O'Reilly Auto Parts 2010 Annual Report Download - page 27

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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.
A downgrade in our credit rating would impact our cost of capital and could impact the market value of our unsecured senior
notes.
Credit ratings are an important part of our cost of capital. We currently have a BBB- credit rating, with a stable outlook, from
Standard & Poor’s and a Baa3 credit rating, with a stable outlook, from Moody’s Investors Service. The evaluations are based upon,
among other factors, our financial strength. Our current credit ratings provide us with the ability to borrow funds at a specific rate. A
downgrade in our current credit rating from both agencies would adversely affect our cost of capital by causing us to pay a higher
interest rate on borrowed funds under our credit facility. A downgrade could also adversely affect the market price and/or liquidity of
our notes, preventing a holder from selling the notes at a favorable price, as well as adversely affect our ability to issue new notes in
the future.
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 service provider 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 us, 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.
Our success has been largely dependent on the efforts of certain key personnel. 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. We must also continue to motivate employees and keep them focused on our strategies and goals. Our
business and results of operations could be materially adversely affected by the unexpected loss of the services of one or more of our
key employees. We cannot be sure that we will be able to continue to attract qualified personnel, which could cause us to be less
efficient, and as a result, may adversely impact our sales and profitability. For a discussion of our management, see the “Business”
section of Item 1 of this annual report on Form 10-K.
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 2011 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.
We are sensitive to regional economic and weather conditions that could reduce our costs and sales.
Approximately 29% 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 coastal regions may be subject to increased
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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” to the consolidated financial statements, several of CSK’s
former officers and employees were charged by the Department of Justice (“DOJ”) and named in civil actions by the Securities and
Exchange Commission (“SEC”). O’Reilly and the DOJ have agreed in principle, subject to final documentation, to resolve CSK’s
pre-acquisition issues with the DOJ. The pre-acquisition SEC investigation of CSK, which commenced in 2006, was settled in May of
2009 by administrative order without fines, disgorgement or other financial remedies. Under Delaware law, the charter documents of
the CSK entities and certain indemnification agreements, CSK has certain obligations to indemnify these persons and, as a result,
O’Reilly is currently incurring legal fees on the behalf of these persons in relation to certain 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
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 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.
FORM 10-K