O'Reilly Auto Parts 2009 Annual Report Download - page 40

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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.