UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010March 31, 2011

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 0-21318000-21318

 

 

O’REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Missouri 44-061801227-4358837

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. 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)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x    No  ¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  x        Accelerated Filer  ¨        Non-Accelerated Filer  ¨        Smaller Reporting Company  ¨

Large Accelerated FilerxAccelerated Filer¨
Non-Accelerated Filer¨Smaller Reporting Company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Common stock, $0.01 par value – 139,636,795137,870,262 shares outstanding as of November 1, 2010.May 2, 2011.

 

 

 


O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

Quarter Ended September 30, 2010March 31, 2011

TABLE OF CONTENTS

 

   Page 

PART I - FINANCIAL INFORMATION

  

ITEM 1 – FINANCIAL STATEMENTS (UNAUDITED)

  

Condensed Consolidated Balance Sheets

   3  

Condensed Consolidated Statements of Income

   4  

Condensed Consolidated Statements of Cash Flows

   5  

Notes to Condensed Consolidated Financial Statements

   6  

ITEM  2 –MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   1615  

ITEM 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   2423  

ITEM 4 –CONTROLS AND PROCEDURES

   24  

PART II - OTHER INFORMATION

  

ITEM 1 –LEGAL PROCEEDINGS

   2425  

ITEM 1A –RISK FACTORS

   25  

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

26

ITEM 6 –EXHIBITS

   2627  

SIGNATURE PAGES

   2728  

PART I FINANCIAL INFORMATION

Item 1.Financial Statements

Item 1. Financial Statements

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

  September 30,
2010
 December 31,
2009
   March 31, 2011   December 31, 2010 
  (Unaudited) (Note)   (Unaudited)   (Note) 

Assets

       

Current assets:

       

Cash and cash equivalents

  $43,193   $26,935    $230,048    $29,721  

Accounts receivable, net

   125,906    107,887     128,224     121,807  

Amounts receivable from vendors

   68,253    63,110     68,641     61,845  

Inventory

   1,997,718    1,913,218     2,001,314     2,023,488  

Prepaid income taxes

   2,735    —    

Deferred income taxes

   39,261    85,934     10,018     33,877  

Other current assets

   32,530    29,635     29,166     30,514  
               

Total current assets

   2,309,596    2,226,719     2,467,411     2,301,252  

Property and equipment, at cost

   2,629,835    2,353,240     2,785,032     2,705,434  

Less: accumulated depreciation and amortization

   738,275    626,861     812,612     775,339  
               

Net property and equipment

   1,891,560    1,726,379     1,972,420     1,930,095  

Notes receivable, less current portion

   19,151    12,481     16,379     18,047  

Goodwill

   743,921    744,313     743,895     743,975  

Other assets, net

   59,191    71,579     47,981     54,458  
               

Total assets

  $5,023,419   $4,781,471    $5,248,086    $5,047,827  
               

Liabilities and shareholders’ equity

       

Current liabilities:

       

Accounts payable

  $943,147   $818,153    $977,627    $895,736  

Self insurance reserves

   54,680    55,348  

Self-insurance reserves

   53,852     51,192  

Accrued payroll

   45,589    42,790     45,351     52,725  

Accrued benefits and withholdings

   45,515    44,295     37,502     45,542  

Income taxes payable

   —      8,068     30,870     4,827  

Other current liabilities

   189,633    143,781     171,564     177,505  

Current portion of long-term debt

   104,698    106,708     1,208     1,431  
               

Total current liabilities

   1,383,262    1,219,143     1,317,974     1,228,958  

Long-term debt, less current portion

   326,554    684,040     497,641     357,273  

Deferred income taxes

   57,446    18,321     63,083     68,736  

Other liabilities

   181,886    174,102     181,538     183,175  

Shareholders’ equity:

       

Common stock, $0.01 par value:

       

Authorized shares – 245,000,000

       

Issued and outstanding shares –
139,319,673 as of September 30, 2010, and
137,468,063 as of December 31, 2009

   1,393    1,375  

Issued and outstanding shares – 138,741,655 as of March 31, 2011, and 141,025,544 as of December 31, 2010

   1,387     1,410  

Additional paid-in capital

   1,113,237    1,042,329     1,138,249     1,141,749  

Retained earnings

   1,963,736    1,650,123     2,048,214     2,069,496  

Accumulated other comprehensive loss

   (4,095  (7,962   —       (2,970
               

Total shareholders’ equity

   3,074,271    2,685,865     3,187,850     3,209,685  
               

Total liabilities and shareholders’ equity

  $5,023,419   $4,781,471    $5,248,086    $5,047,827  
               

Note: The balance sheet at December 31, 2009,2010, has been derived from the audited Consolidated Financial Statementsconsolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain prior period amounts have been reclassified to conform to current period presentation.

See accompanying Notes to Condensed Consolidated Financial Statements.condensed consolidated financial statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
   Three Months Ended
March 31,
 
  2010 2009 2010 2009   2011 2010 

Sales

  $1,425,887   $1,258,239   $4,087,195   $3,673,365    $1,382,738   $1,280,067  

Cost of goods sold, including warehouse and distribution expenses

   732,472    647,684    2,102,800    1,916,371     712,957    661,720  
                    

Gross profit

   693,415    610,555    1,984,395    1,756,994     669,781    618,347  

Selling, general and administrative expenses

   488,484    461,359    1,414,855    1,344,787     473,344    449,902  

Accrual of legacy CSK DOJ investigation charge

   5,900    —      20,900    —    
                    

Operating income

   199,031    149,196    548,640    412,207     196,437    168,445  

Other income (expense), net:

     

Other income (expense):

   

Write-off of asset-based revolving credit facility debt issuance costs

   (21,626  —    

Termination of interest rate swap agreements

   (4,237  —    

Interest expense

   (9,756  (11,086  (31,781  (34,107   (5,237  (10,879

Interest income

   510    340    1,409    1,127     542    396  

Other, net

   407    825    1,845    1,698     295    514  
                    

Total other expense, net

   (8,839  (9,921  (28,527  (31,282

Total other expense

   (30,263  (9,969
                    

Income before income taxes

   190,192    139,275    520,113    380,925     166,174    158,476  

Provision for income taxes

   73,650    52,050    206,500    145,350     63,700    61,000  
                    

Net income

  $116,542   $87,225   $313,613   $235,575    $102,474   $97,476  
                    

Basic income per common share:

     
             

Net income per common share

  $0.84   $0.64   $2.27   $1.73  

Earnings per share-basic:

   

Earnings per share

  $0.73   $0.71  
                    

Weighted-average common shares outstanding

   138,831    136,774    138,219    135,869  

Weighted-average common shares outstanding – basic

   140,579    137,583  
                    

Income per common share-assuming dilution:

     
             

Net income per common share

  $0.82   $0.63   $2.23   $1.71  

Earnings per share-assuming dilution:

   

Earnings per share

  $0.72   $0.70  
                    

Adjusted weighted-average common shares outstanding

   141,706    138,704    140,874    137,442  

Weighted-average common shares outstanding – assuming dilution

   142,866    139,612  
                    

See accompanying Notes to Condensed Consolidated Financial Statements.condensed consolidated financial statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Inin thousands)

 

  Nine Months Ended
September 30,
   Three Months Ended
March 31,
 
  2010 2009   2011 2010 

Operating activities:

      

Net income

  $313,613   $235,575    $102,474   $97,476  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization on property and equipment

   118,817    106,320     38,934    38,263  

Amortization of intangibles

   1,914    4,805     (143  1,672  

Amortization of premium on exchangeable notes

   (561  (561   —      (185

Amortization of discount on senior notes

   74    —    

Amortization of debt issuance costs

   6,418    6,365     265    2,137  

Write-off of asset-based revolving credit facility debt issuance costs

   21,626    —    

Excess tax benefit from stock options exercised

   (2,148  (1,775

Deferred income taxes

   85,823    47,458     16,331    18,287  

Share based compensation programs

   12,792    17,715  

Stock option compensation programs

   4,445    3,650  

Other share based compensation programs

   691    464  

Other

   4,956    7,731     3,058    1,558  

Changes in operating assets and liabilities:

      

Accounts receivable

   (23,749  (11,981   (9,503  (17,424

Inventory

   (84,500  (282,574   22,175    10,110  

Accounts payable

   124,909    150,308     81,907    (23,509

Income taxes payable

   28,191    28,767  

Other

   32,131    7,819     (14,264  11,155  
              

Net cash provided by operating activities

   592,563    288,980     294,113    170,646  

Investing activities:

      

Purchases of property and equipment

   (276,463  (317,195   (94,404  (90,725

Proceeds from sale of property and equipment

   1,866    2,586     252    382  

Payments received on notes receivable

   4,610    4,244     1,679    1,272  

Other

   (4,728  (4,466   227    (1,186
              

Net cash used in investing activities

   (274,715  (314,831   (92,246  (90,257

Financing activities:

      

Proceeds from borrowings on asset-based revolving credit facility

   318,200    439,150     42,400    122,700  

Payments on asset-based revolving credit facility

   (672,000  (468,350   (398,400  (208,300

Proceeds from the issuance of long-term debt

   496,485    —    

Payment of debt issuance costs

   (7,385  —    

Principal payments on capital leases

   (5,134  (7,112   (409  (2,463

Tax benefit of stock options exercised

   11,755    8,973  

Repurchases of common stock

   (145,064  —    

Excess tax benefit from stock options exercised

   2,148    1,775  

Net proceeds from issuance of common stock

   45,589    51,004     8,685    8,836  

Other

   —      420  
              

Net cash (used in)/provided by financing activities

   (301,590  24,085  

Net cash used in financing activities

   (1,540  (77,452
              

Net increase/(decrease) in cash and cash equivalents

   16,258    (1,766

Net increase in cash and cash equivalents

   200,327    2,937  

Cash and cash equivalents at beginning of period

   26,935    31,301     29,721    26,935  
              

Cash and cash equivalents at end of period

  $43,193   $29,535    $230,048   $29,872  
              

Supplemental disclosures of cash flow information:

      

Income taxes paid

  $122,051   $98,376    $17,682   $13,171  

Interest paid, net of capitalized interest

   24,192    26,914     1,637    7,276  

Property and equipment acquired through issuance of capital lease obligations

   —      8,337  

See accompanying Notes to Condensed Consolidated Financial Statements.condensed consolidated financial statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2010March 31, 2011

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2010,March 31, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.2011. Certain prior period amounts 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. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.2010.

NOTE 2 – BUSINESS COMBINATION

On July 11, 2008, the Company completed the acquisition of CSK Auto Corporation (“CSK”), which was 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 at the date of acquisition. 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. 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 the purchase price was finalized on June 30, 2009. The results of CSK’s operations have been included in the Company’s consolidated financial statements since the acquisition date.

NOTE 32 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is reviewed annually on December 31November 30 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 three months ended September 30, 2010, the Company recorded an increase in goodwill of $0.1 million. During the nine months ended September 30, 2010,March 31, 2011, the Company recorded a decrease in goodwill of $0.4approximately $0.1 million, primarily due to adjustments to the purchase price allocations related to small acquisitions and adjustments to the provision for income taxes relating to the exerciseexercises of stock options acquired in the July of 2008 CSK Auto Corporation (“CSK”) acquisition (see Note 2).and adjustments to purchase price allocations related to small acquisitions. The Company did not record any goodwill impairment during the three or nine months ended September 30, 2010.March 31, 2011. For the three and nine months ended September 30,March 31, 2011 and 2010, the Company recorded amortization expense of $1.7$1.5 million and $6.6 million, respectively, related to amortizable intangible assets, which are included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2009, the Company recorded amortization expense of $3.1 million and $11.0$2.8 million, respectively, related to amortizable intangible assets, which are included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets. The components of the Company’s amortizable and unamortizable intangible assets were as followsare described in the table below, as of September 30, 2010,March 31, 2011, and December 31, 20092010 (in thousands):

 

   Cost   Accumulated Amortization 
   September 30,
2010
   December 31,
2009
   September 30,
2010
   December 31,
2009
 

Amortizable intangible assets

        

Favorable leases

  $52,010    $52,010    $16,516    $11,383  

Trade names and trademarks

   13,000     13,000     13,000     11,588  

Other

   579     481     280     201  
                    

Total amortizable intangible assets

  $65,589    $65,491    $29,796    $23,172  
                    

Unamortizable intangible assets

        

Goodwill

  $743,921    $744,313      
              

Total unamortizable intangible assets

  $743,921    $744,313      
              

   Cost   Accumulated Amortization 
   March 31,
2011
   December 31,
2010
   March 31,
2011
   December 31,
2010
 

Amortizable intangible assets:

        

Favorable leases

  $52,010    $52,010    $19,824    $18,329  

Other

   609     579     339     309  
                    

Total amortizable intangible assets

  $52,619    $52,589    $20,163    $18,638  
                    

Unamortizable intangible assets:

        

Goodwill

  $743,895    $743,975      
              

Total unamortizable intangible assets

  $743,895    $743,975      
              

IncludedThe favorable lease assets, included in the above table of amortizable intangible assets are favorable leases. These favorable lease assetsabove, were recorded in conjunction with the acquisition of CSK and represent the values of operating leases acquired with favorable terms. These favorable leases had an estimated weighted-average remaining useful life of approximately 10.3 years as of September 30, 2010.March 31, 2011. In addition, the Company has recorded a liability for the values of operating leases with unfavorable terms, acquired in the acquisition of CSK. The cost of these unfavorable lease liabilities totaledCSK, totaling approximately $49.6 million as of September 30, 2010,at March 31, 2011, and December 31, 2009.2010. These unfavorable leases had an estimated weighted-average remaining useful life of approximately 6.46.1 years as of September 30, 2010.March 31, 2011. During the three and nine months ended September 30,March 31, 2011 and 2010, the Company recognized an amortized benefit of $1.8$1.7 million and $4.9$1.2 million, respectively, related to these unfavorable leases. During the three and nine months ended September 30, 2009, the Company recognized an amortized benefit of $2.3 million and $6.5 million, respectively, related to these unfavorableoperating leases. The carrying amount, net of accumulated amortization, of thethese unfavorable lease liabilityliabilities was $31.6$27.8 million and $36.5$29.5 million as of September 30, 2010,March 31, 2011, and December 31, 2009,2010, respectively, and is included in “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets. The liabilities related to these unfavorable leases are not included as a component of the Company’s closed store reserves, which are discussed in Note 4.

NOTE 43 – LONG-TERM DEBT

OutstandingThe amounts included in “Long-term debt, less current portion” and “Current portion of long-term debt wasdebt” on the accompanying Condensed Consolidated Balance Sheets are described in the table below as follows on September 30, 2010,of March 31, 2011, and December 31, 20092010 (in thousands):

 

   September 30,
2010
   December 31,
2009
 

Capital leases

  $6,096    $11,230  

6 3/4% Exchangeable Senior Notes

   100,156     100,718  

FILO revolving credit facility

   —       125,000  

Tranche A revolving credit facility

   325,000     553,800  
          

Total debt and capital lease obligations

   431,252     790,748  

Current maturities of debt and capital lease obligations

   104,698     106,708  
          

Total long-term debt and capital lease obligations

  $326,554    $684,040  
          

6 3/4% Exchangeable Senior Notes:

On July 11, 2008, the Company executed the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the 6 3/4% 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, 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, the Notes are exchangeable by the holders only under the following circumstances (as more fully described in the indentures under which the Notes were issued):

   March 31,
2011
   December 31,
2010
 

Capital leases

  $2,290    $2,704  

4.875% Senior Notes(1)

   496,559     —    

Unsecured revolving credit facility

   —       —    

Tranche A revolving credit facility

   —       356,000  
          

Total debt and capital lease obligations

   498,849     358,704  

Current portion of long-term debt

   1,208     1,431  
          

Long-term debt, less current portion

  $497,641    $357,273  
          

 

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.

On July 1, 2010, the Notes became exchangeable at the option of the holders and remained exchangeable through September 30, 2010, the last trading day of the Company’s third quarter, as provided for in the indentures governing the Notes. The Notes became exchangeable as the Company’s common stock closed at or above 130% of the Exchange Price (as defined in the indentures governing the Notes) for 20 trading days within the 30 consecutive trading day period ending on June 30, 2010. As a result, during the exchange period commencing July 1, 2010, and continuing through and including September 30, 2010, for each $1,000 principal amount of the Notes held, holders of the Notes could, if they elected, surrender their Notes for exchange. If the Notes were exchanged, the Company would 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 exceeded 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 approximately 25.97 shares of the Company’s common stock and approximately $60.61 in cash. On September 28, 2010, certain holders of the Notes delivered notice to the exchange agent to exercise their right to exchange $11
(1)

Net of original issuance discount of $3.4 million of the principal amount of the Notes. The Cash Settlement Averaging Period (as defined in the indentures governing the Notes) ended on October 27, 2010, and on October 29, 2010 the Company delivered $11 million in cash, which represented the principal amount of the Notes exchanged and the value of partial shares, and 92,855 shares of the Company’s common stock to the exchange agent in settlement of the exchange obligation. Concurrently, the Company retired the $11 million principal amount of the exchanged Notes.

On October 1, 2010, the Notes again became exchangeable at the option of the holders and will remain exchangeable through December 31, 2010, the last trading day of the Company’s fourth quarter, as provided for in the indentures governing the Notes. The Notes became exchangeable as the Company’s common stock closed at or above 130% of the Exchange Price (as defined in the indentures governing the Notes) for 20 trading days within the 30 consecutive trading day period ending on September 30, 2010. As a result, during the exchange period commencing October 1, 2010, and continuing through and including December 31, 2010, for each $1,000 principal amount of the Notes held, holders of the Notes may, if they elect, surrender their Notes for exchange. 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 approximately 25.97 shares of the Company’s common stock and approximately $60.61 in cash.

The holders of the Notes 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 indentures. 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 December 15, 2010, upon at least 35-calendar days notice. The Company intends to redeem the Notes in December 2010, and plans to fund the redemption with available borrowings under its asset-based revolving credit facility.

The Company distinguishes its financial instruments between permanent equity, temporary equity, and assets and liabilities. The share exchange feature and the embedded put and call options within the Notes are required to be accounted for as equity instruments. The difference between the fair value of the Notes at acquisition date and the fair value of the liability component on that date was $2.1 million, which was assigned to equity, and is fixed until the Notes are settled. The principal amount of the Notes as of September 30, 2010, and December 31, 2009, was $100 million and the net carrying amount of the Notes as of September 30, 2010, and December 31, 2009, was $100.2 million and $100.7 million, respectively. The unamortized premium on the Notes was $0.2 million as of September 30, 2010, which will be amortized through December 15, 2010. The unamortized premium on the Notes as of December 31, 2009, was $0.7 million. The if-converted value of the Notes as of September 30, 2010, calculated using the average stock price during the quarter and in accordance with the exchange obligation described above, was $131.4 million. The net interest expense related to the Notes for the three and nine months ended September 30, 2010, was $1.5 million and $4.5 million, respectively, resulting in an effective interest rate of 6.0%. The net interest expense related to the Notes for the three and nine months ended September 30, 2009, was $1.5 million and $4.5 million, respectively, resulting in an effective interest rate of 6.0%. As of September 30, 2010, the entire $100 million of the principal amount of the Notes was outstanding.

Asset-based revolving credit facility:

OnIn July 11,of 2008, in connection with the acquisition of CSK, the Company entered into a credit agreement for a five-year $1.2 billion asset-based revolving credit facility (the “Credit“ABL Credit Facility”), which was scheduled to mature in July of 2013. At December 31, 2010, the Company had outstanding borrowings of $356.0 million under the ABL Credit Facility, of which $106.0 million were not covered under an interest rate swap agreement. All outstanding borrowings under the ABL Credit Facility were repaid, and all related interest rate swap transaction agreements terminated on January 14, 2011, and the ABL Credit Facility was retired concurrent with the issuance of the Company’s 4.875% Senior Notes due 2021, as further described below. In conjunction with the retirement of the Company’s ABL Credit Facility, the Company recognized a one-time adjustment for a non-cash charge to write off the balance of debt issuance costs related to the ABL Credit Facility in the amount of $21.6 million and a one-time charge related to the termination of the Company’s interest rate swap agreements in the amount of $4.2 million, which are included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income for the quarter ended March 31, 2011.

4.875% Senior Notes due 2021:

On January 14, 2011, the Company issued $500 million aggregate principal amount of unsecured 4.875% Senior Notes due 2021 (“4.875% Senior Notes”) in the public market, of which certain of the Company’s subsidiaries are the guarantors (“Subsidiary Guarantors”), and United Missouri Bank, N.A. (“UMB”) is trustee. The 4.875% Senior Notes were issued at 99.297% of their face value of $500 million, and mature on January 14, 2021. Interest on the 4.875% Senior Notes accrues at a rate of 4.875% per annum and is payable on January 14 and July 14 of each year beginning on July 14, 2011. Interest is computed on the basis of a 360-day year.

The Company’s credit ratings on its 4.875% Senior Notes, as of March 31, 2011, are identified below:

Rating Agency

4.875% Senior NotesOutlook

Moody’s Investor Services

Baa3Stable

Standard & Poor’s Rating Services

BBB-Stable

The proceeds from the 4.875% Senior Notes’ issuance were used to repay all of the Company’s outstanding borrowings under its ABL Credit Facility and to pay fees and expenses related to the offering of the 4.875% Senior Notes, and costs associated with terminating the Company’s existing interest rate swap agreements, with the remainder used for general corporate purposes.

Prior to October 14, 2020, the 4.875% Senior Notes are redeemable in whole, at any time, or in part, from time to time, at the Company’s option upon not less than 30 nor more than 60 days’ notice at a redemption price, plus any accrued and unpaid interest to, but not including, the redemption date, equal to the greater of:

100% of the principal amount thereof; or

the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable Treasury Yield (as defined in the indenture governing the 4.875% Senior Notes) plus 25 basis points.

On or after October 14, 2020, the 4.875% Senior Notes are redeemable in whole, at any time, or in part, from time to time, at the Company’s option upon not less than 30 nor more than 60 days’ notice at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to, but not including, the redemption date. In addition, if at any time the Company undergoes

a Change of Control Triggering Event (as defined in the indenture governing the 4.875% Senior Notes), holders of the 4.875% Senior Notes may require the Company to repurchase all or a portion of their 4.875% Senior Notes at a price equal to 101% of the principal amount of the 4.875% Senior Notes being repurchased, plus accrued and unpaid interest, if any, to but not including the repurchase date. The principal amount of the 4.875% Senior Notes as of March 31, 2011, was $500 million and the net carrying amount of the 4.875% Senior Notes was $496.6 million. As of March 31, 2011, the unamortized discount on the 4.875% Senior Notes was $3.4 million.

The 4.875% Senior Notes are guaranteed by certain of the Company’s subsidiaries on a senior unsecured basis. The guarantees are full and unconditional and joint and several. Each of the Subsidiary Guarantors is wholly-owned, directly or indirectly, by the Company and the Company has no independent assets or operations other than those of its subsidiaries. The only direct or indirect subsidiaries of the Company that are not Subsidiary Guarantors are minor subsidiaries. Neither the Company, nor any of its Subsidiary Guarantors, has any material or significant restrictions on the Company’s ability to obtain funds from its subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by applicable law. The 4.875% Senior Notes are subject to certain customary, positive and negative covenants, with which the Company complied as of March 31, 2011.

Unsecured revolving credit facility:

On January 14, 2011, the Company entered into a new credit agreement for a five-year $750 million unsecured revolving credit facility (the “Revolver”) arranged by Bank of America, N.A. (“BA”). and Barclays Capital, which matures in January of 2016. The Credit Facility is comprisedRevolver includes a $200 million sub-limit for the issuance of a five-year $1.075 billion tranche A revolving credit facility (“tranche A revolver”) and a five-year $125 million first-in-last-out revolving credit facility (“FILO tranche”), both of which mature on July 10, 2013. The terms of the Credit Facility grant the Company the right to terminate the FILO tranche upon meeting certain requirements, including no events of default and aggregate projected availability under the Credit Facility. During the third quarter ended September 30, 2010, the Company, upon meeting all requirements to do so, elected to exercise its right to terminate the FILO tranche. As of September 30, 2010, the amount of the borrowing base available under the Credit Facility was $1.072 billion, of which the Company had outstanding borrowings of $325 million. 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 $678.8 million. The available borrowings under the Credit Facility are also reduced by stand-by letters of credit issued byand a $75 million sub-limit for swing line borrowings. As described in the credit agreement, the Company primarilymay, from time to satisfytime, increase the requirementsfacility to a maximum of workers compensation, general liability and other insurance policies. As of September 30, 2010, the Company had stand-by letters of credit outstanding of $72.9 million and the aggregate availability for additional borrowings$950 million.

Borrowings under the Credit Facility was $673.7 million. As of December 31, 2009, the Company had stand-by letters of credit outstanding in the amount of $72.3 million and the aggregate availability for additional borrowings under the credit facility was $445.2 million. As part of the Credit Facility, 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 as of September 30, 2010.

As of September 30, 2010, borrowings under the tranche A revolver boreRevolver (other than swing line loans) bear interest, at the Company’s option, at either the Base Rate or Eurodollar Rate (both as defined in the agreement) plus a rate equalmargin that varies from 1.325% to either a base rate plus 1.25% per annum or LIBOR plus 2.25% per annum, with2.50% in the case of loans bearing interest at the Eurodollar Rate and 0.325% to 1.50% in the case of loans bearing interest at the Base Rate, in each rate being subject to adjustmentcase based upon certain excess availability thresholds. The base rate is equalthe better of the ratings assigned to the higher of the prime lending rate establishedCompany’s debt by BA from time to time or the federal funds effective rate as in effect from time to time plus 0.50%, subject to adjustment based upon remaining available borrowings. Fees related to unused capacityMoody’s Investor Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”). Swing line loans made under the Credit Facility are assessedRevolver bear interest at a rate of 0.50% of the remaining available borrowings underBase Rate plus the facility, subject to adjustment based upon remaining unused capacity.applicable margin described above. In addition, the Company pays lettera facility fee on the aggregate amount of credit fees and other administrative feesthe commitments in respectan amount equal to a percentage of such commitments, varying from 0.175% to 0.50% based upon the better of the ratings assigned to the Credit Facility.Company’s debt by Moody’s and S&P. As of September 30, 2010, all of the Company’s borrowings under its Credit Facility were covered under interest rate swap agreements. As of DecemberMarch 31, 2009,2011, the Company had no outstanding borrowings of $278.8 million under its Credit Facility, which were not covered under an interest rate swap agreement, with interest rates ranging from 2.50% to 4.50%.

On each of July 24, 2008, October 14, 2008, and January 21, 2010, the Company entered into interest rate swap transactions with Branch Banking and Trust Company (“BBT”), BA, SunTrust Bank (“SunTrust”) and/or Barclays Capital (“Barclays”). The Company entered into these interest rate swap transactions to mitigate the risk associated with its floating interest rate based on 30-day LIBOR on an aggregate of $450 million of its debt that was outstanding under the Credit Facility. Revolver.

The Revolver contains certain debt covenants, which include limitations on total outstanding borrowings, a minimum fixed charge coverage ratio of 2.0 times from the closing through December 31, 2012; 2.25 times through December 31, 2014; 2.5 times through maturity; and a maximum adjusted consolidated leverage ratio of 3.0 times through maturity. The consolidated leverage ratio includes a calculation of adjusted earnings before interest, rate swap transactiontaxes, depreciation, amortization, rent and stock option compensation expense to adjusted debt. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit, six-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that the Company entered into with BBTshould default on July 24, 2008, for $100 million matured on August 1, 2010, reducingany covenant contained within the total notionalRevolver, certain actions may be taken, including, but not limited to, possible termination of credit extensions, immediate payment of outstanding principal amount plus accrued interest and litigation from lenders. As of swapped debt to $350 million as of that date. The interest rate swap transaction thatMarch 31, 2011, the Company entered intoremained in compliance with BBT on October 14, 2008, for $25 million and was scheduled to mature on October 17, 2010, was terminated at the Company’s request on September 16, 2010, reducing the total notional amount of swapped debt to $325 million as of that date (see Note 6). The Company is required to make certain monthly fixed rate payments calculated on the notional amounts, while the applicable counterparty is obligated to make certain monthly floating rate paymentsall covenants related 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 exists under the Credit Facility plus an applicable margin under the terms of the Credit Facility. The interest rate swap transactions have maturity dates ranging from October 17, 2010, through October 17, 2011. 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 September 30, 2010, are included in the table below:

Counterparty

  Transaction
Date
   Effective
Date
   Notional Amount
(in thousands)
   Effective
Index
Rate
  Spread at
September 30,
2010
  Effective
Interest Rate at
September 30,
2010
  Maturity
date
 

SunTrust

   07/24/2008     08/01/2008     25,000     3.83  2.25  6.08  08/01/2011  

SunTrust

   07/24/2008     08/01/2008     50,000     3.83  2.25  6.08  08/01/2011  

BA

   07/24/2008     08/01/2008     75,000     3.83  2.25  6.08  08/01/2011  

BBT

   10/14/2008     10/17/2008     25,000     2.99  2.25  5.24  10/17/2010  

BA

   10/14/2008     10/17/2008     25,000     3.05  2.25  5.30  10/17/2010  

SunTrust

   10/14/2008     10/17/2008     25,000     2.99  2.25  5.24  10/17/2010  

BA

   10/14/2008     10/17/2008     50,000     3.56  2.25  5.81  10/17/2011  

Barclays

   01/21/2010     01/22/2010     50,000     0.53  2.25  2.78  01/31/2011  
              
      $325,000       
              

The interest rate swap transactions that the Company entered into with BBT, BA and SunTrust on October 14, 2008, referenced in the table above, for a total of $75 million matured on October 17, 2010, reducing the total notional amount of swapped debt to $250 million as of that date.borrowing arrangements.

NOTE 54 – EXIT ACTIVITIES

The Company maintains reserves for closed stores and other properties that are no longer utilized in current operations as well as reserves for employee separation liabilities. Reserves for closed stores and other properties include stores and other properties acquired in the CSK acquisition (see Note 2). Employee separation liabilities represent costs for anticipated payments, including payments required under various pre-existing employment arrangements with acquired CSK employees, which existed at the time of the acquisition, relating to the planned involuntary termination of employees performing overlapping or duplicative functions. The Company is expected to conclude the restructuring activities related to these employee separation liabilities in the second quarter of 2011.

The Company accrues for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present value of the remaining noncancelablenon-cancelable 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 30, 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.

The following table is a summary ofidentifies the closure reserves for stores, administrative office and distribution facilities, and reserves for employee separation costs as of September 30, 2010,at March 31, 2011, and December 31, 20092010 (in thousands):

 

  Store Closure
Liabilities
 Administrative Office
and Distribution
Facilities Closure
Liabilities
 Employee
Separation
Liabilities
   Store Closure
Liabilities
 Administrative Office and
Distribution Facilities
Closure Liabilities
 Employee
Separation
Liabilities
 

Balance at December 31, 2009:

  $15,777   $7,653   $2,080  

Balance at December 31, 2010:

  $13,971   $5,608   $1,156  

Additions and accretion

   710    348    —       181    89    —    

Payments

   (2,362  (1,624  (1,063   (1,316  (694  (801

Revisions to estimates

   218    (155  595     35    49    —    
                    

Balance at September 30, 2010:

  $14,343   $6,222   $1,612  

Balance at March 31, 2011:

  $12,871   $5,052   $355  
                    

The revisions to estimates in closure reserves for stores and administrative office and distribution facilities included changes in the estimates of sublease agreements, changes in assumptions of various store and office closure activities, and changes in assumed leasing arrangements since the acquisition of CSK. The cumulative amount incurred in closure reserves for stores from the inception of the exit activity through September 30, 2010,March 31, 2011, was $23.1$23.7 million. The cumulative amount incurred in administrative office and distribution facilities from the inception of the exit activity through September 30, 2010,March 31, 2011, was $9.2$9.5 million. The balance of both these reserves is included in “Other current liabilities” and “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets based upon the dates when the reserves are expected to be settled. The revisions to estimates in the reserves for employee separation liabilities include additional severance and incentive compensation accrued for employees of CSK. The cumulative amount incurred in employee separation liabilities from the inception of the exit activity through September 30, 2010,March 31, 2011, was $29.4$30.2 million, the balance of which is included in “Accrued payroll” on the accompanying Condensed Consolidated Balance Sheets.

NOTE 65 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Interest rate risk management:management:

As discussed in Note 4, on each of July 24, 2008, October 14, 2008, and January 21, 2010,3, the Company entered into various interest rate swap transactionstransaction agreements with BBT, BA, SunTrust and/or Barclaysvarious counterparties to mitigate cash flow risk associated with the floating interest rate, basedrates on the one-month LIBOR rate on an aggregate of $450 million of the debt outstanding borrowings under its ABL Credit Facility. The interest rate swap transaction that the Company entered into with BBT on July 24, 2008, for $100 million matured on August 1, 2010, reducing the total notional amount of swapped debt to $350 million as of that date. The interest rate swap transaction that the Company entered into with BBT on October 14, 2008, for $25 million and was scheduled to mature on October 17, 2010, was terminated at the Company’s request on September 16, 2010, reducing the total notional amount of swapped debt to $325 million as of that date. The swap transactions have beenwere designated as cash flow hedges with interest payments designed to offset the interest payments for borrowings under the ABL Credit Facility that correspond tocorresponded with the notional amounts of the swaps. The fair values of the Company’s outstanding hedges arewere recorded as a liability onin the accompanying Condensed Consolidated Balance Sheets at September 30, 2010, and December 31, 2009. For qualifying cash flow hedges, the2010. The effective portion of the change in the fair value of the derivative instrument isCompany’s cash flow hedges was recorded as a component of “Accumulated other comprehensive loss” and any ineffectiveness iswas recognized in earnings in the period of ineffectiveness. The change in the fair valueAll of the $25 million interest rate swap contract, which wastransaction agreements were terminated byat the CompanyCompany’s request on September 16, 2010, was deemed to be ineffective asJanuary 14, 2011, concurrent with the retirement of the termination date. The Company recognized $0.1 millionABL Credit Facility and the issuance of its 4.875% Senior Notes, as described in “Interest expense” for the three and nine months ended September 30, 2010, asNote 3. As a result of this termination, the hedge ineffectiveness.Company’s interest rate swap hedges were terminated and the Company recognized a charge of $4.2 million, which was included as a component of “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income for the quarter ended March 31, 2011. As of September 30, 2010,March 31, 2011, the Company’s remaining hedgingCompany did not hold any instruments have been deemed to be highly effective. that qualified as cash flow hedge derivatives.

The tablestable below representrepresents the effecteffects the Company’s derivative financial instruments had on its condensed consolidated financial statementsCondensed Consolidated Balance Sheets as of March 31, 2011, and December 31, 2010 (in thousands):

 

  Fair Value of Derivative,
Recorded as Payable
   Fair Value of Derivative, Tax
Effect
   Amount of Loss Recognized in
Accumulated Other
Comprehensive Loss on
Derivative, net of tax
  Fair Value of Derivative,
Recorded as Payable to
Counterparties in “Other
current liabilities”
 Fair Value of Derivative, Tax
Effect
 Amount of Loss Recognized in
Accumulated Other
Comprehensive Loss on
Derivative, net of tax
 

Derivative Designated as Hedging Instrument

  September 30,
2010
   December 31,
2009
   September 30,
2010
   December 31,
2009
   September 30,
2010
   December 31,
2009
 
Derivatives Designated as Hedging Instruments March 31,
2011
 December 31,
2010
 March 31,
2011
 December 31,
2010
 March 31,
2011
 December 31,
2010
 

Interest rate swap contracts

  $6,680    $13,053    $2,585    $5,091    $4,095    $7,962   $—     $4,845   $—     $1,875   $—     $2,970  

The table below represents the effects the Company’s derivative financial instruments had on its Condensed Consolidated Statements of Income as of March 31, 2011 and 2010 (in thousands):

   Location and Amount of Loss Recognized in Income on Derivative
(Ineffective Portion)
 

Derivative Designated as Hedging
Instrument

  Three months ended
September 30, 2010
   Three months ended
September 30, 2009
   Nine months ended
September 30, 2010
   Nine months ended
September 30, 2009
 

Interest rate swap contracts

  Interest expense  $65    Interest expense  $—      Interest expense  $65    Interest expense  $—    

 

  Location of and Amount Recorded as Payable to Counterparties   

Location and Amount of Loss Recognized in Income on Derivative

 

Derivative Designated as Hedging Instrument

  September 30, 2010   December 31, 2009 

Derivatives Designated as Hedging
Instruments

  

Three months ended

March 31, 2011

 

Three months ended

March 31, 2010

 

Interest rate swap contracts

  Other current liabilities  $4,973    Other current liabilities  $4,140    Other income (expense)  $(4,237 Other income (expense)  $—    

Interest rate swap contracts

  Other liabilities   1,707    Other liabilities   8,913  

NOTE 76 – 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 Company uses the income and market approaches to determine the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below:

 

Level 1 – Observable inputs that reflect quoted prices in active markets.

 

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable.

 

Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.

6 3/4% Exchangeable4.875% Senior Notes:

The carrying amount of the Company’s 6 3/4% Exchangeable4.875% Senior Notes is included in “Current portion of long-term debt”“Long-term debt, less current portion” on the accompanying Condensed Consolidated Balance Sheets. The estimated fair valuesvalue of the Company’s 6 3/4% Exchangeable4.875% Senior Notes as of March 31, 2011, which areis determined by reference to quoted market prices (Level 1), areis included in the table below (in thousands):

 

   September 30, 2010   December 31, 2009 
   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
 

Obligations under 6 3/4% Exchangeable Senior Notes

  $100,156    $144,590    $100,718    $119,273  
   March 31, 2011         
   Quoted Prices in
Active Markets for
Identical
Instruments
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
   Total 

4.875% Senior Notes

  $493,450    $—      $—      $493,450  

Interest rate swap contracts:

The fair valuesvalue of the Company’s outstanding interest rate swap contracts, areas discussed in Note 3 and Note 5, was included in “Other current liabilities” and “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets.Sheets as of December 31, 2010. The fair value of the interest rate swap contracts arewas based on the discounted net present value of the swapswaps using third party quotes (Level 2). Changes in fair market value arewere recorded in “Accumulated other comprehensive income (loss),loss” on the accompanying Condensed Consolidated Balance Sheets, and changes resulting from ineffectiveness arethe termination of the interest rate swap contracts were recorded in current earnings.“Other income (expense)” on the accompanying Condensed Consolidated Statements of Income. All of the interest rate swap transaction agreements that existed as of December 31, 2010, were terminated at the Company’s request on January 14, 2011, concurrent with the retirement of the ABL Credit Facility and the issuance of its 4.875% Senior Notes, as discussed in Note 3. The fair value of the Company’s interest rate contractsswap agreements as of December 31, 2010, is included in the tablestable below (in thousands):

 

   September 30, 2010 
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
   Total 

Derivative contracts

  $—      $(6,680 $—      $(6,680
   December 31, 2010        
   Quoted Prices in
Active Markets for
Identical
Instruments
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable Inputs
(Level 3)
   Total 

Derivative contracts

  $—      $(4,845 $—      $(4,845

   December 31, 2009 
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
   Total 

Derivative contracts

  $—      $(13,053 $—      $(13,053

Asset-based revolving credit facility:

The Company has determined that the estimated fair value of its asset-based revolving credit facility approximatesABL Credit Facility, as discussed in Note 3, approximated the carrying amount of $325 million and $678.8$356.0 million at September 30, 2010, and December 31, 2009, respectively,2010, which areis included in “Long-term debt, less current portion” on the accompanying Condensed Consolidated Balance Sheets. These valuations were 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 for comparable companies in the industry (Level 2). All outstanding borrowings under the ABL Credit Facility were repaid on January 14, 2011, and the facility was retired concurrent with the issuance of the Company’s 4.875% Senior Notes as discussed in Note 3.

NOTE 87ACCUMULATED OTHER COMPREHENSIVE LOSSSHAREHOLDERS’ EQUITY

Accumulated other comprehensive loss:

Unrealized losses, net of tax, from interest rate swap contractsagreements that qualifyqualified as cash flow hedges arewere included in “Accumulated other comprehensive loss” on the accompanying Condensed Consolidated Balance Sheets.Sheets at December 31, 2010. As discussed in Notes 3 and 5, all interest rate swap agreements were terminated on January 14, 2011. The adjustment to “Accumulated other comprehensive loss” for the three months ended September 30, 2010,March 31, 2011, totaled $2.2$4.8 million with a corresponding tax liabilityasset of $0.8$1.8 million resulting in a net of tax effect of $1.4$3.0 million. The adjustment to “Accumulated other comprehensive loss” for the nine months ended September 30, 2010, totaled $6.4 million with a corresponding tax liability of $2.5 million resulting in a net of tax effect of $3.9 million. During the three months ended September 30, 2010, $0.1 million was reclassified from “Accumulated other comprehensive loss” into earnings due to the ineffectiveness of an interest rate swap contract which was terminated on September 16, 2010 (see Note 6). Changes in “Accumulated other comprehensive loss” for the ninethree months ended September 30, 2010,March 31, 2011, consisted of the following (in thousands):

 

   Unrealized
Gains/(Losses)
on Cash Flow
Hedges
 

Balance at December 31, 2009:

  $(7,962

Period change

   3,867  
     

Balance at September 30, 2010:

  $(4,095
     
   Changes in
Unrealized Losses
on Cash Flow
Hedges
 

Balance at December 31, 2010:

  $(2,970

Period change

   2,970  
     

Balance at March 31, 2011:

  $—    
     

Comprehensive income for the three and nine months ended September 30,March 31, 2011 and 2010, was $117.9$105.4 million and $317.5$98.4 million, respectively. Comprehensive income

Share repurchase program:

In January of 2011, the Company’s Board of Directors approved a $500 million share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions, for a three-year period. The Company and its Board of Directors may increase or otherwise modify, renew, suspend or terminate the repurchase program at any time, without prior notice.

The Company repurchased 2.6 million shares of its common stock under its publicly announced repurchase program during the three and nine months ended September 30, 2009, was $89.4March 31, 2011, at an average price per share of $55.54, for a total investment of $145.0 million. As of March 31, 2011, the Company had $355.0 million remaining under its repurchase program. From April 1, 2011, through and $237.7including May 9, 2011, the Company repurchased 1.1 million respectively.shares of its common stock at an average price of $56.84, for a total investment of $62.9 million.

NOTE 98 – SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS

The Company recognizes share-based compensation expense based on the fair value of the grants, awards or shares at the time of the grant.grant, award or issuance. Share-based payments include stock option awards issued under the Company’s employee stock option plan, 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 awarded to employees through other benefit programs.

Stock options:

The Company’s employee stock-based incentive plan providesplans provide for the granting of stock options for the purchase of common stock of the Company to directors and certain key employees of the Company. Options are granted at an exercise price that is equal to the closing market valueprice of the Company’s common stock on the date of the grant. Director options granted under the plan expire after seven years and are fully vested after six months. Employee options granted under the plan 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. The following table summarizes the stock option activity during the first ninethree months of 2010:2011:

 

   Shares  Weighted-
Average
Exercise
Price
 

Outstanding at December 31, 2009

   9,929,879   $26.57  

Granted

   1,169,125    44.75  

Exercised

   (1,696,886  24.28  

Forfeited

   (549,477  31.91  
         

Outstanding at September 30, 2010

   8,852,641    29.07  
         

Exercisable at September 30, 2010

   4,750,854   $25.16  
         

   Shares  Weighted-Average
Exercise Price
 

Outstanding at December 31, 2010

   8,394,854   $30.37  

Granted

   531,740    57.66  

Exercised

   (250,122  27.65  

Forfeited

   (163,345  38.82  
         

Outstanding at March 31, 2011

   8,513,127    32.05  
         

Exercisable at March 31, 2011

   4,437,316   $26.25  
         

The Company recognized stock option compensation costsexpense of approximately $3.8$4.4 million and $11.3$3.6 million for the three and nine months ended September 30,March 31, 2011 and 2010, respectively, and recognized a corresponding income tax benefit of approximately $1.5$1.7 million and $4.3$1.4 million, for the three and nine months ended September 30, 2010, respectively. The Company recognized stock option compensation costs of approximately $3.3 million and $10.2 million for the three and nine months ended September 30, 2009, respectively, and recognized a corresponding income tax benefit of approximately $1.3 million and $4.0 million for the three and nine months ended September 30, 2009, respectively.

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 life of options granted. The risk free interest raterates for periods within the contractual life of the options isare 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, identified in the table below, were used for grants issued infor the ninethree months ended September 30, 2010March 31, 2011 and 2009:2010:

 

  Three Months Ended
March 31,
 
  2010  2009  2011 2010 

Risk free interest rate

  1.8%  2.0%   1.72  2.11

Expected life

  4.3 Years  4.7 Years   4.1 Years    3.6 Years  

Expected volatility

  34.0%  32.8%   33.5  33.9

Expected dividend yield

  0%  0%   —    —  

The weighted-average grant-date fair value of options granted during the first ninethree months of 2010ended March 31, 2011, was $13.58$16.84 compared to a weighted-average grant-date fair value of $10.92$12.22 for the first ninethree months of 2009.ended March 31, 2010. The remaining unrecognized compensation costexpense related to unvested awards at September 30, 2010,March 31, 2011, was $36.9$38.3 million, and the weighted-average period of time over which this cost will be recognized is 2.63.0 years.

Other employee benefit plans:

The Company sponsors other share-based employee benefit plans including a contributory profit sharing and savings plan that covers substantially all employees, an employee stock purchase plan which permits all eligible employees to purchase shares of the Company’s common stock at 85% of the fair market value and a performance incentive plan under which the Company’s senior management is awarded shares of restricted stock that vest equally over a three-year period. Compensation expense recognized under these plans is measured based on the market price of the Company’s common stock on the date of award and is recorded over the vesting period. During the three and nine months ended September 30, 2010,March 31, 2011, the Company recorded approximately $0.5 million and $1.5$0.7 million of compensation costexpense for benefits provided under these plans and a corresponding income tax benefit of approximately $0.2 million and $0.6 million, respectively.$0.3 million. During the three and nine months ended September 30, 2009,March 31, 2010, the Company recorded approximately $2.7 million and $7.6$0.5 million of compensation costexpense for benefits provided under these plans and recognized a corresponding income tax benefit of approximately $1.1 million and $3.0 million, respectively.$0.2 million.

NOTE 109INCOMEEARNINGS PER COMMON SHARE

The following table sets forthbelow summarizes the computation of basic and diluted incomeearnings per common share for the three and nine months ended September 30,March 31, 2011 and 2010 (in thousands, except per share data):

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2010   2009   2010   2009 

Numerator (basic and diluted):

        

Net income

  $116,542    $87,225    $313,613    $235,575  

Denominator:

        

Denominator for basic income per common share-weighted-average shares

   138,831     136,774     138,219     135,869  

Effect of stock options and restricted shares

   2,236     1,764     2,192     1,573  

Effect of Exchangeable Notes

   639     166     463     —    
                    

Denominator for diluted income per common share-

adjusted weighted-average shares and assumed conversion

   141,706     138,704     140,874     137,442  
                    

Basic net income per common share

  $0.84    $0.64    $2.27    $1.73  
                    

Net income per common share-assuming dilution

  $0.82    $0.63    $2.23    $1.71  
                    

   

Three Months Ended,

March 31,

 
   2011   2010 

Numerator (basic and diluted):

    

Net income

  $102,474    $97,476  

Denominator:

    

Denominator for basic earnings per share–weighted-average shares

   140,579     137,583  

Effect of stock options (see Note 8)

   2,287     1,817  

Effect of exchangeable notes

   —       212  
          

Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversion

   142,866     139,612  

Earnings per share-basic

  $0.73    $0.71  
          

Earnings per share-assuming dilution

  $0.72    $0.70  
          

Incremental net shares for the exchange feature of the Notes, (see Note 4), were included in the diluted earnings per share calculation for the three and nine months ended September 30, 2010, and forFor the three months ended September 30, 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 nine months ended September 30, 2009, as the impact of the Notes would have been antidilutive.

For the threeMarch 31, 2011 and nine months ended September 30, 2010, the Company did not include in the computation of diluted earnings per share approximately 1.0 million and 1.5 million shares, respectively. For the three and nine months ended September 30, 2009, the Company did not include in the computation of diluted earnings per share approximately 0.1 million and 1.6 million shares, respectively.certain common stock equivalents. These sharescommon stock equivalents represent underlying stock options not included in the computation of diluted earnings per share, because the inclusion of such sharesequivalents would have been antidilutive. The table below identifies the antidilutive stock options for the three months ended March 31, 2011 and 2010 (in thousands):

   Three Months Ended
March 31,
 
   2011   2010 

Antidilutive stock options

   1,377     1,456  

Weighted-average exercise price

  $54.43    $37.72  

The exchangeable notes were retired in December of 2010, and therefore had no dilutive effect on 2011 results. Incremental net shares for the exchange feature of the exchangeable notes were included in the diluted earnings per share calculation for the three months ended March 31, 2010.

NOTE 1110 – 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, taking into account applicable insurance and reserves, 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 and CSK’s former officers prior to its acquisition by O’Reilly, Automotive, Inc. as described below.

CSK Pre-Acquisition Matters – Governmental Investigations and Actions:

As previously reported, the pre-acquisition Securities and Exchange Commission (“SEC”) investigation of CSK, which commenced in 2006, was settled in May of 2009 by administrative order without fines, disgorgement or other financial remedies. The Department of Justice (“DOJ”)’s criminal investigation into these same matters as previously disclosed is near a conclusion and is described more fully below. In addition, the previously reported SEC complaint against three (3) former employees of CSK for alleged conduct related to CSK’s historical accounting practices remains ongoing. The action filed by the SEC on July 22, 2009, against Maynard L. Jenkins, the former chief executive officerChief 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. However, on March 24, 2011, the parties filed a Stipulation announcing a tentative settlement agreement had been reached, subject to approval by the SEC’s Commissioners. At the request of the parties, and by Order dated March 25, 2011, the matter has been stayed pending final approval of the parties’ tentative settlement. The previously reported DOJ criminal complaint againstprosecution of Don Watson, the former Chief Financial Officer of CSK, remains ongoing with trial set to commence on or about June 5,7, 2011.

With respect to the ongoing DOJ investigation into CSK’s pre-acquisition accounting practices as referenced above, as previously disclosed, attorneys from the DOJ 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. District Court, District of Arizona; Case No: 2:09-cr-00372-SRB, the DOJ believes criminal charges against CSK are appropriate. O’Reilly has continued to cooperate with and engage in discussions with the DOJ, as previously disclosed, to resolve the pre-acquisition accounting issues related to CSK arising from the conduct of its former employees as referenced above. O’Reilly and the DOJ have now agreed in principle, subject to final documentation, to resolve the DOJ investigation of CSK’s legacy pre-acquisition accounting practices. Based uponThe Company and the agreement in principleDOJ continue work to complete the final documentation necessary for a final settlement, O’Reilly has recorded an additional charge of $5.9 million in the third quarter of 2010 to increase its accrual in anticipationexecution of the DOJ, CSK and O’Reilly executing a Non-Prosecution Agreement previously referenced and paying apayment of the one-time monetary penalty of $20.9 million, dollars.also previously reported. The Company’s total reserve related to the DOJ investigation of CSK was $21.4$21.3 million as of September 30, 2010,March 31, 2011, which relates to the amount of the monetary penalty and associated legal costs.

Notwithstanding the agreement in principle with the DOJ, several of CSK’s former directors or officers and current or former employees have been or may be interviewed or deposed as part 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, as a result, O’Reilly is currently incurring legal fees on 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 indemnity obligations related to the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly has a remaining reserve, with respect to such indemnification obligations, of $18.8$16.8 million as of September 30, 2010,at March 31, 2011, which was primarily recorded as an assumed liability in the Company’s allocation of the purchase price of CSK.

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 flows could be materially affected by an ultimate unfavorable resolution of such matters, depending, in part, upon the results of operations or cash flows for such period. However, at this time, management believes that the ultimate outcome of all of such regulatory proceedings and other matters 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 1211 – RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of any pronouncements stated below, there have been noNo recent accounting pronouncements or changes in accounting pronouncements have occurred since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009,2010, that are of material significance, or have potential material significance, to the Company.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). ASU 2010-06 amends Subtopic 820-10, requiring additional disclosures regarding fair value measurements such as transfers in and out of Levels 1 and 2, as well as separate disclosures about activity relating to Level 3 measurements. ASU 2010-06 clarifies existing disclosure requirements related to the level of disaggregation and input valuation techniques. The updated guidance is effective for interim and annual periods beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and annual periods beginning after December 15, 2010. The application of this guidance affects disclosures only and therefore, did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

In May 2009, the FASB issued FASB Accounting Standards Codification 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC 855 is effective for interim or fiscal periods ending 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. On February 24, 2010, the FASB issued Accounting Standards Update No 2010-09Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”), which was effective immediately. The ASU amended FASB ASC 855, to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. The amendments that are specifically relevant include the requirement that SEC filers evaluate subsequent events through the date the financial statements are issued, and the exemption of SEC filers from disclosing the date through which subsequent events have been evaluated. The Company adopted the provisions of ASU 2010-09 beginning with its condensed consolidated financial statements for the quarter ended March, 31, 2010. The adoption of ASC 855 and ASU 2010-09 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” or “O’Reilly” refer to O’Reilly Automotive, Inc. and its subsidiaries.

In Management’s Discussion and Analysis (“MD&A”), 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, which include the topics bulletedare identified below:

 

an overview of the key drivers of the automotive aftermarket;

 

our results of operations for the thirdfirst quarters ended March 31, 2011 and nine-month periods ended September 30, 2010 and 2009;2010;

 

our liquidity and capital resources;

 

any contractual obligations to which we are committed;

 

our critical accounting policies and estimates;

 

the inflation and seasonality of our business;

 

newrecent accounting standardspronouncements that affect our company;

any measures not calculated using United States (“U.S.”) generally accepted accounting principles (“GAAP”); and

 

recent events and developments that could affect our company.developments.

The review of Management’s Discussion and AnalysisMD&A should be made in conjunction with our condensed consolidated financial statements, related notes and other financial information included elsewhere in this quarterly 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 quarterly report that are not historical facts are forward-looking statements, such as statements discussing among other things, expected growth, store development, CSK Auto Corporation (“CSK”) Department of Justice (“DOJ”) investigation resolution, integration 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 increased debt levels, credit ratings on our public debt, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses includingsuch as the acquisition and integration of 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 our annual report on Form 10-K for the year ended December 31, 2009,2010, for additional factors that could materially affect our financial performance.

OVERVIEW

We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States,U.S., selling our products to both do-it-yourself (“DIY”) customers and professional installers. At September 30, 2010,service providers. During the first quarter ended March 31, 2011, we opened 55 stores, including our first store in West Virginia, and closed 12 stores. As of March 31, 2011, we operated 3,5363,613 stores in 3839 states. The table below depicts our store activity from December 31, 2009, through September 30, 2010:

   Store Count by Brand 
   O’Reilly  Checker  Schuck’s  Kragen  Total 

December 31, 2009

   2,533    321    75    492    3,421  

New

   121    —      —      —      121  

Converted

   580    (170  (75  (335  —    

Closed

   (2  —      —      (4  (6
                     

September 30, 2010

   3,232    151    —      153    3,536  
                     

Our stores carry an extensive product line, including the products bulletedidentified below:

 

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; and

 

accessories, such as floor mats, seat covers and truck accessories.

Many of our stores offer enhanced services and programs to our customers, including those bulletedidentified below:

 

used oil and battery recycling

 

battery diagnostic testing

 

electrical and module testing

 

loaner tool program

 

drum and rotor resurfacing

 

custom hydraulic hoses

professional paint shop mixing and related materials

 

machine shops

OurWe continue our strategy continues to be theof opening of new stores to achieve greater penetration in existing markets and expansion into new, contiguous markets. We plan to open approximately 150 new stores in 2010, and approximately 170 net, new stores in 2011. 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. We believe that our dual market strategy of targeting both the do-it-yourselfDIY retail customer and commercial installerprofessional service provider positions the Companyus extremely well to take advantage of growth in the automotive aftermarket business. We believe our investment in store growth will be funded with the cash flows generated by our existing operations.operations and through available borrowings under our existing credit facility.

We believe that the number of U.S. miles driven, new light vehicle sales, number of U.S. registered vehicles, new light vehicle sales, average vehicle age, unperformed maintenance, unemployment and product quality differentiation are key drivers of current and future demand of products sold within the automotive aftermarket.

Number of miles driven:driven:

Total miles driven in the U.S., along with changes in the average age of vehicles on the road, heavily influenceinfluences the demand for the repair and maintenance products we sell. Historically, the long-term trend in the total miles driven in the U.S. has steadily increased. According to the Department of Transportation, between 19992002 and 2007, the total number of miles driven in the U.S. increased at an average annual rate of approximately 1.6%1.4%. In 2008, however, difficult macroeconomic conditions and record high gas prices during the first half of the year led to a decrease in the number of miles driven, and in 2009, miles driven remained relatively flat. During the first eight months ofIn 2010, miles driven in the United StatesU.S. increased by 0.4%. We believe this slight increase is a result0.7% and the number of stabilization of the economy, unemployment and gas prices. Milesmiles driven in the U.S. has increased each month since March and,by 0.6% through the first two months of 2011. Historically, spikes in gasoline prices have contributed to flat or declining U.S. total miles driven as consumers reacted to the increased expense by reducing travel. Through April of 2011, average gasoline prices increased 24% when compared to the same period in 2010. As the U.S. economy recovers and gasoline prices stabilize, 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:

As a result ofsales, however, have declined over the past decade. From 2000 to 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., beginningnew 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 numberlowest level in the past decade. As of the end of the quarter, the seasonally adjusted annual rate (“SAAR”) of sales of total light vehicle purchases declined sharply. The Automotive Aftermarket Industry Association (“AAIA”) estimates that new car salesvehicles in the U.S. decreased 4.7% between 1999 and 2007 forincreased to $13 million – this increase has been a steady trend since mid-2009; however, the monthly SAAR of sales of total light vehicles remains below historical rates. Based on the current economic environment, we believe new light vehicle market; however, sales for the same market decreased by 18.5% in 2008will remain below historic levels and 21.2% in 2009. We believe that consumers will continue to defer the purchase of new vehicles and choose 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: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 8.58.4 years for light trucks in 19992000 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, such as brakes, belts, hoses, batteries and filters and generally require more maintenance than newer vehicles would require.vehicles.

Unperformed maintenance: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 decisionsConsumers’ decision to avoid or defer maintenance affectaffects demand for our products, and the total amount of unperformed maintenance represents potential future demand. We believe that challenging macroeconomic conditions beginning in 2008 continuing into 2009 and 2010, contributed to the increased amount of unperformed maintenance;maintenance in 2009; however, with the reduced number of new car sales we believe the amount of underperformed maintenance is decreasing as people place a higherand 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.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. The annual U.S. unemployment rate for 2010 was 9.6%, the highest unemployment rate since 1982. The U.S. monthly unemployment rates are below 2010 levels, with April’s unemployment rate at 9.0%; however, unemployment rates remain above historical rates. 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: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.

RECENT EVENTS AND DEVELOPMENTS

On January 11, 2011, we announced a new Board-approved share 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. As of May 9, 2011, we had repurchased approximately 3.7 million shares of our common stock at an aggregate cost of $208 million.

On January 14, 2011, we issued $500 million aggregate principal amount of unsecured 4.875% Senior Notes due 2021 (“4.875% Senior Notes”) in the public market, of which we and our subsidiaries are the guarantors, and United Missouri Bank, N.A. (“UMB”) is trustee. The 4.875% Senior Notes were issued at 99.297% of their face value and will mature on January 14, 2021. The proceeds from the 4.875% Senior Notes issuance were used to repay all of our outstanding borrowings under our existing asset-based revolving credit facility (the “ABL Credit Facility”), pay fees associated with the issuance and for general corporate purposes. Concurrent with the issuance of the 4.875% Senior Notes, we entered into a credit agreement for a $750 million unsecured revolving credit facility arranged by Bank of America (“BA”) and Barclays Capital (the “Revolver”), which replaced the previous ABL Credit Facility, and matures on January 13, 2016. All remaining debt issuance costs related to our previous ABL Credit Facility, totaling $22 million, and all interest rate swap agreements related to notional amounts under the ABL Credit Facility, with a carrying value of $4 million, were terminated and charged to earnings as one-time, non-recurring items upon the retirement of the ABL Credit Facility during the quarter.

RESULTS OF OPERATIONS

Sales:

Sales increased $168 million, or 13% from $1.26 billion in the third quarter of 2009, to $1.43 billion in the third quarter of 2010. Sales for the first nine months of 2010 were $4.09 billion, an increase of $414quarter ended March 31, 2011, increased $103 million, or 11% over sales of $3.678%, to $1.38 billion from $1.28 billion for the first nine months of 2009.same period a year ago. The following table presentsidentifies the components of the increase in sales for the three and nine months ended September 30, 2010:March 31, 2011:

 

   Increase in Sales
For Three Months Ended
September 30, 2010,
Compared to the Same
Period in 2009
   Increase in Sales
For Nine Months Ended
September 30, 2010,
Compared to the Same
Period in 2009
 
   (in millions) 

Comparable store sales

  $136    $311  

Stores opened throughout 2009, excluding stores open at least one
year that are included in comparable store sales

   9     55  

Sales of stores opened throughout 2010

   21     42  

Non-store sales including machinery, sales to independent parts
stores and team members

   2     6  
          

Total increase in sales

  $168    $414  
          
   Increase in Sales for the
Three Months Ended
March 31, 2011,
Compared to the Same
Period in 2010
 
   (in millions) 

Comparable store sales

  $71  

Sales for stores opened throughout 2010, excluding sales for stores open at least one year that are included in comparable store sales

   29  

Sales for stores opened throughout 2011

   6  

Non-store sales including machinery, sales to independent parts stores and team members

   1  

Sales in 2010 for stores that have closed

   (4
     

Total increase in sales

  $103  
     

Comparable store sales for stores open at least one year increased 11.1% and 8.6% for the three and nine months ended September 30, 2010, respectively. Comparable store sales for stores open at least one year increased 5.3% and 5.2% for the three and nine months ended September 30, 2009, respectively.

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 andmembers. Comparable store sales duringfor stores open at least one year increased 5.7% for the one to two week period certain CSK branded stores were closedfirst quarter of 2011, versus 6.9% for conversion.the first quarter of 2010.

We believe the increase inincreased 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 mostthe stores, compensation programs for all store team members that provide incentives for performance and our continued focus on serving professional installers. The improvement inservice providers. Our comparable store sales duringfor the quarter waswere driven both by both increased transaction counts and higher average ticket values. We believe that the increase in transaction counts is a result of the customer’s continued focus on better maintaining their current vehicles, as they defer purchases of new vehicles, stabilization of the economy and gas prices and extreme weather across mostthe growth of our markets.commercial business in the acquired CSK markets, which was partially offset by severe weather in many of our markets in the beginning of the quarter. The improvement in average ticket valuevalues is primarily the result of a larger percentage of our total sales derived from the higher priced, hard part categories.

Store growth:

We opened 4855 stores duringin the three monthsquarter ended September 30, 2010.March 31, 2011, and opened our first store in West Virginia, increasing our store base to 39 states. At September 30, 2010,March 31, 2011, we operated 3,5363,613 stores compared to 3,4153,469 stores at September 30, 2009.March 31, 2010. We anticipate total new store unit growth to be 150170 net, new stores in 2010. This growth is below our historical number of new store openings due to the resources we have directed toward the CSK integration, however we anticipate new store growth to accelerate to approximately 170 stores in 2011.

Gross profit:

Gross profit for the first quarter ended March 31, 2011, increased $82 million, or 14% from $611to $670 million (or 48.5%48.4% of sales) in the third quarter of 2009 to $693from $618 million (or 48.6% of sales) in the third quarter of 2010. Gross profit increased $227 million, or 13%, from $1.76 billion (or 47.8%48.3% of sales) for the nine months ended September 30, 2009, to $1.98 billion (or 48.6%same period a year ago, representing an increase of sales) for the nine months ended September 30, 2010.8%. The increase in gross profit dollars was primarily a result of the increase in sales from new stores and the increase in comparable store sales at existing stores. The increase in gross profit as a percentage of sales was the result of improved product mix and decreased inventory shrinkage at converted CSK stores, improved product mix and lower product acquisition costs, partially offset by the impact of increased commercial sales and reduced leverage on the expanded number of distribution centers. The decrease in shrinkage at converted CSK stores is the resultas a percent of the more robust O’Reilly point of sale system (“POS”), which is installed in the CSK stores as they convert to the O’Reilly distribution systems. The O’Reilly POS provides managers with better tools to track and control inventory resulting in improved shrinkage.total sales mix. The improvement in product mix is primarily driven by increased sales in the hard part categories, which typically generate a higher gross margin percentage than other categories. Increasing hard part sales are the result of strong consumer demand as consumers retain their vehicles longer and our enhanced and more comprehensive inventory levels in the hard part categories in the CSK stores, including the O’Reilly private label products, supported by a more extensive and robust distribution network. Lower product acquisition costs are derived from improved negotiating leverage with our vendors asThe decrease in inventory shrinkage at converted CSK stores is the result of large purchase volume increases associatedthe more robust O’Reilly point-of-sale system (“POS”), which was installed in all CSK stores when they converted to the O’Reilly distribution systems. The O’Reilly POS provides our store managers with better tools to track and control inventory resulting in improved inventory shrinkage. All of the acquisitionacquired CSK stores had been converted to the O’Reilly POS for the entire first quarter of CSK.2011, while approximately two-thirds had been converted to the O’Reilly POS by the end of the first quarter of 2010. Commercial sales in the acquired CSK markets are growing at a faster rate than DIY sales as a result of the enhanced distribution model, in our western markets, which supports the implementation of our dual market strategy in these areas. These commercialCommercial sales which typically carry a lower gross margin percentage than DIY sales, as volume discounts are granted on wholesale transactions to professional service providers, and create pressure on our gross margin percentages and we would expect to see pressure on gross margin as a percentage of sales in the fourth quarter of 2010 as commercial sales are expected to grow at a faster rate than DIY sales. The reduced leverage on distribution center costs is the result of the additional distribution centers, which have been opened in conjunction with the CSK integration plan. New team members in the distribution centers are not yet fully proficient with distribution operations, resulting in inefficiencies.

Selling, general and administrative expenses:expenses:

Selling, general and administrative expenses (“SG&A”) for the first quarter ended March 31, 2011, increased $27 million, or 6%, from $461to $473 million (or 36.7%34.2% of sales) in the third quarter of 2009 to $488from $450 million (or 34.3% of sales) in the third quarter of 2010. SG&A increased $70 million, or 5%, from $1.34 billion (or 36.6%35.1% of sales) for the nine months ended September 30, 2009,same period a year ago, representing an increase of 5%. The increase in total SG&A dollars is primarily the result of additional employees, facilities and vehicles to $1.41 billion (or 34.6% of sales) for the nine months ended September 30, 2010.support our increased store count and dual market strategy in our new markets. The decrease in SG&A as a percentage of sales was primarily attributable to improved labor efficiencies in the acquired CSK stores, positive results on health benefits, as well as increased leverage of store occupancy and headquarters expenses on higherstrong comparable store sales, levels. The increase in total SG&A dollars is primarily the result of additional employees and facilitiesoffset by increased fuel costs related to support our increased store count as well as increased incentive compensation for team members resulting from strong comparable store sales.delivery vehicles.

Operating income:Other income and expense:

The $5.9 million charge to operating income in the third quarter of 2010 is related to the ongoing, legacy DOJ investigation of CSK (see Note 11 – Legal Matters to the Condensed Consolidated Financial Statements). As previously disclosed, prior to O’Reilly’s acquisition of CSK in July of 2008, the DOJ began an investigation of CSK relating to CSK’s historical accounting practices. 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, the Company has recorded an additional charge of $5.9 million in the third quarter of 2010 to increase its accrual in anticipation of the DOJ, CSK and O’Reilly executing a Non-Prosecution Agreement and the Company paying a one-time monetary penalty of $20.9 million to the DOJ.

As a result of the impacts discussed above, operating incomeTotal other expense for the thirdfirst quarter of 2010ended March 31, 2011, increased $50 million from $149to $30 million (or 11.9%2.2% of sales) in 2009 to $199from $10 million (or 14.0%0.8% of sales) in 2010,for the same period a year ago, representing an increase of 33%204%. Operating income for the nine months ended September 30, 2010, increased $137 million from $412 million (or 11.2% of sales) in 2009 to $549 million (or 13.4% of sales) in 2010, representing anThe significant increase of 33%.

Interest expense:

Interest expense decreased $1 million from $11 million (or 1.0% of sales)is driven by one-time charges during the third quartercurrent period related to our new financing transactions that were completed in January of 20092011, slightly offset by a decrease in interest expense. These one-time charges included a non-cash charge to $10 million (or 1.0%write off the balance of sales)debt issuance costs related to our previous credit facility in the third quarteramount of 2010. Interest expense decreased $2$22 million, from $34 million (or 1.0%and a charge related to the termination of sales) duringour interest rate swap agreements in the nine months ended September 30, 2009, to $32 million (or 1.0%amount of sales) during the nine months ended September 30, 2010.$4 million. The decrease in interest expense foris the three and nine months ended September 30, 2010, is primarily due toresult of a decreasedlower level ofaverage outstanding borrowings, under our asset-based revolving credit facility (the “Credit Facility”)as well as lower amortization of debt issuance costs in the current periodsperiod as compared to the same periods oneperiod a year ago.

Income taxes:

Our provision for income taxes increased $22 million to $74 million for the thirdfirst quarter ended March 31, 2011, increased to $64 million (or 4.6% of 2010 compared to $52sales) from $61 million (or 4.8% of sales) for the same period in 2009. Our provision for income taxes increased $62 million to $207 million for the nine months ended September 30, 2010, compared to $145 million for the same period in 2009.a year ago, representing an increase of 4%. The increase in our provision for income taxes is primarily due to the increase in our taxable income. Our effective tax rate for the first quarter ended March 31, 2011, was 38.7%38.3% of income before income taxes for the third quarter of 2010 versus 37.4%compared to 38.5% for the same period in 2009. Our effective tax rate was 39.7% of income before income taxes for the nine months ended September 30, 2010, versus 38.2% for the same period in 2009. The increase in the effective tax rate is the result of the charge related to the CSK DOJ investigation of $5.9 million and $20.9 million for the three and nine months ended September 30, 2010, respectively, which is not expected to be deductible for tax purposes.a year ago.

Net income:

As a result of the impacts discussed above, net income for the thirdfirst quarter of 2010ended March 31, 2011, increased $30 million from $87to $102 million (or 6.9%7.4% of sales) in 2009 to $117from $97 million (or 8.2%7.6% of sales) in 2010,for the same period a year ago, representing an increase of 34%5%. NetAdjusted net income, excluding the impact of the charges relating to our new financing transactions for the nine monthsfirst quarter ended September 30, 2010,March 31, 2011, increased $78 million from $236to $118 million (or 6.4%8.6% of sales) in 2009 to $314from $97 million (or 7.7%7.6% of sales) in 2010,for the same period a year ago, representing an increase of 33%22%.

Earnings per share:

Our diluted earnings per common share for the thirdfirst quarter of 2010ended March 31, 2011, increased 30%3% to $0.82$0.72 on 142143 million shares compared to $0.63versus $0.70 for the thirdsame period a year ago on 140 million shares.

Adjustments for nonrecurring and non-operating events:

Our results for the quarter ended March 31, 2011, included one-time charges associated with the new financing transactions we completed on January 14, 2011, as discussed above. Adjusted net income for the first quarter ended March 31, 2011, excluding the impact of 2009 on 139the charges related to the new financing transactions discussed above, increased to $118 million shares. Diluted(or 8.6% of sales) from $97 million (or 7.6% of sales) for the same period a year ago. Adjusted diluted earnings per common share for the nine monthsfirst quarter ended September 30, 2010,March 31, 2011, increased 30%19% to $2.23 on 141 million shares compared to $1.71$0.83 from $0.70 for the same period in 2009 on 137 million shares. Our third quarter and year-to-date results include a charge related to the ongoing, legacy DOJ investigation of CSK as discussed above. Adjusted operating income, excluding the impact of the charge related to the DOJ investigation of CSK discussed above, increased 37% to $205 million (or 14.4% of sales) during the third quarter ended September 30, 2010, from $149 million (of 11.9% of sales) for the third quarter of 2009. Adjusted operating income, excluding the impact of the charge related to the DOJ investigation of CSK discussed above, increased 38% to $570 million (or 13.9% of sales) for the first nine months of 2010, from $412 million (or 11.2% of sales) for the same period in 2009. Adjusted diluted earnings per common share, excluding the impact of the charge related to the DOJ investigation of CSK discussed above, increased 37% to $0.86 for the third quarter ended September 30, 2010, from $0.63 for the third quarter of 2009. Adjusted diluted earnings per common share, excluding the impact of the charge related to the DOJ investigation of CSK discussed above, increased 39% to $2.37 for the first nine months of 2010, from $1.71 for the same period in 2009.year ago. The table below outlines the impact of the chargecharges related to the new financing transactions for the three and nine monthsfirst quarter ended September 30, 2010:March 31, 2011, (amounts in thousands, except per share data):

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2010  2009  2010  2009 

GAAP operating income

  $199,031   $149,196   $548,640   $412,207  

Accrual of legacy CSK DOJ investigation charge

   5,900    —      20,900    —    
                 

Non-GAAP adjusted operating income

  $204,931   $149,196   $569,540   $412,207  
                 

GAAP operating margin

   14.0  11.9  13.4  11.2

Accrual of legacy CSK DOJ investigation charge

   0.4  —      0.5  —    
                 

Non-GAAP adjusted operating margin

   14.4  11.9  13.9  11.2
                 

GAAP net income

  $116,542   $87,225   $313,613   $235,575  

Accrual of legacy CSK DOJ investigation charge

   5,900    —      20,900    —    
                 

Non-GAAP adjusted net income

  $122,442   $87,225   $334,513   $235,575  
                 

GAAP diluted net income per common share

  $0.82   $0.63   $2.23   $1.71  

Accrual of legacy CSK DOJ investigation charge

   0.04    —      0.14    —    
                 

Non-GAAP adjusted diluted net income per common share

  $0.86   $0.63   $2.37   $1.71  
                 

Adjusted weighted-average common shares outstanding – assuming dilution

   141,706    138,704    140,874    137,442  
   For the Three Months Ended March 31, 
   2011  2010 
   Amount   % of Sales  Amount   % of Sales 

GAAP net income

  $102,474     7.4 $97,476     7.6

Write-off of debt issuance costs, net of tax

   13,337     1.0  —       —  

Termination of interest rate swap agreements, net of tax

   2,613     0.2  —       —  
                   

Non-GAAP adjusted net income

  $118,424     8.6 $97,476     7.6
                   

GAAP diluted earnings per common share

  $0.72     $0.70    

Write-off of debt issuance costs, net of tax

   0.09      —      

Termination of interest rate swap agreements, net of tax

   0.02      —      
             

Non-GAAP adjusted diluted earnings per common share

  $0.83     $0.70    
             

The adjustments to operating income,adjusted net income and adjusted diluted earnings per share discussed and presented in the table above paragraph and table present certain financial informationare not derived in accordance with United States generally accepted accounting principles (“GAAP”).U.S. GAAP. We do not, and 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 operating income, net incomefinancial results and earnings per shareestimates excluding the impact of the chargescharge to write off the balance of debt issuance costs and the charge related to the DOJ investigationtermination of CSKthe interest rate swap agreements provides meaningful supplemental information to both management and investors that is indicative of the Company’sour core operations. Management excludesWe exclude these items in judging our performance and believesbelieve this non-GAAP information is useful to understanding the recurring factors and trends affecting our business. The material limitationinvestors as well. Material limitations of thesethis non-GAAP measures ismeasure are that such measures aredo not reflective ofreflect actual GAAP amounts. We compensate for this limitationsuch limitations by presenting, in the tabletables above, the accompanying reconciliation to the most directly comparable GAAP measures.

LIQUIDITY

The following tables highlight our liquidity and related ratios, as well as our operating, investing and financing activities for the quarters ended March 31, 2011 and 2010 (dollars in millions):

   Three Months Ended
March 31,
     

Liquidity and Related Ratios

  2011   2010   Percentage
Change
 

Current assets

  $2,467    $2,232     10.6

Quick assets(1)

   427     217     96.7

Current liabilities

   1,318     1,255     5.0

Working capital(2)

   1,149     977     17.7

Total debt

   499     703     (29.0)% 

Total equity

   3,188     2,800     13.8

Current ratio(3)

   1.87:1     1.78:1     5.1

Quick ratio(4)

   0.35:1     0.26:1     34.6

Debt to equity(5)

   0.16:1     0.25:1     (36.0)% 

(1)

Quick assets include 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.

   

Three Months Ended

March 31,

 

Liquidity

  2011  2010 

Total cash provided by (used in):

   

Operating activities

  $294,113   $170,646  

Investing activities

   (92,246  (90,257

Financing activities

   (1,540  (77,452
         

Increase in cash and cash equivalents

  $200,327   $2,937  
         

Liquidity and related ratios:

Our working capital increased 18% from March 31, 2010, to March 31, 2011, primarily driven by an increase in cash from the issuance of our 4.875% Senior Notes and cash generated from operations, offset by the impact of cash used for the repurchase of shares of our common stock in accordance with our share repurchase program. Total debt decreased 29% and total equity increased 14% from March 31, 2010, to March 31, 2011. The decrease in total debt was driven by our efforts during 2010 to pay down our secured ABL Credit Facility with cash generated from operations offset by the issuance of our 4.875% Senior Notes in January of 2011. The increase in total equity was primarily due to increased retained earnings resulting from a strong trailing-twelve months of net income partially offset by the impact on additional paid-in capital and retained earnings from share repurchase activity under our share repurchase program.

Operating activities:

Net cash provided by operating activities for the first quarter ended March 31, 2011, increased to $294 million from $289$171 million for the first nine months of 2009 to $593 million for the first nine months of 2010.same period a year ago. The increase in cash provided by operating activities is primarily due to an increase in net income (adjusted for the effect a one-time, non-cash charge to write off the balance of non-cash depreciation and amortization charges, stock compensation charges and deferred income taxes)debt issuance costs in conjunction with the retirement of our ABL Credit Facility), and a significant decrease in investment of net inventory, investment as compared to the same periodoffset by a decrease in 2009.other current liabilities. Net inventory investment reflects our investment in inventory net of the amount of accounts payable to vendors. DuringOur net inventory investment decreased as a result of both reduced gross inventory as well as the first nine months of 2009, we made significant improvementsimpact to accounts payable resulting from our enhanced vendor financing programs. Our gross inventory investment decreased during the depth and breadth of theperiod due to our ongoing effort to reduce excess inventories in theour acquired CSK stores as part ofstores. Our vendor financing programs enable us to reduce overall supply chain costs and negotiate extended terms with our conversion and integration plan. Whilevendors. As we continue to investadd vendors to our programs, the extended payment terms increase our outstanding vendor accounts payable resulting in and refineimproved cash flow from operations. The decrease in other current liabilities is primarily the inventory levelsresult of a reduction in these acquired stores, the incremental net inventory investmentpayroll related accruals during the current period was significantly lower thanas compared to the comparablesame period in 2009.one year ago driven by the timing of pay period end dates.

Investing activities:

Net cash used in investing activities decreased from $315 million duringfor the first nine months of 2009quarter ended March 31, 2011, increased to $275$92 million from $90 million for the comparablesame period in 2010.a year ago. The decreaseslight increase in cash used in investing activities is primarily due to a decrease inincreased capital expenditures in association with the integration of CSKcurrent period as compared to the same period one year ago. The increase in 2009. Capitalcapital expenditures is the result of an increased number of new stores opened in the first quarter of 2011, as compared to the same period last year, offset by reduced capital expenditures in the current period related to the acquisitionconversion process of CSK include the purchase of properties for future distribution centers and costs associated with the conversion ofacquired CSK stores to the O’Reilly Brand. A larger portion of the capital expenditures related to distribution system expansion occurred in the first nine months of 2009, as we acquired property and continued construction on four new distribution centers, versus the same period in 2010.

Financing activities:

Net cash used in financing activities was $302 million infor the first nine months of 2010, comparedquarter ended March 31, 2011, decreased to net cash provided by financing activities of $24$2 million duringfrom $77 million for the same period a year ago. The decrease in 2009. The increase innet cash used in financing activities is primarily driven by thean increase in net repayments of outstanding borrowings onunder our Credit Facility. The repayments were funded by increased cash provided by operating activitiesdebt facilities in the current period as well as decreased capital expenditures compared to net repayments under our facilities in the samefirst quarter of 2010, offset by the impact of repurchases of our common stock in accordance with our Board-approved share repurchase program during the first quarter of 2011. The net borrowings under our debt facilities during the current period last year. For 2010,are the result of the proceeds from the issuance of our focus has been4.875% Senior Notes in January of 2011 offset by the repayment and termination of our previous ABL Credit Facility and by the payment of debt issuance costs related to use available cash on hand to reduce the outstanding borrowings onissuance of our Credit Facility.4.875% Senior Notes and the establishment of our new unsecured Revolver.

CAPITAL RESOURCES

OnAsset-based revolving credit facility:

In July 11,of 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, arranged by Bankwhich was scheduled to mature in July of America, N.A. (“BA”). The Credit Facility is comprised of a five-year $1.075 billion tranche A revolving credit facility (“tranche A revolver”) and a five-year $125 million first-in-last-out revolving credit facility (“FILO tranche”), both of which mature on July 10, 2013. The terms of the Credit Facility grant us the right to terminate the FILO tranche upon meeting certain requirements, including no events of default and aggregate projected availability under the Credit Facility. During the third quarter ended September 30,At December 31, 2010, we, upon meeting all requirements to do so, elected to exercise our right to terminate the FILO tranche. As of September 30, 2010, the amount of the borrowing base available under the Credit Facility was $1.072 billion, of which we had outstanding borrowings of $325 million. As of December 31, 2009, the amount of the borrowing base available$356.0 million under the ABL Credit Facility, was $1.196 billion, of which we had outstanding borrowings of $678.8 million. The available borrowings$106.0 million were not covered 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 September 30, 2010, we had stand-by letters of credit outstanding of $72.9 million and the aggregate availability for additional borrowings under the Credit Facility was $673.7 million. As of December 31, 2009, we had stand-by letters of credit outstanding in the amount of $72.3 million and the aggregate availability for additional borrowings under the Credit Facility was $445.2 million. As part of the Credit Facility, we have pledged substantially all of our assets as collateral and are subject to an ongoing consolidated leverage ratio covenant, with which we complied on September 30, 2010.

During the first nine months of 2010, borrowings under the tranche A revolver bore 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. The base rate is equal to the higher of the prime lending rate established by BA from time to time or the federal funds effective rate as in effect from time to time plus 0.50%. Fees related to unused capacity under the Credit Facility are assessed at a rate of 0.50% of the remaining available borrowings under the facility, subject to adjustment based upon remaining unused capacity. In addition, we pay customary letter of credit fees and other administrative fees in respect to the Credit Facility. Due to the decreased level of borrowings under our Credit Facility during the third quarter of 2010, effective as of October 1, 2010, borrowings under the tranche A revolver will bear interest, at our option, at a rate equal to either a base rate plus 1.00% per annum or LIBOR plus 2.00% per annum, with each rate being subject to adjustment based upon certain excess availability thresholds.

On July 24, 2008, October 14, 2008, and January 21, 2010, we entered into interest rate swap transactionsagreement, with Branch Banking and Trust Company (“BBT”), BA, SunTrust Bank (“SunTrust”) and/or Barclays Capital (“Barclays”)interest rates ranging from 2.31% to 4.25%. We had entered into thesevarious interest rate swap transactionstransaction agreements with various counterparties to mitigate the risk associated with our floating interest rate based on LIBOR on an aggregate of $450 million of our debt that was outstanding under ourthe ABL Credit Facility. TheAll outstanding borrowings under the ABL Credit Facility were repaid, and all related interest rate swap transaction agreements terminated on January 14, 2011, and the ABL Credit Facility was retired concurrent with the issuance of our 4.875% Senior Notes due 2021, as further described below. In conjunction with the retirement of our ABL Credit Facility, we entered into with BBT on July 24, 2008, wasrecognized a one-time adjustment for $100a non-cash charge to write off the balance of debt issuance costs related to the ABL Credit Facility in the amount of $21.6 million and matured on August 1, 2010, bringinga one-time charge related to the total notional amounttermination of swapped debt to $350 million as of that date. Theour interest rate swap transaction that we entered into with BBT on October 14, 2008, for $25 million, was scheduled to mature on October 17, 2010. This swap was terminated at our request on September 16, 2010, reducingagreements in the total notional amount of swapped debt to $325$4.2 million, as of that date. The interest rate swap transactions we entered into with BBT, BA and SunTrust on October 14, 2008, for a total of $75 million matured on October 17, 2010, bringing the total notional amount of swapped debt to $250 million as of that date. Wewhich are required to make certain monthly fixed rate payments calculatedincluded in “Other income (expense)” on the notional amounts, whileaccompanying Condensed Consolidated Statements of Income for the applicable counterparty 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.quarter ended March 31, 2011.

4.875% Senior Notes due 2021:

On July 11, 2008,January 14, 2011, we agreed to become a guarantor, on a subordinated basis, of the $100issued $500 million aggregate principal amount of 6 3/4% Exchangeableunsecured 4.875% Senior Notes due 2025 (the “Notes”2021 in the public market, of which certain of our subsidiaries are the guarantors (“Subsidiary Guarantors”), and United Missouri Bank, N.A. (“UMB”) originallyis trustee. The 4.875% Senior Notes were issued by CSK. at 99.297% of their face value and mature on January 14, 2021. Interest on the 4.875% Senior Notes accrues at a rate of 4.875% per annum and is payable on January 14 and July 14 of each year beginning on July 14, 2011. Interest is computed on the basis of a 360-day year.

The proceeds from the 4.875% Senior Notes’ issuance were used to repay all of the outstanding borrowings under our ABL Credit Facility and to pay fees and expenses related to the offering of the 4.875% Senior Notes, with the remainder used for general corporate purposes.

Prior to October 14, 2020, the 4.875% Senior Notes are exchangeable, under certain circumstances, into cashredeemable in whole, at any time, or in part, from time to time, at our option upon not less than 30 nor more than 60 days’ notice at a redemption price, plus any accrued and shares of our common stock. The Notes bearunpaid interest at 6.75% per year until December 15, 2010, and 6.50% until maturity on December 15, 2025. Prior to, their stated maturity,but not including, the Notes are exchangeable byredemption date, equal to the holders only under the following circumstances (as more fully described in the indentures under which the Notes were issued):greater of:

 

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%100% 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 we have called the Notes for redemption;principal amount thereof; or

 

upon the occurrencesum of specified corporate transactions, such asthe present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a change in control.

On July 1, 2010, the Notes became exchangeablesemiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the option of the holders and remained exchangeable through September 30, 2010, the last trading day in our third quarter, as provided for in the indentures governing the Notes. The Notes became exchangeable as our common stock closed at or above 130% of the Exchange Priceapplicable Treasury Yield (as defined in the indenturesindenture governing the 4.875% Senior Notes) for 20 trading days withinplus 25 basis points.

On or after October 14, 2020, the 4.875% Senior Notes are redeemable, in whole at any time or in part from time to time, at our option upon not less than 30 consecutive trading day period ending on June 30, 2010. Asnor more than 60 days’ notice at a result, duringredemption price equal to 100% of the exchange period commencing July 1, 2010, and continuing through and including September 30, 2010, for each $1,000 principal amount thereof plus accrued and unpaid interest to, but not including, the redemption date. In addition, if at any time we undergo a Change of Control Triggering Event (as defined in the Notes held,indenture governing the 4.875% Senior Notes), holders of the 4.875% Senior Notes could, if they elected, surrendermay require us to repurchase all or a portion of their 4.875% Senior Notes for exchange. If the Notes were exchanged, we would deliver cashat a price 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 exceeded 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 approximately 25.97 shares of our common stock and approximately $60.61 in cash. On September 28, 2010, certain holders of the Notes delivered notice to the exchange agent to exercise their right to exchange $11 million101% of the principal amount of the Notes. 4.875% Senior Notes being repurchased, plus accrued and unpaid interest, if any, to but not including the repurchase date.

The Cash Settlement Averaging Period (as4.875% Senior Notes are guaranteed by certain of our subsidiaries on a senior unsecured basis. The guarantees are full and unconditional and joint and several. Each of the Subsidiary Guarantors is wholly-owned, directly or indirectly, by us and we have no independent assets or operations other than those of our subsidiaries. Our only direct or indirect subsidiaries that are not Subsidiary Guarantors are minor subsidiaries. Neither we, nor any of our Subsidiary Guarantors, has any material or significant restrictions on our ability to obtain funds from our subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by applicable law. The 4.875% Senior Notes are subject to certain customary, positive and negative covenants, with which we complied as of March 31, 2011.

Unsecured revolving credit facility:

On January 14, 2011, we entered into a new credit agreement for a five-year $750 million unsecured revolving credit facility arranged by BA and Barclays Capital, which matures in January of 2016. The Revolver includes a $200 million sub-limit for the issuance of letters of credit and a $75 million sub-limit for swing line borrowings. As described in the credit agreement, we may, from time to time, increase the facility to a maximum of $950 million.

Borrowings under the Revolver (other than swing line loans) bear interest, at our option, at either the Base Rate or Eurodollar Rate (both as defined in the indentures governingagreement) plus a margin that varies from 1.325% to 2.50% in the Notes) endedcase of loans bearing interest at the Eurodollar Rate and 0.325% to 1.50% in the case of loans bearing interest at the Base Rate, in each case based upon the ratings assigned to our debt by Moody’s Investor Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”). Swing line loans made under the Revolver bear interest at the Base Rate plus the applicable margin described above. In addition, we pay a facility fee on October 27, 2010, and on October 29, 2010, we delivered $11 million in cash, which represented the principalaggregate amount of the commitments in an amount equal to a percentage of such commitments, varying from 0.175% to 0.50% based upon the ratings assigned to our debt by Moody’s and S&P. As of March 31, 2011, we had no outstanding borrowings under the Revolver.

Debt covenants:

The indenture governing the 4.875% Senior Notes exchangedcontains covenants that limit our ability and the valueability of partial shares,certain of our subsidiaries to, among other things: (i) create certain liens on assets to secure certain debt; (ii) enter into certain sale and 92,855leaseback transactions; and (iii) merge or consolidate with another company or transfer all or substantially all of our or its property, in each case as set forth in the indenture. These covenants are, however, subject to a number of important limitations and exceptions.

The Revolver covenant includes limitations on total outstanding borrowings under the Revolver, a minimum consolidated fixed charge coverage ratio of 2.00 times from the closing through December 31, 2012; 2.25 times through December 31, 2014; 2.50 times through maturity; and a maximum adjusted consolidated leverage ratio of 3.00 times from the closing through maturity. Our consolidated leverage ratio includes a calculation of adjusted earnings before interest, taxes, depreciation, amortization, rent and stock option compensation expense (“EBITDAR”) to adjusted debt. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit, six-times capitalized rent and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that we should default on any covenant contained within the Revolver, certain actions may be taken against us, including but not limited to possible termination of credit extensions, immediate payment of outstanding principal amount plus accrued interest and litigation from our lenders. As of March 31, 2011, we had a fixed charge coverage ratio of 4.4 times and an adjusted debt to adjusted EBITDAR of 1.7 times, remaining in compliance with all covenants related to the borrowing arrangements. Under our current financing plan, we have a target adjusted consolidated leverage ratio of 2.0 times to 2.25 times.

The table below outlines the calculations of our adjusted debt to adjusted EBITDAR and fixed charge coverage ratio covenants, as defined in the credit agreement governing the Revolver, as of March 31, 2011, (in thousands, except ratios):

   Twelve Months Ended
March 31, 2011
 

GAAP net income

  $424,371  

Add: Interest expense

   33,631  

Rent expense

   227,889  

Provision for income taxes

   272,700  

Depreciation expense

   160,401  

Amortization expense

   (103

Non-cash stock option compensation

   15,742  

Write-off of debt issuance costs

   21,626  

Legacy CSK DOJ investigation charge

   20,900  
     

Non-GAAP adjusted net income (EBITDAR)

  $1,177,157  
     

Interest expense

  $33,631  

Capitalized interest

   4,653  

Rent expense

   227,889  
     

Total fixed charges

  $266,173  
     

Fixed charge coverage ratio

   4.4  

GAAP debt

  $498,849  

Stand-by letters of credit

   74,365  

Discount on senior notes

   3,441  

Six-times rent expense

   1,367,334  
     

Non-GAAP adjusted debt

  $1,943,989  
     

Adjusted debt to adjusted EBITDAR ratio

   1.7  

The adjusted debt to adjusted EBITDAR ratio discussed and presented in the table above is not derived in accordance with U.S. GAAP. We do not, and 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 financial results and estimates excluding the impact of the CSK DOJ investigation charge, the gain from the settlement of the note receivable, the charge to write off the balance of debt issuance costs and the presentation of adjusted debt to adjusted EBITDAR provides meaningful supplemental information to both management and investors that is indicative of our core operations. We exclude these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of this non-GAAP measure are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the tables above, the accompanying reconciliation to the most directly comparable GAAP measures.

Share repurchase program:

In January of 2011, our Board of Directors approved a $500 million share repurchase program. Under the program, we may, from time to time, repurchase shares of our common stock solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate requirements and overall market conditions, for a three-year period. We repurchased 2.6 million shares of our common stock as part of our publicly announced repurchase program during the three months ended March 31, 2011, at an average price per share of $55.54, for a total investment of $145 million. As of that date, we had $355 million remaining under our repurchase program, which is scheduled to expire in January of 2014. Subsequent to the exchange agent in settlementend of the exchange obligation. Concurrently,first quarter, we retired the $11repurchased an additional 1.1 million principal amount of the exchanged Notes. On October 1, 2010, the Notes again became exchangeable at the option of the holders and will remain exchangeable through December 31, 2010, the last trading dayshares of our fourth quarter, as providedcommon stock at an average price per share of $56.84, for in the indentures governing the Notes. We intend to redeem the Notes in December 2010, and plan to fund the redemption with available borrowings under our Credit Facility.a total investment of $63 million.

Store activity:

During the three and nine months ended September 30, 2010,first quarter of 2011, we opened 48 and 12155 new stores respectively. Weand closed 12 stores – we plan to open approximately 29 additionala total of 170 net, new stores during the remainder of 2010.in 2011. The funds required for such planned expansions are expected to be provided by cash generated from operating activities.

CONTRACTUAL OBLIGATIONS

At September 30, 2010,March 31, 2011, we had long-term debt with maturities of less than one year of $105$1 million and long-term debt with maturities greater thanover one year of $327$498 million, representing a total decreaseincrease in all outstanding debt of $359$140 million from December 31, 2009.2010. The ABL Credit Facility, which was scheduled to mature in July of 2013, was repaid and retired on January 14, 2011. The 4.875% Senior Notes issued on January 14, 2011, in the aggregate principal amount of $500 million, were issued at 99.297% of their face value and mature on January 14, 2021. Interest on the 4.875% Senior Notes accrues at a rate of 4.875% per annum and is payable on January 14 and July 14 of each year beginning on July 14, 2011. Interest is computed on the basis of a 360-day year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in accordance with accounting policies generally accepted in the United States (“GAAP”)U.S. 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. There have been no material changes in the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2009.

2010.

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 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.

To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. StoreWhile 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 (October through March) of the year.

NEWRECENT ACCOUNTING PRONOUNCEMENTS

With the exception of any pronouncements stated below, there have been noNo recent accounting pronouncements or changes in accounting pronouncements have occurred since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009,2010, that are of material significance, or have potential material significance, to us.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). ASU 2010-06 amends Subtopic 820-10, requiring additional disclosures regarding fair value measurements such as transfers in and out of Levels 1 and 2, as well as separate disclosures about activity relating to Level 3 measurements. ASU 2010-06 clarifies existing disclosure requirements related to the level of disaggregation and input valuation techniques. The updated guidance is effective for interim and annual periods beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and annual periods beginning after December 15, 2010. The application of this guidance affects disclosures only, and therefore did not have an impact on our consolidated financial condition, results of operations or cash flows.

In May 2009, the FASB issued FASB Accounting Standards Codification 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC 855 is effective for interim or fiscal periods ending 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. On February 24, 2010, the FASB issued Accounting Standards Update No. 2010-09Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”), which was effective immediately. The ASU amended FASB ASC 855, to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. The amendments that are specifically relevant include the requirement that SEC filers evaluate subsequent events through the date the financial statements are issued, and the exemption of SEC filers from disclosing the date through which subsequent events have been evaluated. We adopted the provisions of ASU 2010-09 beginning with our condensed consolidated financial statements for the quarter ended March, 31, 2010. The adoption of ASC 855 and ASU 2010-09 did not have a material impact on our financial position, results of operations or cash flows.

RECENT EVENTS AND DEVELOPMENTS

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.

INTERNET ADDRESS AND ACCESS TO SEC FILINGS

Our Internet address is www.oreillyauto.com. Interested readers can access our 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’s website at www.sec.gov. Such reports are generally available on the day they are filed. Additionally, we will furnish interested readers, upon request and free of charge, a paper copy of such reports.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to interest rate risk to the extent we borrow against our unsecured revolving credit facilitiesfacility (the “Revolver”) with variable interest rates. rates based on either a Base Rate or Eurodollar Rate, as defined in the credit agreement governing the Revolver. As of March 31, 2011, we had no outstanding borrowings under our Revolver.

We haveinvest certain of our excess cash balances in short-term, highly-liquid instruments with maturities of 30 days or less. We do not expect any material losses from our invested cash balances and we believe that our interest rate exposure with respect to the $325 million outstanding balance onis minimal. As of March 31, 2011, our variable interest rate debt at September 30, 2010; however, from time to time, we have entered into interest rate swaps to reduce this exposure. On July 24, 2008, October 14, 2008,cash and January 21, 2010, we reduced our exposure to changes in interest rates by entering into interest rate swap contracts (“the swaps”) with a total notional amount of $325cash equivalents totaled $230 million. The swaps represent contracts to exchange a floating rate for fixed interest payments periodically over the life of the swap agreement. 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. All of the $325 million outstanding balance on our variable interest rate debt was covered by the swaps at September 30, 2010. 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 that are not covered by the swaps, management would likely take further actions that would seek to mitigate our exposure to interest rate risk.

Item 4.Controls and Procedures

Item 4. 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, as amended (the “Exchange Act”). 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 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 Exchange Act 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

There were no changes in the Company’sour internal control over financial reporting during the fiscal quarter ending September 30, 2010,March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

Item 1. 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, taking into account applicable insurance and reserves, 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 and CSK’s former officers prior to its acquisition by O’Reilly, Automotive, Inc. as described below.

CSK Pre-Acquisition Matters – Governmental Investigations and Actions:

As previously reported, the pre-acquisition Securities and Exchange Commission (“SEC”) investigation of CSK, which commenced in 2006, was settled in May of 2009 by administrative order without fines, disgorgement or other financial remedies. The Department of Justice (“DOJ”)’s criminal investigation into these same matters as previously disclosed is near a conclusion and is described more fully below. In addition, the previously reported SEC complaint against three (3) former employees of CSK for alleged conduct related to CSK’s historical accounting practices remains ongoing. The action filed by the SEC on July 22, 2009, against Maynard L. Jenkins, the former chief executive officerChief 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. However, on March 24, 2011, the parties filed a Stipulation announcing a tentative settlement agreement had been reached, subject to approval by the SEC’s Commissioners. At the request of the parties, and by Order dated March 25, 2011, the matter has been stayed pending final approval of the parties’ tentative settlement. The previously reported DOJ criminal complaint againstprosecution of Don Watson, the former Chief Financial Officer of CSK, remains ongoing with trial set to commence on or about June 5,7, 2011.

With respect to the ongoing DOJ investigation into CSK’s pre-acquisition accounting practices as referenced above, as previously disclosed, attorneys from the DOJ 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. District Court, District of Arizona; Case No: 2:09-cr-00372-SRB, the DOJ believes criminal charges against CSK are appropriate. O’Reilly has continued to cooperate with and engage in discussions with the DOJ, as previously disclosed, to resolve the pre-acquisition accounting issues related to CSK arising from the conduct of its former employees as referenced above. O’Reilly and the DOJ have now agreed in principle, subject to final documentation, to resolve the DOJ investigation of CSK’s legacy pre-acquisition accounting practices. Based uponThe Company and the agreement in principleDOJ continue work to complete the final documentation necessary for a final settlement, O’Reilly has recorded an additional charge of $5.9 million in the third quarter of 2010 to increase its accrual in anticipationexecution of the DOJ, CSK and O’Reilly executing a Non-Prosecution Agreement previously referenced and paying apayment of the one-time monetary penalty of $20.9 million, dollars.also previously reported. The Company’s total reserve related to the DOJ investigation of CSK was $21.4$21.3 million as of September 30, 2010,March 31, 2011, which relates to the amount of the monetary penalty and associated legal costs.

Notwithstanding the agreement in principle with the DOJ, several of CSK’s former directors or officers and current or former employees have been or may be interviewed or deposed as part 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, as a result, O’Reilly is currently incurring legal fees on 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 indemnity obligations related to the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly has a remaining reserve, with respect to such indemnification obligations, of $18.8$16.8 million as of September 30, 2010,at March 31, 2011, which was primarily recorded as an assumed liability in the Company’s allocation of the purchase price of CSK.

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 flows could be materially affected by an ultimate unfavorable resolution of such matters, depending, in part, upon the results of operations or cash flows for such period. However, at this time, management believes that the ultimate outcome of all of such regulatory proceedings and other matters 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 1A.Risk Factors

Item 1A. Risk Factors

As of September 30, 2010,March 31, 2011, there have been no material changes in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2009.2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the first quarter ended March 31, 2011. The following table lists all repurchases during the first quarter ended March 31, 2011, of any of our securities registered under Section 12 of the Exchange Act, as amended, by or on behalf of us or any affiliated purchaser (in thousands, except per share amounts):

Issuer Purchases of Equity Securities

 

Period

  Total Number of
Shares
Purchased
   Average
Price Paid
per Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Programs
   Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Programs (1)
 

February 25, 2011, to February 28, 2011

   341    $54.80     341    $481,339  

March 1, 2011, to March 31, 2011

   2,270     55.65     2,270     354,989  
                 

Total as of March 31, 2011

   2,611    $55.54     2,611    $354,989  
    ��            

(1)On January 11, 2011, we announced a Board of Directors approved $500 million share repurchase program. Under the program, we may, from time to time, repurchase shares of our common stock, solely through open market purchases effected through a broker at prevailing market prices.

Subsequent to March 31, 2011, we repurchased an additional 1.1 million shares of our common stock at an average price per share of $56.84, for a total investment of $63 million.

Item 6.Exhibits

Item 6. Exhibits

Exhibits:

 

Number

 

Description

        4.1

Indenture, dated as of January 14, 2011, among O’Reilly Automotive, Inc. as guarantors, and UMB Bank, N.A., as Trustee, filed as Exhibit 4.1 to the Registrant’s current report on Form 8-K dated January 14, 2011, is incorporated herein by this reference.
      31.1

 Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

      31.2

 Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

      32.1

 Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

      32.2

 Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

**101.INS

 XBRL Instance Document

**101.SCH

 XBRL Taxonomy Extension Schema

**101.DEF

101.CAL
 XBRL Taxonomy Extension Calculation Linkbase

**101.CAL

101.DEF
 XBRL Taxonomy Extension Definition Linkbase

**101.LAB

 XBRL Taxonomy Extension Label Linkbase

**101.PRE

 XBRL Taxonomy Extension Presentation Linkbase

 

**** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  O’REILLY AUTOMOTIVE, INC.
November 8, 2010

May 9, 2011

  

/s/ Greg Henslee

Date  

Greg Henslee

Co-President and Chief Executive Officer (Principal

(Principal Executive Officer)

November 8, 2010

May 9, 2011

  

/s/ Thomas McFall

Date  

Thomas McFall

Executive Vice-President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

 

Number

 

Description

        4.1

Indenture, dated as of January 14, 2011, among O’Reilly Automotive, Inc. as guarantors, and UMB Bank, N.A., as Trustee, filed as Exhibit 4.1 to the Registrant’s current report on Form 8-K dated January 14, 2011, is incorporated herein by this reference.
      31.1

 Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

      31.2

 Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

      32.1

 Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

      32.2

 Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

**101.INS

 XBRL Instance Document

**101.SCH

 XBRL Taxonomy Extension Schema

**101.CAL

 XBRL Taxonomy Extension Calculation Linkbase

**101.DEF

 XBRL Taxonomy Extension Definition Linkbase

**101.LAB

 XBRL Taxonomy Extension Label Linkbase

**101.PRE

 XBRL Taxonomy Extension Presentation Linkbase

 

**** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

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