O'Reilly Automotive (ORLY) 10-Q 7 May 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended Mar. 31, 2010	May. 03, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-03-31
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Entity Registrant Name	O REILLY AUTOMOTIVE INC
Entity Central Index Key	0000898173
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		138,121,280

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands	Mar. 31, 2010	Dec. 31, 2009
Assets
Cash and cash equivalents	$29,872	$26,935	[1]
Accounts receivable, net	123,539	107,887	[1]
Amounts receivable from vendors	63,652	63,110	[1]
Inventory	1,903,108	1,913,218	[1]
Deferred income taxes	74,056	85,934	[1]
Other current assets	37,331	29,635	[1]
Total current assets	2,231,558	2,226,719	[1]
Property and equipment, at cost	2,448,289	2,353,240	[1]
Less: accumulated depreciation and amortization	663,988	626,861	[1]
Net property and equipment	1,784,301	1,726,379	[1]
Notes receivable, less current portion	11,208	12,481	[1]
Goodwill	743,824	744,313	[1]
Other assets, net	66,974	71,579	[1]
Total assets	4,837,865	4,781,471	[1]
Liabilities and shareholders' equity
Accounts payable	794,676	818,153	[1]
Self insurance reserve	68,488	67,580	[1]
Accrued payroll	62,652	42,790	[1]
Accrued benefits and withholdings	39,661	44,295	[1]
Income taxes payable	35,060	8,068	[1]
Other current liabilities	148,477	143,781	[1]
Current portion of long-term debt	105,790	106,708	[1]
Total current liabilities	1,254,804	1,231,375	[1]
Long-term debt, less current portion	596,710	684,040	[1]
Deferred income taxes	23,726	18,321	[1]
Other liabilities	162,307	161,870	[1]
Shareholders' equity:
Common stock, $0.01 par value: Authorized shares-245,000,000 Issued and outstanding shares-137,882,397 as of March 31, 2010, and 137,468,063 as of December 31, 2009	1,379	1,375	[1]
Additional paid-in capital	1,058,407	1,042,329	[1]
Retained earnings	1,747,599	1,650,123	[1]
Accumulated other comprehensive loss	(7,067)	(7,962)	[1]
Total shareholders' equity	2,800,318	2,685,865	[1]
Total liabilities and shareholders' equity	$4,837,865	$4,781,471	[1]
[1]Note: The balance sheet at December 31, 2009 has been derived from the audited Consolidated Financial Statements at that date, but does not include all of the information and footnotes requried by accounting principles generally accepted in the United States for complete financial statements.

1_CONDENSED CONSOLIDATED BALANC

CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)
	Mar. 31, 2010	Dec. 31, 2009
Common stock, par or stated value per share	0.01	0.01
Common stock, shares authorized	245,000,000	245,000,000
Common stock, shares issued	137,882,397	137,468,063
Common stock, shares outstanding	137,882,397	137,468,063

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Per Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Sales	$1,280,067	$1,163,749
Cost of goods sold, including warehouse and distribution expenses	661,720	621,079
Gross profit	618,347	542,670
Selling, general and administrative expenses	449,902	429,334
Operating income:	168,445	113,336
Other income (expense), net:
Interest expense	(10,879)	(12,060)
Interest income	396	426
Other, net	514	483
Total other expense, net	(9,969)	(11,151)
Income before income taxes	158,476	102,185
Provision for income taxes	61,000	39,350
Net income	$97,476	$62,835
Basic income per common share:
Net income per common share	0.71	0.47
Weighted-average common shares outstanding	137,583	135,043
Income per common share-assuming dilution:
Net income per common share	0.7	0.46
Adjusted weighted-average common shares outstanding	139,612	136,234

2_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands	3 Months Ended Mar. 31, 2010		3 Months Ended Mar. 31, 2009
Operating activities:
Net income	$97,476		$62,835
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment	38,263		33,864
Amortization of intangibles	1,672		2,168
Amortization of premium on exchangeable notes	(185)		(185)
Amortization of debt issuance costs	2,137		2,151
Deferred income taxes	18,287		(680)
Share based compensation programs	4,114		5,766
Other	1,558		3,077
Changes in operating assets and liabilities:
Accounts receivable	(17,424)		(6,587)
Inventory	10,110		(56,035)
Accounts payable	(23,509)		22,036
Other	38,147		18,140
Net cash provided by operating activities	170,646		86,550
Investing activities:
Purchases of property and equipment	(90,725)		(151,262)
Proceeds from sale of property and equipment	382		1,165
Payments received on notes receivable	1,272		1,332
Other	(1,186)		(1,827)
Net cash used in investing activities	(90,257)		(150,592)
Financing activities:
Proceeds from borrowings on asset-based revolving debt	122,700		173,574
Payments on asset-based revolving debt	(208,300)		(112,298)
Principal payments on capital leases	(2,463)		(3,512)
Tax benefit of stock options exercised	1,775		2,025
Net proceeds from issuance of common stock	8,836		10,356
Net cash (used in)/provided by financing activities	(77,452)		70,145
Net increase in cash and cash equivalents	2,937		6,103
Cash and cash equivalents at beginning of period	26,935	[1]	31,301
Cash and cash equivalents at end of period	29,872		37,404
Supplemental disclosures of cash flow information:
Income taxes paid	13,171		22,814
Interest paid, net of capitalized interest	7,276		8,741
Property and equipment acquired through issuance of capital lease obligations			$2,501
[1]Note: The balance sheet at December 31, 2009 has been derived from the audited Consolidated Financial Statements at that date, but does not include all of the information and footnotes requried by accounting principles generally accepted in the United States for complete financial statements.

BASIS OF PRESENTATION

BASIS OF PRESENTATION
	3 Months Ended Mar. 31, 2010
BASIS OF PRESENTATION	NOTE 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of O'Reilly Automotive, Inc. and its subsidiaries (the "Company") 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 months ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. 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.

BUSINESS COMBINATION

BUSINESS COMBINATION
	3 Months Ended Mar. 31, 2010
BUSINESS COMBINATION	NOTE 2 BUSINESS COMBINATION On July 11, 2008, the Company completed the acquisition of CSK Auto Corporation ("CSK"), one of the largest specialty retailers of auto parts and accessories in the Western United States and one of the largest such retailers in the United States, based on store count. 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.

GOODWILL AND OTHER INTANGIBLE A

GOODWILL AND OTHER INTANGIBLE ASSETS
	3 Months Ended Mar. 31, 2010
GOODWILL AND OTHER INTANGIBLE ASSETS	NOTE 3 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is reviewed annually on December 31 for impairment, or more frequently if events or changes in business conditions indicate that impairment may exist. During the three months ended March 31, 2010, the Company recorded a decrease in goodwill of approximately $0.5 million, primarily due to adjustments in the provision for income taxes relating to exercises of stock options acquired in the CSK acquisition. The Company did not record any goodwill impairment during the three months ended March 31, 2010. For the three months ended March 31, 2010, and 2009, the Company recorded amortization expense of $2.8 million and $4.1 million, respectively, related to amortizable intangible assets, which are included in "Other assets" on the accompanying condensed consolidated balance sheets. The components of the Company's amortizable and unamortizable intangible assets were as follows on March 31, 2010 and December 31, 2009 (in thousands): Cost AccumulatedAmortization March 31,2010 December31,2009 March31,2010 December31,2009 Amortizable intangible assets Favorable leases $ 52,010 $ 52,010 $ 13,156 $ 11,383 Trade names and trademarks 13,000 13,000 12,607 11,588 Other 481 481 225 201 Total amortizable intangible assets $ 65,491 $ 65,491 $ 25,988 $ 23,172 Unamortizable intangible assets Goodwill $ 743,824 $ 744,313 Total unamortizable intangible assets $ 743,824 $ 744,313 In addition, the Company recorded a liability for the values of operating leases with unfavorable terms, acquired in the acquisition of CSK, totaling approximately $49.6 million. These leases have an estimated weighted-average useful life of approximately 7.7 years. During the three months ended March 31, 2010 and 2009, the Company recognized an amortized benefit of $1.2 million and $2.1 million, respectively, related to these unfavorable operating leases. The carrying amount, net of accumulated amortization, of the unfavorable lease liability is $35.3 million and $36.5 million as of March 31, 2010, and December 31, 2009, respectively, and is shown in the "Other liabilities" section of the condensed consolidated balance sheets.

LONG-TERM DEBT

LONG-TERM DEBT
	3 Months Ended Mar. 31, 2010
LONG-TERM DEBT	NOTE 4 LONG-TERM DEBT Outstanding long-term debt was as follows on March 31, 2010, and December 31, 2009, (in thousands): March31,2010 December 31,2009 Capital leases $ 8,767 $ 11,230 63/4 % Exchangeable Senior Notes 100,533 100,718 FILO revolving credit facility 125,000 125,000 Tranche A revolving credit facility 468,200 553,800 Total debt and capital lease obligations 702,500 790,748 Current maturities of debt and capital lease obligations 105,790 106,708 Total long-term debt and capital lease obligations $ 596,710 $ 684,040 On July 11, 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 Facility") arranged by Bank of America, N.A. ("BA"). The Credit Facility is comprised of a five-year $1.075 billion tranche A revolving credit facility and a five-year $125 million first-in-last-out revolving credit facility (FILO tranche), both of which mature on July 10, 2013. As of March 31, 2010, the amount of the borrowing base available under the Credit Facility was $1.197 billion of which the Company had outstanding borrowings of $593.2 million. The available borrowings under the Credit Facility are also reduced by stand-by letters of credit issued by the Company primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. As of March 31, 2010, the Company had stand-by letters of credit outstanding of $72.2 million and the aggregate availability for additional borrowings under the Credit Facility was $531.2 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 on March 31, 2010. At March 31, 2010, borrowings under the tranche A revolver bore interest, at the Company's 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. Borrowings under the FILO tranche bore interest, at the Company's option, at a rate equal to either a base rate plus 2.50% per annum or LIBOR plus 3.50% 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%, subject to adjustment based upon remaining available borrowings. Fees related to unused capacity under the Credit Facility are assessed at a rate of 0.375% of the remaining available borrowings under the facility, subject to adjustment based upon remaining unused capacity. In addition, the Company pays letter of credit fees and other administrative fees in respect to the Credit Facility. At March 31, 2010, the Company had borrowings of $143.2 million under its Credit Facility, which were not covered under an inte

EXIT ACTIVITIES

EXIT ACTIVITIES
	3 Months Ended Mar. 31, 2010
EXIT ACTIVITIES	NOTE 5 EXIT ACTIVITIES The Company maintains reserves for closed stores and other properties that are no longer utilized in current operations. The Company accrues for closed property operating lease liabilities using a credit-adjusted discount rate to calculate the present value of the remaining noncancelable 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 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. Following is a summary of closure reserves for stores, administrative office and distribution facilities and reserves for employee separation costs at March 31, 2010, and December 31, 2009, (in thousands): StoreClosureLiabilities AdministrativeOffice andDistributionFacilitiesClosureLiabilities EmployeeSeparationLiabilities Balance at December31, 2009: $ 15,777 $ 7,653 $ 2,080 Additions and accretion 221 123 Payments (884 ) (456 ) (432 ) Revisions to estimates 51 (1 ) Balance at March31, 2010: $ 15,165 $ 7,319 $ 1,648

DERIVATIVE INSTRUMENTS AND HEDG

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
	3 Months Ended Mar. 31, 2010
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES	NOTE 6 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Interest Rate Risk Management As discussed in Note 4, on each of July 24, 2008, October 14, 2008, and January 21, 2010, the Company entered into interest rate swap transactions with BBT, BA, SunTrust and/or Barclays to mitigate cash flow risk associated with the floating interest rate, based on the one month LIBOR rate on an aggregate of $450 million of the debt outstanding under the Credit Facility. The swap transactions have been designated as cash flow hedges with interest payments designed to offset the interest payments for borrowings under the Credit Facility that correspond to notional amounts of the swaps. The fair values of the Company's outstanding hedges are recorded as a liability in the accompanying condensed consolidated balance sheets at March 31, 2010 and December 31, 2009. Changes in fair value are recorded in "Accumulated other comprehensive loss", and any changes resulting from ineffectiveness of the hedge transactions would be recorded in current earnings. The Company's hedging instruments have been deemed to be highly effective as of March 31, 2010. The fair value of the swap transactions at March 31, 2010, was a payable of $11.6 million ($7.1 million net of tax). The fair value of the swap transactions at December 31, 2009, was a payable of $13.1 million ($8.0 million net of tax). The net amount of each is included as a component of "Accumulated other comprehensive loss." The table below represents the fair values of the Company's hedged items at March 31, 2010 and December 31, 2009 (in thousands): Liabilities Derivative designated as hedging instrument Location March31,2010 December31,2009 Interest Rate Swap Contracts OtherCurrentLiabilities $ 2,947 $ 4,140 Interest Rate Swap Contracts Other Liabilities $ 8,646 $ 8,913

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS
	3 Months Ended Mar. 31, 2010
FAIR VALUE MEASUREMENTS	NOTE 7 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 three levels of the fair value hierarchy are set forth below: * Level 1 Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. * Level 2 Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. * Level 3 Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value from the perspective of a market participant. The fair value of the interest rate swap transactions are based on the discounted net present value of the swap using third party quotes (level 2). Changes in fair market value are recorded in other comprehensive income (loss), and changes resulting from ineffectiveness are recorded in current earnings. Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are identified in the table below and are as follows: a) Market approach prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities b) Cost approach amount that would be required to replace the service capacity of an asset (replacement cost) c) Income approach techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models) Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands): March31, 2010 QuotedPrices inActiveMarketsforIdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs (Level 3) ValuationTechnique Total Derivative contracts $ $ (11,593 ) $ (c )

ACCUMULATED OTHER COMPREHENSIVE

ACCUMULATED OTHER COMPREHENSIVE LOSS
	3 Months Ended Mar. 31, 2010
ACCUMULATED OTHER COMPREHENSIVE LOSS	NOTE 8 ACCUMULATED OTHER COMPREHENSIVE LOSS Unrealized losses from interest rate swaps that qualify as cash flow hedges are included in "Accumulated other comprehensive loss." The adjustment to "Accumulated other comprehensive loss" for the three months ended March 31, 2010, totaled $1.5 million with a corresponding tax liability of $0.6 million resulting in a net of tax effect of $0.9 million. Changes in "Accumulated other comprehensive loss" for the three months ended March 31, 2010, consisted of the following (in thousands): UnrealizedGains onCash FlowHedges Balance at December31, 2009: $ (7,962 ) Period change 895 Balance at March1, 2010: $ (7,067 ) Comprehensive income for the three months ended March 31, 2010 and 2009, was $98.4 million and $62.3 million, respectively.

SHARE-BASED EMPLOYEE COMPENSATI

SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS
	3 Months Ended Mar. 31, 2010
SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS	NOTE 9 SHARE-BASED EMPLOYEE COMPENSATION PLANS AND OTHER BENEFIT PLANS The Company recognizes share-based compensation expense based on the fair value of the awards at the time of the grant. Share-based payments include stock option awards issued under the Company's employee stock option plan, director stock option 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 provides 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 market value 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 three months of 2010: Shares Weighted-AverageExercisePrice Outstanding at December31, 2009 9,929,879 $ 26.57 Granted 471,500 39.35 Exercised (340,680 ) 22.92 Forfeited (175,886 ) 30.34 Outstanding at March31, 2010 9,884,813 27.24 Exercisable at March31, 2010 5,068,456 $ 24.42 The Company recognized stock option compensation costs of approximately $3.6 million and $3.3 million in the first three months of 2010 and 2009, respectively, and recognized a corresponding income tax benefit of approximately $1.4 million and $1.3 million, 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 rate for periods within the contractual life of the options is based on the United States Treasury rates in effect at the time the options are granted for the options' expected life. The following weighted-average assumptions were used for grants issued in the three months ended March 31, 2010 and 2009: 2010 2009 Risk free interest rate 2.11 % 1.63 % Expected life 3.6 Years 3.6 Years Expected volatility 33.9 % 31.9 % Expected dividend yield 0 % 0 % The weighted-average grant-date fair value of options granted during the first three months of 2010 was $12.22 compared to $9.00 for the first three months of 2009. The remaining u

INCOME PER COMMON SHARE

INCOME PER COMMON SHARE
	3 Months Ended Mar. 31, 2010
INCOME PER COMMON SHARE	NOTE 10 INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted income per common share for the three months ended March 31 (in thousands except per share data): 2010 2009 Numerator (basic and diluted): Net income $ 97,476 $ 62,835 Denominator: Denominator for basic income per common share - weighted-average shares 137,583 135,043 Effect of stock options and restricted shares 1,817 1,191 Effect of Exchangeable Notes 212 Denominator for diluted income per common share- adjusted weighted-average shares and assumed conversion 139,612 136,234 Basic net income per common share $ 0.71 $ 0.47 Net income per common share-assuming dilution $ 0.70 $ 0.46 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 months ended March 31, 2010; however, the incremental net shares for the exchange feature of the Notes were not included in the diluted earnings per share calculation for the three months ended March 31, 2009, as the impact would have been antidilutive. For the three months ended March 31, 2010 and 2009, the Company did not include in the computation of diluted earnings per share approximately 1.2 million and 5.0 million shares, respectively. These shares represent underlying stock options and restricted shares not included in the computation of diluted earnings per share because inclusion of such shares would have been antidilutive.

LEGAL MATTERS

LEGAL MATTERS
	3 Months Ended Mar. 31, 2010
LEGAL MATTERS	NOTE 11 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 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 prior to its acquisition by O'Reilly. 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 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 remains ongoing. In addition, the previously reported SEC complaint against four (4) former employees of CSK for alleged conduct related to CSK's historical accounting practices remains ongoing. However, the SEC will not amend its pleadings to add the estate of one of the four (4) former employees who died in January, 2010. The action filed by the SEC on July 22, 2009 against Maynard L. Jenkins, the former chief 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. The previously reported DOJ criminal complaint against two (2) of the former employees of CSK remains ongoing only with regard to CSK's former Chief Financial Officer due to the death of the other former employee referenced above. With respect to the ongoing DOJ investigation into CSK's pre-acquisition accounting practices discussed above, attorneys from the DOJ have 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.Dist.Ct., Dist. of Ariz.; Case No: 2:09-cr-00372-SRB, the DOJ is considering whether to file criminal charges against CSK. O'Reilly is engaged in discussions with the DOJ to attempt to resolve the matter. O'Reilly cannot predict the outcome of these discussions at this time. O'Reilly intends to vigorously defend against any such charges if filed. The probability of criminal charges being filed against CSK or the magnitude of the costs to resolve these issues cannot now be reasonably estimated. Accordingly, the accompanying financial statements do not reflect an accrued liability for this contingency. Several of CSK's former directors or officers and current or former employees have been or may be interviewed as part of or become the subject 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

RECENT ACCOUNTING PRONOUNCEMENT

RECENT ACCOUNTING PRONOUNCEMENTS
	3 Months Ended Mar. 31, 2010
RECENT ACCOUNTING PRONOUNCEMENTS	NOTE 12 RECENT ACCOUNTING PRONOUNCEMENTS With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, that are of material significance, or have potential material significance, to the Company. In May 2009, the FASB issued FASB ASC 855, Subsequent Events (SFAS No. 165), which provides guidance to establish general standards of accounting for and disclosures of events that occur after 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 ("ASU") number 2010-09 ("ASU 2010-09"), Amendments to Certain Recognition and Disclosure Requirements, which is effective immediately. The ASU amends 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.