraska
Montana
Wyoming
North Dakota
Alaska
Hawaii
South Dakota
Virginia
42
38
32
30
29
23
16
12
11
11
11
9
Market Consolidation Opportunity
The largest suppliers in the automotive aftermarket
make up a relatively small percentage of the
overall market, even after several years of steady
consolidation. We continue to opportunistically
pursue strategic acquisitions to take advantage
of further market consolidation.
Remaining Market
General Parts/NAPA
General Parts Inc./Carquest
O’Reilly Auto Parts
Advanced Auto Parts
Autozone
62%
3%
5%
9%
9%
12%
7
7
O’Reilly Automotive 2009 Annual Report
O’Reilly Automotive 2009 Annual Report
“ WE REMAIN CONFIDENT AND EXCITED ABOUT THE OPPORTUNITIES
WE HAVE TO GROW MARKET SHARE ON BOTH SIDES OF THE BUSINESS
IN THE WESTERN STATES.”
Greg Henslee
Chief Executive Officer and Co-President
in our
training
Our store team members participate in extensive and
ongoing
industry-leading programs
that emphasize customer service and superior technical
knowledge. The CSK store conversion process has given
us the opportunity to expand these educational programs
across the country to build sales and service levels in these
new western markets. Many of our veteran O’Reilly team
members have and continue to travel to converted CSK store
locations to give our new team members hands on training
on the O’Reilly store systems, our dual-market strategy, and
help instill our Live Green culture.
Equipping our people with unbeatable parts availability,
a comprehensive selection of high quality good, better
and best product assortments at competitive prices keep
O’Reilly sales in motion. Optimizing our mix of availability,
selection and price is another key ingredient to our success.
In our CSK stores, we have changed over and aligned all of
our major hard-part product categories with that of our core
O’Reilly stores. This alignment has added a much wider
breadth of hard parts selection in the acquired CSK stores,
eliminated non-automotive merchandise, and customized
each store’s inventory to fit the vehicle population for its
specific market.
Successful Store Conversions
Our store conversions are aimed at creating professional parts stores
that provide a one-stop shopping experience for our customers. We are
enhancing store-specific hard parts, eliminating non-core merchandise and
moving to our daily inventory replenishment system. Our converted stores
adopt our consistent layout with efficient, attractive front room and more
back-room space for hard parts.
Re-Branding Timeline
CSK operated under four brand names – Schuck’s,
Kragen, Checker and Murray’s. As we open new
DCs and update existing facilities to the O’Reilly
system, we are converting the stores they service.
By doing so we are breaking down the 1,300 store
acquisitions in several 100 to 300 store blocks.
These conversions are going well and we expect to
be complete by the end of 2010.
2009
FOURTH QUARTER
Seattle, WA
DC Opens
2010
FIRST QUARTER
Denver, CO and
Moreno Valley, CA DCs Open
SECOND QUARTER
Salt Lake City, UT
DC Opens
FOURTH QUARTER
We will convert our acquired west coast stores as we open new distribution centers in Denver, CO
and Salt Lake City, UT and convert existing CSK centers in Moreno Valley, CA and Phoenix, AZ.
8
O’Reilly Automotive 2009 Annual Report
SERVICE
IN MOTION
$41
Automotive Aftermarket
Industry Overview
Our intent is to be the dominant auto parts
provider in all the markets we serve by
providing significant value to both installers
and DIY customers.
BILLION
Do-It-Yourself
Market
$142
BILLION
Professional
Installer Market
9
O’Reilly Automotive 2009 Annual Report
Every step in our finely-tuned process of getting the right
part at the right price to our customers is based on a singular
focus on excellent customer service. When we purchased CSK
Auto in July 2008, we committed to extending our high level
of customer service into CSK stores in the western markets,
while continuing to deliver the same great level of service to
our core O’Reilly locations.
We work hard and pride ourselves on being the friendliest,
most knowledgeable parts store in every market we serve.
Our 45,000 team members across the country are dedicated
to a continual cycle of moving our company forward and
building on our long track record of success. We are able to
accomplish this by staying true to our time-tested values and
business model.
Our successful growth over the past 52 years is proof that
the auto parts business is a relationship business. We continue
to receive countless letters, phone calls, and e-mails from
customers who drive past the competition on their way to
one of our stores because of the attention and personal service
they receive at O’Reilly. Our customers appreciate our team
members’ dedication to providing them with solutions to
their auto parts needs. Our enhanced level of service ranges
from installing wiper blades for our do-it-yourself customers
to making special deliveries for our professional installers
working on their customers’ vehicles. In all instances, it means
our stores, DCs and corporate team members never hesitate to
go the extra mile for our customers.
O’Reilly will not stop moving forward. We have a lot of
hard work ahead of us to complete the integration of the
CSK stores to our dual-market strategy. We have laid a solid
foundation with our proven dual-market strategy and Live
Our People Make the Difference
All 45,000 members of Team O’Reilly are working hard to complete our
integration, build out our distribution network, and successfully convert
remaining stores. They are working hard to make these things happen
and to make O’Reilly an auto parts brand that will be easily recognized
from coast to coast.
Green culture in all CSK stores. We will continue to execute our
detailed conversion plans in CSK markets while maintaining
and growing our market share in existing territories. We will
accomplish all of this because of our O’Reilly commitment to
hard work, teamwork, and customer service.
Extraordinary Service
Little things mean a lot. Whether it’s coming out from behind the counter to
greet our customers or locating that hard-to-find part, Team O’Reilly maintains
a strong commitment to being the friendliest parts store in town.
SERVICE
IN MOTION
10
O’Reilly Automotive 2009 Annual Report
6.8 MILLION
Square Feet
of Operating space
Daily Delivery
Our network of 20 distribution centers
across the country gives us the ability
to make daily deliveries to our stores
and multiple deliveries per day to our
professional installer customers in
many metropolitan areas.
118 THOUSAND
Parts in Stock for
Our Customers
11
O’Reilly Automotive 2009 Annual Report
An essential element to the O’Reilly business model and a
key competitive advantage is our strategic commitment
to a robust, regional distribution network. Our network
currently operates 20 distribution centers across the country,
with three more planned to open in 2010, giving us the ability
to deliver to every store every day. As these new distribution
centers open, we begin moving service away from the legacy
CSK model to the enhanced O’Reilly model at a rate of 30
stores per week. Daily access to a wide range of parts will
allow CSK stores to better serve their retail customers as
well as build relationships with professional installers in
the legacy CSK markets, laying the groundwork for strong,
sustainable long-term business growth.
All of our distribution centers are equipped with
advanced inventory control systems and state-of-the-art
distribution technology to efficiently manage our inventory
of more than 118,000 different parts. Virtually every O’Reilly
store is within 250 miles of one of our DCs, allowing us to
deliver nightly to all our stores and to offer multiple daily
deliveries for our installer customers in many metropolitan
areas. When a customer orders a part not currently in stock,
O’Reilly’s distribution network ensures the right part is
picked, packed and delivered to the store that day or night.
This commitment to extensive regional inventories insures
quick access to parts for both our retail and professional
installer customers across the United States.
Core O’Reilly
Atlanta, GA
Belleville, MI
Billings, MT
Dallas, TX
Des Moines, IA
Dixon, CA
Greensboro, NC
Houston, TX
Indianapolis, IN
Kansas City, MO
Knoxville, TN
Little Rock, AR
Lubbock, TX
Mobile, AL
Western Expansion
Acquired CSK
Nashville, TN
Oklahoma City, OK
Phoenix, AZ
Springfield, MO
St. Paul, MN
Denver, CO
Moreno Valley, CA
Salt Lake City, UT
Seattle, WA
Detroit, MI
(converted 4/09)
Dixon, CA
(converting 9/10)
Phoenix, AZ
(converting 12/10)
Current O’Reilly
Distribution Area
Western
Expansion
Acquired CSK
Distribution Area
12
O’Reilly Automotive 2009 Annual Report
BOARD OF DIRECTORS
Term Expiring in 2010
Term Expiring in 2011
Term Expiring in 2012
Larry O’Reilly
Vice Chairman
of the Board
Rosalie
O’Reilly-Wooten
Director
Joe Greene
(1936-2009)
Mr. Greene passed
away May 8, 2009.
Thomas T. Hendrickson
has been nominated
by the board as
independent Class II
director.
Jay Burchfield
Director Since 1997
Compensation
Committee - Chairman
Corporate Governance/
Nominating Committee
Paul Lederer
Lead Director
1993-July 1997;
Since February 2001
Governance/Nominating
Committee-Chairman
Audit & Compensation
Committee
David O’Reilly
Chairman of the Board
John Murphy
Director Since 2003
Audit Committee -
Chairman Corporate
Governance/Nominating
Committee
Charlie O’Reilly
Vice Chairman
of the Board
Ronald Rashkow
Director Since 2003
Audit Committee
Compensation
Committee
EXECUTIVE COMMITTEE AND DIVISIONAL VICE PRESIDENTS
Phyllis Evans
Vice President of
Store Administration
Steve Jasinski
Vice President of
Information Systems
Doug Ruble
Vice President of
Marketing/Advertising
Greg Henslee
Chief Executive Officer
and Co-President
Ted Wise
Chief Operating Officer
and Co-President
Tom Mcfall
Executive Vice President
and Chief Financial Officer
Greg Johnson
Senior Vice President
of Distribution
Jeff Shaw
Senior Vice President of
Store Operations/Sales
Mike Swearengin
Senior Vice President of
Merchandise
Tony Bartholomew
Vice President of
Sales
Greg Beck
Vice President of
Purchasing
Brad Beckham
Vice President of
Eastern Division
Tom Connor
Vice President of
Distribution Eastern Division
Ken Cope
Vice President of
Central Division
Tricia Headley
Vice President and Corporate
Secretary/Secretary to Board
Charlie Downs
Vice President of
Real Estate and Expansion
Larry Ellis
Vice President of
Distribution Western Division
Randy Johnson
Vice President of
Store Inventories
Alan Fears
Vice President of Jobber
Sales and Acquisitions
Jeff Groves
Vice President of
Legal and Claim Services
and General Counsel
Brett Heintz
Vice President of
Retail Systems
Jaime Hinojosa
Vice President of
Southern Division
Brad Knight
Vice President of
Pricing
Scott Kraus
Vice President of
Northern Division
Greg Langdon
Vice President of
Southwest Division
Kenny Martin
Vice President of
Northeast Division
Wayne Price
Vice President of
Risk Management
Keith Childers
Vice President of CSK Store
Operations Integration
Jeremy Fletcher
Vice President of
Finance and Controller
Barry Sabor
Vice President of
Loss Prevention
Ro Salazar
Vice President of
Northwest Division
Tom Seboldt
Vice President of
Merchandise
Phil Thompson
Vice President of
Human Resources
Mike Williams
Vice President of
Advanced Technology
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
O'REILLY AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction
of incorporation or organization)
0-21318
Commission file number
44-0618012
(IRS 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange on which Registered
The NASDAQ Stock Market LLC
(Nasdaq Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under
those Sections.
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 [ ] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained here, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by a checkmark 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 [ ] Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At February 22, 2010, an aggregate of 137,566,704 shares of the common stock of the registrant was outstanding. As of that date, the aggregate market value of the
voting stock held by non-affiliates of the Company was approximately $5,326,582,779 based on the last sale price of the common stock reported by The Nasdaq
Global Select Market.
At June 30, 2009, an aggregate of 136,129,931 shares of the common stock of the registrant was outstanding. As of that date, the aggregate market value of the voting
stock held by non-affiliates of the Company was approximately $5,183,827,772 based on the last sale price of the common stock reported by The Nasdaq Global
Select Market.
1
As indicated below, portions of the registrant’s documents specified below are incorporated here by reference:
DOCUMENTS INCORPORATED BY REFERENCE
Document
Form 10-K Part
Proxy Statement for 2010 Annual Meeting of Shareholders (to be filed
pursuant to Regulation 14A within 120 days of the end of registrant’s
most recently completed fiscal year)
Part III
2
Forward Looking Information
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 including the acquisition of CSK Auto Corporation (“CSK”), 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 this annual report on Form 10-K for the year ended December 31, 2009, for
additional factors that could materially affect our financial performance.
Item 1.
Business
Introduction
PART I
O'Reilly Automotive, Inc. and its subsidiaries, collectively “O’Reilly” or the “Company”, 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. O’Reilly Automotive, Inc. was incorporated in 1957 as a corporation. The
Company was founded by Charles F. O'Reilly and his son, Charles H. ''Chub'' O'Reilly, Sr. and initially operated from a single store in
Springfield, Missouri. The Company’s common stock trades on The NASDAQ Global Select Market under the symbol “ORLY”.
At December 31, 2009, we operated 3,421 stores in 38 states. Our stores carry an extensive product line, including, but not limited to,
the products bulleted below (we do not sell tires or perform automotive repairs or installations):
•
new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system
components, batteries, belts, hoses, chassis parts and engine parts;
• maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products;
•
•
accessories, such as floor mats, seat covers and truck accessories; and
a complete line of auto body paint and related materials, automotive tools and professional service equipment.
On July 11, 2008, we completed the acquisition of CSK, one of the largest specialty retailers of auto parts and accessories in the
western United States and one of the largest such retailers in the United States, based on store count. Pursuant to the merger
agreement, each share of CSK common stock outstanding immediately prior to the merger was canceled and converted into the right to
receive 0.4285 of a share of O’Reilly common stock and $1.00 in cash. To fund the transaction, we entered into a Credit Agreement
(“ABL Credit Agreement”) for a $1.2 billion asset-based revolving credit facility (“ABL Credit Facility”) arranged by Bank of
America, N.A. (“BA”), which we used to refinance debt, fund the cash portion of the acquisition, pay for other transaction-related
expenses and provide liquidity for the combined company going forward. The results of CSK’s operations have been included in our
consolidated financial statements since the acquisition date.
At the date of the acquisition, CSK had 1,342 stores in 22 states, operating under four brand names: Checker Auto Parts, Schuck’s
Auto Supply, Kragen Auto Parts and Murray’s Discount Auto Parts. This acquisition added stores in twelve new states: Alaska,
Arizona, California, Colorado, Hawaii, Idaho, Michigan, Nevada, New Mexico, Oregon, Utah and Washington, and a number of new
markets in states where O’Reilly had a presence prior to the acquisition. The integration of CSK is focused on the implementation of
our dual market strategy, the ability to effectively serve both DIY customers and professional installers, which requires conversion of
store and distribution information systems, enhancements to the distribution infrastructure, inventory offerings and infusion of the
O’Reilly culture. Conversion of all CSK stores to O’Reilly branded stores began in October of 2008 and will continue into 2011. In
order to implement our proven dual market strategy throughout the CSK store network, we have added a distribution center in Seattle,
Washington, in November of 2009, and Moreno Valley, California, in January of 2010, and will add distribution centers in Denver,
Colorado and Salt Lake City, Utah, in the first half of 2010. As of December 31, 2009, we had converted 405 CSK stores to O’Reilly
systems, merged 41 CSK stores with existing O’Reilly locations, closed 13 CSK stores and opened five new stores in CSK historical
markets.
See "Risk Factors" beginning on page 14 for a description of certain risks relevant to our business. These risk factors include, among
others, risks related to our growth strategy, the integration of CSK, increased debt levels, our acquisition strategies, competition in the
3
automotive aftermarket business, our dependence upon key and other personnel, future growth assurance, our sensitivity to regional
economic and weather conditions, legal proceedings and related matters arising from CSK, the effect of sales of shares of our common
stock eligible for future sale, unanticipated fluctuations in our quarterly results, the volatility of the market price of our common stock,
our relationships with key vendors and availability of key products, complications in our distribution centers, and environmental
legislation and regulations.
Our Business
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our
growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business in
new markets by focusing on our dual market strategy and core O’Reilly values of customer service and expense control. Our intent is
to be the dominant auto parts provider in all the markets we serve by providing significant value to both installer and DIY customers.
Competitive Advantages
Proven Ability to Execute a Dual Market Strategy. We have an established track record of effectively serving, at a high level, both
DIY customers and professional installers. We believe our ability to execute a dual market strategy is a competitive advantage. The
execution of this strategy enables us to better compete by targeting a larger base of consumers of automotive aftermarket parts, by
capitalizing on our existing retail and distribution infrastructure, by operating profitably in both large markets and less densely
populated geographic areas that typically attract fewer competitors, as well as by enhancing service levels offered to DIY customers
through the offering of a broad inventory and the extensive product knowledge required by professional installers.
We have been committed to our dual market strategy for over 30 years. In 2009, core O’Reilly stores derived approximately 53% of
our sales from our DIY customers and approximately 47% from our professional installer customers. As a result of our historical
success of executing our dual market strategy and our over 450 full-time sales staff dedicated solely to calling upon and servicing the
professional installer, we believe we will continue to increase our sales to professional installers and will continue to have a
competitive advantage over our retail competitors who derive a high concentration of their sales from the DIY market. In 2009,
acquired CSK stores derived approximately 84% of sales from our DIY customers and approximately 16% from our professional
installer customers. We have a tremendous opportunity to build on the strong retail base at the CSK stores by growing the commercial
business through the implementation of our dual market strategy and capitalizing on our other competitive advantages.
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 are bulleted below:
•
•
•
•
superior in-store service through highly-motivated, technically-proficient store personnel (“Professional Parts People”) using an
advanced point-of-sale system;
an extensive selection and availability of products;
attractive stores in convenient locations; and
competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers’ quality and value
preferences.
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 value the expert assistance provided by our Professional Parts People.
Strategic Distribution Systems. We believe our commitment to a robust, regional distribution center network provides for superior
replenishment and access to hard-to-find parts and enables us to optimize product availability and inventory levels throughout our store
network. 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, excluding the nonconverted CSK
stores, with same-day or overnight access to an average of 118,000 stock keeping units (“SKUs”), many of which are hard to find items
not typically stocked by other auto parts retailers. Distribution infrastructure enhancements are a key component to the CSK
integration plan and will enable us to support the acquired store network with the same inventory availability provided to our historic
O’Reilly markets. We believe this timely access to a broad range of products is a key competitive advantage in satisfying customer
demand and generating repeat business.
We currently operate 21 distribution centers, including two acquired in the CSK acquisition and our newly opened Greensboro, North
Carolina; Seattle, Washington; and Moreno Valley, California, distribution centers. In 2010, we will open additional distribution
4
centers in Denver, Colorado, and Salt Lake City, Utah, to help support the acquired CSK stores in the west. As these new distribution
centers open, the acquired CSK stores in those areas will begin to convert to O’Reilly systems and will begin receiving same-day or
overnight access to an average of 118,000 SKUs.
Experienced Management Team. Our management team has demonstrated the consistent ability to successfully execute our business
plan, including the identification and integration of strategic acquisitions. We have experienced seventeen consecutive years of record
revenues and positive comparable store sales results since becoming a public company in April of 1993. We have a strong senior
management team comprised of 133 professionals who average 16 years of service. In addition, our 191 corporate managers average
13 years of service and our 311 district managers average 10 years of service.
Growth Strategy
Aggressively Open New Stores. We intend to continue to open new stores to achieve greater penetration in existing markets and to
expand into new, contiguous markets. We plan to open approximately 150 stores in 2010 – a majority of these sites have been
identified. To date, we have not experienced significant difficulties in locating suitable sites for construction of new stores or
identifying suitable acquisition targets for conversion to O'Reilly stores. We typically open new stores either by (i) constructing a new
store at a site we purchase or lease and stocking the new store with fixtures and inventory, (ii) acquiring an independently owned auto
parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store, or (iii)
purchasing multi-store chains. Store sites are strategically located in clusters within geographic areas that complement our distribution
network in order to achieve economies of scale in management, advertising and distribution. 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, other competing auto parts stores, 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 economies of
scale.
We target both small and large markets for expansion of our store network. While we have faced, and expect to continue to face,
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 with our dual market strategy, we are better able to operate stores in less densely populated areas within
our geographic footprint, which would not otherwise support a national chain store selling primarily to the retail automotive
aftermarket. Consequently, we also expect to continue to open new stores in less densely populated market areas.
Profitable same store sales growth 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 the service provided to our customers. We believe that while competitive
pricing is an essential component of successful growth in 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 retail chains, such as ourselves, to operate more efficiently than smaller independent operators or mass
merchandisers will result in continued industry consolidation. Thus, our intention is to continue to selectively pursue acquisition
targets that will strengthen our position as a leading automotive products supplier.
Continually Enhance Store Design and Location. Our current prototype store design features enhancements such as optimized square
footage, higher ceilings, more convenient interior store layouts, improved in-store signage, brighter lighting, increased parking
availability and dedicated counters to serve professional installers, each designed to increase 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 enhance store performance. We believe that our ability to consistently achieve growth in same store
sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best serve our
customers.
Grow Professional Installer Relationships in the Western United States. In order to implement our proven dual market strategy
throughout the CSK store network and grow our share of the professional installer market in those areas, we opened distribution
centers in Seattle, Washington, in November of 2009 and Moreno Valley, California, in January of 2010. We will open two new
distribution centers in Denver, Colorado, and Salt Lake City, Utah, in the first half of 2010. The Seattle, Moreno Valley and Denver
distribution centers were existing facilities we purchased and ranged in size from 222,000 to 407,000 square feet. The Salt Lake City
distribution center will be constructed and total approximately 205,000 square feet. After evaluation of the existing CSK Dixon,
California, distribution center, we made the decision to relocate this distribution center to a larger facility in Stockton, California. The
Stockton, California, distribution center will be a 520,000 square foot, leased facility that will open in the summer of 2010. These
strategically located distribution centers will provide converted CSK stores with same-day or overnight delivery access to an average
5
of 118,000 SKUs and will give these stores an important tool to provide industry-leading customer service to the professional installer,
as well as the DIY customer. Our expanded distribution network will provide access to the breadth of SKUs needed to succeed in the
professional installer side of the business and will be a very meaningful service enhancement for our retail customers as well.
Management Structure
Each of our stores is staffed with a store manager and one or more assistant managers, in addition to parts specialists, retail and/or
installer service specialists and other positions required to meet the specific needs of that store. Each of our 311 district managers has
general supervisory responsibility for an average of 11 stores, which provides our stores with the appropriate amount of operational
support.
Each district manager receives continuous comprehensive training throughout their management tenure through training sessions and
meetings with their regional managers. These training sessions and meetings focus on management techniques, new product
announcements, advanced automotive systems training and our policies and procedures. In turn, the information presented at such
training sessions and meetings is covered by the district managers at monthly meetings with their store managers. All store managers
are required to successfully complete a six-month manager-training program, which includes classroom and field training. This
program covers all facets of store operations, as well as principles of successful management. In addition, all new or prospective
managers attend a manager development program, at the corporate headquarters in Springfield, Missouri, which includes 40 hours of
classroom training. Upon returning to the stores, managers are given continuous field training throughout their management tenure.
We provide financial incentives to our district managers and all store team members through incentive compensation programs.
Under our incentive compensation programs, base salary is augmented by incentive compensation based upon their individual and/or
store’s sales and profitability. In addition, each of our district and store managers participates in the Company’s stock option program.
We believe that our incentive compensation programs significantly increase the motivation and overall performance of our district and
store team members and enhance 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 16 years of service, corporate management team averages over 13 years of service
and district management team have an average length of service of over 10 years.
Team Members
As of January 31, 2010, we employed 44,822 total team members (30,379 full-time team members and 14,443 part-time team
members), of whom 37,517 were employed at our stores, 5,756 were employed at our distribution centers and 1,549 were employed at
our corporate and regional offices. A union represents 53 stores’ team members in the Greater Bay Area in California, and has for
many years – except for these team members, our team members are not represented by a labor union. Our tradition of 53 years has
been to treat all of our team members with honesty and respect and to commit significant resources to instill in them our “Live Green”
Culture, which emphasizes the importance of every team member’s contribution to the success of O’Reilly. This focus on
professionalism and fairness has created an industry-leading team and we consider our relations with our team members to be
excellent.
Inflation and Seasonality
We have been successful, 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. To the
extent our acquisition cost increases due to base commodity price increases industry-wide, we have typically been able to pass along
these increased costs through higher retail prices for the affected products. As a result, we do not believe our operations have been
materially, adversely affected by inflation.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. Store
sales and profits have historically been higher in the second and third quarters (April through September) than in the first and fourth
quarters of the year.
Regulations
We are subject to various federal, state and local laws and governmental regulations relating to our business, including those related to
the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants, and the ownership and
operation of real property.
6
As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous
materials onto our property in connection with, for example, our oil and battery recycling programs. We currently provide a recycling
program for batteries and the collection of used lubricants at certain of our stores as a service to our customers pursuant to agreements
with third-party vendors. The batteries and used lubricants are collected by our associates, deposited into vendor-supplied containers
and pallets and then disposed of by the third-party vendors. In general, our agreements with such vendors contain provisions that are
designed to limit our potential liability under applicable environmental regulations for any damage or contamination, which may be
caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused
by the vendor.
Compliance with any such laws and regulations has not had a material adverse effect on our operations to date. We cannot give any
assurance, however, that we will not incur significant expenses in the future in order to comply with any such law or regulation.
Available Information
Our Internet address is www.oreillyauto.com. Interested readers can access, free of charge, 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 Securities and Exchange Commission website
at www.sec.gov and searching with our ticker symbol “ORLY”. Such reports are generally available the day they are filed. Upon
request, the Company will furnish interested readers a paper copy of such reports free of charge by contacting Thomas McFall,
Executive Vice President of Finance and Chief Financial Officer, at 233 South Patterson, Springfield, Missouri, 65802.
7
Store Operations
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
small, less densely populated areas that would not otherwise support a national chain selling primarily to the retail automotive
aftermarket. The following table sets forth the geographic distribution of our stores:
December 31,
2008
2009 Net New
O’Reilly Stores
2009 CSK Net
New, Merged or
Closed Stores
December 31, 2009
% of
Total
Store
Count
15.4%
14.6%
5.3%
4.0%
4.2%
3.9%
3.7%
3.7%
3.2%
3.1%
3.0%
2.9%
2.7%
2.4%
1.5%
2.1%
2.1%
2.0%
2.0%
2.0%
1.3%
1.4%
1.7%
1.6%
1.2%
1.4%
1.3%
1.1%
0.7%
0.9%
0.9%
0.7%
0.5%
0.4%
0.3%
0.3%
0.3%
0.2%
100%
Store
Count
506
480
175
131
139
129
122
123
106
103
100
94
89
79
48
70
68
65
65
64
42
45
55
53
40
45
42
35
24
30
28
23
16
12
11
11
10
7
3,285
State
Texas
California
Missouri
Georgia
Washington
Arizona
Tennessee
Illinois
Oklahoma
Alabama
Minnesota
Arkansas
Colorado
Louisiana
North Carolina
Indiana
Mississippi
Michigan
Iowa
Kansas
Ohio
Wisconsin
Utah
Kentucky
South Carolina
Nevada
Oregon
New Mexico
Florida
Idaho
Nebraska
Montana
Wyoming
North Dakota
Alaska
Hawaii
South Dakota
Virginia
Total
% of
Total
Store
Count
-
42.8%
-
-
-
-
-
14.3%
-
-
-
-
28.6%
-
-
-
-
-
-
-
-
-
14.3%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
100%
% of
Total
Store
Count
15.2%
13.9%
5.2%
4.2%
4.1%
3.8%
3.8%
3.7%
3.2%
3.1%
2.9%
2.8%
2.5%
2.3%
2.3%
2.2%
2.1%
2.0%
1.9%
1.9%
1.8%
1.6%
1.6%
1.6%
1.5%
1.3%
1.2%
1.1%
0.9%
0.9%
0.8%
0.7%
0.5%
0.4%
0.3%
0.3%
0.3%
0.1%
100%
Store
Count
521
477
177
143
139
129
129
125
109
105
100
96
87
80
77
74
71
67
65
65
63
55
54
54
50
45
42
38
32
30
29
23
16
12
11
11
11
9
3,421
Store
Count
-
(3)
-
-
-
-
-
(1)
-
-
-
-
(2)
-
-
-
-
-
-
-
-
-
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(7)
Cumulative
% of Total
Store Count
15.2%
29.1%
34.3%
38.5%
42.6%
46.4%
50.2%
53.9%
57.1%
60.2%
63.1%
65.9%
68.4%
70.7%
73.0%
75.2%
77.3%
79.3%
81.2%
83.1%
84.9%
86.5%
88.1%
89.7%
91.2%
92.5%
93.7%
94.8%
95.7%
96.6%
97.4%
98.1%
98.6%
99.0%
99.3%
99.6%
99.9%
100.0%
% of
Total
Store
Count
10.6%
0.0%
1.4%
8.5%
0.0%
0.0%
5.0%
2.1%
2.1%
1.4%
0.0%
1.4%
0.0%
0.7%
20.4%
2.8%
2.1%
1.4%
0.0%
0.7%
14.8%
7.0%
0.0%
0.7%
7.0%
0.0%
0.0%
2.1%
5.7%
0.0%
0.7%
0.0%
0.0%
0.0%
0.0%
0.0%
0.7%
1.4%
100%
Store
Count
15
-
2
12
-
-
7
3
3
2
-
2
-
1
29
4
3
2
-
1
21
10
-
1
10
-
-
3
8
-
1
-
-
-
-
-
1
2
143
8
Our stores, on average, carry approximately 22,000 SKUs and average approximately 7,000 total square feet in size. At December 31,
2009, we had a total of approximately 24.2 million square feet in our 3,421 stores. Our stores are served primarily by the nearest
distribution center, but they also have access to the broader selection of inventory available at one of our 196 Master Inventory Stores,
which on average carry approximately 38,000 SKUs and average approximately 9,900 square feet in size. In addition to serving DIY
and professional installer customers in their markets, Master Inventory Stores also provide our other stores within the contiguous 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 and prominent end caps situated on
or near major traffic thoroughfares, and offer ample parking, easy customer access and proximity to our installer customers.
Store Layout. We utilize a computer-assisted ''plan-o-grammed'' store layout system to provide a uniform and consistent merchandise
presentation; however, each store’s hard-parts inventory assortment is customized to meet the specific needs of a particular market
area. Front room merchandise is arranged to provide easy customer access, maximum selling space and to prominently display high-
turnover products and accessories to customers. To ensure the best customer experience possible, we have selectively implemented
bilingual in-store signage based on the demographics in each store’s geographic area. Aisle displays and end caps are used to feature
high-demand or seasonal merchandise, new items and advertised specials.
Store Automation. To enhance store-level operations, customer service and reliability, we use IBM I-Series and X-Series computer
systems in stores that have converted to the O’Reilly systems. These systems are linked with the I-Series computers located in each of
our distribution centers. Our point-of-sale terminals provide immediate access to our electronic catalog to graphically display parts
and pricing information by make, model and year of vehicle and use bar code scanning technology to price our merchandise. This
system speeds transaction times, reduces the customer’s checkout time, ensures accuracy and provides enhanced customer service.
Moreover, our store automation systems capture detailed sales information which assists in store management, strategic planning,
inventory control and distribution efficiency. As CSK stores are converted to O’Reilly stores, IBM I-Series and X-Series computer
systems are installed in the converted store, linking the store to our distribution centers, electronic catalog and pricing information.
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 are bulleted below:
population density and segmentation;
•
• market economic strength, retail draw and growth patterns;
•
•
•
•
age, ethnicity and per capita income;
number of registered vehicles;
the number, type and sales potential of existing automotive repair facilities;
the number of auto parts stores and other competitors within a predetermined radius and the operational strength of such
competitors; and
physical location, size, economics and presentation of the site.
•
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 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.
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, premium name brand products such as AC Delco, Armor All, BWD, Cardone,
Castrol, Federal Mogul, Gates Rubber, Monroe, Moog, Pennzoil, Prestone, Quaker State, STP, Turtle Wax, Valvoline, Wagner, and
Wix. In addition to name brand products, our stores carry a wide variety of high-quality private label products under our BestTest®,
BrakeBest®, Master Pro®, Micro-Gard®, Murray and Omnispark®, O’Reilly Auto Parts®, Power Torque®, Super Start®, and
Ultima® proprietary name brands. Our private label products are produced by nationally recognized manufacturers and meet or
exceed original equipment manufacturer specifications and provide a great combination of quality and value – a characteristic
important to our DIY customers. We have added O’Reilly branded chemicals and commodities as well as proprietary private label
products to all converted and nonconverted, acquired CSK stores. These stores have also undergone hard-part resets, which
significantly increased their hard-part SKU offering, giving our customers in all stores a good, better, and best product offering.
9
We purchase automotive products in substantial quantities from over 500 vendors, the five largest of which accounted for
approximately 24% of our total purchases in 2009. Our largest vendor in 2009 accounted for approximately nine percent of our total
purchases and the next four largest vendors each accounted for approximately three to four percent 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 supply sources for automotive parts. We believe that alternative supply sources exist at substantially similar costs, for
substantially all of the automotive products that we sell. It is our policy to take advantage of payment and seasonal purchasing
discounts offered by our vendors and to utilize extended dating terms available from vendors. During 2009, we entered into various
programs and arrangements with certain vendors that provided for extended dating and payment terms for inventory purchases. As a
whole, we consider our relationships with our vendors to be very good.
Pricing
We believe that a competitive pricing policy is essential to successfully operate in the automotive aftermarket business. Product
pricing is generally established to compete with the pricing policies of competitors in the market area served by each store. Most
automotive products that we sell are priced based upon a combination of competitor price comparisons and internal gross margin
targets and are generally sold at a discount to the manufacturer’s suggested retail price with additional savings 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 our competitors in the same market area.
We have repositioned the product offering and pricing in all CSK stores to an every-day low price strategy to ensure we are
competitive in every market. We feel competitive pricing is needed to grow our market share and maintain a customer’s repeat
business, and we feel strongly that this strategy is more sustainable, requires less promotional spending and will produce better results
than CSK’s historical promotional-based, high-low pricing strategy.
Professional Parts People
We believe our highly trained team of Professional Parts People is essential in providing superior customer service to both DIY and
professional installer customers. Because a significant portion of our business is from installers, our Professional Parts People are
required to be technically proficient in automotive products. In addition, we have found that the typical DIY customer often seeks
assistance from a Professional Parts Person, particularly when purchasing hard parts. The ability of our Professional Parts People to
provide such assistance to the DIY customer creates a favorable impression and is a significant factor in generating repeat DIY
business.
We screen prospective team members to identify highly motivated individuals who either have experience with automotive parts or
repairs, or automotive aptitude. New store team members go through a comprehensive orientation about the culture of our company as
well as the requirements for their specific job position. Additionally, during their first year of employment, our parts specialists go
through extensive automotive systems training to prepare them to become certified by the National Institute for Automotive Service
Excellence (ASE). Parts specialists also receive ongoing product knowledge training to ensure they are able to provide the highest
level of service to our customers.
All of our stores have the ability to service professional installer customers. For this reason, select team members in each store
complete extensive sales call training with their regional field sales manager. Afterward, these team members spend one day per week
calling on existing and potential professional installer customers. Additionally, each team member engaged in such sales activities
participates 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 products requested. Accordingly, each
O'Reilly store carries a broad selection of automotive products designed to cover a wide range of vehicle applications. We
continuously refine the inventory levels and assortments carried in our stores, based in large part on the sales movement tracked by our
inventory control system, market vehicle registration data, failure rates and management's assessment of the changes and trends in the
marketplace.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY customers through an integrated marketing program, which
includes television, radio, direct mail and newspaper advertising, in-store and online promotions, and sports and event sponsorships.
10
Our marketing activities have resulted in a significant increase in our brand awareness across our geographic footprint. We utilize a
combination of brand and product/price messaging to drive retail traffic and purchases, which frequently coincide with key sales
events. During 2009, we continued to co-brand our advertising in the markets where nonconverted CSK stores are located. This
advertising and marketing is essential to build awareness of the O’Reilly Brand in those markets to allow for a smoother transition as
stores are rebranded. In addition to co-branding in these select markets, we have co-branded all existing CSK advertising programs
that have national exposure.
To stimulate sales to race enthusiasts, who we believe on an individual basis spend more on automotive products than the general
public, we sponsored multiple nationally televised races and over 1,500 grassroots, local, and regional motorsports events in 38 states
during 2009. We continued our partnership with NASCAR as the Official Auto Parts Store of NASCAR and in the fall of 2009 we
sponsored the Checker O’Reilly Auto Parts 500 NASCAR Sprint Cup race, at the Phoenix International Raceway.
During the fall and winter, we strategically sponsor National Collegiate Athletic Association (“NCAA”) basketball and the National
Football League (“NFL”). We have relationships with over 80 NCAA teams and tournaments resulting in the placement of the
O’Reilly logo on courts, goal stanchions, seat backs, kick plates, and scoring table signs throughout the season. O’Reilly Auto Parts
radio advertising can be heard in approximately 200 NFL games through our sponsorship of a dozen teams.
In 2009, we continued our dedicated problem/solution messaging strategy, which encourages vehicle owners to perform regular
maintenance as a way to save money and protect their automotive investment over the long term. We expanded our Hispanic
marketing efforts to capture incremental sales from this dynamic and growing consumer segment.
Marketing to the Professional Installer. We have over 450 full-time O’Reilly sales representatives strategically located across our
market areas. Each sales representative is dedicated solely to calling upon, selling to and servicing our professional installer
customers. Targeted marketing materials such as flyers, quick reference guides and catalogs are produced and distributed on a regular
basis to professional installers, paint and body shops and fleet customers. Our industry leading First Call program enables our sales
representatives, district managers, and store managers to provide excellent customer service to each of our professional installer
accounts by providing the products and services bulleted below:
broad selection of merchandise at competitive prices;
dedicated Installer Service Specialists in our stores;
•
•
• multiple deliveries from our stores per day;
•
•
•
• First Call Online, a dedicated Internet based catalog and ordering system designed to connect professional installers directly
same-day or overnight access to an average of 118,000 SKUs through five-night-a-week store inventory replenishments;
a separate service counter and phone line in our stores dedicated exclusively to service professional installers;
trade credit for qualified accounts;
•
•
•
to our inventory system;
training and seminars covering topics of interest, such as technical updates, safety and general business management;
access to a comprehensive inventory of products and equipment needed to operate and maintain their shop; and
the Certified Auto Repair Center Program, a program that provides professional installers with business tools they can utilize
to profitably grow and market their shops.
Marketing to the Independently Owned Parts Store. Along with the daily operation and management of the distribution centers and the
distribution of automotive products to our stores, Ozark Automotive Distributors, Inc., our wholly owned subsidiary (“Ozark”), also
sells automotive products directly to independently owned parts stores (“jobber stores”) throughout our trade areas. These jobber
stores are generally located in areas not directly serviced by an O'Reilly store. Ozark administers a dedicated and distinct marketing
program specifically targeted to jobber stores.
Approximately 183 jobber stores currently purchase automotive products from Ozark and participate in our Parts City Auto Parts
program, our proprietary jobber service program. As a participant in these programs, a jobber store, which meets certain financial and
operational standards, is permitted to indicate its Parts City Auto Parts membership through the display of the respective logo that is
owned by Ozark. We provide advertising, promotional assistance, marketing and sales support to Parts City Auto Parts stores
purchasing automotive products from Ozark. In return for a commitment to purchase automotive products from Ozark, we offer
assistance to Parts City Auto Parts jobber stores by making available computer software for business management and inventory
control.
Competition
We compete in both the DIY and professional installer portions of the automotive aftermarket. We compete primarily with the stores
bulleted below:
11
•
national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, NAPA, CARQUEST and the
Pep Boys - Manny, Moe and Jack, Inc.);
regional retail and wholesale automotive parts chains;
independently owned parts stores;
•
•
• wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as
NAPA, CARQUEST, Bumper to Bumper and Auto Value);
automobile dealers; and
•
• 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, store layout and convenient and accessible store locations.
Distribution System Support
We currently operate 21 distribution centers comprised of approximately 7.4 million operating square feet (see the “Properties” table
in Item 2 of this Form 10-K for a detailed listing of distribution center operating square footages). Our distribution centers are
equipped with highly automated material handling equipment, which efficiently expedite the movement of our products from the
shelves to the loading areas for shipment to each of our stores on a nightly basis. The distribution centers utilize technology to
electronically receive orders from computers located in each of our stores. In addition to the bar code system employed in our stores,
each of our stores is connected through secured data transmission technology to our distribution centers and corporate headquarters.
We believe that our distribution system provides industry-leading parts availability and store in-stock positions while lowering our
inventory carrying costs and controlling inventory. Moreover, we believe that our ongoing, significant capital investments made to
expand the network of distribution centers allows us to efficiently service new stores that are planned to open in contiguous market
areas as well as servicing our existing store network. Our distribution center expansion strategy complements our new store opening
strategy by supporting newly established clusters of stores located in the regions surrounding each distribution center. We opened a
new distribution center in Greensboro, North Carolina in the summer of 2009, to service existing stores in that area and to expand in
the Mid-Atlantic States. We currently have a total growth capacity of approximately 350 stores in our current 21 distribution centers.
In order to implement our proven dual market strategy throughout the CSK store network, we added distribution centers in Seattle,
Washington, in November of 2009 and Moreno Valley, California, in January of 2010. Following these openings, two additional new
distribution centers will be opened in Denver, Colorado and Salt Lake City, Utah, in the first half of 2010. The Seattle, Moreno Valley
and Denver distribution centers were purchased existing facilities, while the land for the Salt Lake City distribution center was
purchased and the distribution center is being constructed. After a detailed evaluation of the existing CSK Dixon, California,
distribution center, we made the decision to relocate this distribution center to a larger facility in Stockton, California, which will open
in the summer of 2010. We closed one CSK distribution center in Mendota Heights, Minnesota, in the spring of 2009 that directly
overlapped a larger, existing O’Reilly distribution center in Brooklyn Park, Minnesota.
As part of our continuing efforts to enhance our distribution network in 2010 we plan to:
•
•
•
•
•
add three new distribution centers (“DCs”), relocate and convert an existing acquired CSK DC and convert an existing acquired
CSK DC;
continue to implement a voice picking technology in additional distribution centers;
develop further automated paperless picking processes;
improve proof of delivery systems to further increase the accuracy of product movement to our stores;
implement our dedicated private delivery fleet model in the Western United States enabling us to further reduce logistics costs and
provide a higher service level to our stores;
continue to define and implement best practice procedures in all distribution centers; and
•
• make proven, ROI based capital enhancements to material handling equipment in distribution centers including conveyor systems,
picking modules and lift equipment.
Executive Officers of the Registrant
The following paragraphs discuss information about executive officers of the Company who are not also directors:
Gregory L. Henslee, age 49, Chief Executive Officer and Co-President, has been an O’Reilly team member for 25 years. Mr.
Henslee’s O’Reilly career started as a parts specialist, and during his first five years he served in several positions in retail store
operations, including district manager. From there he advanced to Computer Operations Manager, and over the next 15 years, he
served as Director of Computer Operations/Loss Prevention, Vice President of Store Operations and as Senior Vice President. In
12
1999, he became President of Merchandise, Distribution, Information Systems and Loss Prevention, and has been in his current
positions of Chief Executive Officer and Co-President since 2005.
Ted F. Wise, age 59, Chief Operating Officer and Co-President, has been an O’Reilly team member for 39 years. Mr. Wise’s primary
areas of responsibility are Sales, Operations and Real Estate. He began his O’Reilly career in sales in 1970, was promoted to store
manager in 1973 and became our first district manager in 1977. He continued his progression with O’Reilly as Operations Manager,
Vice President, Senior Vice President of Operations and Sales, and Executive Vice President. He has been President of Sales,
Operations and Real Estate since 1999, and in his current positions of Chief Operating Officer and Co-President since 2005.
Thomas G. McFall, age 39, Executive Vice President of Finance and Chief Financial Officer, has been an O’Reilly team member since
2006 and has held his position as Chief Financial Officer during this time. Mr. McFall’s primary areas of responsibility are Finance
and Accounting. Prior to joining O’Reilly, Mr. McFall held the position of Chief Financial Officer – Midwest Operation for CSK,
following CSK’s acquisition of Murray’s Discount Auto Stores (“Murray’s”). Mr. McFall served Murray’s for eight years as
Controller, Vice President of Finance, and Chief Financial Officer, with direct responsibility for finance and accounting, distribution
and logistics operations. Prior to joining Murray’s, Mr. McFall was an Audit Manager with Ernst & Young, LLP in Detroit, Michigan.
Jeff M. Shaw, age 47, Senior Vice President of Sales and Operations, has been an O'Reilly team member for 21 years. Mr. Shaw's
primary areas of responsibility are managing Store Sales and Operations. His O'Reilly career started as a parts specialist, and has
progressed through the roles of store manager, district manager, regional manager and Vice President of the Southern division. He
advanced to Vice President of Sales and Operations in 2003 and to his current position as Senior Vice President of Sales and
Operations in 2004.
Michael D. Swearengin, age 49, Senior Vice President of Merchandise, has been an O'Reilly team member for 16 years. Mr.
Swearengin's primary areas of responsibility are Merchandise, Purchasing, Pricing and Advertising. His O'Reilly career started as an
employee in a store later acquired by O’Reilly, he then became Product Manager, a position he held for four years. From there he
advanced to Senior Product Manager, Director of Merchandise and Vice President of Merchandise with responsibility for product mix
and replenishment. He has been in his current position as Senior Vice President since 2004.
Gregory D. Johnson, age 44, Senior Vice President of Distribution Operations, has been an O’Reilly team member for 27 years. Mr.
Johnson’s primary area of responsibility is Distribution and Logistics. He began his O’Reilly career as a part-time stocker in the
Nashville DC in 1982 and advanced with O’Reilly as Retail Systems Manager, WMS Systems Development Manager, Director of
Distribution and Vice President of Distribution. He has been in his current position as Senior Vice President since September 2007.
Service Marks and Trademarks
We have registered, acquired and/or been assigned the following service marks and trademarks: BESTEST®, BETTER PARTS.
BETTER PRICES.®, BRAKEBEST®, CERTIFIED AUTO REPAIR®, CUSTOMIZE YOUR RIDE®, FIRST CALL®, FROM OUR
STORE TO YOUR DOOR®, HI-LO®, MASTER PRO®, MASTER PRO REFINISHING®, MICRO-GARD®, MILES AHEAD®,
MURRAY®, O®, OMNISPARK®, O’REILLY®, O’REILLY AUTO COLOR PROFESSIONAL PAINT PEOPLE®, O’REILLY
AUTO PARTS®, O’REILLY AUTO PARTS PROFESSIONAL PARTS PEOPLE®, O’REILLY AUTOMOTIVE®, O’REILLY
RACING®, PARTNERSHIP NETWORK®, PARTS CITY®, PARTS CITY AUTO COLOR PROFESSIONAL PAINT PEOPLE®,
PARTS CITY AUTO PARTS®, PARTS CITY TOOL BOX®, PARTS PAYOFF®, POWER TORQUE®, REAL WORLD
TRAINING®, SUPER START®, SUPER START FARMLAND®, TOOLBOX®, ULTIMA®, CSK PROSHOP®, FLAG®,
KRAGEN AUTO PARTS®, MURRAY’S AUTO PARTS®, MURRAY’S DISCOUNT AUTO STORE THE AUTO PARTS
SUPERMARKET®, PRIORITY PARTS®, PROXONE®, SCHUCK’S®, WE’RE THE PLACE WITH ALL THE PARTS®,
MURRAY’S VIP PROGRAM®, PAY N $AVE®. Some of the service marks and trademarks listed above may also have a design
associated therewith. Each of the service marks and trademarks are in duration for as long as we continue to use and seek renewal of
such marks – the duration of each of these service marks and trademarks is typically between five and ten years per renewal. We
believe that our business is not otherwise dependent upon any patent, trademark, service mark or copyright.
13
Item 1A.
Risk Factors
Our future performance is subject to a variety of risks and uncertainties. Although the risks described below are the risks that we
believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon
the information available to us that later may prove to be material. Interested parties should be aware that the occurrence of the events
described in these risk factors, elsewhere in this Form 10-K and in our other filings with the Securities and Exchange Commission
could have a material adverse effect on our business, operating results and financial condition. Actual results, therefore, may
materially differ from anticipated results described in these forward-looking statements.
Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and
others with which we do business to suffer financial hardship, all of which could adversely impact our business, results of
operations, financial condition and cash flows.
Worldwide economic conditions have deteriorated significantly in many countries and regions, including the United States, and may
remain depressed for the foreseeable future. Although demand for many of our products is non-discretionary in nature and tend to be
purchased by consumers out of necessity, rather than on an impulse basis, our sales are impacted by constraints on discretionary
spending by our customers. Discretionary spending is affected by many factors, including, among others, general business conditions,
interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, fuel prices,
unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of our
control. Our customers’ purchases, including purchases of our products, could decline during periods when disposable income is
lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. If any of
these events occur, or if unfavorable economic conditions continue to challenge the consumer environment, our business, results of
operations, financial condition and cash flows could be adversely affected.
In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings,
bankruptcies, liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial
institutions which are counterparties to our credit facilities and interest rate swap transactions. In addition, the ability of these third
parties to overcome these difficulties may increase. If third parties, on which we rely for merchandise, are unable to overcome
difficulties resulting from the deterioration in economic conditions and provide us with the merchandise we need, or if counterparties
to our credit facilities or interest rate swap transactions do not perform their obligations, our business, results of operations, financial
condition and cash flows could be adversely affected.
The integration of the operations of CSK involves risks, and the failure to integrate the operations successfully or in the expected
time frame may adversely affect the future results of the combined company.
The failure of the Company to meet the challenges involved in integrating the operations of CSK successfully or to otherwise realize
any of the anticipated benefits of the acquisition could seriously harm our results of operations. Our ability to realize the benefits of
the acquisition will depend, in part, on the timely integration of organizations, operations, procedures, policies and technologies, as
well as the successful adoption of the O’Reilly culture and the retention of key personnel. The integration of CSK will be a complex,
time-consuming and expensive process that, even with proper planning and implementation, could significantly disrupt the Company’s
business. The challenges involved in this integration include the following:
•
•
•
implementing O’Reilly distribution, point of sale and inventory management systems;
combining respective product offerings;
preserving customer, supplier and other important relationships of both O’Reilly and CSK and resolving potential conflicts
that may arise;
• minimizing the diversion of management attention from ongoing business concerns;
•
•
contingencies that may arise of which we were not aware or of which we underestimated the significance;
addressing differences in the business cultures of O’Reilly and CSK to maintain employee morale and retain key employees;
and
coordinating and combining geographically diverse operations, relationships and facilities which may be subject to additional
constraints imposed by distance and local laws and regulations.
•
We may not successfully integrate the operations of CSK in a timely manner, or not at all, and we may not realize the anticipated
benefits or synergies of the merger to the extent, or in the time frame, anticipated. The anticipated benefits and synergies are based on
projections and assumptions, not actual experience, and assume a successful integration. In addition to the integration risks discussed
above, our ability to realize these benefits and synergies could be adversely affected by practical or legal constraints on our ability to
combine operations. If we fail to manage the integration of these businesses effectively, our growth strategy and future profitability
could be negatively affected, and we may fail to achieve the intended benefits of the merger.
14
Our increased debt levels could adversely affect our cash flow and prevent us from fulfilling our obligations.
In conjunction with the acquisition of CSK, we entered into a new credit facility, which significantly increased our outstanding
indebtedness and debt service requirements. Our substantial debt could have important consequences, such as:
•
•
•
•
•
requiring us to dedicate a substantial portion of our cash flow from operations and other capital resources to principal and
interest, thereby reducing our ability to fund working capital, capital expenditures and other cash requirements;
increasing our vulnerability to adverse economic and industry conditions;
limiting our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a
competitive disadvantage;
limiting our ability to incur additional debt on acceptable terms, if at all; and
exposing us to fluctuations in interest rates.
In addition, the terms of the financing obligations include restrictions, such as affirmative and negative covenants, conditions on
borrowing, subsidiary guarantees and asset and stock pledges. A failure to comply with these restrictions could result in a default
under the financing obligations or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The
occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could have a material adverse
effect on our business, financial condition or results of operations.
Risks associated with future acquisitions may not lead to expected growth and could result in increased costs and inefficiencies.
We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause
our actual growth and profitability to differ from our expectations, examples of such risks include the following:
• we may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices
or on other favorable terms;
our management’s attention may be distracted;
•
• we may fail to retain key personnel from acquired businesses;
• we may assume unanticipated legal liabilities and other problems;
• 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; and
• we may fail or be unable to discover liabilities of businesses that we acquire for which we, as a successor owner or operator,
may be liable.
The automotive aftermarket business is highly competitive, and we may have to risk our capital to remain 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. We may have to expend
more resources and risk additional capital to remain competitive. For a list of our principal competitors, see the “Competition” section
of Item 1 of this annual report on Form 10-K.
In order to be successful, we will need to retain and motivate key employees, which may be more difficult in light of uncertainty
created by the acquisition of CSK, and failure to do so could seriously harm the Company.
In order to be successful, we will need to retain and motivate executives and other key employees. Experienced management and
technical personnel are in high demand and competition for their talents is intense. Employee retention may be a particularly
challenging issue in connection with the integration of the acquired CSK operations. We also must continue to motivate employees
and keep them focused on our strategies and goals, which may be particularly difficult due to the potential distractions of the merger.
We cannot assure future growth will be achieved.
We believe that our ability to open additional, profitable stores at a high growth rate will be a significant factor in achieving our growth
objectives for the future. 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 2010 and beyond will be achieved.
Failure to achieve our growth objectives may negatively impact the trading price of our common stock. For a discussion of our growth
strategies, see the “Growth Strategy” section of Item 1 of this annual report on Form 10-K.
15
We are sensitive to regional economic and weather conditions that could reduce our costs and sales.
Approximately 30% of our stores are located in Texas and California. Therefore, our business is sensitive to the economic and
weather conditions of those regions. Unusually inclement weather, such as significant rain, snow, sleet, freezing rain, flooding, seismic
activity and hurricanes, has historically discouraged our customers from visiting our stores during the affected period and reduced our
sales, particularly to DIY customers. In addition, our stores located in these coastal regions may be subject to increased insurance
claims resulting from regional weather conditions and our results of operations and financial condition could be adversely affected.
Legal proceedings and related matters arising from CSK could adversely affect us.
As discussed in Item 3, “Legal Proceedings” and Note 14 “Legal Matters” of the consolidated financial statements, several of CSK’s
former officers and employees have been charged by the Department of Justice (“DOJ”) and named in civil actions by the Securities
and Exchange Commission (“SEC”). O’Reilly has resolved CSK’s pre-acquisition issues with the SEC, but as set forth in Item 3 and
Note 14 “Legal Matters”, the DOJ investigation continues and could result in criminal charges being filed against CSK. We are
involved in working toward resolution of these matters. Under Delaware law, the charter documents of the CSK entities and certain
indemnification agreements, CSK has certain obligations to indemnify these persons and O’Reilly is currently incurring legal fees on
the behalf of these persons in relation to pending matters. There can be no assurance that the expenses incurred in connection with the
resolution of these matters will be covered by CSK’s directors’ and officers’ insurance policies. If we incur significant uninsured
expenses in connection with the resolution of the matters described above, this could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
Sales of shares of our common stock eligible for future sale could adversely affect our share price.
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, which 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. We believe 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.
Risks related to the Company and unanticipated fluctuations in our quarterly operating results could affect the Company’s stock
price.
We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of the future operating
results of the Company and should not be relied on as an indication of future performance. If our quarterly operating results fail to
meet the expectations of analysts, the trading price of our common stock could be negatively affected. We cannot be certain that our
business strategy and our plans to integrate the operations of CSK will be successful or that they will successfully meet the
expectations of these analysts. If we fail to adequately address any of these risks or difficulties, our business would likely suffer.
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon 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. Downturns in the stock market may cause the price of our common stock
to decline. 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 companies. 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.
A change in the relationship with any of our key vendors or the unavailability of our key products at competitive prices could affect
our financial health.
Our business depends on developing and maintaining close relationships with our vendors and on our vendors' ability or willingness to
sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the
ability or willingness of these vendors to sell us products on favorable terms. For example, financial or operational difficulties that
some of our vendors may face could increase the cost of the products we purchase from them or our ability to source product from
them. In addition, the trend towards consolidation among automotive parts suppliers as well as the off-shoring of manufacturing
capacity to foreign countries may disrupt or end our relationship with some vendors, and could lead to less competition and result in
16
higher prices. We could also be negatively impacted by suppliers who might experience work stoppages, labor strikes or other
interruptions to or difficulties in the manufacture or supply of the products we purchase from them.
Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.
We operate 21 distribution centers nationwide to support our business. If complications arise with any facility or if any facility is
severely damaged or destroyed, our other distribution centers may not be able to support the resulting additional distribution demands.
This may adversely affect our ability to deliver inventory on a nightly basis and therefore affect our ability to timely provide products
to our customers resulting in lost sales. Such a disruption in revenue could potentially have a negative impact on our results of
operations and financial condition.
Environmental legislation and regulations could affect our operations, such as by increasing fuel prices, and therefore increase
our operating costs.
Initiatives to limit greenhouse gas emissions and bills related to climate change have been introduced in the U.S. Congress, which
could adversely impact all industries. While it is uncertain whether these will become law, additional climate change related mandates
could potentially be forthcoming, and these mandates, if enacted, could adversely impact our costs, including, among other things,
increasing fuel prices.
Item 1B.
Unresolved Staff Comments
Not applicable.
17
Item 2.
Properties
The following table provides certain information regarding our administrative offices and distribution centers as of December 31,
2009:
Location
Atlanta, GA
Belleville, MI
Billings, MT
Dallas, TX
Denver, CO
Des Moines, IA
Dixon, CA
Greensboro, NC
Houston, TX
Indianapolis, IN
Kansas City, MO
Knoxville, TN
Little Rock, AR
Lubbock, TX
Mobile, AL
Moreno Valley, CA
Nashville, TN
Oklahoma City, OK
Phoenix, AZ
Salt Lake City, UT
Seattle, WA
Springfield, MO
St. Paul, MN
Auburn, WA
Aurora, CO
Clearfield, UT
Commerce, CA
McAllen, TX
Phoenix, AZ
Springfield, MO
Vacaville, CA
Phoenix, AZ
Springfield, MO
Springfield, MO
Principal Use(s)
Footage
Interest
Operating Square
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center (to open in 2010)
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center (opened in January of 2010)
Distribution Center
Distribution Center
Distribution Center
Distribution Center (to open in 2010)
Distribution Center
Distribution Center, Bulk and Return Facilities
and Corporate Offices
Distribution Center
Bulk Facility
Bulk Facility
Bulk Facility
Bulk Facility
Bulk Facility
Return Facility
Return Facility
Return Facility
Corporate Offices
Corporate Offices
Corporate Offices, Training and Technical
Center
492,350 Leased (a)
333,262 Leased (b)
108,300 Leased (c)
442,000 Owned
321,242 Owned
253,886 Owned
366,900 Leased (d)
441,600 Owned
489,351 Owned
657,603 Owned
299,018 Owned
150,766 Owned
122,969 Leased (e)
276,896 Owned
301,068 Leased (f)
547,478 Owned
237,257 Leased (g)
294,000 Owned (h)
383,570 Leased (i)
294,932 Owned
533,790 Owned
310,245
Owned
324,668 Owned
81,761 Leased (j)
34,800 Leased (k)
60,000 Leased (l)
75,000 Leased (m)
24,560 Leased (n)
49,770 Leased (o)
140,970 Leased (p)
65,000 Leased (q)
179,897 Leased (r)
54,910 Leased (s)
33,580
8,783,399
Leased (t)
(a) Occupied under the terms of a lease expiring October 31, 2024, with an unaffiliated party, subject to renewal for ten five-year
terms at our option.
(b) Occupied under the terms of a lease expiring February 16, 2015, with an unaffiliated party, subject to renewal for three five-year
terms at our option
(c) Occupied under the terms of two separate leases the first lease expiring September 30, 2011, with an unaffiliated party, subject to
renewal for two three-year terms at our option and the second lease expiring January 31, 2012, with an unaffiliated party, subject
to renewal for one five-year terms at our option.
(d) Occupied under the terms of a lease expiring January 31, 2011, with an unaffiliated party, subject to renewal for three six-year
terms at our option.
(e) Occupied under the terms of a lease expiring March 31, 2012, with an unaffiliated party, subject to renewal for four five-year
terms at our option.
(f) Occupied under the terms of a lease expiring December 31, 2012, with an unaffiliated party, subject to renewal for ten five-year
terms at our option.
(g) Occupied under the terms of two separate leases both expiring December 31, 2018, with an unaffiliated party, subject to renewal
for two five-year terms at our option.
18
(h) Primary facility owned, additional space leased and occupied under the terms of lease expiring July 31, 2014, with an unaffiliated
party, subject to renewal for one five-year terms at our option.
(i) Occupied under the terms of a lease expiring June 22, 2015, with an unaffiliated party, subject to renewal for three five-year
terms at our option.
(j) Occupied under the terms of a lease expiring June 30, 2018, with an unaffiliated party, subject to renewal for two five-year terms
at our option.
(k) Occupied under the terms of a lease expiring February 28, 2011, with an unaffiliated party, subject to renewal for one five-year
term at our option.
(l) Occupied under the terms of a lease expiring July 31, 2010, with an unaffiliated party, subject to renewal for one five-year term at
our option.
(m) Occupied under the terms of a lease expiring August 31, 2013, with an unaffiliated party, not subject to renewal.
(n) Occupied under the terms of a lease expiring April 30, 2017, with an unaffiliated party, subject to renewal for three five-year
terms at our option.
(o) Occupied under the terms of a lease expiring August 31, 2011, with an unaffiliated party, subject to renewal for two three-year
terms at our option.
(p) Occupied under the terms of a lease expiring May 31, 2012, with an unaffiliated party, subject to renewal for four five-year terms
at our option.
(q) Occupied under the terms of a lease expiring March 14, 2010, with an unaffiliated party, subject to renewal for one six-month
term at our option.
(r) Occupied under the terms of a lease expiring October 31, 2012, with an unaffiliated party, not subject to renewal.
(s) Occupied under the terms of a lease expiring September 30, 2010, with an unaffiliated party, not subject to renewal.
(t) Occupied under the terms of a lease expiring July 31, 2012, with an unaffiliated party, subject to renewal for two five-year terms
at our option.
Of the 3,421 stores that we operated at December 31, 2009, 1,064 stores were owned, 2,288 stores were leased from unaffiliated
parties and 69 stores were leased from one of three entities owned by O'Reilly family members. 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, at a minimum, 10 years, subject to one or more renewals at our option. We have entered into separate master lease agreements with
each of the affiliated entities for the occupancy of the stores covered thereby. Such master lease agreements with two of the three
O’Reilly family entities have been modified to extend the term of the lease agreement for specific stores. The master lease agreements
or modifications thereto expire on dates ranging from May 31, 2010, to December 31, 2029. We believe that the lease agreements
with the affiliated entities 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. The store servicing capacity of our 21 distribution centers is just over
3,800 stores, with a growth capacity of over 350 stores; our total growth capacity will increase to over 600 stores after the opening of
our additional distribution centers in 2010. We believe this growth capacity will be adequate for near-term store growth.
Item 3.
Legal Proceedings
O’Reilly Litigation
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s 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,
these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular
quarter or annual period. In addition, O'Reilly is involved in resolving the governmental investigations that were being conducted
against CSK prior to its acquisition by O'Reilly.
CSK Pre-Acquisition Matters – Governmental Investigations and Actions
As previously reported, the pre-acquisition SEC investigation of CSK, which commenced in 2006, was settled in May 2009 by
administrative order without fines, disgorgement or other financial remedies. However, the DOJ’s criminal investigation into these
same matters remains ongoing. In addition, the previously reported SEC complaint against four (4) former employees of CSK for
alleged conduct related to CSK’s historical accounting practices remains ongoing, though one of those former employees died in
January, 2010. The action filed by the SEC on July 22, 2009, against Maynard L. Jenkins, the former chief executive officer of CSK
seeking reimbursement from Mr. Jenkins of certain bonuses and stock sale profits pursuant to Section 304 of the Sarbanes-Oxley Act
of 2002, as previously reported, also continues. The previously reported DOJ criminal complaint against two (2) of the former
employees of CSK remains ongoing. However, given the recent death of one (1) of those former employees, we expect no further
action with respect to such former employee.
19
With respect to the ongoing DOJ investigation discussed above, attorneys from the DOJ have indicated that as a result of conduct
alleged against the former employees, as set forth in the pleadings in United States vs. Fraser, et. al., U.S.Dist.Ct., Dist. of Ariz.; Case
No: 2:09-cr-00372-SRB-2, the DOJ is considering whether to file criminal charges against CSK. O’Reilly is engaged in discussions
with the DOJ to attempt to resolve the matter. O’Reilly cannot predict the outcome of these discussions at this time. O’Reilly intends
to vigorously defend against any such charges if filed. The probability of criminal charges being filed against CSK or the magnitude of
the costs to resolve these issues cannot now be reasonably estimated. Accordingly, the accompanying financial statements do not
reflect an accrued liability for this contingency.
Several of CSK's former directors or officers and current or former employees have been or may be interviewed as part of or become
the subject of criminal, administrative and civil investigations and lawsuits. As described above, certain former employees of CSK are
the subject of civil and criminal litigation commenced by the government. Under Delaware law, the charter documents of the CSK
entities and certain indemnification agreements, CSK has certain obligations to indemnify these persons and O’Reilly is currently
incurring legal fees on the behalf of these persons in relation to pending matters. Some of these indemnification obligations and other
related costs may not be covered by CSK’s insurance policies.
As a result of the CSK acquisition, O’Reilly expects to continue to incur ongoing legal fees related to the ongoing DOJ investigation of
CSK and indemnity obligations for the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly
recorded an assumed liability for such fees in the Company’s allocation of purchase price of CSK, of which $20.7 million remains
accrued as of December 31, 2009. O’Reilly has paid approximately $4.0 million of such legal costs related to the government
investigations and indemnity obligations in 2009.
The foregoing governmental investigations and indemnification matters are subject to many uncertainties, and, given their complexity
and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period the
Company’s results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of such matters,
depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the
ultimate outcome of all of such regulatory proceedings that are pending, after consideration of applicable reserves and potentially
available insurance coverage benefits not contemplated in recorded reserves, should not have a material adverse effect on the
Company’s consolidated financial condition, results of operations and cash flows.
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, 2009.
20
PART II
Item 5.
Market For Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Company’s stock is traded on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “ORLY”. As of February 22,
2010, O’Reilly Automotive, Inc. had approximately 64,150 shareholders based on the number of holders of record and an estimate of
individual participants represented by security position listings. The Company’s common stock began trading on April 22, 1993. No
cash dividends have been declared since 1992, and we do not anticipate paying any cash dividends in the foreseeable future.
As a result of the death of Mr. Joe C. Greene, an independent Director of the Company’s Board of Directors, on May 8, 2009, the
Company received notice from Nasdaq that it was no longer in compliance with Nasdaq Listing Rule 5605 which requires that a
majority of the board of directors be comprised of independent directors. The company currently has eight directors, four of which
qualify as independent. In accordance with Nasdaq Listing Rule 5605(b)(1)(A), the Company has a “cure period” of until the next
annual shareholders’ meeting to regain compliance. To that end, on February 11, 2010, the Corporate Governance and Nominating
Committee of the Company’s Board of Directors nominated Thomas T. Hendrickson as an independent Class II Director. Mr.
Hendrickson will stand for election at the 2010 Annual Meeting of Shareholders.
The prices in the following table represent the high and low sales price for O’Reilly Automotive, Inc. common stock as reported by
The Nasdaq Global Select Market. During fiscal 2009, the Company made no purchases or repurchases of its common stock.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the Year
2009
2008
High
$ 35.63
38.85
42.22
40.26
42.22
Low
$ 27.00
35.08
36.14
33.68
27.00
High
$ 32.68
30.50
30.38
31.18
32.68
Low
$ 24.08
22.32
21.92
20.00
20.00
The following table sets forth shares authorized for issuance under the Company’s equity compensation plans at December 31, 2009:
Number of shares to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a)).
Equity compensation plans approved
by shareholders
Equity compensation plans not
approved by shareholders
Total
9,930
--
9,930
$26.57
--
$26.57
10,459
--
10,459
(a) Number of shares presented is in thousands.
(b) Includes weighted average exercise price of outstanding stock options.
The graph below shows the cumulative total stockholder return assuming the investment of $100, on December 31, 2004, and the
reinvestment of dividends thereafter, in the Company’s common stock versus the Nasdaq Retail Trade Stocks Total Return Index,
Nasdaq United States Stock Market Total Returns Index and the Standard and Poor’s S&P 500 Index (“S&P 500”). The Company
entered into the S&P 500 during 2009, therefore, this index has been added to the graph below.
21
Company/Index
O'Reilly Auto Parts
Nasdaq Retail Trade Stocks
Nasdaq US
Standard and Poor's S&P 500
$
2004
2005
2006
2007
2008
100 $
100
100
100
142 $
101
102
105
142 $
110
112
121
144 $
100
122
128
136 $
70
59
81
2009
169
97
84
102
For the Years Ended December 31,
22
Item 6.
Selected Financial Data
The table below compares the Company’s selected financial data over a ten-year period. In 2001, 2005 and 2008, the Company
acquired Mid-State Automotive Distributors, Midwest Auto Parts Distributors and CSK Auto Corporation, respectively. The 2001
Mid-State acquisition added 82 stores, the 2005 Midwest acquisition added 72 stores and the 2008 CSK acquisition added 1,342 stores
to the O’Reilly store count. Financial results for these acquired companies have been included in the Company’s consolidated
financial statements from the dates of the acquisitions forward.
Years ended December 31,
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
(In thousands, except per share data)
INCOME STATEMENT DATA:
Sales
Cost of goods sold, including
warehouse and distribution
expenses
Gross profit
Selling, general and
administrative expenses
Operating income
Other income (expense), net
Income before income taxes and
cumulative effect of accounting
change
Provision for income taxes
Income before cumulative effect of
accounting change
Cumulative effect of accounting
change,
net of tax (a)
Net income
BASIC EARNINGS PER
COMMON
SHARE:
Income before cumulative effect of
accounting change
Cumulative effect of accounting
change (a)
Net income per share
Weighted-average common shares
outstanding
EARNINGS PER COMMON
SHARE-
ASSUMING DILUTION:
Income before cumulative effect of
accounting change
Cumulative effect of accounting
change (a)
Net income per share
Weighted-average common shares
outstanding – adjusted
PRO FORMA INCOME
STATEMENT DATA: (b)
Sales
Cost of goods sold, including
warehouse and distribution
expenses
Gross profit
Selling, general and
administrative expenses
Operating income
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Net income per share
Net income per share – assuming
dilution
$
4,847,062
$
3,576,553
$
2,522,319
$
2,283,222
$
2,045,318
$
1,721,241
$
1,511,816
$
1,312,490
$
1,092,112 $
890,421
2,520,534
2,326,528
1,788,909
537,619
1,948,627
1,627,926
1,292,309
335,617
1,401,859
1,120,460
1,276,511
1,006,711
1,152,815
892,503
815,309
305,151
724,396
282,315
639,979
252,524
978,076
743,165
552,707
190,458
873,481
638,335
473,060
165,275
759,090
553,400
415,099
138,301
624,294
467,818
353,987
113,831
507,720
382,701
292,672
90,029
(40,721)
(33,085)
2,337
(50)
(1,455)
(2,721)
(5,233)
(7,319)
(7,104)
(6,870)
496,898
189,400
302,532
116,300
307,488
113,500
282,265
104,180
251,069
86,803
187,737
70,063
160,042
59,955
130,982
48,990
106,727
40,375
83,159
31,451
307,498
186,232
193,988
178,085
164,266
117,674
100,087
81,992
66,352
51,708
--
307,498
$
--
186,232
$
--
193,988
$
--
178,085
$
--
164,266
$
21,892
139,566
$
--
100,087
$
--
81,992
$
--
66,352 $
--
51,708
2.26
$
1.50
$
1.69
$
1.57
$
1.47
$
1.07
$
0.93
$
0.77
$
0.64 $
--
2.26
$
--
1.50
$
--
1.69
$
--
1.57
$
--
1.47
$
0.20
1.27
$
--
0.93
$
--
0.77
$
--
0.64 $
0.51
--
0.51
136,230
124,526
114,667
113,253
111,613
110,020
107,816
106,228
104,242
102,336
2.23
$
1.48
$
1.67
$
1.55
$
1.45
$
1.05
$
0.92
$
0.76
$
0.63 $
--
2.23
$
--
1.48
$
--
1.67
$
--
1.55
$
--
1.45
$
0.20
1.25
$
--
0.92
$
--
0.76
$
--
0.63 $
0.50
--
0.50
137,882
125,413
116,080
115,119
113,385
111,423
109,060
107,384
105,572
103,456
$
$
$
$
$
$
1,511,816
$
1,312,490
$
1,092,112 $
890,421
872,658
639,158
473,060
166,098
(5,233)
160,865
60,266
100,599
0.93
$
$
754,844
557,646
415,099
142,547
(7,319)
135,228
50,595
84,633
0.80
618,217
473,895
353,987
119,908
(7,104)
112,804
42,672
$
$
70,132 $
0.67 $
501,567
388,854
292,672
96,182
(6,870)
89,312
33,776
55,536
0.54
0.92
$
0.79
$
0.66 $
0.54
$
$
$
(a) The cumulative change in accounting method, effective January 1, 2004, changed the method of applying LIFO accounting policy for certain inventory
costs. Under the new method, included in the value of inventory are certain procurement, warehousing and distribution center costs. The previous method
was to recognize those costs as incurred, reported as a component of costs of goods sold.
(b) The pro forma income statement reflects the retroactive application of the cumulative effect of the accounting change to historical periods.
23
Years ended December 31,
(In thousands, except per share data)
SELECTED OPERATING DATA:
Number of stores at year-end (a)
Total store square footage at year-end
(in 000’s)(a)(b)
Sales per weighted-average store
( in 000’s)(a)(b)
Sales per weighted-average square
foot (b)
Percentage increase in same store
sales (c)(d)(e)
BALANCE SHEET DATA:
Working capital
Total assets
Current portion of long-term debt and
short-term debt
Long-term debt, less current portion
Shareholders’ equity
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
3,421
3,285
1,830
1,640
24,200
23,205
12,439
11,004
$
$
$
$
1,424
202
4.6%
$
$
1,379
201
1.5%
$
$
1,430
212
3.7%
$
$
1,439
215
3.3%
1,470
9,801
1,478
220
7.5%
$
$
1,249
8,318
1,443
217
6.8%
$
$
1,109
7,348
1,413
215
7.8%
$
$
981
6,408
1,372
211
3.7%
$
$
875
5,882
1,426
219
8.8%
$
$
672
4,491
1,412
218
5.0%
$
995,344
4,781,471
$
821,932
4,193,317
$
573,328
2,279,737
$
566,892
1,977,496
$
424,974
1,718,896
$
479,662
1,432,357
$
441,617
1,157,033
$
483,623
1,009,419
$
429,527
856,859
$
296,272
715,995
106,708
684,040
2,685,865
8,131
724,564
2,282,218
25,320
75,149
1,592,477
309
110,170
1,364,096
75,313
25,461
1,145,769
592
100,322
947,817
925
120,977
784,285
682
190,470
650,524
16,843
165,618
556,291
49,121
90,463
463,731
(a) Store count for 2002 does not include 27 stores acquired from Dick Smith Enterprises and Davie Automotive, Inc. in December 2002.
(b) Total square footage includes normal selling, office, stockroom and receiving space. Sales per weighted-average store and square foot are weighted to consider the
approximate dates of store openings or expansions.
(c) Same-store sales are calculated based on the change in sales of stores open at least one year. Percentage increase in same-store sales is calculated based on store
sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to team members.
(d) Same-store sales for 2008 include sales for stores acquired in the CSK acquisition. Comparable stores sales for O’Reilly stores open at least one year increased
2.6% for the year ended December 31, 2008. Comparable stores sales for CSK stores open at least one year decreased 1.7% for the portion of CSK’s sales in 2008 since
the July 11, 2008, acquisition.
(e) Same-store sales for 2009 include sales for stores acquired in the CSK acquisition. Comparable stores sales for stores operating on O’Reilly systems open at least
one year increased 5.4% for the year ended December 31, 2009. Comparable stores sales for stores operating on the legacy CSK system open at least one year increased
3.0% for the year ended December 31, 2009.
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results
of operations, liquidity and certain other factors that may affect our future results, including:
•
•
•
•
•
•
•
•
•
•
an overview of the key drivers of the automotive aftermarket;
key events and recent developments within our company;
our results of operations for the years ended 2009, 2008 and 2007;
our liquidity and capital resources;
any off balance sheet arrangements we utilize;
any contractual obligations to which we are committed;
our critical accounting estimates;
the inflation and seasonality of our business;
our quarterly results for the fourth quarter of 2009; and
new accounting standards that affect our company.
The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements,
related notes and other financial information included elsewhere in this annual report.
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 including CSK Auto Corporation (“CSK”), 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.
OVERVIEW
O’Reilly Automotive, Inc. is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the
United States. We are one of the largest automotive aftermarket specialty retailers, 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 auto body paint and related materials, automotive tools and
professional installer service equipment. As of December 31, 2009, we operated 3,421 stores in 38 states.
Operating within the retail industry, we, along with other retail companies, are influenced by a number of general macroeconomic
factors including, but not limited to, fuel costs, unemployment rates, consumer preferences and spending habits and competition. The
difficult conditions that affected the overall macroeconomic environment in recent years continue to impact our company and the retail
sector in general. We cannot predict whether, when, or the manner in which, these economic conditions will change.
We believe that the number of U.S. miles driven, number of U.S. registered vehicles, average vehicle age, new light vehicle sales,
unperformed maintenance and product quality differentiation are key drivers of current and future demand of products sold within the
automotive aftermarket.
Number of U.S. miles driven and number of U.S. registered vehicles:
Total miles driven in the U.S. heavily influences the demand for the repair and maintenance products we sell. The long-term trend in
the number of vehicles on the road and the total miles driven in the U.S. has exhibited steady growth over the past decade. Between
1999 and 2007, the total number of miles driven in the United States increased at an annual rate of approximately 1.6%. According to
the Department of Transportation, estimated total number of miles driven declined by 3.6% in 2008 and increased slightly in 2009.
The relatively flat number of miles driven during 2009 as compared to 2008 is due to lower fuel costs compared to those in 2008, but
the overall decrease in miles driven in recent years is a result of challenging macroeconomic conditions. The total number of
registered vehicles on the road increased from 201 million light vehicles in 1999 to 242 million in 2008. We believe that the decrease
in miles driven in 2008 and the relatively flat number of miles driven in 2009 is a short-term trend, and that long-term miles driven will
increase in the future because of the increasing number of vehicles on the road.
25
Average vehicle age and new light vehicle sales:
Changes in the average age of vehicles on the road impacts demand for automotive aftermarket products. As the average age of a
vehicle increases, the vehicle goes through more routine maintenance cycles requiring replacement parts such as brakes, belts, hoses,
batteries and filters. The sales of these products are a key component of our business. As reported by the Automotive Aftermarket
Industry Association (“AAIA”) the average age of the United States vehicle population has increased over the past decade from 9.1
years for passenger cars and 8.5 years for light trucks in 1999 to 10.6 and 9.3 years, respectively, in 2008. Based on estimates
provided by the AAIA, new car sales decreased 4.7% between 1999 and 2007 for the light vehicle market; however, sales for the same
market decreased 18.5% in 2008. Due to difficult economic conditions and better engineered vehicles, we expect that consumers will
continue to choose to keep their vehicles longer and drive them at higher mileages and that this increasing trend in average vehicle age
will continue.
Unperformed maintenance:
According to estimates compiled by the AAIA, the annual amount of unperformed or underperformed maintenance in the United States
totaled $50 billion for 2008. This metric represents the degree to which routine vehicle maintenance recommended by the
manufacturer is not being performed. Consumer decisions to avoid or defer maintenance affect demand for our products and the total
amount of unperformed maintenance represents potential future demand. We believe that challenging macroeconomic conditions in
2008 contributed to the amount of unperformed maintenance; however, with the reduced number of new car sales, we believe the
amount of underperformed maintenance is decreasing as people place a higher focus on maintaining their current vehicle with the
expectation of keeping the vehicle longer than they would have in a better macroeconomic environment.
Product quality differentiation:
We provide our customers with an assortment of products that are differentiated by quality and price for most of the product lines we
offer. For many of our product offerings, this quality differentiation reflects good, better, and best alternatives. Our sales and total
gross margin dollars are highest for the “best” quality category of products. Consumers’ willingness to select products at a higher
point on the value spectrum is a driver of sales and profitability in our industry. We believe that the average consumer’s tendency has
been to “trade-down” to lower quality products during the recent challenging economic conditions. We have ongoing initiatives
targeted to marketing higher quality products to our customers and expect our customers to be more willing to return to purchasing up
on the value spectrum in the future.
KEY EVENTS AND RECENT DEVELOPMENTS
Several key events have had or may have a significant effect on our operations and are summarized below:
• On July 11, 2008, we completed the acquisition of CSK Auto Corporation (“CSK”), one of the largest specialty retailers of
auto parts and accessories in the Western United States and one of the largest such retailers in the United States, based on
store count. Pursuant to the merger agreement, each share of CSK common stock outstanding immediately prior to the
merger was canceled and converted into the right to receive 0.4285 of a share of O’Reilly common stock and $1.00 in cash.
The results of CSK’s operations have been included in our consolidated financial statements since the acquisition date.
• On July 11, 2008, to fund the CSK acquisition, we entered into a Credit Agreement for a $1.2 billion asset-based revolving
credit facility (“ABL Credit Facility”) arranged by Bank of America, N.A. (“BA”), which we used to refinance debt, fund the
cash portion of the acquisition, pay for other transaction-related expenses and provide liquidity for our combined Company
going forward.
• On July 11, 2008, we agreed to become a guarantor, on a subordinated basis, of the $100 million principal amount of 6 ¾%
Exchangeable Senior Notes due 2025 (the “Notes”) originally issued by CSK. The Notes are exchangeable, under certain
circumstances, into cash and shares of our common stock. The Notes bear interest at 6.75% per year until December 15,
2010, and 6.5% until maturity on December 15, 2025.
• On each of July 24, 2008, October 14, 2008, November 24, 2008, and January 21, 2010, we entered into interest rate swap
transactions with Branch Banking and Trust Company (“BBT”), BA, SunTrust Bank (“SunTrust”) and/or Barclays Capital
(“Barclays”). We entered into these interest rate swap transactions to mitigate the risk associated with our floating interest
rate based on LIBOR on an aggregate of $500 million of our debt that is outstanding under the Credit Agreement. The
interest rate swap transaction we entered into with SunTrust on November 24, 2008, was for $50 million and matured on
November 28, 2009.
• Since July 11, 2008, and as a result of the CSK acquisition, we have incurred and will continue to incur legal fees related to
ongoing governmental investigations and indemnity obligations for the litigation that has commenced against CSK and former
CSK employees.
26
RESULTS OF OPERATIONS
The following table sets forth, certain income statement data as a percentage of sales for the years indicated:
Sales
Cost of goods sold, including warehouse and
distribution expenses
Gross profit
Selling, general and administrative
expenses
Operating income
Debt prepayment costs
Interim facility commitment fee
Interest expense
Interest income
Other income, net
Income before income taxes
Provision for income taxes
Net income
Years ended December 31,
2008
100%
2009
100%
2007
100%
52.0
48.0
36.9
11.1
--
--
(0.9)
--
0.1
10.3
4.0
6.3%
54.5
45.5
36.1
9.4
(0.2)
(0.1)
(0.7)
0.1
--
8.5
3.3
5.2%
55.6
44.4
32.3
12.1
--
--
(0.1)
0.1
0.1
12.2
4.5
7.7%
2009 Compared to 2008
Sales increased $1.27 billion, or 36%, from $3.58 billion in 2008 to $4.85 billion in 2009. The following table presents the
components of the increase in sales for the year ended December 31, 2009 (in millions):
Comparable store sales
Stores opened throughout 2008, excluding stores open at
least one year that are included in comparable stores
sales
Sales of stores opened throughout 2009
Non-store sales including machinery, sales to independent
part stores and team members
Sales in 2008 for stores that have merged or closed
Acquired CSK store sales, excluding sales that are included
in comparable store sales (sales after 7/11/2009, the one
year anniversary of the acquisition)
Total increase in sales
$
$
Increase in Sales for the Year
Ended December 31, 2009,
compared to the same period
in 2008
188.5
71.7
72.8
4.4
(2.1)
935.2
1,270.5
Comparable store sales are calculated based on the change in sales of stores open at least one year and exclude sales of specialty
machinery, sales to independent parts stores, sales to team members and sales during the one to two week period certain CSK branded
stores were closed for conversion. Comparable store sales for stores operating on the O’Reilly systems increased 5.4% for the year
ended December 31, 2009. The O’Reilly systems comparable store sales results consisted of a 6.6% increase for the core O’Reilly and
post conversion Schuck’s stores, a 2.1% increase from the 123 converted Checker stores and a 11.9% decrease in comparable stores
sales from the 141 converted Murray’s stores. Comparable store sales for stores operating on the legacy CSK system increased 3.0%
for the year ended December 31, 2009. Consolidated comparable store sales increased 4.6% for the year ended December 31, 2009.
We believe that the increased sales achieved by our stores are the result of superior inventory availability, a broader selection of
products offered in most stores, a targeted promotional and advertising effort through a variety of media and localized promotional
events, continued improvement in the merchandising and store layouts of the stores, compensation programs for all store team
members that provide incentives for performance and our continued focus on serving professional installers. We opened 149 new
O’Reilly branded stores and one new Schuck’s store in 2009. At December 31, 2009, we operated 3,421 stores compared to 3,285
stores at December 31, 2008. Due to the acquisition and integration of CSK, we anticipate new store unit growth to be limited to 150
new stores in 2010, excluding the previously disclosed consolidation and closure of underperforming stores related to the acquisition
of CSK; however, we anticipate that continued store unit growth consistent with our historical openings will continue in the future.
27
Gross profit increased $699 million, or 43%, from $1.63 billion (45.5% of sales) in 2008 to $2.33 billion (48.0% of sales) in 2009.
The increase in gross profit dollars was primarily a result of the inclusion of a full year of sales from acquired CSK stores in 2009
versus roughly one half of a year of sales from acquired CSK stores in 2008, the increase in sales from new stores and an increase in
comparable store sales from existing stores. The increase in gross profit as a percentage of sales is the result of lower product
acquisition cost, changes in our product mix, distribution system improvements and a favorable pricing environment on certain
commodity based products. Product acquisition costs improved primarily due to continued negotiating leverage with our vendors as a
result of our significant growth related to the acquisition of CSK. We anticipate continued improvements in product acquisition costs
at a moderate rate in 2010 from a full year of the benefit from improved leverage with our vendors as we anniversary product line
changeovers in the acquired CSK stores throughout the year. We improved our product mix by continuing to implement strategies to
differentiate our merchandise selections at each store based on customer demand and vehicle demographics in the store’s market and
through ongoing Team Member training initiatives focused on selling products with greater gross margin contribution. Additionally,
gross margin percentage improved as a result of an increased percentage of our total sales mix to DIY customers. Prior to the
acquisition of CSK, our mix of sales to DIY customers was approximately equal to sales to professional installer customers. At the
time of the acquisition in July of 2008, acquired CSK stores generated more than 90% of their total sales from DIY customers. The
addition of the acquired CSK stores’ predominantly retail sales has resulted in a mix shift of our consolidated sales to approximately
65% DIY and 35% professional installer. In 2009, core O’Reilly stores derived approximately 53% of our sales from our DIY
customers and approximately 47% from our professional installer customers, while acquired CSK stores derived approximately 84% of
sales from our DIY customers and approximately 16% from our professional installer customers. Sales to DIY customers generally
have higher gross margin percentages than sales to professional installers as volume discounts are granted on these wholesale
transactions to professional installers. In addition, we have added our private label product lines to the acquired CSK stores inventory
mix. Private label product sales generally offer better gross margin percentages than sales of corresponding branded products.
Improvements in our distribution system were the result of capital projects designed to create operating expense efficiencies. The
reductions in commodity prices, without corresponding decreases in retail pricing, that we experienced in 2009 returned to more
normal levels by the end of 2009 and we would not anticipate this favorable pricing environment to continue in 2010. Additionally, in
conjunction with the opening of our distribution centers in our western markets, we would anticipate a temporary decrease in
distribution efficiencies as the new distribution center team members become proficient with the O’Reilly distribution systems and as
duplicative capacity is removed from the system.
SG&A increased $497 million, or 38%, from $1.29 billion (36.1% of sales) in 2008 to $1.79 billion (36.9% of sales) in 2009. The
dollar increase in SG&A expenses resulted from a full year inclusion of CSK and new stores. The increase in SG&A expenses as a
percentage of sales was attributable to the addition of the acquired CSK stores, which have a higher expense structure than the core
O’Reilly store base, and the additional store payroll required to complete the ongoing product-line changeovers for acquired CSK
stores. These increases were offset by a reduction in duplicative administrative corporate overhead as we continue to transition the
CSK headquarters operations in Phoenix, Arizona to our facilities in Springfield, Missouri and increased leverage of fixed costs as a
result of the increase in comparable store sales.
Interest expense increased $19 million, from $26 million (or 0.7% of sales) in 2008 to $45 million (or 0.9% of sales) in 2009. The
increase in interest expense is the result of a full-year of borrowings under our asset-based revolving credit facility in 2009 that was
used to fund the acquisition of CSK in 2008, the opening of new stores, ongoing capital expenditures related to the integration of the
operations of CSK, the expansion of our distribution infrastructure and the operation of our existing stores slightly offset by more
favorable interest rates in 2009 on the non-swapped portion of the outstanding borrowings under our asset-based revolving credit
facility which are subject to variable interest rate changes. Other income (expense) for the year ended December 31, 2008, included
one-time charges of $4.2 million for interim financing facility commitment fees related to the CSK acquisition and $7.2 million of debt
prepayment costs resulting from the payoff of our existing senior notes and synthetic lease facility.
Our provision for income taxes increased from $116 million in 2008 (38.4% effective tax rate) to $189 million in 2009 (38.1%
effective tax rate). The decrease in effective tax rate is the result of the one-time charge to adjust tax liabilities in 2008 relating to the
CSK acquisition, offset by the generally higher effective tax rates in most states where CSK stores are located. The increase in the
dollar amount for income taxes was due to the increase in income before income taxes.
As a result of the impacts discussed above, net income increased $121 million from $186 million in 2008 (5.2% of sales) to $307
million in 2009 (6.3% of sales).
Our diluted earnings per common share for the year ended December 31, 2009, increased 51% to $2.23 on 137.9 million shares
compared to $1.48 for the year ended December 31, 2008, on 125.4 million shares. Our year ended December 31, 2008, included one-
time and non-cash charges related to the July 11, 2008, acquisition of CSK. These charges included one-time costs for prepayment
and extinguishment of our existing debt, commitment fees for an unused interim financing facility, a one-time adjustment to the tax
liabilities resulting from the acquisition of CSK, a one-time charge to conform the CSK team member vacation policy with the
O’Reilly policy and a non-cash charge to amortize the value assigned to CSK’s trade names and trademarks, which will be amortized
over a period coinciding with the anticipated conversion of CSK store locations. Our year ended December 31, 2009, results included
28
a non-cash charge to amortize the value assigned to CSK’s trade names and trademarks. Adjusted diluted earnings per share,
excluding the impact of the acquisition related charges, increased 38% to $2.26 for the year ended December 31, 2009, from $1.64 for
the same period one year ago. The table below outlines the impact of the acquisition related charges for the year ended December 31,
2009 and 2008 (in thousands, except per share data):
Net income and diluted EPS excluding acquisition related charges $
Acquisition related charges:
Debt prepayment costs, net of tax
Commitment fee for interim financing facility, net of tax
Adjustments to tax liabilities
Charge to conform vacation policies, net of tax
Amortization of trade names and trademarks, net of tax
Net income and diluted EPS
$
Net Income
2009
311,392 $
2008
205,474
Diluted Earnings Per Share
2008
2009
$
2.26 $
1.64
--
--
--
--
3,894
307,498 $
4,402
2,552
3,142
5,879
3,267
186,232
$
--
--
--
--
0.03
2.23 $
0.04
0.02
0.02
0.05
0.03
1.48
The acquisition-related adjustment to EPS in the above paragraph and table present certain financial information not derived in
accordance with GAAP. We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation
from, or as a substitute for, GAAP financial information. We believe that the presentation of adjusted net income and earnings per
share excluding acquisition-related charges provides meaningful supplemental information to both management and investors that is
indicative of the Company’s ongoing core operations. Management excludes these items in judging our performance and believes this
non-GAAP information is useful to gain an understanding of the recurring factors and trends affecting our business. Material
limitations of this non-GAAP measure are that such measures do not reflect actual GAAP amounts and amortization of acquisition-
related trade names and trademarks reflect charges to net income and earnings per share that will recur over the estimated useful lives
of the assets ranging from one to three years. We compensate for such limitations by presenting, in the table above, the accompanying
reconciliation to the most directly comparable GAAP measures.
2008 Compared to 2007
Sales increased $1.05 billion, or 42%, from $2.52 billion in 2007 to $3.58 billion in 2008, due to the acquisition of 1,342 CSK stores
and the addition of 150 net new O’Reilly stores opened during 2008. The following table presents the components of the increase in
sales for the year ended December 31, 2008 (in millions):
Comparable store sales – O’Reilly stores
Stores opened throughout 2007, excluding
stores open at least one year that are
included in comparable stores sales
Sales of stores opened through 2008
Non-store sales including machinery, sales to
independent part stores and team members
Acquired CSK stores
Total increase in sales
$
$
Increase in Sales for the Year
Ended December 31, 2008,
compared to the same period in
2007
65.0
92.3
61.8
(1.1)
836.2
1,054.2
We believe that the increased sales achieved by our existing stores is the result of superior inventory availability, a broader selection of
products in most stores, targeted promotional and advertising efforts through a variety of media and localized promotional events,
continued improvement in the merchandising and layout of stores, compensation programs for all store team members that provide
incentives for performance and our continued focus on serving professional installers. Consolidated comparable store sales for stores
open at least one year increased 1.5% for the year ended December 31, 2008. This increase in 2008 was less than the prior year’s
increase of 3.7% and historical trends primarily due to challenging external macroeconomic factors in 2008 as well as a decline in
comparable store sales in the stores added in the CSK acquisition. The external macroeconomic factors which we believe negatively
impacted our sales were constraints on our customers’ discretionary income resulting from inflation, declining home and investment
asset values, higher gas prices in early 2008, increased unemployment and the impact of a contraction in the US economy.
Comparable store sales for O’Reilly stores, including CSK stores after conversion to the O’Reilly brand, but excluding the acquired,
yet-to-be-converted CSK stores, increased 2.6% for the year ended December 31, 2008. Comparable store sales for acquired CSK
29
stores open at least one year decreased 1.7% for the portion of those stores’ sales since the July 11, 2008 acquisition by O’Reilly as
compared to the same period in 2007 when CSK’s sales were not included in our consolidated financial statements. We anticipate that
continued store unit and sales growth consistent with our historical rates will continue in the future. We expect future sales growth as
the CSK stores are converted to the O’Reilly dual market strategy. Comparable store sales are calculated based on the change in sales
of stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to team members.
Gross profit increased $508 million, or 45%, from $1.12 billion (44.4% of sales) in 2007 to $1.63 billion (45.5% of sales) in 2008.
The increase in gross profit dollars was primarily the result of the increase in sales resulting from the acquisition of CSK, the increase
from new stores and increased sales levels at existing stores. The increase in gross profit as a percentage of sales is the result of
improved product mix, lower product acquisition cost and distribution system improvements. We improved our product mix by
continuing to implement strategies to differentiate our merchandise selections at each store based on customer demand and vehicle
demographics in the store’s market and through ongoing Team Member training initiatives focused on selling products with greater
gross margin contribution. Additionally, gross margin percentage improved as a result of the inclusion of sales from stores acquired in
the acquisition of CSK. Gross margin percentages on the sales at these stores are higher than existing O’Reilly stores primarily
because a greater proportion of these sales are made to DIY customers (which typically have higher gross margin percentages) and
because of market conditions, primarily overall price levels, which are specific to the markets in which the acquired stores are located.
Product acquisition costs improved due to increased production by our suppliers in lower-cost foreign countries and improved
negotiating leverage with our vendors as a result of our significant growth. Improvements in our distribution system were the result of
capital projects designed to create operating expense efficiencies.
SG&A increased $477 million, or 59%, from $815 million (32.3% of sales) in 2007 to $1.29 billion (36.1% of sales) in 2008. The
dollar increase in SG&A expenses resulted primarily from the acquisition of CSK and from additional team members and resources to
support our increased store count. The increase in SG&A expenses as a percentage of sales was primarily due to the addition of the
CSK store base which has a higher expense structure than the core O’Reilly store base, a one-time charge of $9.6 million to align
CSK’s vacation policy with the Company’s policy, $5.3 million of non-cash amortization of CSK trade names and trademarks and
partial de-leverage of fixed SG&A expenses on low comparable store sales increases.
Interest expense increased $22 million, from $4 million (or 0.1% of sales) in 2007 to $26 million (or 0.7% of sales) in 2008. The
increase in interest expense is the result of borrowings under our new asset-based revolving credit facility that were used to fund the
CSK acquisition as well as amortization of a portion of the debt issuance costs. Other one-time charges were incurred in 2008 of $4.2
million for interim financing facility commitment fees related to the CSK acquisition and $7.2 million of debt prepayment costs
resulting from the payoff of our existing senior notes and synthetic lease facility.
Our provision for income taxes increased from $114 million in 2007 (36.9% effective tax rate) to $116 million in 2008 (38.4%
effective tax rate). The increase in effective tax rate is the result of our acquisition of CSK and the generally higher effective tax rates
in most states where the acquired CSK stores are located. The increase is also attributable to a one-time charge to adjust tax liabilities
in the amount $3.1 million relating to the acquisition.
As a result of the impacts discussed above, net income decreased $8 million from $194 million in 2007 (7.7% of sales) to $186 million
in 2008 (5.2% of sales). Diluted earnings per share decreased $0.19 per share in 2008 to $1.48 per share on 125.4 million diluted
shares outstanding from $1.67 per share in 2007 on 116.1 million diluted shares outstanding. The increase in dilutive shares
outstanding is principally the result of shares exchanged in the acquisition of CSK.
30
LIQUIDITY AND CAPITAL RESOURCES
The following table highlights our liquidity and related ratios for the years ended December 31, 2009 and 2008, as well as our cash
flows from operating, investing and financing activities for the fiscal years ended December 31, 2009, 2008 and 2007 ($ in thousands):
Year Ended
Liquidity and Related Ratios
Current assets
Quick assets (1)
Current liabilities
Working capital (2)
Total debt
Total equity
Current ratio (3)
Quick ratio (4)
Debt to equity (5)
December 31, 2009
$
December 31, 2008
1,875
197
1,054
822
733
2,282
1.78:1
0.29:1
0.32
2,227 $
198
1,231
995
791
2,686
1.81:1
0.25:1
0.29
Percentage Change
18.8%
0.5%
16.8%
21.0%
7.9%
17.7%
1.7%
(13.8%)
(9.4%)
Liquidity
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
December 31, 2009
Year Ended
December 31, 2008
December 31, 2007
$
$
285,200 $
(410,661)
121,095
(4,366) $
298,542 $
(367,597)
52,801
(16,254) $
299,418
(300,318)
18,552
17,652
(1) Quick assets includes cash, cash equivalents and receivables.
(2) Working capital is calculated as current assets less current liabilities.
(3) Current ratio is calculated as current assets divided by current liabilities.
(4) Quick ratio is calculated as current assets, less inventories, divided by current liabilities.
(5) Debt to equity is calculated as total debt divided by total shareholders’ equity.
Liquidity and Related Ratios
Current assets increased 19% from 2008 to 2009, primarily driven by increased investment in inventory as part of the process to
properly align the acquired CSK stores with O’Reilly branded stores’ inventory levels and selection. Current liabilities increased 17%
from 2008 to 2009, primarily attributable to the presentation of our acquired 6 ¾% Exchangeable Notes as short-term debt, due to the
Noteholders’ right to require our repurchase of the Notes in 2010, and an increase in accounts payable stemming from our increased
inventory investment. Total working capital increased 21% from 2008 to 2009, principally as a result of our investment in inventory,
offset by the related increase in accounts payable as discussed above. Total debt increased 8% and total equity increased 18% from
2008 to 2009. The increase in debt is primarily attributable to increased borrowing levels under our ABL Facility to support the
integration and conversion of CSK. The increase in total equity is principally due to a 23% increase in retained earnings resulting from
net income in 2009 and an increase in additional paid-in capital of 10% primarily from the issuance of common stock upon the
exercise of stock options.
Operating Activities
Net cash provided by operating activities was $285 million in 2009, $299 million in 2008 and $299 million in 2007. The decrease in
net cash provided by operating activities in 2009 compared to 2008 was principally due to an increase in net inventory investment in
2009, which was slightly offset by an increase in operating income adjusted for non-cash depreciation and amortization expenses. Net
cash provided by operating activities in 2008 was flat with the cash provided by operating activities in 2007 principally because an
increase in net inventory investment in 2008 was offset by an increase in operating income adjusted for non-cash depreciation and
amortization expenses, and a one-time non-cash charge of $9.6 million to align, where possible, CSK’s vacation policy with the
Company’s policy. Net inventory investment reflects our investment in inventory net of the amount of accounts payable to vendors.
The increases in net inventory investment in 2008 and 2009 were the result of investments made to improve the inventory availability
in the stores acquired in the acquisition of CSK. The average per-store inventory for core O’Reilly stores increased to $498,000 as of
December 31, 2009, from $489,000 as of December 31, 2008. Nonconverted CSK store’s average per-store inventory increased to
$595,000 as of December 31, 2009, from $461,000 as of December 31, 2008.
Investing Activities
Net cash used in investing activities was $411 million in 2009, $368 million in 2008 and $300 million in 2007. Increases in cash used
in investing activities in both 2009 and 2008 was primarily due to an increase in capital expenditures related to conversions of acquired
CSK stores to the O’Reilly Brand and additional distribution centers. Capital expenditures were $415 million in 2009, $342 million in
31
2008, and $283 million in 2007. The increase in cash used in investing activities in 2009 compared to 2008, was due to the purchase
of two distribution center facilities and land for an additional distribution center in our western markets to enhance the distribution
infrastructure, the conversion of 354 acquired CSK stores to O’Reilly systems. The increase in cash used in investing activities in
2008 compared to 2007 was principally due to an increase in capital expenditures and payments made in association with the
acquisition and in the integration of CSK, partially offset by decreased capital expenditures for new store construction. We opened
150, 150, and 190 net stores in 2009, 2008 and 2007, respectively.
In 2010, we plan to open 150 new stores, convert 888 acquired CSK stores to O’Reilly systems, open three new distribution centers in
the west, relocate and convert an existing acquired CSK distribution center to O’Reilly systems and convert an existing acquired CSK
distribution center to O’Reilly systems. The costs associated with the opening of a new store (including the cost of land acquisition,
improvements, fixtures, net inventory investment and computer equipment) are estimated to average approximately $1.3 million to
$1.5 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site. Capital costs
associated with the conversion of CSK stores include investments in store computer systems, signage, fixtures, interior and exterior
renovation, and delivery vehicles. The average estimated capital conversion cost per store is expected to be approximately $135,000.
Total capital expenditures in 2010 are expected to range from $400 million to $450 million.
Financing Activities
Net cash provided by financing activities was $121 million in 2009, $53 million in 2008 and $19 million in 2007. The increase in cash
provided by financing activities in 2009 was the result of a reduction in payments on long term debt in 2009 compared to 2008
primarily relating to the payment of outstanding principal balances on existing debt, debt issuance costs and prepayment costs in
association with the financing of the acquisition of CSK in 2008 and an increase in the net proceeds from the issuance of common
stock related to our stock option plans along with the increase in the associated tax benefit from the exercises partially offset by
reduced borrowings under our asset-based credit facility. The increase in cash provided by financing activities in 2008 was the result
of the proceeds from borrowings under our asset-based credit facility, which was partially offset by the payment of outstanding
principal balances on existing debt and debt assumed in the CSK acquisition, debt issuance costs and prepayment costs in association
with the financing of the acquisition of CSK.
Sources of Liquidity
Our current business strategy requires capital to open new stores, convert acquired CSK stores, expand distribution infrastructure and
operate existing stores. The primary sources of our liquidity are funds generated from operations and borrowed under our ABL Credit
Facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate
funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the debt
covenants of our Credit Agreement and therefore negatively impact the funds available under our ABL Credit Facility. In 2010, we
plan to open 150 new stores and open three new distribution centers in our Western markets. We also plan to relocate an existing
acquired CSK distribution center in Northern California to a larger facility and plan to convert our acquired Phoenix distribution center
to O’Reilly systems. In addition, we plan to convert 888 acquired CSK stores to O’Reilly systems in 2010. We believe that cash
expected to be provided by operating activities and availability under our ABL Credit Facility will be sufficient to fund both our short-
term and long-term capital and liquidity needs for the foreseeable future. However, if our liquidity is insufficient, we may be forced to
limit our planned expansion in 2010. There can be no assurance that we will continue to generate cash flows at or above recent levels.
Credit Facility
On July 11, 2008, in connection with the acquisition of CSK, we entered into a Credit Agreement for a five-year $1.2 billion asset-
based revolving credit facility (“ABL Credit Facility”) arranged by Bank of America, N.A., which we used to refinance debt, fund the
cash portion of the acquisition, pay for other transaction-related expenses and provide liquidity for the combined Company going
forward. This facility replaced a previous unsecured, five-year syndicated revolving credit facility in the amount of $100 million.
The ABL Credit Facility is comprised of a $1.075 billion tranche A revolving credit facility and a $125.0 million first-in-last-out
revolving credit facility (FILO tranche). On the date of the transaction, the amount of the borrowing base available, as described in the
ABL Credit Agreement, under the ABL Credit Facility was $1.05 billion of which we borrowed $588 million. We used borrowings
under the ABL Credit Facility to repay certain existing debt of CSK, repay our $75 million 2006-A Senior Notes and purchase all of
the properties that had been leased under our synthetic lease facility. As of December 31, 2009 and 2008, the amount of the borrowing
base available under the credit facility was $1.2 billion and $1.1 billion, respectively, of which we had outstanding borrowings of $679
million and $614 million, respectively. The available borrowings under the credit facility are also reduced by stand-by letters of credit
issued by us primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. As of
December 31, 2009 and 2008, we had stand-by letters of credit outstanding in the amount of $72 million and $56 million, respectively,
and the aggregate availability for additional borrowings under the credit facility was $445 million and $454 million, respectively. As
part of the Credit Agreement, we have pledged substantially all of our assets as collateral and we are subject to an ongoing
consolidated leverage ratio covenant, with which we complied on December 31, 2009 and 2008. In the event that we should default on
32
any covenant contained within the Credit Agreement, certain actions may be taken; these actions include, but are not limited to, the
summarized items below:
•
•
•
•
termination of credit extensions;
any outstanding principal amount plus accrued interest could become immediately payable;
cash collateralization of all letter of credit obligations; and/or
litigation from lenders.
Borrowings under the tranche A revolver bear interest, at our option, at a rate equal to either a base rate plus 1.25% per annum or
LIBOR plus 2.25% per annum, with each rate being subject to adjustment based upon certain excess availability thresholds.
Borrowings under the FILO tranche bear interest, at our option, at a rate equal to either a base rate plus 2.5% per annum or LIBOR
plus 3.5% per annum, with each rate being subject to adjustment based upon certain excess availability thresholds. The base rate is
equal to the higher of the prime lending rate established by Bank of America from time to time and the federal funds effective rate as in
effect from time to time plus 1.25%. Fees related to unused capacity under the ABL Credit Facility are assessed at a rate of 0.375% of
the remaining available borrowings under the facility, subject to adjustment based upon remaining unused capacity. In addition, we
paid customary commitment fees, letter of credit fees, underwriting fees and other administrative fees in respect of the credit facility.
On July 24, 2008, October 14, 2008, November 24, 2008, and January 21, 2010, we entered into interest rate swap transactions with
BBT, BA, SunTrust and/or Barclays. We entered into these interest rate swap transactions to mitigate the risk associated with our
floating interest rate based on LIBOR on an aggregate of $500 million of our debt that is outstanding under our ABL Credit
Agreement, dated as of July 11, 2008. We are required to make certain monthly fixed rate payments calculated on the notional
amounts, while the applicable counter party is obligated to make certain monthly floating rate payments to us referencing the same
notional amount. The interest rate swap transactions effectively fix the annual interest rate payable on these notional amounts of our
debt, which exists under the Credit Agreement plus an applicable margin under the terms of the same credit facility. The interest rate
swap transactions have maturity dates ranging from August 1, 2010, through October 17, 2011. The interest rate swap transaction we
entered into with SunTrust on November 24, 2008, was for $50 million and matured on November 28, 2009, increasing our exposure
to changes in interest rates on a total notional amount of $400 million as of December 31, 2009. On January 21, 2010 we entered into
an interest rate swap transaction with Barclays in the amount of $50 million, reducing our exposure to changes in interest rates on a
total notional amount of $450 million as of that date.
Senior Exchangeable Notes
On July 11, 2008, we agreed to become a guarantor, on a subordinated basis, of the $100 million principal amount of 6 ¾%
Exchangeable Senior Notes due 2025 (the “Notes”) originally issued by CSK. The Notes are exchangeable, under certain
circumstances, into cash and shares of our common stock. The Notes bear interest at 6.75% per year until December 15, 2010, and
6.50% until maturity on December 15, 2025. Prior to their stated maturity, the Notes are exchangeable by the holders only under the
following circumstances (as more fully described in the indenture under which the Notes were issued):
•
•
•
during any fiscal quarter (and only during that fiscal quarter) commencing after July 11, 2008, if the last reported sale price of
our common stock is greater than or equal to 130% of the applicable exchange price of $36.17 for at least 20 trading days in
the period of 30 consecutive trading days;
if we have called the Notes for redemption; or
upon the occurrence of specified corporate transactions, such as a change in control.
Upon exchange of the Notes, we will deliver cash equal to the lesser of the aggregate principal amount of Notes to be exchanged and
our total exchange obligation and, in the event our total exchange obligation exceeds the aggregate principal amount of Notes to be
exchanged, shares of our common stock in respect of that excess. The total exchange obligation reflects the exchange rate whereby
each $1,000 in principal amount of the Notes is exchangeable into an equivalent value of 25.9697 shares of our common stock and
$60.6061 in cash. The incremental net shares for the Notes exchange feature were included in the diluted earnings per share
calculation for the year ended December 31, 2009, however the incremental net shares for the Notes exchange feature were not
included in the diluted earnings per share calculation for the year ended December 31, 2008, as the impact would have been
antidilutive.
The Noteholders may require us to repurchase some or all of the Notes for cash at a repurchase price equal to 100% of the principal
amount of the Notes being repurchased, plus any accrued and unpaid interest on December 15, 2010; December 15, 2015; or
December 15, 2020, or on any date following a fundamental change as described in the indenture. We may redeem some or all of the
Notes for cash at a redemption price of 100% of the principal amount plus any accrued and unpaid interest on or after December 15,
2010, upon at least 35-calendar days notice. Our intention is to redeem the Notes in December of 2010, and we plan to fund the
redemption with available borrowings under our ABL Credit Facility.
33
OFF BALANCE SHEET ARRANGEMENTS
Off balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which
we have an obligation to the entity that is not recorded in our consolidated financial statements. We have utilized various off balance
sheet financial instruments from time to time as sources of cash when such instruments provided a cost-effective alternative to our
existing sources of cash. We do not believe, however, that we are dependent on the availability of these instruments to fund our
working capital requirements or our growth plans.
On December 29, 2000, we entered into a sale-leaseback transaction with an unrelated party. Under the terms of the transaction, we
sold 90 properties, including land, buildings and improvements, which generated $52.3 million of cash. 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 is approximately $5.5 million annually.
In August 2001, we entered into a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain affiliates of the
Company). The transaction involved the sale and leaseback of nine O’Reilly Auto Parts stores and generated approximately $5.6
million of cash. The transaction did not result in a material gain or loss. The lease, which has been accounted for as an operating
lease, calls for an initial term of 15 years with three five-year renewal options.
On September 28, 2007, we completed a second amended and restated master agreement to our $49 million Synthetic Operating Lease
Facility with a group of financial institutions. The terms of such lease facility provided for an initial lease period of seven years, a
residual value guarantee of approximately $39.7 million at December 31, 2007 and purchase options on the properties. On July 11,
2008, in connection with the acquisition of CSK, we purchased all the properties included in our Synthetic Operating Lease Facility for
$49.3 million, thus terminating the facility. The purchase was funded through borrowings under the ABL Credit Facility.
On July 11, 2008, and as a result of the acquisition, we entered into a master lease agreement with ARI Fleet LT (“ARI”), which was
originally entered into on March 19, 2001, by CSK. The lease agreement with ARI is for the lease of all of CSK’s delivery and
management vehicles, which is accounted for as a capital lease. Under the master agreement, a lease contract is created on each
vehicle, with terms typically ranging from 50 to 60 months. Interest expense on the capital lease totaled $0.3 million for each of the
years ended December 31, 2009 and 2008. At December 31, 2009 and 2008, the book value of the ARI master lease agreement was
$3.9 million and $7.4 million, respectively.
We issue stand-by letters of credit provided by a $200 million sub limit under the ABL Credit Facility that reduce our available
borrowings. These letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other
insurance policies. Substantially all of the outstanding letters of credit have a one-year term from the date of issuance. Letters of
credit totaling $72.3 million and $55.6 million were outstanding at December 31, 2009 and 2008, respectively.
34
CONTRACTUAL OBLIGATIONS
Deferred income taxes, self-insurance accruals, interest payments on our variable rate long-term debt and commitments with various
vendors for the purchase of inventory are included in “Other liabilities” on our consolidated balance sheets and are not reflected in the
table below due to the absence of scheduled maturities, the nature of the account or the commitment’s cancellation terms. Due to the
absence of scheduled maturities, the timing of certain of these payments cannot be determined, except for amounts estimated to be
payable in 2010, which are included in “Current liabilities” on our consolidated balance sheets.
Our contractual obligations at December 31, 2009, included commitments for future payments under noncancelable lease
arrangements, short and long-term debt arrangements, interest payments related to long-term debt, fixed payments related to interest
rate swaps and purchase obligations for construction contract commitments, which are summarized in the table below and are fully
disclosed in Note 4 “Long-Term Debt” and Note 6 “Commitments” to the consolidated financial statements. We expect to fund these
commitments primarily with operating cash flows generated in the normal course of business, through borrowings under our ABL
Credit Facility or through future borrowings.
Total
Before 1
Year
Payments Due By Period
1 to 2 Years
3 to 4 Years
(In thousands)
Years 5 and
Over
Contractual Obligations:
Long-term debt
Payments under interest rate swap
agreements
Interest rate payments under 6¾%
Exchangeable Senior Notes
Future minimum lease payments under
capital leases
Future minimum lease payments under
operating leases
Other obligations
Purchase obligations
$
778,800
$
100,000
$
--
$
678,800
$
16,646
103,954
12,327
1,501,522
4,200
102,556
11,900
6,739
6,455
214,087
600
102,556
4,746
13,000
4,343
377,053
1,200
--
--
13,000
1,202
278,242
1,200
--
--
--
71,215
327
632,140
1,200
--
Total contractual cash obligations
$
2,520,005
$
442,337
$
400,342
$
972,444
$
704,882
We may redeem some or all of the Notes for cash at a redemption price of 100% of the principal amount plus any accrued and unpaid
interest on or after December 15, 2010, upon at least 35-calendar days notice. Our intention is to redeem the Notes in December of
2010, and we plan to fund the redemption with available borrowings under our ABL Credit Facility.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in accordance with accounting policies generally accepted in the United States (“GAAP”)
requires the application of certain estimates and judgments by management. Management bases its assumptions, estimates, and
adjustments on historical experience, current trends and other factors believed to be relevant at the time the consolidated financial
statements are prepared. Management believes that the following policies are critical due to the inherent uncertainty of these matters
and the complex and subjective judgments required to establish these estimates. Management continues to review these critical
accounting policies and estimates to ensure that the consolidated financial statements are presented fairly in accordance with GAAP.
However, actual results could differ from our assumptions and estimates and such differences could be material.
• 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 material vendor
concessions are recognized as a reduction to the cost of inventory. Amounts receivable from vendors also include amounts due to
us relating to vendor purchases and product returns. Management regularly reviews amounts receivable from vendors and
assesses the need for a reserve for uncollectible amounts based on our evaluation of our vendors’ financial position and
corresponding ability to meet their financial obligations. Based on our historical results and current assessment, we have not
recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not believe there is a reasonable
likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability of our vendors to pay us
the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or gains that could be
material.
35
• Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities
from 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 for any individual workers’ compensation, general liability, vehicle liability or property
loss claim. 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. The assumptions made by
management as they relate to each of these factors represent our judgment as to the most probable cumulative impact of each
factor to our future obligations. Our calculation of self-insurance 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 and the application
of alternative assumptions could result in a different estimate of these liabilities. Actual claim activity or development may vary
from our assumptions and estimates, which may result in material losses or gains. As we obtain additional information that affects
the assumptions and estimates we used to recognize liabilities for claims incurred in prior accounting periods, we adjust our self-
insurance liabilities to reflect the revised estimates based on this additional information. These liabilities are recorded at our
estimate of their net present value. These liabilities do not have scheduled maturities, but we can estimate the timing of future
payments based upon historical patterns. We could apply alternative assumptions regarding the timing of payments or the
applicable discount rate that could result in materially different estimates of the net present value of the liabilities. If self-
insurance reserves were changed 10% from our estimated reserves at December 31, 2009, the financial impact would have been
approximately $9.1 million or 1.8% of pretax income for the year ended December 31, 2009.
• Accounts Receivable – We provide credit to our commercial customers in the ordinary course of business. We estimate the
allowance for doubtful accounts on these receivables based on historical loss ratios and other relevant factors. Actual results have
consistently been within management’s expectations, and we do not believe there is a reasonable likelihood that there will be a
material change in the future that will require a significant change in the 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. If the
allowance for doubtful accounts were changed 10% from our estimated allowance at December 31, 2009, the financial impact
would have been approximately $0.7 million or 0.1% of pretax income for the year ended December 31, 2009.
• 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. The amount of such liabilities is based on various factors, such as differing interpretations of tax
regulations by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. Changes in our
tax liability 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. The estimates of our potential tax liabilities contain uncertainties because management must use judgment to estimate
the exposures associated with our various tax positions and actual results could differ from our estimates. Alternatively, we could
have applied assumptions regarding the eventual outcome of the resolution of open tax positions that could differ from our current
estimates but that would still be reasonable given the nature of a particular position. Our judgment regarding the most likely
outcome of uncertain tax positions has historically resulted in an estimate of our tax liability that is greater than actual results.
While our estimates are subject to the uncertainty noted in the preceding discussion, our initial estimates of our potential tax
liabilities have historically not been materially different from actual results except in instances where we have reversed liabilities
that were recorded for periods that were subsequently closed with the applicable taxing authority.
•
Inventory Obsolescence and Shrink – Inventory, which consists of automotive hard parts, maintenance items, accessories and
tools, is stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of
obsolescence of our inventory is minimal. The products that we sell generally have applications in our markets for a relatively
long period of time in conjunction with the corresponding vehicle population. We have developed sophisticated systems for
monitoring the life cycle of a given product and, accordingly, have historically been very successful in adjusting the volume of our
inventory in conjunction with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory through
a charge to cost of sales in the isolated instances where we believe that the market value of a product line is lower than our
recorded cost. This reserve is based on our assumptions about the marketability of our existing inventory and is subject to
uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be sold in future
periods. Ultimately, our projections could differ from actual results and could result in a material impact to our stated inventory
balances. We have historically not had to materially adjust our obsolescence reserves due to the factors discussed above and do
not anticipate that we will experience material changes in our estimates in the future.
We also record a reserve to reduce the carrying value of our perpetual inventory to account for quantities in our perpetual records
above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our
extensive and frequent cycle counting programs and periodic, full physical inventories at our stores and distribution centers. To
36
the extent that our estimates do not accurately reflect the actual unrecorded inventory shrinkage, we could potentially experience a
material impact to our inventory balances. We have historically been able to provide a timely and accurate measurement of shrink
and have not experienced material adjustments to our estimates. If unrecorded shrink were changed 10% from the estimate that
we recorded based on our historical experience at December 31, 2009, the financial impact would have been approximately $1.2
million or 0.3% of pretax income for the year ended December 31, 2009.
• Valuation of Long-Lived Assets and Goodwill - We evaluate the carrying value of long-lived assets whenever events or changes
in circumstances indicate that a potential impairment has occurred. As part of the evaluation, we review performance at the store
level to identify any stores with current period operating losses that should be considered for impairment. A potential impairment
has occurred if the projected future undiscounted cash flows realized from the best possible use of the asset are less than the
carrying value of the asset. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly
resulting from the use of that asset in operations. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets.
Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows
and determining the ultimate useful lives and fair values of the assets. Actual results could differ from these estimates, which could
materially impact our impairment assessment.
We review goodwill and other intangible assets for impairment annually on December 31, or when events or changes in
circumstances indicate the carrying value of these assets might exceed their current fair values. We have not historically recorded
an impairment to our goodwill or intangible assets. The process of evaluating goodwill for impairment involves the determination
of the fair value of our Company using the market approach. Inherent in such fair value determinations are certain judgments and
estimates, including estimates which incorporate assumptions marketplace participants would use in making their estimates of fair
value. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, we will
adjust the carrying value of these assets in the period in which the impairment occurs, however, we do not believe there has been
any change of events or circumstances that would indicate that a reevaluation of goodwill or other intangible assets is required as
of December 31, 2009, nor do we believe goodwill or any other intangible assets are at risk of failing impairment testing. If the
price of O’Reilly stock, which was a primary input used to determine the Company’s market capitalization during step one of
goodwill impairment testing, changed by 10% from the value used during testing, the results and our conclusions would not have
changed and no further steps would have been required.
• Closed Property Reserves – We maintain reserves for closed stores and other properties that are no longer utilized in current
operations. We accrue for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present
value of the remaining noncancelable lease payments, contractual occupancy costs and lease termination fees after the closing
date, net of estimated sublease income. The closed property lease liabilities are expected to be paid over the remaining lease
terms. We estimate sublease income and future cash flows based on our experience and knowledge of the market in which the
closed property is located, our previous efforts to dispose of similar assets and existing economic conditions. Adjustments to
closed property reserves are made to reflect changes in estimated sublease income or actual exit costs from original estimates.
Adjustments are made for changes in estimates in the period in which the changes become known. If closed property reserves
were changed 10% from our estimated reserves at December 31, 2009, the financial impact would have been approximately $2.3
million or 0.5% of pretax income for the year ended December 31, 2009.
• Legal Reserves – We maintain reserves for expenses associated with litigation for which O’Reilly is currently involved. We are
currently involved in litigation incidental to the ordinary conduct of our business as well as resolving the governmental
investigations that are being conducted against CSK and litigation commenced against its former employees for alleged conduct
relating to periods prior to the acquisition date. As a result of the acquisition, we expect to continue to incur ongoing legal fees
related to such investigations, litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed
liability in our allocation of the purchase price of CSK, which was finalized on June 30, 2009. Management, with the assistance of
outside legal counsel, must make estimates of potential legal obligations and possible liabilities arising from such litigation and
records reserves for these expenditures. If legal reserves were changed 10% from our estimated reserves at December 31, 2009,
the financial impact would have been approximately $2.4 million or 0.5% of pretax income for the year ended December 31,
2009.
INFLATION AND SEASONALITY
For the last three fiscal years, we have been successful, 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. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have typically
been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe our
operations have been materially, adversely affected by inflation.
37
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While
we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the
second and third quarters (April through September) than in the first and fourth quarters of the year.
QUARTERLY RESULTS
The following table sets forth certain quarterly unaudited operating data for fiscal 2009 and 2008. The unaudited quarterly information
includes all adjustments which management considers necessary for a fair presentation of the information shown.
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 therein.
Fiscal 2009
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Sales
Gross profit
Operating income
Net income
Basic net income per common share
Net income per common share – assuming dilution
$ 1,163,749
542,670
113,336
62,835
0.47
0.46
$ 1,251,377
603,769
149,675
85,515
0.63
0.62
$ 1,258,239
610,555
149,196
87,225
0.64
0.63
$ 1,173,697
569,534
125,412
71,923
0.52
0.52
Fiscal 2008
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Sales
Gross profit
Operating income
Net income
Basic net income per common share
Net income per common share – assuming dilution
$
646,220
288,494
74,156
46,331
0.40
0.40
RECENT ACCOUNTING PRONOUNCEMENTS
(In thousands, except per share data)
$
704,430
317,097
88,388
55,788
0.48
0.48
$ 1,111,272
507,206
92,471
41,399
0.31
0.31
$ 1,114,631
515,129
80,602
42,714
0.32
0.32
In December 2007, the Financial Accounting Standards Board (“FASB”) issued the Consolidation Topic (“ASC 810”) of the FASB
ASC, which is effective for fiscal years beginning after December 15, 2008. ASC 810 states that accounting and reporting for minority
interests will be recharacterized as noncontrolling interests and classified as a component of equity. The calculation of earnings per
share will continue to be based on income amounts attributable to the parent. ASC 810 applies to all entities that prepare consolidated
financial statements, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. The provisions of ASC 810 were effective for us beginning January 1, 2009, and are applied
prospectively. The adoption of ASC 810 did not have a material impact on our consolidated financial position, results of operations or
cash flows.
In March 2008, the FASB issued the Derivatives and Hedging Topic (“ASC 815”) of the FASB ASC, which requires entities that
utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well
as any details of credit-risk-related contingent features contained within derivatives. ASC 815 also requires entities to disclose
additional information about the amounts and location of derivatives located within the financial statements, how the provisions of
ASC 815 have been applied, and the impact that hedges have on an entity’s financial position, financial performance and cash flows.
ASC 815 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We
have adopted the provisions of ASC 815 beginning with our condensed consolidated financial statements for the quarter ended March
31, 2009.
In May 2008, the FASB issued the Debt with Conversions and Other Options Topic (“ASC 470”) of the FASB ASC, which clarifies
the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion and
specifies that issuers of such instruments should separately account for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent
periods. ASC 470 requires bifurcation of a component of the debt, classification of that component in equity if certain criteria are met
38
and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our Consolidated Statement of
Operations. ASC 470 is effective for fiscal years and interim periods beginning after December 15, 2008, with early application
prohibited. We adopted the provisions of ASC 470 beginning with our condensed consolidated financial statements for the quarter
ended March 31, 2009; however, the retrospective adoption of ASC 470 did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 4 “Long-Term Debt” to the consolidated financial statements.
In April 2009, the FASB issued the Financial Instruments Topic (“ASC 825”) of the FASB ASC. This Topic requires quarterly
disclosure of the methods and significant assumptions used to estimate the fair values of all financial instruments, and is effective for
interim and annual periods ended after June 15, 2009. We adopted the provisions of ASC 825 beginning with our condensed
consolidated financial statements for the quarter ended June 30, 2009. The application of this guidance affects disclosures only and
therefore did not have an impact on our financial condition, results of operations or cash flows.
In May 2009, the FASB issued the Subsequent Events Topic (“ASC 855”) of the FASB ASC. ASC 855 incorporates into authoritative
accounting literature certain guidance that already existed within generally accepted auditing standards. ASC 855 addresses events
which occur after the balance sheet date but before the issuance of financial statements. Under ASC 855, as under current practice, an
entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and
must disclose, but not record, the effects of subsequent events which provide evidence about conditions that did not exist at the balance
sheet date. In addition, ASC 855 requires disclosure of the date through which an entity has evaluated subsequent events and the basis
for that date. ASC 855 is effective for interim and annual periods ended after June 15, 2009. We adopted the provisions of ASC 855
beginning with our condensed consolidated financial statements for the quarter ended June 30, 2009.
In June 2009, the FASB issued the Generally Accepted Accounting Standards Topic (“ASC 105”) of the FASB ASC. ASC 105
defines the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. This
standard reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent
structure; also included, is relevant Securities and Exchange Commission guidance organized using the same topical structure in
separate sections. ASC 105 is effective for reporting periods ended after September 15, 2009. We adopted the provisions of ASC 105
beginning with our condensed consolidated financial statements for the quarter ended September 30, 2009, and our financial
statements and related disclosures reflect the newly adopted codification.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) number 2009-05 (“ASU 2009-05”), an update to the Fair
Value Measurements and Disclosures Topic (“ASC 820”). This update provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using (a) a
valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities
and/or (b) an income approach valuation technique or a market approach valuation technique, consistent with the principles of ASC
820. This update is effective for the first reporting period (including interim periods) beginning after issuance. We adopted this
update beginning with our condensed consolidated financial statements for the quarter ended September 30, 2009; the adoption of this
update did not have a material impact on our consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to interest rate risk to the extent we borrow against our credit facilities with variable interest rates. Primarily as a result
of borrowings in 2008 to fund the acquisition of CSK, we have interest rate exposure with respect to the $679 million outstanding
balance on our variable interest rate debt at December 31, 2009; however, from time to time, we have entered into interest rate swaps
to reduce this exposure. On July 24, 2008, October 14, 2008, and November 24, 2008, we reduced our exposure to changes in interest
rates by entering into interest rate swap contracts (“the Swaps”) with a total notional amount of $450 million. The interest rate swap
transaction we entered into with SunTrust on November 24, 2008, was for $50 million and matured on November 28, 2009, increasing
our exposure to changes in interest rates by $50 million, to a total notional amount of $400 million. On January 21, 2010, we entered
into an interest rate swap contract with Barclays on an additional $50 million of the Company’s outstanding floating rate debt. The
Swaps represent contracts to exchange a floating rate for fixed interest payments periodically over the life of the Swap agreement
without exchange of the underlying notional amount. The notional amount of the swap is used to measure interest to be paid or
received and does not represent the amount of exposure to credit loss. The Swaps have been designated as cash flow hedges. If
interest rates increased or decreased by 100 basis points, annualized interest expense and cash payments for interest would increase or
decrease by approximately $2.8 million ($1.7 million after tax), based on our exposure to interest rate changes on variable rate debt
that is not covered by the Swaps. This analysis does not consider the effects of the change in the level of overall economic activity that
could exist in an environment of adversely changing interest rates. In the event of an adverse change in interest rates and to the extent
that we have amounts outstanding under our asset-based credit facility, management would likely take further actions that would seek
to mitigate our exposure to interest rate risk.
39
Item 8.
Financial Statements and Supplementary Data
Management’s Report on Internal Control over Financial Reporting
Index
Report of Independent Registered Public Accounting Firm: Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm: Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
41
42
43
44
45
46
47
48
40
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”), under the supervision and with the participation of
the Company’s principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States.
Internal control over financial reporting includes all policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may
become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer,
management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated Framework. Based on this assessment, management believes that as of December 31,
2009, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company’s consolidated financial statements
and has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, as stated in their
report which is included herein.
/s/ Greg Henslee
Greg Henslee
Chief Executive Officer &
Co-President
February 26, 2010
/s/ Thomas McFall
Thomas McFall
Executive Vice President of Finance &
Chief Financial Officer
February 26, 2010
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of O’Reilly Automotive, Inc. and Subsidiaries
We have audited O’Reilly Automotive, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). O’Reilly Automotive, Inc. and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, O’Reilly Automotive, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2009, of O’Reilly Automotive, Inc. and
Subsidiaries and our report dated February 26, 2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 26, 2010
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of 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,
2009 and 2008, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, 2009 and 2008, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, 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 have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), O’Reilly
Automotive, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 26, 2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 26, 2010
43
Consolidated Balance Sheets
(In thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $6,795 in 2009 and $4,521 in 2008
Amounts receivable from vendors
Inventory
Deferred income taxes
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
Deferred income taxes
Other assets, net
Total assets
Liabilities and shareholders’ equity:
Current liabilities:
Accounts payable
Self insurance reserve
Accrued payroll
Accrued benefits and withholdings
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:
Preferred stock, $0.01 par value:
Authorized shares – 5,000,000
Issued and outstanding shares – none
Common stock, $0.01 par value:
Authorized shares – 245,000,000
Issued and outstanding shares – 137,468,063
in 2009 and 134,828,650 in 2008
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2009
2008
$
26,935
$
31,301
107,887
63,110
1,913,218
85,934
29,635
2,226,719
2,353,240
626,861
1,726,379
12,481
744,313
--
71,579
$ 4,781,471
$
818,153
67,580
42,790
44,295
8,068
143,781
106,708
1,231,375
684,040
18,321
161,870
105,985
59,826
1,570,144
64,028
44,149
1,875,433
1,939,532
489,639
1,449,893
21,548
720,508
28,767
97,168
4,193,317
736,986
65,170
60,616
38,583
9,951
134,064
8,131
1,053,501
724,564
--
133,034
$
$
--
--
1,375
1,042,329
1,650,123
(7,962)
2,685,865
$ 4,781,471
1,348
949,758
1,342,625
(11,513)
2,282,218
4,193,317
$
See accompanying Notes to Consolidated Financial Statements.
44
Consolidated Statements of Income
(In thousands, except per share data)
Sales
Cost of goods sold, including warehouse
and distribution expenses
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expense), net:
Debt prepayment costs
Interim facility commitment fee
Interest expense
Interest income
Other, net
Total other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic income per common share:
Net income per common share
Weighted-average common shares outstanding
Income per common share-assuming dilution:
Net income per common share-assuming dilution
Adjusted weighted-average common shares outstanding
2009
Years ended December 31,
2008
2007
$
4,847,062
$
3,576,553
$
2,522,319
2,520,534
2,326,528
1,788,909
537,619
1,948,627
1,627,926
1,292,309
335,617
1,401,859
1,120,460
815,309
305,151
--
--
(45,176)
1,543
2,912
(40,721)
496,898
189,400
307,498
2.26
136,230
2.23
137,882
$
$
$
(7,157)
(4,150)
(26,138)
3,185
1,175
(33,085)
302,532
116,300
186,232
1.50
124,526
1.48
125,413
$
$
$
--
--
(3,723)
4,077
1,983
(2,337)
307,488
113,500
193,988
1.69
114,667
1.67
116,080
$
$
$
See accompanying Notes to Consolidated Financial Statements.
45
Consolidated Statements of Shareholders' Equity
(In thousands)
Common Stock
Shares
Par Value
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Comprehensive
Income
Balance at December 31,
2006
113,929
$
1,139
$
400,552
$
962,405
$
Net income
--
--
--
193,988
--
--
$
1,364,096
193,988
$
193,988
Other comprehensive loss
Comprehensive income
Issuance of common
stock under
employee
benefit plans
Issuance of common
stock under stock
option plans
Tax benefit of stock
options exercised
Share based
compensation
Balance at December 31,
2007
Net income
Other comprehensive loss
Comprehensive income
Issuance of common
stock under
employee
benefit plans
Issuance of common
stock under stock
option plans
Issued in CSK
acquisition
Tax benefit of stock
options exercised
Share based compensation
Balance at December 31,
2008
Net income
Other comprehensive
income
Comprehensive income
Issuance of common
stock under
employee
benefit plans
Issuance of common
stock under stock
option plans
Tax benefit of stock
options exercised
Share based compensation
Fair value of equity
component of 6 ¾%
Senior Exchangeable
Notes
Balance at December 31,
2009
--
--
--
--
(6,800)
(6,800)
(6,800)
187,188
$
367
965
--
--
4
11,543
10
--
--
17,114
6,835
5,687
--
--
--
--
--
--
--
--
11,547
17,124
6,835
5,687
115,261
--
$
1,153
--
$
441,731
--
$
1,156,393
186,232
$
(6,800)
--
$
1,592,477
186,232
$
186,232
--
--
--
--
(4,713)
(4,713)
(4,713)
181,519
$
546
876
5
9
13,710
18,277
18,146
181
465,645
--
--
--
--
1,573
8,822
--
--
--
--
--
--
--
--
--
--
13,715
18,286
465,826
1,573
8,822
134,829
--
$
1,348
--
$
949,758
--
$
1,342,625
307,498
$
(11,513)
$
--
2,282,218
307,498
$
$
307,498
--
--
--
--
3,551
3,551
3,551
311,049
$
$
393
2,246
--
--
--
4
23
--
--
12,969
54,049
9,043
14,410
--
2,100
--
--
--
--
--
--
--
--
--
12,973
54,072
9,043
14,410
--
2,100
137,468
$
1,375
$
1,042,329
$
1,650,123
$
(7,962)
$
2,685,865
See accompanying Notes to Consolidated Financial Statements.
46
Consolidated Statements of Cash Flows
2009
Years ended December 31,
2008
(In thousands)
2007
$
307,498
$
186,232
$
193,988
Operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization on property and equipment
Amortization of intangibles
Amortization of premium on 6 ¾% exchangeable notes
Amortization of debt issuance costs
Deferred income taxes
Share based compensation programs
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Accounts payable
Other
Net cash provided by operating activities
Investing activities
Cash component of acquisition price of CSK Automotive, Inc., net of cash
acquired
Purchases of property and equipment
Proceeds from sale of property and equipment
Payments received on notes receivable
Purchase of short-term investments
Other
Net cash used in investing activities
Financing activities
Proceeds from borrowings on asset-based revolving debt and other long
term debt
Payments on asset-based revolving debt
Payment of debt issuance costs
Principal payments on debt and capital leases
Debt prepayment costs
Issuance cost of equity exchanged in CSK acquisition
Tax benefit of stock options exercised
Net proceeds from issuance of common stock
Other
Net cash provided by financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Income taxes paid
Interest paid, net of capitalized interest
Property and equipment acquired through issuance of capital lease
obligations
Issuance of common stock to acquire CSK
Fair value of converted CSK stock options and restricted stock
$
$
142,912
5,267
(750)
8,508
50,381
21,413
8,739
(9,714)
(339,742)
79,824
10,864
285,200
--
(414,779)
4,288
5,819
--
(5,989)
(410,661)
664,550
(599,950)
--
(13,648)
--
--
10,215
59,508
420
121,095
(4,366)
31,301
26,935
126,882
36,881
8,337
--
--
107,345
5,653
(352)
4,084
11,031
13,554
8,226
(7,437)
(142,333)
50,410
62,129
298,542
(33,767)
(341,679)
1,246
5,342
--
1,261
(367,597)
925,256
(311,056)
(43,239)
(534,944)
(7,157)
(1,218)
2,184
22,995
(20)
52,801
(16,254)
47,555
31,301
74,227
17,824
4,847
459,308
7,736
78,943
--
--
--
(6,341)
12,777
5,007
(8,555)
(68,823)
62,279
30,143
299,418
--
(282,655)
2,327
5,202
(21,724)
(3,468)
(300,318)
16,450
--
--
(26,460)
--
--
6,835
21,727
--
18,552
17,652
29,903
47,555
93,040
3,727
--
--
--
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
47
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 do-it-yourself (“DIY”) customer and the professional installer in 38 states.
Reclassification
Certain prior period amounts may have been reclassified to conform to current period presentation. These reclassifications had no
effect on reported totals for assets, liabilities, shareholders’ equity, cash flows or net income.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-
company balances and transactions have been eliminated in consolidation. On July 11, 2008, the Company completed the acquisition
of CSK Auto Corporation (“CSK”), one of the largest specialty retailers of auto parts and accessories in the Western United States and
one of the largest such retailers in the United States, based on store count. The results of CSK’s operations have been included in the
Company’s consolidated financial statements since the acquisition date.
Revenue Recognition
Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional installers, also
referred to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at the customer’s
place of business. Wholesale sales to other retailers, also referred to as “jobber sales,” are recorded upon shipment of the merchandise
from a regional distribution center with same-day delivery to the jobber customer's location. All sales are recorded net of estimated
allowances, discounts and taxes.
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.
Cash Equivalents
Cash equivalents include investments with maturities of 90 days or less at the day of purchase.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers
to make required payments. The Company considers the following factors when determining if collection is reasonably assured:
customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer
payment terms.
Inventory
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market.
Inventory also includes related procurement, warehousing and distribution center costs. Cost has been determined using the last-in,
first-out (“LIFO”) method, which is a better matching of costs with revenues. The replacement cost of inventory was $1,921,961,000
and $1,630,549,000 as of December 31, 2009 and 2008, respectively.
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative
advertising, devaluation programs, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that
are incremental to the Company’s 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 material vendor concessions
are recognized as a reduction to the cost of inventory. Amounts receivable from vendors also includes amounts due to the Company
for changeover merchandise and product returns. The Company regularly reviews vendor receivables for collectability and assesses
48
the need for a reserve for uncollectible amounts based on an evaluation of the Company’s vendors’ financial positions and
corresponding abilities to meet financial obligations. Management does not believe there is a reasonable likelihood that the Company
will be unable to collect the amounts receivable from vendors and the Company did not record a reserve for uncollectible amounts in
the consolidated financial statements at December 31, 2009 and 2008.
Debt Issuance Costs
Deferred debt issuance costs totaled $30,172,000 and $39,155,000, net of amortization, as of December 31, 2009 and 2008,
respectively, of which $8,553,000 and $8,648,000 were included in “Other current assets” as of December 31, 2009 and 2008,
respectively. The remainder was included in “Other assets” as of December 31, 2009 and 2008. Deferred debt issuance costs are
being amortized using the straight-line method over the term of the corresponding long-term debt issue and are included in interest
expense in our Consolidated Statements of Income.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease
term includes renewal options determined by management at lease inception for which failure to renew options would result in a
substantial economic penalty to the Company. 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.
Property and equipment consists of the following (in thousands):
Land
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Vehicles
Construction in progress
Less: accumulated depreciation and amortization
Net property and equipment
Original
Useful Lives
December 31,
December 31,
2009
2008
15 – 39 years
3 – 25 years
3 – 20 years
5 – 10 years
$
$
331,456 $
766,446
314,751
645,839
157,535
137,213
2,353,240
626,861
1,726,379 $
281,814
638,976
268,574
556,706
127,709
65,753
1,939,532
489,639
1,449,893
The gross value of capital lease assets included in the “Furniture, fixtures and equipment” amounts of the above table was $17,393,000
and $13,203,000 at December 31, 2009 and 2008, respectively. The gross value of capital lease assets included in the “Vehicles”
amount of the above table was $9,722,000 and $10,371,000 at December 31, 2009 and 2008, respectively. As of December 31, 2009
and 2008, the Company recorded accumulated amortization on all capital lease assets in the amount of $10,536,000 and $3,962,000,
respectively, all of which is included in accumulated depreciation and amortization in the above table.
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, 2009, 2008 and 2007, were $6,715,000,
$2,318,000 and $2,554,000, respectively.
Goodwill and Other Intangible Assets
The accompanying consolidated balance sheets at December 31, 2009 and 2008, include goodwill and other intangible assets recorded
as the result of previous acquisitions. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually
on December 31, rather than systematically amortizing goodwill against earnings. The Company reviews goodwill and indefinite-lived
intangible assets for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might
exceed their current fair values. The goodwill impairment test compares the fair value of a reporting unit to its carrying amount,
including goodwill. The Company operates as one reporting unit, and its fair value exceeds its carrying value, including goodwill.
Therefore, the Company has determined that no impairment of goodwill existed at December 31, 2009 and 2008.
49
Operating Leases
The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the estimated economic life of those
assets. Generally, the lease term for stores is the base lease term and the lease term for distribution centers includes the base lease term
plus certain renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in a
significant economic penalty. The Company recognizes rent expense on a straight-line basis over these lease terms.
Notes Receivable
The Company had notes receivable from vendors and other third parties amounting to $16,591,000 and $28,221,000 at December 31,
2009 and 2008, respectively. The notes receivable, which bear interest at rates ranging from 0% to 10%, are due in varying amounts
through August 2017.
Self-Insurance Reserves
The Company uses 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, the Company obtains third-party insurance coverage to
limit its exposure. The Company estimates its self-insurance liabilities by considering a number of factors, including historical claims
experience and trend-lines, projected medical and legal inflation, and growth patterns and exposure forecasts. These liabilities are
recorded at their net present value.
Warranty Costs
The Company offers warranties on the merchandise it sells with warranty periods ranging from 30 days to lifetime, limited warranties.
The risk of loss arising from warranty claims is typically the obligation of the Company’s vendors, but for a small portion of
merchandise sold, the Company bears the risk of loss associated with the cost of warranty claims. Estimated warranty costs, which are
recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company’s
historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the
Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual
claims. To the extent vendors provide upfront allowances in lieu of accepting the obligation for warranty claims and the allowance is
in excess of the related warranty expense, the excess is recorded as a reduction to cost of sales.
Derivative Instruments and Hedging Activities
The Company’s accounting policies for derivative financial instruments are based on whether the instruments meet the criteria for
designation as cash flow or fair value hedges. A designated hedge of the exposure to variability in the future cash flows of an asset or
a liability qualifies as a cash flow hedge. A designated hedge of the exposure to changes in fair value of an asset or a liability qualifies
as a fair value hedge. The criteria for designating a derivative as a hedge include the assessment of the instrument’s effectiveness in
risk reduction, matching of the derivative instrument to its underlying transaction and the probability that the underlying transaction
will occur. For derivatives with cash flow hedge accounting designation, the Company reports the after-tax gain or loss from the
effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassifies it into earnings in the
same period or periods in which the hedged transaction affects earnings, and within the same income statement line item as the impact
of the hedged transaction. For derivatives with fair value hedge accounting designation, the Company would recognize gains or losses
from the change in fair value of these derivatives, as well as the offsetting change in the fair value of the underlying hedged item, in
earnings.
The Company currently holds derivative financial instruments to manage interest rate risk. The Company has designated these
derivative financial instruments as cash flow hedges. The derivative financial instruments are recorded at fair value and are included in
“Other liabilities and “Other long-term liabilities”. Derivative instruments recorded at fair value as liabilities totaled $13,053,000 and
$18,874,000 as of December 31, 2009 and 2008, respectively. Derivative instruments included in “Other liabilities” totaled
$4,140,000 and $18,874,000 as of December 31, 2009 and 2008, respectively. Derivative instruments included in “Other long-term
liabilities” totaled $8,913,000 as of December 31, 2009. On a quarterly basis, the Company measures the effectiveness of the
derivative financial instruments by comparing the present value of the cumulative change in the expected future interest to be paid or
received on the variable leg of the instruments against the expected future interest payments on the corresponding variable rate debt.
In addition, the Company compares the critical terms, including notional amounts, underlying indexes and reset dates of the derivative
financial instruments with the respective variable rate debt to ensure all terms agree. Any ineffectiveness would be reclassified from
“Accumulated other comprehensive income (loss)” to “Interest expense.” As of December 31, 2009, the Company had no
50
ineffectiveness on its derivative financial instruments. See Note 8 for further information concerning these derivative instruments
accounted for as hedges.
Income Taxes
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using
enacted tax rules currently scheduled to be in effect for the year in which the differences are expected to reverse, and also includes the
amount of tax carry forwards. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the
period of the enactment date. The Company records a valuation allowance against deferred tax assets to the extent it is more likely
than not the amount will not be realized, based upon evidence available at the time of the determination, and any change in the
valuation allowance is recorded in the period of a change in such determination.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $72,927,000,
$65,640,000 and $40,472,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
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.
Share-Based Compensation Plans
The Company currently sponsors share-based employee benefit plans and stock option plans. The Company recognizes compensation
expense for its share-based payments based on the fair value of the awards on the date of the grant. Share-based payments include
stock option awards issued under the Company’s employee stock option plan, director stock option plan, stock issued through the
Company’s employee stock purchase plan and stock awarded to employees through other benefit programs. See Note 11 for further
information concerning these plans.
Litigation Reserves
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company records
reserves for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate
the probable loss. The Company reserves for an estimate of material legal costs to be incurred on pending litigation matters. 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, these matters will have a material adverse effect on our consolidated financial position, results or operations or cash flows.
In addition, O’Reilly is involved in resolving legacy governmental investigations and litigation that were being conducted against
former CSK employees and CSK arising out of alleged conduct relating to periods prior to the acquisition. Further detail regarding
such matters is described in Note 14.
Closed Store Liabilities
The Company maintains reserves for closed stores and other properties that are no longer being utilized in current operations. The
Company provides for these liabilities using a credit-adjusted discount rate to calculate the present value of the remaining
noncancelable lease payments, occupancy costs and lease termination fees after the close date, net of estimated sublease income. In
conjunction with the acquisition of CSK, the Company’s reserves include purchase accounting liabilities related to acquired properties
that are no longer being utilized in the acquired business and the Company’s planned exit activities. See Note 7 for further
information concerning these liabilities.
Earnings per Share
Basic earnings per share is based on the weighted-average outstanding common shares. Diluted earnings per share is based on the
weighted-average outstanding shares adjusted for the effect of common stock equivalents. Common stock equivalents that could
potentially dilute basic earnings per share in the future that were not included in the fully diluted computation because they would have
been antidilutive were 1,103,000, 5,184,000 and 1,613,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
51
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents,
accounts receivable and notes receivable.
The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Concentrations of
credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of smaller
customers, thus spreading the credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring
procedures. Generally, the Company does not require security when 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 entered into various derivative financial instruments to mitigate the risk of interest rate fluctuations on its variable
rate long-term debt. If the market interest rate on the Company’s net derivative positions with counterparties exceeds a specified
threshold, the counterparty is required to transfer cash in excess of the threshold to the Company. Conversely, if the market value of
the net derivative positions falls below a specified threshold, the Company is required to transfer cash below the threshold to the
counterparty. The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative contracts used in
these hedging activities. The counterparties to the Company’s derivative contracts are major financial institutions and the Company
has not experienced nonperformance by any of its counterparties.
Other than derivative instruments and the Company’s 6¾% Exchangeable Notes (see Note 4), the Company’s non-financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable and long-term debt, as reported in the
accompanying Consolidated Balance Sheets, approximate fair value. The carrying value of the Company’s derivative financial
instruments has been adjusted to fair value in the accompanying Consolidated Balance Sheets.
New Accounting Pronouncements
In December 2007, the FASB issued the Consolidation Topic (“ASC 810”) of the FASB ASC, which is effective for fiscal years
beginning after December 15, 2008. ASC 810 states that accounting and reporting for minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. The calculation of earnings per share will continue to be based on
income amounts attributable to the parent. ASC 810 applies to all entities that prepare consolidated financial statements, but will affect
only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The
provisions of ASC 810 were effective for the Company beginning January 1, 2009, and are applied prospectively. The adoption of
ASC 810 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued the Derivatives and Hedging Topic (“ASC 815”) of the FASB ASC, which requires entities that
utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well
as any details of credit-risk-related contingent features contained within derivatives. ASC 815 also requires entities to disclose
additional information about the amounts and location of derivatives located within the financial statements, how the provisions of
ASC 815 have been applied, and the impact that hedges have on an entity’s financial position, financial performance and cash flows.
ASC 815 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The
Company has adopted the provisions of ASC 815 beginning with its condensed consolidated financial statements for the quarter ended
March 31, 2009.
In May 2008, the FASB issued the Debt with Conversions and Other Options Topic (“ASC 470”) of the FASB ASC, which clarifies
the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion and
specifies that issuers of such instruments should separately account for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent
periods. ASC 470 requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in the Company’s consolidated statement of operations.
ASC 470 is effective for fiscal years and interim periods beginning after December 15, 2008, with early application prohibited. The
Company adopted the provisions of ASC 470 beginning with its condensed consolidated financial statements for the quarter ended
March 31, 2009; however, the retrospective adoption of ASC 470 did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows (see Note 4).
In April 2009, the FASB issued the Financial Instruments Topic (“ASC 825”) of the FASB ASC. This Topic requires quarterly
disclosure of the methods and significant assumptions used to estimate the fair values of all financial instruments, and is effective for
interim and annual periods ended after June 15, 2009. The Company adopted the provisions of ASC 825 beginning with its condensed
consolidated financial statements for the quarter ended June 30, 2009. The application of this guidance affects disclosures only and
therefore did not have an impact on the Company’s financial condition, results of operations or cash flows.
52
In May 2009, the FASB issued the Subsequent Events Topic (“ASC 855”) of the FASB ASC. ASC 855 incorporates into authoritative
accounting literature certain guidance that already existed within generally accepted auditing standards. ASC 855 addresses events
which occur after the balance sheet date but before the issuance of financial statements. Under ASC 855, as under current practice, an
entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and
must disclose, but not record, the effects of subsequent events which provide evidence about conditions that did not exist at the balance
sheet date. In addition, ASC 855 requires disclosure of the date through which an entity has evaluated subsequent events and the basis
for that date. ASC 855 is effective for interim and annual periods ended after June 15, 2009. The Company adopted the provisions of
ASC 855 beginning with its condensed consolidated financial statements for the quarter ended June 30, 2009.
In June 2009, the FASB issued the Generally Accepted Accounting Standards Topic (“ASC 105”) of the FASB ASC. ASC 105
defines the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. This
standard reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent
structure; also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in
separate sections. ASC 105 is effective for reporting periods ended after September 15, 2009. The Company adopted the provisions
of ASC 105 beginning with its condensed consolidated financial statements for the quarter ended September 30, 2009, and the
Company’s financial statements and related disclosures reflect the newly adopted codification.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) number 2009-05 (“ASU 2009-05”), an update to the Fair
Value Measurements and Disclosures Topic (“ASC 820”). This update provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using (a) a
valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities
and/or (b) an income approach valuation technique or a market approach valuation technique, consistent with the principles of ASC
820. This update is effective for the first reporting period (including interim periods) beginning after issuance. The Company adopted
this update beginning with its condensed consolidated financial statements for the quarter ended September 30, 2009; the adoption of
this update did not have a material impact on the Company’s consolidated financial position or results of operations.
Subsequent Events
The Company entered into an interest rate swap transaction on January 21, 2010, with Barclays Capital. The Company entered into
this swap transaction to mitigate the interest rate risk on an additional $50,000,000 of the Company’s outstanding floating rate debt
under its Credit Agreement. The swap transaction has an effective date of January 22, 2010, and a maturity date of January 31, 2011.
Under the terms of the swap transaction, the Company is required to make certain monthly fixed rate payments calculated on a notional
amount of $50,000,000 at a fixed rate of 0.525% and the counterparty is obligated to make certain monthly floating rate payments to
the Company based on LIBOR on the same referenced notional amount.
The Company opened its second, new distribution center in the western-half of the United States in January of 2010 in Moreno Valley,
California. This distribution center is an owned facility with over 547,000 operating square feet. This facility will service the 238
Kragen stores in the southern California area. The Kragen stores that will be serviced out of this distribution center began converting
to the O’Reilly systems in January of 2010 and will continue to convert at a rate of approximately 30 stores per week. All 238 Kragen
stores are expected to be converted to the O’Reilly systems and be serviced from this new distribution center by the end of the first
quarter of 2010.
The Company has evaluated subsequent events and transactions that occurred after the balance sheet date of December 31, 2009,
through the filing of these financial statements which occurred on February 26, 2010. Other than the events described above, no
material events or transactions, which would require adjustments or disclosures in the consolidated financial statements, occurred
during this period.
NOTE 2 – BUSINESS COMBINATION
On July 11, 2008, the Company completed the acquisition of CSK, one of the largest specialty retailers of auto parts and accessories in
the Western United States and one of the largest such retailers in the United States, based on store count. Pursuant to the merger
agreement, each share of CSK common stock outstanding immediately prior to the merger was canceled and converted into the right to
receive 0.4285 of a share of O’Reilly common stock and $1.00 in cash. To fund the transaction, the Company entered into a credit
agreement for a $1.2 billion asset-based revolving credit facility arranged by Bank of America, N.A. (“BA”), which the Company used
to refinance debt, fund the cash portion of the acquisition, pay for other transaction-related expenses and provide liquidity for the
combined Company going forward. The results of CSK’s operations have been included in the Company’s consolidated financial
statements since the acquisition date.
53
At the date of the acquisition, CSK had 1,342 stores in 22 states, operating under four brand names: Checker Auto Parts, Schuck’s
Auto Supply, Kragen Auto Parts and Murray’s Discount Auto Parts. As of December 31, 2009, the Company had converted 405 CSK
stores to the O’Reilly systems, merged 41 CSK stores with existing O’Reilly locations, closed 13 CSK stores and opened five new
stores in CSK historical markets.
Purchase Price Allocation
The purchase price for CSK, adjusted from its initial purchase price and finalized on June 30, 2009, was comprised of the following
amounts (in thousands):
O’Reilly stock exchanged for CSK shares
Cash payment to CSK shareholders
CSK shares purchased by O’Reilly prior to merger
Fair value of options and unvested restricted stock exchanged
Direct costs of the acquisition
Total purchase price
$
$
459,308
42,253
21,724
7,736
11,227
542,248
The acquisition was accounted for under the purchase method of accounting with O’Reilly Automotive, Inc. as the acquiring entity in
accordance with the Statement of Financial Accounting Standard No. 141, Business Combinations. Accordingly, the consideration
paid by the Company to complete the acquisition was allocated to the assets acquired and liabilities assumed based upon their
estimated fair values as of the date of the acquisition. The allocation of purchase price was based upon certain external valuations and
other analyses, including the review of legal reserves (see Note 14). Between the acquisition date and June 30, 2009, the Company
adjusted its initial acquisition cost and preliminary purchase price allocation to reflect adjustments to certain assets, reserves, and
obligations.
O’Reilly exchanged 18,104,371 shares of common stock pursuant to the formula prescribed in the merger agreement relating to the
acquisition of CSK, dated April 1, 2008. The value of the O’Reilly stock, $25.37 per share, exchanged for CSK shares was
determined based on the average close price of O’Reilly stock beginning two days before and ending two days after June 9, 2008. The
June 9, 2008, measurement date reflects the last day when the number of O’Reilly shares issuable in the transaction became fixed such
that subsequent applications of the formula in the merger agreement did not result in a change in the total number of shares exchanged.
The fair value of options exchanged in the merger of $6,659,000 was based on CSK’s 3,689,761 outstanding options on July 11, 2008,
multiplied by the exchange ratio adjusted to reflect the $1.00 per share cash consideration. The weighted-average fair value per option
of $3.82 was determined using a Black-Scholes valuation model with the following weighted-average assumptions:
Risk free interest rate
Expected life
Expected volatility
Expected dividend yield
2.5 %
2.3 Years
29.9 %
0 %
The fair value of $1,077,000 for the O’Reilly shares exchanged for CSK’s unvested restricted stock outstanding at July 11, 2008, was
based on the fair value per O’Reilly share of $25.37 on the June 9, 2008, measurement date. Direct costs of the acquisition include
investment-banking fees, legal and accounting fees, and other external costs directly related to the acquisition.
54
The final purchase price allocations, adjusted from the preliminary purchase price allocation disclosed as of December 31, 2008, and
finalized on June 30, 2009, were as follows (in thousands):
Inventory
Other current assets
Property and equipment
Goodwill
Deferred income taxes
Other intangible assets
Other assets
Total assets acquired
Senior credit facility
Term loan facility
Capital lease obligations
Other current liabilities
6 ¾% senior exchangeable notes
Other liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
$
Preliminary Purchase
Price Allocation as of
December 31, 2008
Final Purchase
Price Allocation as
of June 30, 2009
546,052
77,307
126,670
670,508
134,074
65,270
9,241
1,629,122
343,921
86,700
15,212
467,773
103,920
69,602
1,087,128
541,994
$
$
$
$
$
539,827
84,959
124,208
694,987
160,943
65,270
6,270
1,676,464
343,921
86,700
16,486
501,470
103,920
81,719
1,134,216
542,248
The adjustments to the preliminary purchase price allocation disclosed as of December 31, 2008, compared to the final purchase price
allocation completed as of June 30, 2009, related to information obtained subsequent to December 31, 2008, upon completion of the
purchase price allocation procedures the Company identified at the acquisition date. The adjustments primarily related to completion
of the Company’s review of CSK store locations, leases for stores to be closed and inventories to be liquidated, as well as the
evaluation of the timing and costs to be incurred under the Company’s indemnification obligations to certain former CSK officers in
ongoing U.S. Securities and Exchange Commission (“SEC”) and U.S. Department of Justice (“DOJ”) investigations. Material
adjustments arising from the finalization of these planned procedures and the receipt of updated information resulted in increases to
reserves for pre-acquisition legal matters of $21,814,000, exit activities, including store, distribution center and administrative office
closure reserves of $15,385,000, and inventory reserves of $6,225,000, offset by the related effects of deferred tax assets which
increased $26,869,000. The net impact of all adjustments between December 31, 2008, and June 30, 2009, increased goodwill by
$24,479,000.
Estimated fair values of intangible assets acquired as of the date of acquisition are as follows (in thousands):
Trademarks and trade names
Favorable property leases
Total intangible assets
Intangible assets
13,000
52,270
65,270
$
$
Weighted-Average
Useful Lives
(in years)
1.4
10.7
The estimated values of operating leases with unfavorable terms compared with current market conditions totaled approximately
$49,680,000. These liabilities have an estimated weighted-average useful life of approximately 7.7 years and are included in other
liabilities. Favorable and unfavorable lease assets and liabilities are being amortized to selling, general and administrative expense
over their expected lives, which approximates the period of time that the favorable or unfavorable lease terms will be in effect.
Trademarks and trade names have useful lives of one to three years and will be amortized to coincide with the anticipated conversion
of CSK store brands to the O’Reilly branded locations over that period.
The final allocation of the purchase price included $53,961,000 of accrued liabilities for estimated costs to exit certain activities of
CSK, including $14,828,000 of exit costs associated with the planned closure of 51 CSK stores, $3,650,000 of assumed liabilities
related to CSK’s existing closed stores for 127 locations that were closed prior to the Company’s acquisition of CSK, $26,617,000 of
employee separation costs, and $8,866,000 of exit costs associated with the planned closure of other administrative offices and certain
distribution facilities. The Company began to formulate its exit plans prior to the completion of the acquisition. Pursuant to these
plans, between the date of the acquisition and June 30, 2009, the Company reviewed all 1,342 acquired CSK stores to determine, from
a location, lease, and facility standpoint, which stores would be closed. During the initial assessment, 33 CSK stores were identified as
55
locations which would be merged with existing O’Reilly locations due to overlapping market coverage; it was determined that the
remaining CSK store base would be evaluated by quantitative analysis of financial and market factors in addition to evaluations of the
potential for further development of commercial business in those markets. From the initial assessment through June 30, 2009, and as
contemplated in its initial exit plan, the Company completed a detailed review of custom demographic reports, which included do-it-
yourself customer forecasting, wholesale sales potential and strength and quantity of competitors in the respective markets on a store-
by-store basis. Along with the demographic reports, the Company evaluated historical store financial results, store lease obligations,
store floor plans, and locations previously identified by former CSK management as projected closures. This detailed assessment
resulted in the identification of an additional 18 CSK locations for closure, five of which were closed by the end of 2009. The
employee separation costs include anticipated payments, as required under various pre-existing employment arrangements with CSK
employees at the time of acquisition, relating to the planned involuntarily termination of employees performing overlapping or
duplicative functions. Administrative and distribution facility exit liabilities include costs to close a distribution center in Mendota
Heights, Minnesota, which overlapped an existing O’Reilly distribution center and costs to close small distribution facilities located in
Washington and California, which will not be utilized under O’Reilly’s distribution model. In addition, the administrative and
distribution exit liabilities include costs to exit certain administrative office space at CSK’s headquarters in Phoenix, Arizona, as
functions performed at these locations will be transitioned to the Company’s Springfield, Missouri, headquarters location. As of June
30, 2009, the Company had finalized all exit plans.
The CSK senior credit facility and term loan facility required repayment upon merger or acquisition and the entire amounts outstanding
under both facilities were repaid by the Company on the July 11, 2008, acquisition date. The excess of the final purchase price over
the estimated fair values of tangible and identifiable intangible assets acquired and liabilities assumed was recorded as goodwill.
Goodwill in the amount of $694,987,000 was recorded in the final purchase price allocations and is not amortizable for tax purposes.
Unaudited Pro Forma Financial Information
The following pro forma financial information presents the combined historical results of the combined Company as if the acquisition
had occurred as of the beginning of the respective period (in thousands, except per share data):
Pro Forma Results of
Operations for the Year
Ended December 31, 2008
Sales
Net income
Net income per common share
Net income per common share-assuming dilution
Weighted-average common shares outstanding
Adjusted weighted-average common shares outstanding
– assuming dilution
$
$
$
$
4,494,475
176,385
1.32
1.31
134,023
134,910
This pro forma information is not intended to represent or be indicative of actual results had the acquisition occurred as of the
beginning of the period, nor is it necessarily indicative of future results and does not reflect potential synergies, integration costs, or
other such costs or savings. Certain pro forma adjustments have been made to net income to give effect to: estimated charges to
conform CSK’s method of accounting for inventory to LIFO, adjustments to selling, general and administrative expenses to remove the
amortization on eliminated CSK historical identifiable intangible assets and deferred liabilities, expenses to amortize the value of
identified intangibles acquired in the acquisition (primarily trade names, trademarks and leases), rent and depreciation adjustments to
reflect O’Reilly’s purchase of properties under its synthetic lease facility, adjustments to interest expense to reflect the elimination of
preexisting O’Reilly and CSK debt, estimated interest expense on O’Reilly’s new asset-based credit facility and other minor
adjustments. The pro forma information presented above for the year ended December 31, 2008, includes certain acquisition related
charges, net of tax, incurred in 2008 of $4,402,000, $2,552,000, and $5,727,000 for debt prepayment costs, interim facility
commitment fees, and the acceleration of CSK’s stock options and restricted stock as a result of the change in control, respectively.
NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is reviewed annually on December 31 for impairment or more frequently if events or changes in business conditions indicate
that impairment may exist. Goodwill is not amortizable for financial statement purposes. During the year ended December 31, 2009,
the Company recorded goodwill of approximately $23,805,000, primarily due to changes in purchase price allocation in connection
with the acquisition of CSK, which was finalized on June 30, 2009, (see Note 2). For the years ended December 31, 2009, 2008 and
56
2007, the Company recorded amortization expense of $14,097,000, $9,166,000, and $199,000, respectively, related to amortizable
intangible assets, which are included in “Other assets” on the accompanying Consolidated Balance Sheets. The components of the
Company’s amortizable and unamortizable intangible assets were as follows on December 31, 2009 and December 31, 2008 (in
thousands):
Cost
December 31,
2009
December 31,
2008
Accumulated Amortization
December 31,
December 31,
2008
2009
Amortizable intangible assets
Favorable leases
Trade names and trademarks
Other
Total amortizable intangible assets
Unamortizable intangible assets
Goodwill
Total unamortizable intangible assets
$
$
$
$
52,010 $
13,000
481
65,491 $
52,270
13,000
819
66,089
$
$
11,383 $
11,588
201
23,172 $
3,690
5,312
547
9,549
744,313 $
744,313 $
720,508
720,508
In addition, the Company has recorded a liability for the values of operating leases with unfavorable terms, acquired in the acquisition
of CSK, totaling approximately $49,570,000 and $49,680,000 for the years ended December 31, 2009 and 2008, respectively, which
are included in the “Other liabilities” section of the Consolidated Balance Sheets. These leases have an estimated weighted-average
useful life of approximately 7.7 years. During the years ended December 31, 2009 and 2008, the Company recognized an amortized
benefit of $9,166,000 and $3,941,000, respectively, related to these unfavorable operating leases. None of the liabilities related to
unfavorable lease terms relate to stores to be closed as discussed in Note 2.
At December 31, 2009, estimated net amortization of the Company’s intangible assets and liabilities for each of the next five years is
as follows (in thousands):
2010 $
2011
2012
2013
2014
$
2,154
897
850
639
621
5,161
The change in the goodwill for the years ended December 31, 2009, and December 31, 2008, was as follows (in thousands):
Balance at December 31, 2007
Acquisition of CSK
Other
Balance at December 31, 2008
Adjustment to preliminary purchase
price allocation of CSK
Other
Balance at December 31, 2009
$
$
50,447
670,508
(447)
720,508
24,479
(674)
744,313
57
NOTE 4 — LONG-TERM DEBT AND CAPITAL LEASES
Outstanding long-term debt was as follows on December 31, 2009, and December 31, 2008, (in thousands):
December 31,
2009
December 31,
2008
Capital leases
6 ¾% Senior Exchangeable Notes
FILO revolving credit facility
Tranche A revolving credit facility
Total debt and capital lease obligations
Current maturities of debt and capital lease obligations
Total long-term debt and capital lease obligations
$
$
11,230
100,718
125,000
553,800
790,748
106,708
684,040
$
$
14,927
103,568
125,000
489,200
732,695
8,131
724,564
On July 11, 2008, in connection with the acquisition of CSK (see Note 2), the Company entered into its ABL Credit Agreement for a
five-year $1.2 billion asset-based revolving credit facility arranged by BA, which the Company used to refinance debt, fund the cash
portion of the acquisition, pay for other transaction-related expenses and provide liquidity for the combined Company going forward.
The ABL Credit Agreement is comprised of a five-year $1.075 billion tranche A revolving credit facility and a five-year $125 million
first-in-last-out revolving credit facility (FILO tranche) both of which mature on July 11, 2013. As part of the ABL Credit Agreement,
the Company has pledged virtually all of its assets as collateral and is subject to an ongoing consolidated leverage ratio covenant. On
the date of the transaction, the amount of the borrowing base available, as described in the ABL Credit Agreement, under the credit
facility was $1.050 billion, of which the Company borrowed $588 million. The Company used borrowings under the credit facility to
repay certain existing debt of CSK, repay the Company’s $75 million 2006-A Senior Notes and purchase all of the properties that had
been leased under the Company’s synthetic lease facility. As of December 31, 2009, the amount of the borrowing base available under
the credit facility was $1.196 billion, of which the Company had outstanding borrowings of $679 million. The available borrowings
under the credit facility are also reduced by stand-by letters of credit issued by the Company primarily to satisfy the requirements of
workers compensation, general liability and other insurance policies. As of December 31, 2009, the Company had stand-by letters of
credit outstanding in the amount of $72 million and the aggregate availability for additional borrowings under the credit facility was
$445 million. As part of the Credit Agreement, the Company has pledged substantially all of its assets as collateral and is subject to an
ongoing consolidated leverage ratio covenant, with which the Company complied on December 31, 2009. As of December 31, 2008,
the amount of the borrowing base available under the credit facility was $1.124 billion, of which the Company had outstanding
borrowings of $614 million. The available borrowings under the credit facility are also reduced by stand-by letters of credit
outstanding in the amount of $56 million and the aggregate availability for additional borrowings under the credit facility was $454
million. In the event that we should default on any covenant contained within the Credit Agreement, certain actions may be taken;
these actions include, but are not limited to, the bulleted items below:
•
•
•
•
termination of credit extensions
any outstanding principal amount plus accrued interest could become immediately payable
cash collateralization of all letter of credit obligations
litigation from lenders
At December 31, 2009, borrowings under the tranche A revolver bore interest, at the Company’s option, at a rate equal to either a base
rate plus 1.25% per annum or LIBOR plus 2.25% per annum, with each rate being subject to adjustment based upon certain excess
availability thresholds. Borrowings under the FILO tranche bore interest, at the Company’s option, at a rate equal to either a base rate
plus 2.50% per annum or LIBOR plus 3.50% per annum, with each rate being subject to adjustment based upon certain excess
availability thresholds. The base rate is equal to the higher of the prime lending rate established by BA from time to time and the
federal funds effective rate as in effect from time to time plus 1.25%, subject to adjustment based upon remaining available
borrowings. Fees related to unused capacity under the credit facility are assessed at a rate of 0.375% of the remaining available
borrowings under the facility, subject to adjustment based upon remaining unused capacity. In addition, the Company paid customary
commitment fees, letter of credit fees, underwriting fees and other administrative fees in respect to the credit facility. At December 31,
2008, the Company had borrowings of $164 million under its facilities, which were not covered under an interest rate swap agreement,
with interest rates ranging from 3.125% to 4.75%. At December 31, 2009, the Company had borrowings of $279 million under its
facilities, which were not covered under an interest rate swap agreement, with interest rates ranging from 2.50% to 4.50%.
On July 24, 2008, October 14, 2008, and November 24, 2008, the Company entered into interest rate swap transactions with Branch
Banking and Trust Company (“BBT”), BA and SunTrust Bank (“SunTrust”). The Company entered into these interest rate swap
transactions to mitigate the risk associated with its floating interest rate based on LIBOR on an aggregate of $450 million of its debt
that is outstanding under its ABL Credit Agreement, dated as of July 11, 2008. The interest rate swap transaction the Company
58
entered into with SunTrust on November 24, 2008, was for $50 million and matured on November 28, 2009, bringing the total notional
amount of swapped debt to $400 million as of December 31, 2009, thus increasing the Company’s exposure to changes in interest
rates. On January 21, 2010 the Company entered into an interest rate swap transaction with Barclays in the amount of $50 million,
increasing the total notional amount of swapped debt to $450 million as of that date, thus reducing the Company’s exposure to changes
in interest rates. The Company is required to make certain monthly fixed rate payments calculated on the notional amounts, while the
applicable counter party is obligated to make certain monthly floating rate payments to the Company referencing the same notional
amount. The interest rate swap transactions effectively fix the annual interest rate payable on these notional amounts of the Company’s
debt, which may exist under the ABL Credit Facility plus an applicable margin under the terms of the same credit facility. The
counterparties, transaction dates, effective dates, applicable notional amounts, effective index rates and maturity dates of each of the
interest rate swap transactions which existed as of December 31, 2009, are included in the table below:
Notional
Amount
Effective
index rate
Spread at
December
31, 2009
Effective
Interest Rate at
December 31,
2009
Counterparty
BBT
BA
SunTrust
SunTrust
BBT
BBT
BA
SunTrust
BA
Transaction
Date
7/24/2008
7/24/2008
7/24/2008
7/24/2008
10/14/2008
10/14/2008
10/14/2008
10/14/2008
10/14/2008
Effective Date
8/1/2008 $
8/1/2008
8/1/2008
8/1/2008
10/17/2008
10/17/2008
10/17/2008
10/17/2008
10/17/2008
$
(in thousands)
100,000
75,000
25,000
50,000
25,000
25,000
25,000
25,000
50,000
400,000
3.425%
3.830
3.830
3.830
2.990
3.010
3.050
2.990
3.560
3.50%
2.67
3.50
2.25
2.25
2.25
2.25
2.25
2.25
Maturity date
8/1/2010
8/1/2011
8/1/2011
8/1/2011
10/17/2010
10/17/2010
10/17/2010
10/17/2010
10/17/2011
6.93 %
6.50
7.33
6.08
5.24
5.26
5.30
5.24
5.81
On July 11, 2008, the Company executed the Third Supplemental Indenture (the ‘Third Supplemental Indenture”) to the 6¾%
Exchangeable Senior Notes due 2025 (the “Notes”), in which it agreed to become a guarantor, on a subordinated basis, of the $100
million principal amount of the Notes originally issued by CSK pursuant to an Indenture dated as of December 19, 2005, as amended
and supplemented by the First Supplemental Indenture dated as of December 30, 2005, and the Second Supplemental Indenture, dated
as of July 27, 2006, (the “Second Supplemental Indenture”) by and between CSK Auto Corporation, CSK Auto, Inc. and The Bank of
New York Mellon Trust Company, N.A., as trustee. On December 31, 2008, and effective as of July 11, 2008, the Company entered
into the Fourth Supplemental Indenture in order to correct the definition of Exchange Rate in the Third Supplemental Indenture.
The Notes are exchangeable, under certain circumstances, into cash and shares of the Company’s common stock. The Notes bear
interest at 6.75% per year until December 15, 2010, and 6.50% until maturity on December 15, 2025. Prior to their stated maturity,
these Notes are exchangeable by the holder only under the following circumstances (as more fully described in the indenture under
which the Notes were issued):
• During any fiscal quarter (and only during that fiscal quarter) commencing after July 11, 2008, if the last reported sale price
of the Company’s common stock is greater than or equal to 130% of the applicable exchange price of $36.17 for at least 20
trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter;
If the Notes have been called for redemption by the Company; or
•
• Upon the occurrence of specified corporate transactions, such as a change in control.
If the Notes are exchanged, the Company will deliver cash equal to the lesser of the aggregate principal amount of Notes to be
exchanged and the Company’s total exchange obligation and, in the event the Company’s total exchange obligation exceeds the
aggregate principal amount of Notes to be exchanged, shares of the Company’s common stock in respect of that excess. The total
exchange obligation reflects the exchange rate whereby each $1,000 in principal amount of the Notes is exchangeable into an
equivalent value of 25.97 shares of the Company’s common stock and $60.61 in cash.
The Noteholders may require the Company to repurchase some or all of the Notes for cash at a repurchase price equal to 100% of the
principal amount of the Notes being repurchased, plus any accrued and unpaid interest on December 15, 2010; December 15, 2015; or
December 15, 2020, or on any date following a fundamental change as described in the indenture. The Company may redeem some or
all of the Notes for cash at a redemption price of 100% of the principal amount plus any accrued and unpaid interest on or after
59
December 15, 2010, upon at least 35-calendar days notice. The Company intends to redeem the Notes in December of 2010, and plans
to fund the redemption with available borrowings under its ABL Credit Facility.
The Company has determined that the share exchange feature and the embedded put and call options within the Notes will be
accounted for as equity instruments and as such, the share exchange feature and the embedded options have not been accounted for as
derivatives. Effective January 1, 2009, the Company adopted the provisions of the Debt with Conversion and Other Options Topic
470 (“ASC 470”) of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), which impacts the
accounting associated with its Notes. ASC 470 requires the Company to recognize interest expense, including non-cash interest, based
on the market rate for similar debt instruments without the conversion feature, which the Company determined to be 5.93%. In
accordance with ASC 470, the liability component of the exchangeable debt was measured as of the acquisition date, using a 5.93%
interest rate and an assumed 2.43-year life, as determined by the first date the holders may require the Company redeem the Note. The
difference between the fair value of the Notes at acquisition date and the fair value of the liability component on that date and
December 31, 2009, was $2,100,000, which was assigned to equity. The carrying amount of the equity portion of the Notes was
$2,100,000 at December 31, 2009, and is fixed until the Notes are settled. The principal amount of the Notes as of December 31, 2009
and 2008, was $100,000,000. The unamortized premium on the Notes was $718,000 and $3,568,000 as of December 31, 2009 and
2008, respectively, which would be amortized over a period of approximately 0.96 and 1.96 years, respectively, resulting in a net
carrying amount of the Notes as of December 31, 2009 and 2008, of $100,718,000 and $103,568,000, respectively. As of December
31, 2009, the if-converted value of the Notes was $100,037,000; however, as of December 31, 2008, the exchange value of the Notes
did not exceed their principal amount. The net interest expense related to the Notes for the year ended December 31, 2009, was
$5,999,000, resulting in an effective interest rate of 6.0%. The net interest expense related to the Notes for the year ended December
31, 2008, was $2,892,000, resulting in an effective interest rate of 6.0%. The incremental net shares for the Notes exchange feature
were included in the diluted earnings per share calculation for the year ended December 31, 2009. The incremental net shares for the
Notes exchange feature were not included in the diluted earnings per share calculation for the year ended December 31, 2008, as the
impact would have been antidilutive. The retrospective accounting impact the adoption of ASC 470 had on the Company’s
Consolidated Balance Sheet as of December 31, 2008, was not material.
The Company leases certain equipment under capital lease agreements. The lease agreements have terms ranging from 47 to 180
months, expiring on dates ranging from February 2010 to March 2017. The present value of the future minimum lease payments under
capital leases totaled approximately $10,455,000 and $12,997,000 at December 31, 2009 and 2008, respectively, which have been
classified as long-term debt in the accompanying consolidated financial statements. The Company acquired additional equipment
under capital leases in the amount of $8,337,000 during the period ended December 31, 2009. The Company assumed capital lease
liabilities totaling $13,022,000 in its acquisition of CSK; in addition, the Company acquired additional equipment under capital leases
in the amount of $4,847,000 during the period ended December 31, 2008.
The Company assumed certain building capital leases, which have lease agreements with terms ranging from 58 to 302 months,
expiring on dates ranging from October 2010 to April 2015. The present value of future minimum lease payments under building
capital leases totaled approximately $775,000 and $1,930,000 at December 31, 2009 and 2008, respectively, which have been
classified as long-term debt in the accompanying consolidated financial statements. The Company did not acquire any building capital
leases during the period ended December 31, 2009. The Company assumed building capital lease liabilities totaling $2,190,000 in its
acquisition of CSK during the period ended December 31, 2008.
Principal maturities of long-term debt and capital lease obligations are as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
$
$
106,708
2,947
945
679,387
456
305
790,748
NOTE 5 — RELATED PARTIES
The Company leases certain land and buildings related to 48 of its O'Reilly Auto Parts stores under fifteen-year operating lease
agreements with O'Reilly Investment Company and O'Reilly Real Estate Company, partnerships in which certain shareholders and
directors of the Company are partners. Generally, these lease agreements provide for renewal options for an additional five years at
the option of the Company and the lease agreements are periodically modified to further extend the lease term for specific stores under
the agreement. Additionally, the Company leases certain land and buildings related to 21 of its O’Reilly Auto Parts stores under
fifteen-year operating lease agreements with O’Reilly-Wooten 2000 LLC, which is owned by certain shareholders and directors of the
60
Company. Generally, these lease agreements provide for renewal options for two additional five-year terms at the option of the
Company (see Note 6). Rent payments under these operating leases totaled $3,661,000, $3,542,000 and $3,446,000 in 2009, 2008 and
2007, respectively.
NOTE 6 — COMMITMENTS
Lease Commitments
On September 28, 2007, the Company completed a second amended and restated master agreement to its $49,137,000 Synthetic
Operating Lease Facility with a group of financial institutions. The terms of such lease facility provided for an initial lease period of
seven years, a residual value guarantee of approximately $39,700,000 at December 31, 2007, and purchase options on the properties.
The lease facility also contained 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 second amended and restated Facility had been accounted for as an operating lease. On
July 11, 2008, the Company, in connection with the acquisition of CSK, purchased all the properties included in its Synthetic
Operating Lease Facility for the amount of $49,273,000, thus terminating the facility. The purchase was funded through borrowings
under a new asset-based revolving credit facility (See Note 2 and Note 4).
The Company also leases certain office space, retail stores, property and equipment under long-term, noncancelable 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, 2009, 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 (in thousands):
2010
2011
2012
2013
2014
Thereafter
Related
Parties
$
$
3,662
3,470
3,438
3,361
1,950
6,820
22,701
Non-related
Parties
210,425
194,536
175,609
148,658
124,273
625,320
1,478,821
Total
214,087
198,006
179,047
152,019
126,223
632,140
1,501,522
Rental expense amounted to $226,049,000, $142,363,000 and $55,358,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.
Other Commitments
The Company had construction commitments, which totaled approximately $102,556,000, at December 31, 2009.
NOTE 7 – EXIT ACTIVITIES
The Company maintains reserves for closed stores and other properties that are no longer utilized in current operations. The Company
accrues for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present value of the
remaining noncancelable lease payments, contractual occupancy costs and lease termination fees after the closing date, net of estimated
sublease income. The closed property lease liabilities are expected to be paid over the remaining lease terms, which currently extend
through April 2023. The Company estimates sublease income and future cash flows based on the Company’s experience and
knowledge of the market in which the closed property is located, the Company’s previous efforts to dispose of similar assets and
existing economic conditions. Adjustments to closed property reserves are made to reflect changes in estimated sublease income or
actual contracted exit costs, which vary from original estimates. Adjustments are made for material changes in estimates in the period
in which the changes become known.
As discussed more fully in Note 2, in connection with the acquisition of CSK, the Company recorded $14,828,000 of exit costs
associated with the planned closure of 51 CSK stores, assumed CSK’s existing closed stores liabilities of $3,650,000 related to 127
locations that were closed prior to the Company’s acquisition of CSK, recorded $8,866,000 of exit costs associated with the planned
closure of CSK administrative office and certain distribution facilities and recorded $26,617,000 of employee separation costs. These
activities have been accounted for in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination.
61
The following is a summary of closure reserves for stores, administrative office and distribution facilities and reserves for employee
separation costs at December 31, 2009, and 2008 (in thousands):
Store Closure
Liabilities
Administrative Office
and Distribution
Facilities Closure
Liabilities
Employee
Separation
Liabilities
Balance at January 1, 2008:
$
1,841
$
Recorded CSK liabilities assumed, as of July 11, 2008
Planned CSK exit activities
Additions and accretion
Payments
CSK exit activities
Other exit activities
Revisions to estimates
Balance at December 31, 2008:
Planned CSK exit activities
Additions and accretion
Payments
CSK exit activities
Other exit activities
Revisions to estimates
3,650
4,141
695
(1,723)
(868)
(362)
7,374
10,646
995
(2,810)
(949)
521
$
--
--
4,127
--
--
--
--
4,127
4,739
291
(1,375)
--
(129)
--
--
27,613
--
(2,534)
--
--
25,079
(996)
--
(22,003)
--
--
Balance at December 31, 2009:
$
15,777
$
7,653
$
2,080
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As discussed in Note 4 on each of July 24, 2008, October 14, 2008, and November 24, 2008, the Company entered into interest rate
swap transactions with BBT, BA and SunTrust to mitigate cash flow risk associated with the floating interest rate based on the one
month LIBOR rate on an aggregate of $450 million of the debt outstanding under the ABL Credit Agreement, dated as of July 11,
2008. The interest rate swap transaction we entered into with SunTrust on November 24, 2008, was for $50 million and matured on
November 28, 2009, bringing out total notional amount to $400 million as of December 31, 2009, thus increasing our exposure to
changes in interest rates. The swap transactions have been designated as cash flow hedges with interest payments designed to offset
the interest payments for borrowings under the ABL Credit Agreement that correspond to notional amounts of the swaps. The fair
value of the Company’s outstanding hedges are recorded as a liability in the accompanying Consolidated Balance Sheets at December
31, 2009 and 2008. Changes in fair market value are recorded in other comprehensive income (loss), and any changes resulting from
ineffectiveness of the hedge transactions would be recorded in current earnings. The Company’s hedging instruments have been
deemed to be highly effective as of December 31, 2009. The fair value of the swap transactions for the years ended December 31,
2009 and 2008, were a payable of $13.1 million ($8.0 million net of tax) and $18.9 million ($11.5 million net of tax), respectively.
The net amount is included as a component of “Accumulated other comprehensive loss”.
The table below represents the amount recorded on the Company’s Consolidated Balance Sheets as being a payable to counterparties
at December 31 (in thousands):
Derivative designated as hedging instrument
Interest Rate Swap Contracts
Interest Rate Swap Contracts
Location
Other Current Liabilities
Other Liabilities
2009
$
$
4,140
8,913
$
2008
18,874
--
Liabilities
62
The table below represents unrealized losses related to derivative amounts included in “Accumulated other comprehensive loss” for the
years ended December 31, (in thousands):
Contract Type
Interest Rate Swaps
$
Balance in
Accumulated Other
Comprehensive Loss
2008
2009
18,874
13,053 $
NOTE 9 – FAIR VALUE MEASUREMENTS
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial
instruments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value
hierarchy are set forth below:
• Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active
markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
• Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or
indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or
other valuation methodologies. These models are primarily industry-standard models that consider various assumptions,
including time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as
other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the
full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions
are executed in the marketplace.
• Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs
may be used with internally developed methodologies that result in management’s best estimate of fair value from the
perspective of a market participant.
The fair value of the interest rate swap transactions are based on the discounted net present value of the swap using third party quotes
(level 2). Changes in fair market value are recorded in other comprehensive income (loss), and changes resulting from ineffectiveness
are recorded in current earnings.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are
identified in the table below and are as follows:
a) Market approach – prices and other relevant information generated by market transactions involving identical or comparable
assets or liabilities
b) Cost approach – amount that would be required to replace the service capacity of an asset (replacement cost)
c)
Income approach – techniques to convert future amounts to a single present amount based on market expectations (including
present value techniques, option-pricing and excess earnings models)
63
Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
December 31, 2009
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Valuation
Technique
Total
Derivative contracts
$
-- $
(13,053) $
--
(c) $
(13,053)
December 31, 2008
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Valuation
Technique
Total
Derivative contracts
$
-- $
(18,874) $
--
(c) $
(18,874)
The estimated fair values of the Company’s financial instruments, which are determined by reference to quoted market prices, where
available, or are based on comparisons to similar instruments of comparable maturities, are as follows (in thousands):
December 31, 2009
Carrying
Amount
Estimated
Fair Value
December 31, 2008
Carrying
Amount
Estimated
Fair Value
Obligations under 6¾% senior
exchangeable notes
$ 100,718
$ 119,273
$ 103,568
$
99,750
The Company has determined that the estimated fair value of its asset-based revolving credit facility approximates the carrying amount
of $678,800,000. The valuation was determined by consulting investment bankers, the Company’s observations of the value tendered
by counterparties moving into and out of the facility and an analysis of the changes in credit spreads over the previous twelve months
for comparable companies in the industry.
NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized holding gains on available-for-sale securities, consisting of the Company’s investment in CSK common stock prior to the
Company’s completion of the acquisition of CSK, as well as unrealized losses from interest rate swaps that qualify as cash flow hedges
are included in accumulated other comprehensive income (loss). The adjustment to accumulated other comprehensive loss for the year
ended December 31, 2009, totaled $5,821,000 with a corresponding tax liability of $2,270,000 resulting in a net of tax effect of
$3,551,000. The adjustment to accumulated other comprehensive loss for the year ended December 31, 2008, totaled $7,974,000 with
a corresponding tax liability of $3,261,000 resulting in a net of tax effect of $4,713,000.
Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2007, December 31, 2008, and
December 31, 2009, consisted of the following (in thousands):
Balance at December 31, 2006
Period change
Balance at December 31, 2007
Period change
Balance at December 31, 2008
Period change
Balance at December 31, 2009
$
$
Unrealized
Gains (Losses)
on Securities
Unrealized
Losses on
Cash Flow
Hedges
Accumulated
Other
Comprehensive
Loss
--
(6,800)
(6,800)
6,800
--
--
--
$
$
--
--
--
(11,513)
(11,513)
3,551
(7,962)
$
$
--
(6,800)
(6,800)
(4,713)
(11,513)
3,551
(7,962)
Comprehensive income for the years ended December 31, 2009, December 31, 2008, and December 31, 2007, was $311,049,000
$181,519,000 and $187,188,000, respectively.
64
NOTE 11 — SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS
The Company recognizes share-based compensation expense based on the fair value of the awards at the time of the grant. Share-
based payments include stock option awards issued under the Company’s employee stock option plan, director stock option plan, stock
issued through the Company’s employee stock purchase plan and stock awarded to employees through other benefit programs.
Stock Options
The Company’s employee stock-based incentive plans provides for the granting of stock options to certain key employees of the
Company for the purchase of common stock of the Company. A total of 34,000,000 shares have been authorized for issuance under
these plans. Options are granted at an exercise price that is equal to the closing market price 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. The Company
records compensation expense for the grant date fair value of option awards evenly over the vesting period under the straight-line
method. A summary of the shares subject to currently issued and outstanding stock options under these plans are as follows:
Outstanding at December 31, 2008
Granted
Exercised
Forfeited
Outstanding at December 31, 2009
Vested or expected to vest at December 31, 2009
Exercisable at December 31, 2009
Shares
11,270,976
1,536,702
(2,195,815)
(886,984)
9,724,879
8,791,096
4,844,901
Weighted-
Average
Exercise
Price
$
$
$
$
25.25
34.63
24.27
29.34
26.57
26.13
23.70
Weighted-
Average
Remaining
Contractual
Terms (in
years)
Aggregate
Intrinsic Value
6.98
6.79
5.29
$
$
$
112,311,115
105,413,590
69,855,725
The Company maintains a stock based incentive plan for non-employee directors of the Company pursuant to which the Company may
grant stock options. Up to 1,000,000 shares of common stock have been authorized for issuance under this plan. 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. The Company records compensation expense for the grant date fair
value of option awards evenly over the vesting period under the straight-line method. A summary of the shares subject to currently
issued and outstanding stock options under this plan is as follows:
Outstanding at December 31, 2008
Granted
Exercised
Forfeited
Outstanding at December 31, 2009
Vested or expected to vest at December 31, 2009
Exercisable at December 31, 2009
Weighted-
Average
Exercise
Price
$
$
$
$
23.04
37.50
17.63
--
26.39
26.39
26.39
Shares
240,000
25,000
(60,000)
--
205,000
205,000
205,000
Weighted-
Average
Remaining
Contractual
Terms (in
years)
Aggregate
Intrinsic Value
3.24
3.24
3.24
2,404,925
2,404,925
2,404,925
At December 31, 2009, approximately 9,691,000 and 310,000 shares were available for future grants under the employee stock option
plan and director stock option plan, respectively. For the year ended December 31, 2009, the Company recognized stock option
compensation expense related to these plans of $13,451,000 and a corresponding income tax benefit of $5,246,000. For the year
ended December 31, 2008, the Company recognized stock option compensation expense related to these plans of $7,991,000 and a
corresponding income tax benefit of $3,072,000. For the year ended December 31, 2007, the Company recognized stock option
compensation expense related to these plans of $4,882,000 and a corresponding income tax benefit of $1,801,000.
The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The
Black-Scholes model requires the use of assumptions, including expected volatility, expected life, the risk free rate and the expected
65
dividend yield. Expected volatility 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 rates for periods within the contractual life of the options are based on the United States
Treasury rates in effect at the time the options are granted for the options’ expected life.
The following weighted-average assumptions were used for grants issued for the years ended December 31, 2009, 2008 and 2007:
Risk-free interest rate
Expected life
Expected volatility
Expected dividend yield
2009
2.04 %
4.7 years
33.0 %
0 %
2008
2.91 %
4.2 years
26.8 %
0 %
2007
4.47 %
4.4 years
33.7 %
0 %
The weighted-average grant-date fair value of options granted during the years ended December 31, 2009, 2008 and 2007, were
$11.10, $7.01 and $11.81, respectively. The total intrinsic value of options exercised during the years ended December 31, 2009,
2008 and 2007 were $30,039,000, $6,578,000 and $19,511,000, respectively. The Company recorded cash received from the exercise
of stock options of $54,346,000, $18,625,000 and $17,124,000, in the years ended December 31, 2009, 2008 and 2007, respectively.
The remaining unrecognized compensation cost related to unvested awards at December 31, 2009, was $37,113,000 and the weighted-
average period of time over which this cost will be recognized is 2.62 years. The weighted-average remaining contractual life of
options currently exercisable at December 31, 2009, 2008 and 2007, was 5.21, 4.90 and 4.96 years, respectively.
Employee Stock Purchase Plan
The Company’s employee stock purchase plan permits all eligible employees to purchase shares of the Company’s common stock at
85% of the fair market value. Participants may authorize the Company to withhold up to 5% of their annual salary to participate in the
plan. The stock purchase plan authorizes up to 4,250,000 shares to be granted. During the year ended December 31, 2009, the
Company issued 178,523 shares under the purchase plan at a weighted average price of $30.47 per share. During the year ended
December 31, 2008, the Company issued 208,293 shares under the purchase plan at a weighted average price of $22.61 per share.
During the year ended December 31, 2007, the Company issued 156,466 shares under the purchase plan at a weighted average price of
$29.12 per share. Compensation expense is recognized based on the discount between the grant date fair value and the employee
purchase price for shares sold to employees. During the year ended December 31, 2009, the Company recorded $959,000 of
compensation cost related to employee share purchases and a corresponding income tax benefit of $374,000. During the year ended
December 31, 2008, the Company recorded $831,000 of compensation cost related to employee share purchases and a corresponding
income tax benefit of $319,000. During the year ended December 31, 2007, the Company recorded $804,000 of compensation cost
related to employee share purchases and a corresponding income tax benefit of $290,000. At December 31, 2009, approximately
1,453,000 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 and have at least six months of service. The Company has agreed to make matching contributions equal to 100% of the first 2%
of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed. The Company
may also make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of
Directors. Prior to September 30, 2009, the Company’s matching and profit sharing contributions under this plan were funded in the
form of shares of the Company’s common stock. Since September 30, 2009, the Company’s matching and discretionary profit sharing
contributions under this plan have been funded in cash. A total of 4,200,000 shares of common stock have been authorized for
issuance under this plan. During the year ended December 31, 2009, the Company recorded $6,832,000 of compensation cost for
contributions to this plan and a corresponding income tax benefit of $2,664,000. During the year ended December 31, 2008, the
Company recorded $4,159,000 of compensation cost for contributions to this plan and a corresponding income tax benefit of
$1,599,000. During the year ended December 31, 2007, the Company recorded $6,849,000 of compensation cost for contributions to
this plan and a corresponding income tax benefit of $2,527,000. The Company issued 193,127 shares in 2009 to fund matching
contributions at an average grant date fair value of $35.37. The Company issued 321,162 shares in 2008 to fund the 2007 profit
sharing and matching contributions at an average grant date fair value of $26.72. The Company issued 197,431 shares in 2007 to fund
the 2006 profit sharing and matching contributions at an average grant date fair value of $32.90. A portion of these shares related to
profit sharing contributions accrued in prior periods. At December 31, 2009, approximately 349,000 shares were reserved for future
issuance under this plan; however, the Company does not anticipate funding this plan with the issuance of shares in the future.
On July 11, 2008, in conjunction with the acquisition of CSK, the Company became the sponsor for a 401(k) plan that is available to
all CSK team members who are at least 21 years of age. The Company matches from 40% to 60% of participant contributions in 10%
increments, based on years of service, up to 4% of the participant’s base salary. The Company matching contributions vest after one
66
year of plan participation or three years of Company service. The Company’s matching contributions from the July 11, 2008,
acquisition date through December 31, 2008, totaled $889,000. The CSK 401(k) plan was merged with the Company’s profit sharing
and savings plan effective January 1, 2009.
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 650,000 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 $544,000 of compensation cost for this plan for
the year ended December 31, 2009, and recognized a corresponding income tax benefit of $212,000. The Company recorded
$494,000 of compensation cost for this plan for the year ended December 31, 2008, and recognized a corresponding income tax
benefit of $190,000. The Company recorded $459,000 of compensation cost for this plan for the year ended December 31, 2007, and
recognized a corresponding income tax benefit of $169,000. The total fair value of shares vested (at vest date) for the years ended
December 31, 2009, 2008 and 2007, were $657,000, $497,000 and $478,000, respectively. The remaining unrecognized
compensation cost related to unvested awards at December 31, 2009, was $618,000. The Company awarded 21,773 shares under this
plan in 2009 with an average grant date fair value of $33.36. The Company awarded 16,830 shares under this plan in 2008 with an
average grant date fair value of $26.96. The Company awarded 16,189 shares under this plan in 2007 with an average grant date fair
value of $34.02. Compensation cost for shares awarded is recognized over the three-year vesting period. Changes in the Company’s
restricted stock for the year ended December 31, 2009, were as follows:
Non-vested at December 31, 2008
Granted during the period
Vested during the period
Forfeited during the period
Non-vested at December 31, 2009
Shares
15,381
21,773
17,244
(378)
19,532
Weighted-
Average
Grant Date
Fair Value
$
29.13
33.36
31.57
31.34
31.65
At December 31, 2009, approximately 458,000 shares were reserved for future issuance under this plan.
Supplemental Retirement Plan Agreement
In conjunction with the CSK acquisition on July 11, 2008, the Company assumed a supplemental executive retirement plan agreement
with CSK’s former Chairman and Chief Executive Officer, Maynard Jenkins, which provides supplemental retirement benefits for a
period of 10 years beginning on the first anniversary of the effective date of termination of his employment. Mr. Jenkins retired on
August 15, 2007. The benefit amount in this agreement is fully vested and payable to Mr. Jenkins at a rate of $600,000 per annum.
The Company has accrued the entire present value of this obligation of approximately $4,000,000 as of the July 11, 2008 acquisition
date. Payments of $600,000 were made to Mr. Jenkins in 2009 and payments of $600,000 were made to Mr. Jenkins between July 11,
2008, the acquisition date, and December 31, 2008.
67
NOTE 12 — INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income per common share (in thousands, except per share data):
Numerator (basic and diluted):
Net income
Denominator:
Denominator for basic income per common share–
weighted-average shares
Effect of stock options (See Note 11)
Effect of exchangeable notes (See Note 4)
Denominator for diluted income per common share-
adjusted weighted-average shares and
assumed conversion
2009
Years ended December 31,
2008
2007
$
307,498
$
186,232
$
193,988
136,230
1,651
1
124,526
887
--
114,667
1,413
--
137,882
125,413
116,080
Basic net income per common share
Net income per common share-assuming dilution
$
$
2.26
$
1.50
$
2.23
$
1.48
$
1.69
1.67
Incremental net shares for the exchange feature of the Notes, (see Note 4), were included in the diluted earnings per share calculation
for the year ended December 31, 2009; however, the incremental net shares for the exchange feature of the Notes were not included in
the diluted earnings per share calculation for the year ended December 31, 2008, as the impact would have been antidilutive. The
Company did not hold the Notes for any portion of the year ended December 31, 2007.
For the years ended December 31, 2009, 2008 and 2007, there were stock options outstanding, which were not included in the
computation of diluted earnings per share as the impact of these options would have been antidilutive. The weighted-average exercise
price per share for the options was $35.15, $30.27 and $33.00 for the years ended December 31, 2009, 2008 and 2007, respectively.
The following table summarizes the antidilutive stock options (in thousands):
Antidilutive stock options
2009
1,103
Years ended December 31,
2008
5,184
2007
1,613
68
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, and also include the tax effect of carry forwards.
Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31 (in thousands):
Deferred tax assets:
Current:
Allowance for doubtful accounts
Unrealized loss on cash flow hedges
Net operating losses
Other accruals
Noncurrent:
Tax credits
Net operating losses
Unrealized losses on cash flow hedges
Other accruals
Total deferred tax assets
Deferred tax liabilities:
Current:
Inventories
Noncurrent:
Property and equipment
Other
Total deferred tax liabilities
Net deferred tax assets
2009
2008
$
1,897
1,606
16,159
74,702
9,202
4,016
3,458
31,375
142,415
1,763
7,361
--
57,518
9,294
38,560
--
22,380
136,876
8,430
62,764
3,608
74,802
67,613
$
2,614
40,896
571
44,081
92,795
$
$
The provision for income taxes consists of the following (in thousands):
2009:
Federal
State
2008:
Federal
State
2007:
Federal
State
$
$
$
$
$
$
Current
Deferred
Total
121,919
17,100
139,019
$
$
44,339
6,042
50,381
$
$
166,258
23,142
189,400
90,544
14,725
105,269
$
$
9,313
1,718
11,031
$
$
99,857
16,443
116,300
110,302
9,539
119,841
$
$
(5,847)
(494)
(6,341)
$
$
104,455
9,045
113,500
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows (in thousands):
Federal income taxes at statutory rate
State income taxes, net of federal tax benefit
Other items, net
2009
$
$
173,914
18,896
(3,410)
189,400
$
$
2008
105,887
10,633
(220)
116,300
2007
107,620
5,880
--
113,500
$
$
The excess 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.
69
As of December 31, 2009, the Company had net operating loss carry forwards for federal income tax purposes of $51,578,000 (for
which a portion are also available for state tax purposes) and general business tax credit carry forwards available for federal and state
tax purposes of $2,386,000 and $4,305,000, respectively. The Company also has an alternative minimum tax credit carry forward for
federal tax purposes of $2,510,000. The net operating loss carry forwards generally expire in years ranging from 2021 to 2027, and
the tax credits generally expire in years ranging from 2019 to 2028. The alternative minimum tax credit carry forward does not expire.
As of the years ended December 31, 2009, 2008 and 2007, the Company had recorded a reserve for unrecognized tax benefits
(including interest) of $37,600,000, $34,300,000 and $19,700,000, respectively, of which $37,600,000, $34,300,000 and $19,700,000
would affect the Company’s effective tax rate if recognized, generally net of federal tax affect. The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense. As of the years ended December 31, 2009, 2008 and 2007, the
Company had accrued approximately $4,030,000, $3,900,000 and $2,748,000, respectively, of interest related to uncertain tax
positions before the benefit of the deduction for interest on state and federal returns. During the years ended December 31, 2009, 2008
and 2007, the Company recorded tax expense related to an increase in its liability for interest of $1,521,000, $1,429,000 and
$1,289,000, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2010, the
Company expects a reduction of $3,465,000 of unrecognized tax benefits during the one-year period subsequent to December 31,
2009, resulting from settlement or expiration of the statute of limitations.
The O’Reilly U.S. federal income tax returns for tax years 2006 and beyond remain subject to examination by the Internal Revenue
Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2006 and 2007 federal income tax returns in the
fourth quarter of 2009. The statute of limitations for the O’Reilly federal income tax returns for tax years 2005 and prior have expired.
The statute of limitations for the O’Reilly U.S. federal income tax return for 2006 will expire on September 15, 2010, unless otherwise
extended. The IRS is currently conducting an examination of the O’Reilly consolidated return for the tax year 2008. The O’Reilly
state income tax returns remain subject to examination by various state authorities for tax years ranging from 2001 through 2008.
CSK has had net operating losses in various years dating back to the tax year 1993. For CSK, the statute of limitation for a particular
tax year for examination by the IRS is three years subsequent to the last year in which the loss carryover is finally used. The IRS
completed an examination of the CSK consolidated federal tax return for the fiscal years ended January 30, 2005, January 29, 2006,
February 4, 2007, and February 2, 2008. The statute of limitation for a particular tax year for examination by various states is
generally three to four years subsequent to the last year in which the loss carryover is finally used.
A summary of the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended
December 31, 2009, 2008 and 2007, is shown below (in thousands):
Balance as of January 1
Addition based on tax positions related to the current year
Addition based on tax positions related to prior years
Addition based on tax positions related to CSK acquisition
Reduction due to lapse of statute of limitations
Balance as of December 31
2009
30,400
5,900
--
--
(2,730)
33,570
$
$
2008
16,952
5,638
--
8,620
(810)
30,400
$
$
2007
13,245
3,484
827
--
(604)
16,952
$
$
NOTE 14 — LEGAL MATTERS
O’Reilly Litigation
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s 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,
these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular
quarter or annual period. In addition, O'Reilly is involved in resolving the governmental investigations that were being conducted
against CSK prior to its acquisition by O'Reilly.
CSK Pre-Acquisition Matters – Governmental Investigations and Actions
As previously reported, the pre-acquisition SEC investigation of CSK, which commenced in 2006, was settled in May 2009 by
administrative order without fines, disgorgement or other financial remedies. However, the DOJ’s criminal investigation into these
same matters remains ongoing. In addition, the previously reported SEC complaint against four (4) former employees of CSK for
alleged conduct related to CSK’s historical accounting practices remains ongoing, though one of those former employees died in
January, 2010. The action filed by the SEC on July 22, 2009, against Maynard L. Jenkins, the former chief executive officer of CSK
seeking reimbursement from Mr. Jenkins of certain bonuses and stock sale profits pursuant to Section 304 of the Sarbanes-Oxley Act
70
of 2002, as previously reported, also continues. The previously reported DOJ criminal complaint against two (2) of the former
employees of CSK remains ongoing. However, given the recent death of one (1) of those former employees, we expect no further
action with respect to such former employee.
With respect to the ongoing DOJ investigation discussed above, attorneys from the DOJ have indicated that as a result of conduct
alleged against the former employees, as set forth in the pleadings in United States vs. Fraser, et. al., U.S.Dist.Ct., Dist. of Ariz.; Case
No: 2:09-cr-00372-SRB-2, the DOJ is considering whether to file criminal charges against CSK. O’Reilly is engaged in discussions
with the DOJ to attempt to resolve the matter. O’Reilly cannot predict the outcome of these discussions at this time. O’Reilly intends
to vigorously defend against any such charges if filed. The probability of criminal charges being filed against CSK or the magnitude of
the costs to resolve these issues cannot now be reasonably estimated. Accordingly, the accompanying financial statements do not
reflect an accrued liability for this contingency.
Several of CSK's former directors or officers and current or former employees have been or may be interviewed as part of or become
the subject of criminal, administrative and civil investigations and lawsuits. As described above, certain former employees of CSK are
the subject of civil and criminal litigation commenced by the government. Under Delaware law, the charter documents of the CSK
entities and certain indemnification agreements, CSK has certain obligations to indemnify these persons and O’Reilly is currently
incurring legal fees on the behalf of these persons in relation to pending matters. Some of these indemnification obligations and other
related costs may not be covered by CSK’s insurance policies.
As a result of the CSK acquisition, O’Reilly expects to continue to incur ongoing legal fees related to the ongoing DOJ investigation of
CSK and indemnity obligations for the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly
recorded an assumed liability for such fees in the Company’s allocation of purchase price of CSK, of which $20,682,000 remains
accrued as of December 31, 2009. O’Reilly has paid approximately $3,978,000 of such legal costs related to the government
investigations and indemnity obligations in 2009.
The foregoing governmental investigations and indemnification matters are subject to many uncertainties, and, given their complexity
and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period the
Company’s results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of such matters,
depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the
ultimate outcome of all of such regulatory proceedings that are pending, after consideration of applicable reserves and potentially
available insurance coverage benefits not contemplated in recorded reserves, should not have a material adverse effect on the
Company’s consolidated financial condition, results of operations and cash flows.
NOTE 15—SHAREHOLDER RIGHTS PLAN
On May 7, 2002, the Board of Directors adopted a shareholder rights plan whereby one right was distributed for each share of common
stock, par value $0.01 per share, of the Company held by stockholders of record (the “Rights”) as of the close of business on May 31,
2002. The Rights initially entitle stockholders to buy a unit representing one one-hundredth of a share of a new series of preferred
stock of the Company for $160 and expire on May 30, 2012. The Rights generally will be exercisable only if a person or group
acquires beneficial ownership of 15% or more of the Company's common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of the Company's common stock. If a person or
group acquires beneficial ownership of 15% or more of the Company's common stock, each Right (other than Rights held by the
acquiror) will, unless the Rights are redeemed by the Company, become exercisable upon payment of the exercise price of $160 for an
amount of common stock of the Company having a market value of twice the exercise price of the Right. A copy of the Rights
Agreement was filed on June 3, 2002, with the Securities and Exchange Commission, as Exhibit 4.2 to the Company’s report on Form
8-K.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report
71
are functioning effectively to provide reasonable assurance that the information required to be disclosed by us (including our
consolidated subsidiaries) in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
On July 11, 2008, the Company completed its acquisition of CSK, at which time CSK became a wholly owned subsidiary of the
Company. The Company considers the transaction material to results of operations, cash flows and financial position from the date of
the acquisition through December 31, 2009.
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2009,
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company.
Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our
board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the
United States and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
our assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and members of our board of directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control—Integrated Framework.
Based on our assessment, management concluded that, as of December 31, 2009, our internal control over financial reporting is
effective based on those criteria.
Ernst & Young LLP, our independent registered public accounting firm, has audited management’s assessment of the effectiveness of
our internal control over financial reporting as of December 31, 2009, as stated in their report, which is included above.
Item 9B. Other Information
Not Applicable.
72
PART III
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 2010
Annual Meeting of Shareholders (the “Proxy Statement”) under the caption “Proposal 1-Election of Class II Directors” is incorporated
herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of
our most recent fiscal year. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I,
in accordance with General Instruction G (3) to Form 10-K, for our executive officers who are not also directors.
Our Board of Directors has adopted a code of ethics that applies to all of our directors, officers (including its chief executive officer,
chief operating officer, chief financial officer, chief accounting officer, controller and any person performing similar functions) and
employees. Our Code of Ethics is available on our website at www.oreillyauto.com.
The Board of Directors has established an Audit Committee pursuant to Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). The Audit Committee currently consists of John Murphy, Paul R. Lederer and Ronald Rashkow,
each an independent director in accordance with The Nasdaq Stock Market Marketplace Rule 5605(a)(2), the standards of Rule 10A-3
of the Exchange Act and the requirements of The Nasdaq Stock Market Marketplace Rule 5605(c)(2). In addition, our Board of
Directors has determined that Mr. Murphy, Chairman of the Audit Committee, qualifies as an audit committee financial expert under
Item 407(d)(5) of Regulation S-K.
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 “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
Item 11.
Executive Compensation
The information required by Item 402 of Regulation S-K will be included in the Proxy Statement under the captions “Compensation of
Executive Officers” and “Director Compensation” and that information is incorporated herein by reference.
The information required by Item 407(e)(4) and (e)(5) of Regulation S-K will be included in the Proxy Statement under the captions
“Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” and that information is
incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 201(d) of Regulation S-K regarding our equity compensation plans will be included in the Proxy
Statement under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated herein by
reference. The information required by Item 403 of Regulation S-K will be included in the Proxy Statement under the captions
“Security Ownership of Certain Beneficial Owners” and “Security Ownership of Directors and Management” and is incorporated
herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by Item 404 of Regulation S-K will be included in the Proxy Statement under the caption “Certain
Relationships and Related Transactions” and is incorporated herein by reference.
The information required by Item 407(a) of Regulation S-K will be included in the Proxy Statement under the caption “Director
Independence” and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information in the Proxy Statement under the caption “Fees Paid to Independent Registered Public Accounting Firm” is
incorporated herein by reference.
73
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
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, 2009, are filed with this Annual Report in Part II, Item 8:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm – Financial Statements
Consolidated Balance Sheets as of December 31, 2009, and 2008
Consolidated Statements of Income for the years ended December 31, 2009, 2008, and 2007
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2009, 2008, and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007
Notes to Consolidated Financial Statements for the years ended December 31, 2009, 2008, and 2007
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 15(c):
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.
3. Exhibits
See Exhibit Index on page E-1.
74
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Column A
Column B
Column C
Column D
Column E
Balance at
Beginning
of Period
Additions -
Charged to
Costs and
Expenses
Additions -
Charged to Other
Accounts -
Describe
Deductions -
Describe
Balance at
End
of Period
$
2,776 $
4,521
2,540 $
11,342
--
$
--
9,068 (1)
$
5,316
6,795
$
2,263 $
42 $
656 (2) $
185 (3) $
3,179
7,439
431 (2)
6,528 (1)
2,776
4,521
$
1,540 $
2,861
723 $
5,361
-
-
$
-
$
5,043 (1)
2,263
3,179
Description
(amounts in thousands)
Year ended December 31, 2009:
Deducted from asset account:
Sales and returns allowances
Allowance for doubtful accounts
Year ended December 31, 2008:
Deducted from asset account:
Sales and returns allowances
Allowance for doubtful accounts
Year ended December 31, 2007:
Deducted from asset account:
Sales and returns allowances
Allowance for doubtful accounts
(1) Uncollectable accounts written off
(2) Acquired in allocation of CSK purchase price
(3) Allowance adjustment
75
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.
SIGNATURES
O'REILLY AUTOMOTIVE, INC.
(Registrant)
Date: February 26, 2010
By /s/ Greg Henslee
Greg Henslee
Chief Executive Officer and Co-President
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
/s/ David E. O’Reilly
David E. O'Reilly
Director and Chairman of the Board
Date
February 26, 2010
/s/ Lawrence P. O’Reilly
Lawrence P. O'Reilly
Director and Vice-Chairman of the Board
February 26, 2010
/s/ Charles H. O’Reilly, Jr.
Charles H. O'Reilly, Jr.
Director and Vice-Chairman of the Board
February 26, 2010
/s/ Rosalie O’Reilly Wooten
Rosalie O'Reilly Wooten
Director
/s/ Jay D. Burchfield
Jay D. Burchfield
/s/ Paul R. Lederer
Paul R. Lederer
/s/ John Murphy
John Murphy
/s/ Ronald Rashkow
Ronald Rashkow
Director
Director
Director
Director
February 26, 2010
February 26, 2010
February 26, 2010
February 26, 2010
February 26, 2010
/s/ Greg Henslee
Greg Henslee
Chief Executive Officer and Co-President
(Principal Executive Officer)
February 26, 2010
/s/ Ted Wise
Ted Wise
Chief Operating Officer and Co-President
February 26, 2010
/s/ Thomas McFall
Thomas McFall
Executive Vice-President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 26, 2010
76
Exhibit
No.
2.2
3.1
3.2
Description
EXHIBIT INDEX
Agreement and Plan of Merger, dated April 1, 2008, between O’Reilly Automotive, Inc., OC Acquisition
Company and CSK Auto Corporation, filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
dated April 7, 2008, is incorporated herein by this reference.
Restated Articles of Incorporation of the Registrant, filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K dated May 27, 2005, is incorporated herein by this reference.
Amended and Restated Bylaws of the Registrant as Amended by Amendment No. 1, filed as Exhibit 3.2 to the
Form 8-K dated November 12, 2003, is incorporated herein by reference.
4.1*
Form of Stock Certificate for Common Stock.
4.2
Rights Agreement, dated as of May 7, 2002, between O'Reilly Automotive, Inc. and UMB Bank, N.A., as
Rights Agent, including the form of Certificate of Designation, Preferences and Rights as Exhibit A, the form
of Rights Certificates as Exhibit B and the Form of Summary of Rights as Exhibit C, filed as Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K dated June 3, 2002, is incorporated herein by this reference.
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 herein 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 herein 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.
10.13
10.14
Loan commitment and construction loan agreement between the Registrant and Deck Enterprises, filed as
Exhibit 10.13 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31,
1993, are incorporated herein by this reference.
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 herein by this
reference.
10.15(a) 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 herein 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 herein by this
reference.
Page E-1
77
EXHIBIT INDEX (continued)
Description
Exhibit
No.
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 herein 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 incorporated
herein 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
herein by this reference.
10.22 (a) O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as Exhibit 10.23 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated herein 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 herein by this reference.
10.24(a) 2001 Amendment to the O’Reilly Automotive, Inc. 1993 Stock Option Plan, dated May 8, 2001, filed as Exhibit
10.24 to the Registrant’s Annual Shareholders’ Report on Form 10-K for the year ended December 31, 2002, is
incorporated herein by this reference.
10.26(a) First Amendment to Retirement Agreement, dated February 7, 2001, filed as Exhibit 10.26 to the Registrant’s
Annual Shareholders’ Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by
this reference.
10.27(a) Fourth Amendment to the O’Reilly Automotive, Inc. 1993 Stock Option Plan, dated February 7, 2001, filed as
Exhibit 10.27 to the Registrant’s Annual Shareholders’ Report on Form 10-K for the year ended December 31,
2001, is incorporated herein by this reference.
10.37(a) Amended and Restated O’Reilly Automotive, Inc 2003 Incentive Plan, filed as Appendix B to the Registrant’s
Proxy Statement for 2005 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this
reference.
10.38(a) Amended and Restated O’Reilly Automotive, Inc 2003 Directors’ Stock Plan, filed as Appendix C to the
Registrant’s Proxy Statement for 2005 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein
by this reference.
10.39
10.40
10.41
Credit Agreement, dated as of July 11, 2008, among O’Reilly Automotive, Inc., as the lead Borrower itself and
the other Borrowers from time to time party thereto, the Guarantors from time to time party thereto, Bank of
America N.A., as Administrative Agent, Collateral Agent, L/C Issuer, and Swing Line Lender, the Lenders from
time to time party thereto, and the other agents party thereto, filed as Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K dated July 11, 2008, is incorporated herein by this reference.
Indenture, dated as of December 19, 2005, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM,
Inc. as guarantors, and the Bank of New York Trust Company, N.A., as Trustee, filed as Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K dated July 11, 2008, is incorporated herein by this reference.
First Supplemental Indenture, dated as of December 30, 2005, among CSK Auto, Inc., CSK Auto Corporation,
CSKAUTO.COM, Inc., and The Bank of New York Trust Company, N.A., as Trustee, filed as Exhibit 10.3 to
the Registrant’s Current Report on Form 8-K dated July 11, 2008, is incorporated herein by this reference.
Page E-2
78
EXHIBIT INDEX (continued)
Exhibit
No.
10.42
10.43
10.44
Description
Second Supplemental Indenture, dated as of July 27, 2006, among CSK Auto, Inc., CSK Auto Corporation,
CSKAUTO.COM, Inc., and The Bank of New York Trust Company, N.A., as Trustee, filed as Exhibit 10.4 to
the Registrant’s Current Report on Form 8-K dated July 11, 2008, is incorporated herein by this reference.
Third Supplemental Indenture, dated as of July 11, 2008, among O’Reilly Automotive, Inc., CSKAUTO.COM,
Inc., CSK Auto, Inc., CSK Auto Corporation, and The Bank of New York Mellon Trust Company, N.A., as
Trustee, filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated July 11, 2008, is
incorporated herein by this reference.
Fourth Supplemental Indenture, dated as of December 31, 2008, among O’Reilly Automotive, Inc., CSK Auto
Corporation, CSKAUTO.COM, Inc. and The Bank of New York Trust Company, N.A., as Trustee, filed as
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 31, 2008, is incorporated herein
by this reference.
10.45 (a) O’Reilly Automotive, Inc. 2009 Stock Purchase Plan, filed as Appendix A to the Registrant’s Proxy Statement
for 2009 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
10.46 (a) O’Reilly Automotive, Inc. 2009 Incentive Plan, filed as Appendix B to the Registrant’s Proxy Statement for
2009 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
10.47
Form of Stock Option Agreement, dated as of December 31, 2009, filed herewith.
18.0
Independent Registered Public Accounting Firm Letter Regarding Accounting Change, dated March 7, 2005,
filed as Exhibit 18.0 to the Registrant’s Annual Shareholders’ Report on Form 10-K for the year ended
December 31, 2004, is incorporated herein by this reference.
21.1
Subsidiaries of the Registrant, filed herewith.
23.1
Consent of Ernst & Young LLP, independent registered public accounting firm, filed herewith.
31.1
31.2
32.1
32.2
Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, filed herewith.
*
(a)
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.
Management contract or compensatory plan or arrangement.
Page E-3
79
O’REILLY AUTOMOTIVE, INC. 2009 INCENTIVE PLAN
FORM OF STOCK OPTION AGREEMENT
Exhibit 10.47
This Stock Option Agreement (the “Agreement”) is entered into this [Date1] (the “Option Date”) by and between O’Reilly Automotive, Inc.,
a Missouri corporation (the “Company”), and [Award Recipient] (the “Optionee”) pursuant to the O’Reilly Automotive, Inc. 2009 Incentive
Plan, as the same may be amended from time to time (the “Plan”). Capitalized terms not defined herein shall have the meanings set forth in
the Plan.
1.
GRANT OF OPTION. The Company hereby grants to the Optionee an option to purchase [Insert Number] shares (the
“Option Shares”) of the common stock of the Company (the “Common Stock”) at a price of [Insert Price] per share, in the manner and
subject to the conditions provided herein. This Option is intended to be a Non-Qualified Stock Option, as defined in Section 2(s) of the Plan.
2.
TERM OF OPTION. The maximum term of this Option is ten (10) years; accordingly, this Option shall expire not later
than the close of business on [Insert Date].
3.
TIME OF EXERCISE OF OPTION. Subject to the Optionee’s continued employment with the Company or a
Subsidiary, this Option shall become twenty five percent (25%) exercisable upon [Date2]; fifty percent (50%) exercisable upon [Date3];
seventy five percent (75%) exercisable upon [Date4]; and one hundred percent (100%) exercisable upon [Date5] and for the remainder of its
term with respect to all of the Option Shares then remaining unissued (subject to Section 5 hereof and the terms of the Plan) [modify for
vesting schedule as determined by the Board]. Notwithstanding the foregoing, in the event of a Change in Control [or retirement upon
circumstances determined by the Board], this Option shall become one hundred percent (100%) exercisable effective on the date of such
Change in Control [ subject to the Optionee’s continued employment with the Company or a Subsidiary at such time]. All unexercised
Options, both vested and unvested, are immediately forfeited upon a termination of the Optionee’s employment with the Company and its
Subsidiaries.
4.
METHOD OF EXERCISE OF OPTION. The Optionee may exercise this Option in whole or in part to the extent then
exercisable by delivering written notice to the Secretary of the Company (or to such other person or persons in other such forms as may be
designated from time to time by the Committee) stating the number of shares with respect to which the Option is being exercised (the
“Exercise Notice”), accompanied by payment in full of the exercise price either (i) in cash or check payable and acceptable to the Company,
(ii) subject to the approval of the Committee, by tender to the Company of shares of Common Stock owned by the Optionee and registered in
Optionee’s name, having a fair market value equal to the cash exercise price of the option being exercised, (iii); by any combination of (i)
and (ii) hereof, or (iv) (provided the approval of the Committee has been given on or prior to the Grant Date), by requesting in writing that a
sufficient number of the shares to be issued pursuant to such exercise be delivered to a broker for sale on behalf of the Optionee that the
proceeds of such sale be applied by the Company in payment thereof. Any exercise of this Option shall be contingent upon, and shall not be
effective until the first business day following (the “Effective Date”), the completion of the following steps: (a) the receipt by the Company
of the Exercise Notice, the exercise price and such other documents as may be required by the Committee, (b) [the determination by the
Company that Optionee’s employment status with the Company is satisfactory to the Company based on, among other things, the status of
any pending loss prevention investigation], and (c) the processing by the Company of sale requests (if any) set forth in the Exercise Notice.
As soon as practicable after, and as of, the Effective Date, the Company shall issue the appropriate number of shares in the name of the
Optionee evidenced by a stock certificate, appropriate entry on the books of the Company’s duly authorized transfer agent or other
appropriate means as determined by the Company, and/or deliver a check, or cause the delivery of a check, payable to the order of the
Optionee for the appropriate amount of cash. The number of shares may be adjusted appropriately, or other appropriate arrangements shall be
made [(which may include the Company requiring the Optionee to remit the applicable amount of taxes)], for any taxes required to be
withheld by federal, state or local law in connection with the exercise of the Option.
5.
TERMINATION OF OPTION. This Option shall terminate on the earlier of:
(i)
(ii)
(iii)
(iv)
(v)
the date specified in Paragraph 2 of this Agreement;
one year following the death of Optionee;
one year following the termination of Optionee’s employment with the Company or any of its subsidiaries by
reason of Disability;
one year following the termination of Optionee’s employment with the Company or any of its subsidiaries by
reason of Retirement;
one year following the involuntary termination of Optionee’s employment with the Company following a
Change in Control; or
80
(vi)
the date of termination of Optionee’s employment with the Company or any of its subsidiaries for any reason
other than those set forth in parts (ii) through (iv) above.
[Alternative:
(i)
(ii)
(iii)
the date which is three months following the effective date of the Optionee’s retirement from service on the
Board of Directors of the Company;
the date on which is one year following the date on which the Optionee’s service on the Board of Directors of
the Company creases due to death or disability; and
the date specified in Paragraph 2 of this Agreement.]
6.
EFFECT OF DEMOTION. The demotion by the Company of Optionee to a position having a lower pay scale, lower
responsibility level or other lower status (a “Lower Position”), as determined by the Committee, in its discretion, within a period of one year
from Option Date shall result in the loss of this Option and shall be deemed, on the notice date of such demotion, a termination pursuant to
Paragraph 5 (v) of this Agreement. To the extent Optionee takes a Lower Position at any time, the unvested portion (determined as of the
earlier of the date the Optionee begins working at such Lower Position or the date the Company accepts Optionee’s decision to take such
Lower Position) of this Option shall terminate. The provisions of this Section 6 shall be inapplicable following a Change in Control. [Not
included in non-executive director awards.]
7.
NON-TRANSFERABILITY OF OPTION. This Option is non-transferable by Optionee except by will or the laws of
descent and distribution and shall be exercisable during Optionee’s lifetime only by Optionee. In the event of Optionee’s death, but before
expiration of the Option, such Option shall be exercisable by the person or persons to whom Optionee’s rights under the Option shall have
passed by will or by the laws of descent and distribution or by a person named by Optionee in a beneficiary designation form.
8.
OPTION CONDITIONED ON ACCEPTANCE. This Agreement shall be void and of no effect unless a copy hereof is
executed by Optionee and returned to the Secretary of the company no later than 30 days after the Option Date; provided, however, that if
Optionee dies with such 30 day period, this Agreement shall be effective notwithstanding the fact that it has not been executed by Optionee.
9.
NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder with respect to any shares of
Common Stock covered by this Agreement until a certificate or certificate for such shares have been issued to Optionee; such rights shall
then exist only with respect to the shares evidenced by such certificates.
10.
NO GUARANTEE OF CONTINUED SERVICE. The Optionee acknowledges and agrees that neither this Agreement
nor the award of the Option constitute an express or implied promise of continued engagement as an employee or as a service provider for
any period and shall not interfere with the Optionee's right or the Company's right to terminate the Optionee's relationship as an employee or
as a service provider at any time.
11.
INCORPORATION OF STOCK OPTION PLAN. This Agreement is entered into pursuant to the Plan, which is by
this reference incorporated herein and made a part hereof. By acceptance of this Agreement, the Optionee hereby acknowledges that the
Optionee has received a copy of the Plan and agrees to be bound by its terms (not all of which are set forth herein). In the event of a conflict
between the terms of the Plan and those of this Agreement, the terms of the Plan shall govern.
IN WITNESS WHEREOF, O’REILLY AUTOMOTIVE, INC. has caused this Agreement to be executed and its Corporate Seal
to be affixed, and Optionee has signed the same, in duplicate originals as of the day and year first above written.
Effective [UPDATE]
O’REILLY AUTOMOTIVE, INC.
By: ____________________________
Title: Chairman
_______________________________
Optionee
81
Exhibit 21.1 – Subsidiaries of the Company
O'Reilly Automotive, Inc. and Subsidiaries
Subsidiary
State of Incorporation
Ozark Automotive Distributors, Inc.
Greene County Realty Co.
O’Reilly II Aviation, Inc.
Ozark Services, Inc.
Ozark Purchasing, LLC
CSK Auto Corporation
CSK Auto, Inc.
CSKAUTO.COM, Inc.
OC Holding Company, LLC
Missouri
Missouri
Missouri
Missouri
Missouri
Delaware
Arizona
Delaware
Delaware
One hundred percent of the capital stock of each of the above listed subsidiaries is directly or indirectly owned by O’Reilly
Automotive, Inc.
82
Exhibit 23.1 – Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statement (Form S-8 No. 033-91022) and Post-Effective Amendment No. 1 to Registration Statement on Form
S-8 (Form S-8 No. 033-91022) pertaining to the O’Reilly Automotive, Inc. Performance Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-63467) pertaining to the O’Reilly Automotive, Inc. Director Stock Option Plan
and the O’Reilly Automotive, Inc. 1993 Stock Option Plan,
(3) Registration Statements (Form S-8 No. 333-59568 and 333-136958) pertaining to the O’Reilly Automotive, Inc. Profit
Sharing and Savings Plan,
(4) Registration Statement (Form S-8 No. 333-111976) pertaining to the O’Reilly Automotive, Inc. 2003 Employee Stock Option
Plan, O’Reilly Automotive, Inc. 2003 Director Stock Option Plan, O’Reilly Automotive, Inc. 1993 Employee Stock Option
Plan, and the O’Reilly Automotive, Inc. Stock Purchase Plan,
(5) Post-Effective Amendment No. 1 to Registration Statement on Form S-8 to Form S-4 (Form S-8 No. 333-151578) pertaining
to the CSK Auto Corporation 2004 Stock and Incentive Plan, CSK Auto Corporation 1999 Employee Stock Option Plan,
CSK Auto Corporation 1996 Executive Stock Option Plan, CSK Auto Corporation 1996 Associate Stock Option Plan and
CSK Auto Corporation Nonqualified Stock Option Agreement with Lawrence N. Mondry,
(6) Registration Statement (Form S-8 No. 333-157862) pertaining to the O’Reilly Automotive, Inc. Stock Purchase Plan, and
(7) Registration Statement (Form S-8 No. 333-159351) pertaining to the O’Reilly Automotive, Inc. 2009 Stock Purchase Plan
and to the O’Reilly Automotive, Inc. 2009 Incentive Plan;
of our reports dated February 26, 2010, with respect to the consolidated financial statements and schedule of O’Reilly Automotive, Inc.
and Subsidiaries and the effectiveness of internal control over financial reporting of O’Reilly Automotive, Inc. and Subsidiaries,
included in this Annual Report (Form 10-K) for the year ended December 31, 2009.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 26, 2010
83
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
Exhibit 31.1 – CEO Certification
I, Greg Henslee, certify that:
1. I have reviewed this report on Form 10-K 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 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; and
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: February 26, 2010
/s/ Greg Henslee
Greg Henslee, Co-President and
Chief Executive Officer (Principal Executive Officer)
84
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
Exhibit 31.2 – CFO Certification
I, Thomas McFall, certify that:
1. I have reviewed this report on Form 10-K 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 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; and
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: February 26, 2010
/s/ Thomas McFall
Thomas McFall, Executive Vice President of
Finance and Chief Financial Officer (Principal
Financial and Accounting Officer)
85
Exhibit 32.1 – CEO Certification
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
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 Report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2009,
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,
to the best of my knowledge:
(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
February 26, 2010
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose. This certification
accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
86
Exhibit 32.2 – CFO Certification
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
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 Report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2009,
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,
to the best of my knowledge:
(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
February 26, 2010
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose. This certification
accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
87
FINANCIAL HIGHLIGHTS
In thousands, except earnings per share data and operating data
years ended December 31
Sales
Operating Income
Net Income
Working Capital
Total Assets
Total Debt
Shareholders’ Equity
Net Income Per Common Share
(assuming dilution)
Weight-Average Common Share
(assuming dilution)
Stores At Year-End
Same-Store Sales Gain
2009
2008
2007
2006
2005
$ 4,847,062
537,619
307,498
995,344
4,781,471
790,748
2,685,865
$ 3,576,553
335,617
186,232
821,932
4,193,317
732,695
2,282,218
$ 2,522,319
305,151
193,988
573,328
2,279,737
100,469
1,592,477
2.23
1.48
1.67
137,882
3,421
125,413
3,285
116,080
1,830
$ 2,283,222
282,315
178,085
566,892
1,977,496
110,479
1,364,096
1.55
115,119
1,640
$ 2,045,318
252,524
164,266
424,974
1,718,896
100,774
1,145,769
1.45
113,385
1,470
4.6%
1.5%
3.7%
3.3%
7.5%
During 2009, we continued to convert our acquired CSK stores to the O’Reilly systems. We are very optimistic with the potential to
improve the sales performance of these acquired stores by implementing our proven dual market strategy in these new markets.
Operating Income
(In thousands)
Same-Store Sales
(Percent)
538
7.5
336
305
282
253
4.6
3.7
3.3
1.5
Earnings Per Share
(Assuming dilution)
2.23
1.55
1.45
1.67
1.48
‘05 ‘06 ‘07 ‘08 ‘09
‘05 ‘06 ‘07 ‘08 ‘09
‘05 ‘06 ‘07 ‘08 ‘09
We were able to increase operating margins
18% by focusing on expense control and
hard work and by continually adapting
the product mix in each of our stores to
meet the needs of our customers.
O’Reilly’s proven dual market strategy and
commitment to providing the best customer
service in the industry resulted in a 4.6%
same store sales increase.
Our strong vendor relationships and solid
sales results from both our “core” O’Reilly
as well as acquired CSK stores led to a 51%
increase in diluted earnings per share.
SHAREHOLDER INFORMATION
Corporate Address
233 South Patterson
Springfield, Missouri 65802
417-862-3333
www.oreillyauto.com
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Inquiries regarding stock transfers, lost certificates or
address changes should be directed to Computershare
Investor Services at the above address.
Independent Registered Public Accounting Firm
Ernst & Young LLP
One Kansas City Place
1200 Main Street, Suite 2000
Kansas City, Missouri 64105-2143
Annual Meeting
The annual meeting of shareholders of O’Reilly Automotive,
Inc. will be held at 10 a.m. Central time on May 4, 2010,
at the Double Tree Hotel, 2431 North Glenstone Ave in
Springfield, Missouri. Shareholders of record as of
February 26, 2010, 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 Thomas
McFall, Executive Vice President of Finance and Chief
Financial Officer, at the corporate address.
Trading Symbol
The Company’s common stock is traded on The Nasdaq
Global Select Market under the symbol ORLY.
Number of Shareholders
As of February 26, 2010, O’Reilly Automotive, Inc. had
approximately 71,000 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.:
BB&T Capital Markets
Anthony Cristello
Morgan Stanley
Gregory Melich
Wachovia Securities
Peter Benedict
Credit Suisse
Gary Balter
Deutsche Bank
Research
Michael Baker
Friedman, Billings, &
Ramsey Investment
Stephen Chick
Goldman Sachs
Research
Matthew J. Fassler
JPMorgan Securities
Christopher Horvers
BAS-ML
Alan Rifkin
Raymond James &
Associates
Dan Wewer
William Blair &
Company
Jack Murphy
RBC Capital Markets
Scot Ciccarelli
Gabelli & Company
Brian Sponheimer
Rochdale Securities
Jaison Blair
Longbow Research
Mark Becks
Sanford Berstein
Colin McGranahan
Sidoti & Company
Scott Stember
Stifel Nicolaus
& Company,
Incorportated
David Schick
Oppenheimer &
Co. Inc.
Brian Nagel
Robert W. Baird & Co.
Craig R. Kennison
Wedbush Morgan
Securities
Camilo Lyon
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 Global Select 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 foreseeable future.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the Year
2009
2008
High
Low
High
Low
$ 35.63
38.85
42.22
40.26
42.22
$ 27.0
35.1
36.1
33.7
27.0
$ 32.68
30.50
30.38
31.18
32.68
$ 24.08
22.32
21.92
20.00
20.00
MOVING FORWARD
WITH OUR WINNING PROCESS.
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PROGRESS
IN MOTION
O’Reilly Automotive
233 South Patterson
Springfield, Missouri 65802
417.862.3333
www.oreillyauto.com
O’Reilly Automotive 2009 Annual Report