O'Reilly Auto Parts 2010 Annual Report Download - page 80

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and director stock option plan, restricted stock awarded under the Company’s employee incentive plan and director plan, stock issued
through the Company’s employee stock purchase plan and stock issued through other benefit programs.
Stock options:
The Company’s employee stock-based incentive plans provide 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:
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Terms
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2009 9,724,879 $ 26.57
Granted 1,480,375 47.64
Exercised (2,248,650) 24.55
Forfeited (701,750) 32.78
Outstanding at December 31, 2010 8,254,854 $ 30.37 6.78 $ 248,031
Vested or expected to vest at December 31, 2010 7,430,477 $ 29.53 6.59 $ 229,497
Exercisable at December 31, 2010 4,147,534 $ 25.36 5.24 $ 145,409
The Company maintains a stock based incentive plan for directors of the Company pursuant to which the Company may grant stock
options and/or restricted stock awards. A total of 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:
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Terms
(in years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2009 205,000 $ 26.39
Granted 25,000 48.31
Exercised (90,000) 21.52
Forfeited - -
Outstanding at December 31, 2010 140,000 $ 33.43 4.20 $ 3,778
Vested or expected to vest at December 31, 2010 140,000 $ 33.43 4.20 $ 3,778
Exercisable at December 31, 2010 140,000 $ 33.43 4.20 $ 3,778
At December 31, 2010, approximately 8,667,000 and 285,000 shares were available for future grants under the employee stock option
plan and director stock option plan, respectively. For the year ended December 31, 2010, the Company recognized stock option
compensation expense related to these plans of $14.9 million and a corresponding income tax benefit of $5.7 million. For the year
ended December 31, 2009, the Company recognized stock option compensation expense related to these plans of $13.5 million and a
corresponding income tax benefit of $5.2 million. For the year ended December 31, 2008, the Company recognized stock option
compensation expense related to these plans of $8.0 million and a corresponding income tax benefit of $3.1 million.
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
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
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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, 2010, 2009 and 2008:
2010 2009 2008
Risk-free interest rate 1.67 % 2.04 % 2.91 %
Expected life 4.3 years 4.7 years 4.2 years
Expected volatility 33.9 % 33.0 % 26.8 %
Expected dividend yield 0 % 0 % 0 %
The weighted-average grant-date fair value of options granted during the years ended December 31, 2010, 2009 and 2008, were
$14.24, $11.10 and $7.01, respectively. The total intrinsic value of options exercised during the years ended December 31, 2010,
2009 and 2008 were $60.0 million, $30.0 million and $6.6 million, respectively. The Company recorded cash received from the
exercise of stock options of $56.9 million, $54.3 million and $18.6 million, in the years ended December 31, 2010, 2009 and 2008,
respectively. The remaining unrecognized compensation expense related to unvested awards at December 31, 2010, was $37.2
million and the weighted-average period of time over which this expense will be recognized is 2.69 years. The weighted-average
remaining contractual life of options currently exercisable at December 31, 2010, 2009 and 2008, was 5.21, 5.21 and 4.90 years,
respectively.
Performance incentive plan
The Company has in effect a performance incentive plan for the Company’s corporate and 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 expense is recorded over the vesting period. The Company recorded $0.9
million of compensation expense for this plan for the year ended December 31, 2010, and recognized a corresponding income tax
benefit of $0.4 million. The Company recorded $0.5 million of compensation expense for this plan for the year ended December 31,
2009, and recognized a corresponding income tax benefit of $0.2 million. The Company recorded $0.5 million of compensation
expense for this plan for the year ended December 31, 2008, and recognized a corresponding income tax benefit of $0.2 million. The
total fair value (at vest date) of shares vested for the years ended December 31, 2010, 2009 and 2008, were $1.6 million, $0.7 million
and $0.5 million, respectively. The remaining unrecognized compensation expense related to unvested awards at December 31, 2010,
was $1.3 million. The Company awarded 41,134 shares under this plan in 2010 with an average grant-date fair value of $39.57. 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. Compensation expense for shares awarded is
recognized over the three-year vesting period. Changes in the Company’s restricted stock for the year ended December 31, 2010,
were as follows:
Shares
Weighted-
Average
Grant-Date
Fair Value
Non-vested at December 31, 2009 19,532 $ 31.65
Granted during the period 41,134 39.57
Vested during the period (26,037) 35.35
Forfeited during the period (996) 37.35
Non-vested at December 31, 2010 33,633 $ 38.30
At December 31, 2010, approximately 418,000 shares were reserved for future issuance under this plan.
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, 2010, the
Company issued 152,910 shares under the purchase plan at a weighted-average price of $40.86 per share. 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. 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, 2010, the Company recorded $1.1 million of
compensation expense related to the employee share purchases with a corresponding income tax benefit of $0.4 million. During the
year ended December 31, 2009, the Company recorded $1.0 million of compensation expense related to employee share purchases
FORM 10-K