O'Reilly Auto Parts 2010 Annual Report Download - page 38

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economy recovers, we believe that annual miles driven will return to historical growth rates and continue to increase the demand for
our products.
Number of U.S. registered vehicles and new light vehicle sales:
As reported by the Automotive Aftermarket Industry Association (“AAIA”), the total number of vehicles on the road in the U.S. has
exhibited steady growth over the past decade, with the total number of registered vehicles increasing 18%, from 205 million light
vehicles in 2000 to 242 million in 2009. New light vehicle sales, however, have declined over the past decade. Between 2000 and
2007, new car sales in the U.S. decreased by 7%, from 17.4 million in 2000 to 16.2 million vehicles in 2007. Due to the recent
difficult macroeconomic environment in the U.S., new light vehicles sales declined by 18% in 2008 to 13.2 million and declined by
21% in 2009 to 10.4 million vehicles, which is the lowest level in the past decade. Based on the current economic environment, we
believe new light vehicle sales will remain below historic levels and consumers will continue to keep their vehicles longer and drive
them at higher miles, continuing the trend of an aging vehicle population.
Average vehicle age of registered vehicles:
As reported by the AAIA, the average age of the U.S. 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 9.6 years in 2009, respectively. We believe this increase in average
age can be attributed to better engineered and built vehicles, which can be reliably driven at higher miles due to better quality power
trains, and interiors and exteriors, the decrease in new car sales over the past two years and the consumers’ willingness to invest in
maintaining their higher-mileage, better built vehicles. As the average age of the vehicle on the road increases, a larger percentage of
miles are being driven by vehicles which are outside of manufacturer warranty. These out-of-warranty, older vehicles generate strong
demand for our products as they go through more routine maintenance cycles, have more frequent mechanical failures which require
replacement parts and generally require more maintenance than newer vehicles would require.
Unperformed maintenance:
According to estimates compiled by the Automotive Aftermarket Suppliers Association, the annual amount of unperformed or
underperformed maintenance in the U.S. totaled $54 billion for 2009 versus $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 beginning in 2008 contributed to the increased amount of unperformed
maintenance in 2009; however, with the reduced number of new car sales and consumers’ increased focus on maintaining their current
vehicle with the expectation of keeping the vehicle longer than they would have in a better macroeconomic environment, we believe
the amount of underperformed maintenance decreased in 2010, resulting in a strong year in the automotive aftermarket.
Unemployment:
Challenging macroeconomic conditions have lead to high levels of unemployment. Monthly U.S. unemployment rates for 2010
ranged from 9.4% to 9.9%. We believe that these unemployment rates and continued uncertainty in the overall economic health have
a negative impact on consumer confidence and the level of consumer discretionary spending. We also believe macroeconomic
uncertainties and the potential for future joblessness can motivate consumers to find ways to save money and can be an important
factor in the consumer’s decision to defer the purchase of a new vehicle. While the deferral of vehicle purchases has lead to an
increase in vehicle maintenance, long term trends of high unemployment levels could reduce the number of total annual miles driven
as well as decrease consumer discretionary spending habits, both of which could negatively impact our business.
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 macroeconomic 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 as the U.S. economy recovers.
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KEY EVENTS AND RECENT DEVELOPMENTS
Several key events have had or may have a significant effect on our operations and are summarized below:
• Since July 11, 2008, and as a result of the CSK acquisition, we have incurred and may 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. O’Reilly and the DOJ have now agreed in principle, subject to final documentation, to resolve the
DOJ investigation of CSK’s legacy accounting practices. Based upon the agreement in principle for a final settlement, we
have recorded a charge of $20.9 million for the year ended December 31, 2010, in anticipation of the DOJ, CSK and O’Reilly
executing a Non-Prosecution Agreement.
• 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 were exchangeable, under certain
circumstances, into cash and shares of our common stock. The Notes bore interest at 6.75% per year until December 15,
2010, and 6.5% until maturity. During 2010, all holders of the Notes exercised their right to exchange and on December 21,
2010, the Notes were retired.
• In March of 2010, the President of the United States of America signed into law the Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Acts”). The provisions of the Acts are
not expected to have a significant impact to our consolidated financial statements in the short-term. However, the potential
long-term impacts of the Acts to our business and consolidated financial statements, while currently uncertain, are being
evaluated by management. We will continue to assess how the Acts apply to us, their effect on our business and how we plan
to best meet the stated requirements.
• On December 29, 2010, we completed a corporate reorganization creating a holding company structure (the
“Reorganization”). The Reorganization was implemented through an agreement and plan of merger under Section 351.448
of The General Corporation Law of the State of Missouri which did not require a vote of the shareholders. As a result of the
Reorganization, the previous parent company and registrant O’Reilly Automotive, Inc. (“Old O’Reilly”) was renamed
O’Reilly Automotive Stores, Inc. and is now a wholly owned subsidiary of the new parent company and registrant, which
was renamed O’Reilly Automotive, Inc.
• On January 11, 2011, we announced a new Board-approved share repurchase program (the “Repurchase Program”) that
authorizes us to repurchase up to $500 million of shares of our common stock over a three-year period. Stock repurchases
under the Repurchase Program may be made from time to time as we deem appropriate, solely through open market
purchases effected through a broker dealer at prevailing market prices, and we may increase or otherwise modify the
Repurchase Program at any time without prior notice.
• On January 14, 2011, we issued $500 million aggregate principal amount of unsecured 4.875% Senior Notes due 2021 (the
“2011 4.875% Senior Notes”) in the public market, of which we, and certain of our subsidiaries, are the guarantors and UMB
Bank, N.A. (“UMB”) is trustee. The 2011 4.875% Senior Notes bear interest at 4.875% which is payable on January 14 and
July 14 of each year, beginning on July 14, 2011. The 2011 4.875% Senior Notes mature on July 14, 2021. Proceeds from
the issuance of the 2011 4.875% Senior Notes were used to repay all outstanding borrowings under our previous credit
facility, pay fees associated with the issuance and for general corporate purposes. Concurrent with the closing and issuance
of the 2011 4.875% Senior Notes, on January 14, 2011, we entered into a credit agreement for a $750 million unsecured
revolving credit facility (“the Revolver”) arranged by Bank of America, N.A. (“BA”) and Barclays Capital (“Barclays”) and
simultaneously retired our existing secured revolving credit facility.
FORM 10-K