UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )

 

Filed by the Registrant [X]
Filed by a Party other than the Registrant [   ]

Check the appropriate box:
[X]  Preliminary Proxy Statement                 

[   ]  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[   ]  Definitive Proxy Statement
[   ]  Definitive Additional Materials

[   ]  Soliciting Material Under Rule 14a-12

 

O’Reilly Automotive, Inc.

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[   ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

 

 

 

[   ] Fee paid previously with preliminary materials.

[  ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

 

 

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PRELIMINARY PROXY STATEMENT – SUBJECT TO COMPLETION

 

 

 

 

 

 

 

 

 

 

March [  ], 2013

 

Dear Shareholder:

 

You are cordially invited to attend the 2013 Annual Meeting of Shareholders of O’Reilly Automotive, Inc. to be held at the Doubletree Hotel Springfield, 2431 North Glenstone Avenue, Springfield, Missouri 65803, on Tuesday, May 7, 2013, at 10:00 a.m. central time.

 

Details of the business to be conducted at the Annual Meeting are given in the attached Notice of Annual Meeting of Shareholders and Proxy Statement.

 

In addition to the specific matters to be acted upon, there will be a report on the progress of the Company and an opportunity for questions of general interest to the shareholders.

 

It is important that your shares be represented at the meeting.  Whether or not you plan to attend in person, please complete, sign, date and return the enclosed proxy card in the envelope provided at your earliest convenience or vote via telephone or Internet using the instructions on the proxy card.  If you attend the meeting, you may vote your shares in person even if you have previously signed and returned your proxy.

 

In order to assist us in preparing for the Annual Meeting, please let us know if you plan to attend by contacting Tricia Headley, our Corporate Secretary, at 233 South Patterson Avenue, Springfield, Missouri 65802, (417) 874-7161.

 

We look forward to seeing you at the Annual Meeting.

 

 

                                                                                                                                                            

David O’Reilly

Chairman of the Board

 

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PRELIMINARY PROXY STATEMENT – SUBJECT TO COMPLETION

 

O’REILLY AUTOMOTIVE, INC.

233 South Patterson Avenue

Springfield, Missouri 65802

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To be held on May 7, 2013

 

 

Springfield, Missouri

March [  ], 2013

 

The Annual Meeting of Shareholders (“Annual Meeting”) of O’Reilly Automotive, Inc. (the “Company”), will be held on Tuesday, May 7, 2013, at 10:00 a.m. central time, at the Doubletree Hotel Springfield, 2431 North Glenstone Avenue, Springfield, Missouri 65803.

 

The Annual Meeting is being held for the following purposes:

 

 

The Board of Directors has fixed the close of business on February 28, 2013, as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting and any adjournments or postponements thereof.  A list of all shareholders entitled to vote at the Annual Meeting, arranged in alphabetical order and showing the address of and number of shares held by each shareholder, will be available during usual business hours at the office of the Corporate Secretary, Tricia Headley, at 2831 South Ingram Mill Road, Springfield, Missouri 65804, to be examined by any shareholder for any purpose reasonably related to the Annual Meeting for ten days prior to the date thereof.  The list will also be available for examination throughout the course of the meeting.

 

Your vote is important to ensure a quorum at the meeting.  Even if you own only a few shares, and whether or not you expect to be present at the meeting, we request you mark, date, sign and mail the enclosed proxy card in the postage-paid envelope provided or vote your shares by telephone or Internet as directed on the enclosed proxy card.  Telephone and Internet voting facilities for shareholders of record will be available 24 hours a day and will close on Monday, May 6, 2013, at 11:59 p.m. eastern time.

 

A copy of the Company’s Annual Shareholders’ Report for fiscal year 2012 accompanies this notice.

 

By Order of the Board of Directors,

Tricia Headley

Secretary

 

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O’REILLY AUTOMOTIVE, INC.

233 South Patterson Avenue

Springfield, Missouri 65802

 

 

PROXY STATEMENT

 

The enclosed proxy is solicited by the Board of Directors (the “Board”) of O’Reilly Automotive, Inc. (the “Company” or “O’Reilly”), for use at our Annual Meeting of Shareholders (“Annual Meeting”) to be held at the Doubletree Hotel Springfield, 2431 North Glenstone Avenue, Springfield, Missouri 65803, on Tuesday, May 7, 2013, at 10:00 a.m., central time, and at any adjournments thereof.  Whether or not you expect to attend the meeting in person, please return your executed proxy card in the enclosed postage-paid envelope or vote via telephone or Internet, using the instructions discussed below and on the proxy card, and the shares represented thereby will be voted in accordance with your instructions.  This proxy statement and the accompanying proxy card are first being mailed to shareholders on or about March [  ], 2013.

 

Solicitation of proxies is being made by us and may be made by mail, electronic mail, telephone or fax.  The cost of solicitation of proxies will be borne by us and will also include reimbursement paid to brokerage firms and others for their reasonable out-of-pocket expenses of forwarding solicitation materials to their principals.

 

GENERAL INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

 

What is the purpose of the Annual Meeting?

At our Annual Meeting, shareholders will act upon the matters described in the accompanying notice of meeting.  In addition, our management will report on the Company’s performance during fiscal 2012 and respond to questions from shareholders.

 

When and where will the 2013 Annual Meeting be held?

The 2013 Annual Meeting will be held at the Doubletree Hotel Springfield, 2431 North Glenstone Avenue, Springfield, Missouri 65803, on Tuesday, May 7, 2013, at 10:00 a.m. central time.

 

Who may vote?

      Any shareholder of record, as of the record date, is entitled to receive this notice and vote their shares at the Annual Meeting.

 

What is a “shareholder of record”?

A shareholder of record is a shareholder whose ownership of our common stock is reflected directly on the books and records of our transfer agent, Computershare Trust Company, N.A. 

What is the record date for the Annual Meeting?

The record date is February 28, 2013.  Shareholders of record at the close of business on February 28, 2013, will be entitled to vote at the Annual Meeting.  Each share of common stock will have one vote on each matter to be voted upon.

 

Which O’Reilly shares are included in the proxy card I received?

The proxy card you received covers the number of common shares to be voted in your account as of the record date.

 

What is the difference between holding shares as a registered shareholder and as a beneficial owner?

A registered shareholder owns shares that are registered directly in their name with the Company’s transfer agent, Computershare.  A beneficial owner owns shares held in a stock brokerage account or by a bank.

 

Why would I receive more than one proxy card?

You may receive more than one proxy card if you owned shares in more than one account.  You should vote the shares on each of your proxy cards.

           

What matters will be voted on at the Annual Meeting?

At the Annual Meeting, shareholders will be asked to vote on the following proposals, all of which were solicited by the Board:

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May I vote with my proxy card in person at the Annual Meeting?

If you wish to vote your shares in person at the Annual Meeting, you may bring a signed proxy card with your choices specified by marking the appropriate boxes on the card. 

 

May I vote without attending the Annual Meeting?

If you do not plan to attend the Annual Meeting, you have three additional options to vote your shares:

 

 

If you choose to vote on the Internet or by telephone, please note the voting will close at 11:59 PM eastern time, on Monday, May 6, 2013. 

            

If you do not attend the Annual Meeting, your shares cannot be voted unless a signed proxy card is returned, shares are voted using the Internet or the telephone, or other specific arrangements have been made to have your shares represented.  Whether or not you attend the meeting, we encourage you to vote your shares promptly. 

 

May I change my vote after I submit my proxy?

You may change your vote after submitting a proxy card.  If, after sending in your proxy, you decide to vote in person or desire to revoke your proxy for any other reason, you may do so by notifying the Secretary of the Company in writing at our principal office at any time prior to the voting of the proxy.  Our principal executive office is located at 233 South Patterson Avenue, Springfield, Missouri 65802.

 

Are my votes confidential?

All shareholder meeting proxies, ballots and tabulations that identify the vote of a particular shareholder will be kept confidential, except as necessary to allow the inspectors of election to certify the voting results or to meet legal requirements.  Representatives of Broadridge Financial Solutions (“Broadridge”) will act as the inspector of election and will count the votes.

 

How will my vote be counted?

All votes will be tabulated by Broadridge.  All properly executed proxies received by the Board pursuant to this solicitation will be voted in accordance with the shareholder’s directions specified in the proxy card.  If no such directions have been specified by marking the appropriate squares in the signed and returned proxy card, the shares will be voted by the persons named in the enclosed proxy card as follows:

 

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The Board is not aware of any matter to be presented for action at the Annual Meeting other than the matters set forth herein.  Our shareholders have no dissenter’s or appraisal rights in connection with any of the proposals described herein.

 

No nominee has indicated that he or she would be unable or unwilling to serve as a Director, if elected.  However, should any nominee become unable or unwilling to serve for any reason, it is intended that the persons named in the proxy will vote for the election of such other persons in their stead as may be designated by the Board.  The Board is not aware of any reason that might cause any nominee to be unavailable to serve as a Director.

 

How does the Board recommend I vote?

  The Board recommends a vote “FOR” each of the nominees for Director named in this proxy statement.  The Board recommends a vote “FOR” the approval of the amendment to the Company’s’ Articles of Incorporation, as amended, (the “Articles of Incorporation”), to eliminate the classified structure of the Board and to provide for the annual election of Directors.  The Board recommends a vote “FOR” the approval of the amendment to the Company’s Articles of Incorporation to grant shareholders owning not less than 25% of the voting power of all outstanding shares of the Company’s common stock to require the Company to call a special meeting of shareholders.  The Board recommends a vote “FOR” the approval of the amendment to the Company’s Articles of Incorporation to eliminate unnecessary and outdated provisions and to make minor revisions to conform to current state laws and clarify.  The Board recommends a vote “FOR” the approval, by an advisory (non-binding) vote, of the 2012 compensation of our Named Executive Officers.  The Board recommends a vote “FOR” the ratification of the selection of Ernst & Young, LLP, as our independent auditors for the year ending December 31, 2013. 

 

What constitutes a quorum?

On February 28, 2013, there were 111,337,049 shares of common stock outstanding, which constitutes all of the outstanding shares of our voting capital stock.  A majority of the outstanding shares entitled to vote at the Annual Meeting, represented in person or by proxy, will constitute a quorum at the meeting. 

 

What votes are required?

The affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote is required to elect each person nominated for Director.  There is no cumulative voting for directors.  Shares present at the meeting, but which are represented by proxies that are marked "WITHHOLD AUTHORITY'' with respect to the election of all persons or any person to serve on the Board or for which no direction is given, will be considered in determining whether the requisite number of affirmative votes are cast on such matter.  Proxies marked "WITHHOLD AUTHORITY" will have the same effect as a vote against the nominee as to which such direction applies.  Shares not present at the meeting will not affect the election of Directors.

 

The affirmative vote of a majority of the outstanding shares of common stock entitled to vote thereon is required to approve Proposals 2, 3 and 4.  Shares represented by a proxy which directs that the shares abstain from voting, shall be deemed to be represented at the meeting as to such matter and will have the same effect as a vote against such Proposals.

 

The vote required for the other proposals described in this proxy statement and for any other matter properly brought before the meeting will be the affirmative vote of the majority of the shares of common stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the proposal, so long as a quorum is present, unless Missouri law or the Company’s Articles of Incorporation and Amended and Restated Bylaws (the “Bylaws”) require a greater vote.  Shares represented by a proxy which directs that the shares abstain from voting shall be deemed to be represented at the meeting as to such matter and will have the same effect as a vote against such matter.

 

While counted for quorum purposes, shares represented by a proxy as to which there is a “broker non-vote” (for example, where a broker does not have discretionary authority to vote the shares) as to one or more matters to be voted on shall not be deemed represented at the meeting for purposes of such matter or matters and, therefore, will have no effect thereon.    However, for Proposals 2, 3 and 4, which require the approval of a majority of the outstanding shares of common stock entitled to vote, “broker non-votes” will have the same effect as a vote against such Proposals.  Brokers cannot vote your shares on any proposals described in this proxy statement, other than Ratification of Selection of Independent Auditors, without your specific instructions.

 

Are the Notice, proxy statement and Annual Report available on the Internet?

The Notice, proxy statement and Annual Report are available at www.proxyvote.com.  The required control number can be found on your proxy card in the box next to the arrow.  

 

Where may I find the voting results of the Annual Meeting?

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       We plan to announce the preliminary voting results at the Annual Meeting.  We plan to publish the final results in a Current Report on Form 8-K to be filed with the Securities and Exchange Commission within four business days following the Annual Meeting, if final voting results are available at that time.  If the final voting results are not available within that time, we will report preliminary results in a Current Report on Form 8-K within four business days following the Annual Meeting and will report final voting results in an amended Current Report on Form 8-K when available.

 

Will a proxy solicitor be used?

       Yes, the Company has engaged Georgeson to assist in the solicitation of proxies for the Annual Meeting and estimates it will pay Georgeson a fee of approximately $15,000.  The Company has also agreed to reimburse Georgeson for reasonable administrative and out-of-pocket expenses incurred in connection with the proxy solicitation and indemnify Georgeson against certain losses, costs and expenses.

 

What are the deadlines for consideration of stockholder proposals or director nominations for the 2014 Annual Meeting of Shareholders?

Shareholder proposals intended to be presented at the 2014 Annual Meeting of Shareholders and included in the Company’s proxy statement and form of proxy relating to that meeting pursuant to Rule 14a-8 under the Exchange Act must be received by the Company at the Company’s principal executive offices by November 22, 2013.  The Company’s Bylaws require that shareholder proposals made outside of Rule 14a-8 be submitted not later than March 8, 2014, and not earlier than February 6, 2014.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

The following table summarizes information as of December 31, 2012, with respect to each person or other entity (other than management) known to the Company to be the beneficial owner of more than five percent (5%) of its outstanding shares of common stock.

 

 

 

 

 

SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

 

The following table summarizes, as of February 28, 2013, the beneficial ownership of the Company’s outstanding shares of common stock for each current Director (including Directors standing for reelection at the 2013 Annual Meeting) of the Board, each of the Company’s Named Executive Officers and all Directors and executive officers as a group.  Unless otherwise indicated, the Company believes that the beneficial owners set forth in the following table have sole voting and dispositive power.

 

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Officer and Director Stock Ownership Guidelines

 

The Board adopted stock ownership requirements for the Company’s independent Directors, executive officers and senior vice presidents to further align their interests with those of the Company’s shareholders.  The Compensation Committee reviews the stock ownership guidelines and reviews progress toward meeting ownership requirements quarterly.  The Compensation Committee may waive these guidelines at its discretion.  

 

The Company’s independent Directors are required to own shares of the Company’s common stock valued at a minimum of $50,000 within five years of the date they first become a Director.  For purposes of the guidelines, common stock ownership includes shares owned by the Director directly or indirectly and vested stock options granted to the Director under the Company’s Director Stock Plan.  As of December 31, 2012, each independent Director’s total holdings in the Company’s stock satisfied their respective stock ownership requirement. 

 

The Company’s executive officers and senior vice presidents are required to own shares of the Company’s common stock valued at the minimum of a specified multiple of their base salary within five years of first assuming their respective positions.  For purposes of the guidelines, common stock ownership includes shares owned by the officer directly, shares held by the officer in the Company’s Employee Stock Purchase Plan, shares held by the officer in the Company’s Profit Sharing and Savings Plan and the officer’s vested stock options granted under the Company’s incentive plans.  Individuals who do not achieve the required level of ownership within the prescribed period of time may, at the discretion of the Compensation Committee, be required to hold 50% of net after-tax shares issued upon the exercise of any of their stock options and may not be allowed to sell any other shares of the Company which they may own.  The stock ownership requirement does not apply after the executive officer or senior vice president reaches age 62.  The Compensation Committee may waive these guidelines at its discretion.  As of December 31, 2012, each of the Company’s executive officers’ and senior vice presidents’ total holdings in the Company’s stock satisfied their respective stock ownership requirement. 

 

The following table identifies the executive officers’ and senior vice presidents’ ownership requirement as of December 31, 2012:

 

 

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PROPOSAL 1–ELECTION OF DIRECTORS

 

Information about the Director Nominees and the Directors Continuing in Office

 

The Company’s Bylaws and Articles of Incorporation currently provide for three classes of Directors, each class serving a three-year term expiring one year after expiration of the term of the preceding class, so that the term of one class will expire each year.  The terms of the current Class III and Class I Directors expire in 2014 and 2015, respectively.  The Board has nominated Larry O’Reilly, Rosalie O’Reilly-Wooten and Thomas T. Hendrickson as Class II Directors for a three-year term expiring at the Company’s 2016 Annual Meeting of Shareholders.

 

As explained in further detail in Proposal 2 of this proxy statement, the Board is proposing to amend the Company’s Articles of Incorporation and the Company’s Bylaws to eliminate the classified structure of the Board as the existing terms of the Directors expire and to provide for the annual election of all Directors beginning at the Company’s 2015 Annual Meeting of Shareholders.  This action cannot take place, however, until approved by the shareholders.  Accordingly, if the proposed amendment in Proposal 2 is not approved by the shareholders, the three Class II nominees will be nominated to a three-year term expiring at the Company’s 2016 Annual Meeting of Shareholders.  If the shareholders approve Proposal 2 to amend the Company’s Articles of Incorporation to eliminate the classified structure of the Board and to provide for the annual election of Directors, then the Class II nominees are nominated for a one-year term expiring at the Company’s 2014 Annual Meeting of Shareholders.

 

The following table identifies (i) the business experience and principal occupation for at least the last five years of each of the nominees and the present Directors continuing in office, (ii) his or her present positions and offices with the Company, if applicable, (iii) the year in which he or she was first elected or appointed a Director (each serving continuously since first elected or appointed, unless otherwise stated), (iv) his or her age, (v) his or her directorships for at least the last five years in any company with a class of securities registered pursuant to Section 12 or subject to the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended, or in any company registered as an investment company under the Investment Company Act of 1940 (as specifically noted), as applicable and (vi) the qualifications and skills, which the Director possesses, that qualify him or her for service on the Company’s Board.

 

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THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE CLASS II NOMINEES.

 

 

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INFORMATION CONCERNING THE BOARD OF DIRECTORS

                                                

Director Independence

 

Rules of the Nasdaq Stock Market (the “Nasdaq”) require that a majority of the Board be “independent”.  Under the Nasdaq rules, a director is independent if he or she is not an officer or employee of the Company and does not have any relationship with the Company which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.  The Board has reviewed the independence of its Directors under the Nasdaq rules.  During this review, the Board considered transactions and relationships between each Director or any member of his or her family and the Company during 2012.  Consistent with these considerations, the Board has determined that Messrs. Burchfield, Hendrickson, Lederer, Murphy and Rashkow (“independent Directors”) are independent under the Nasdaq rules.

 

Family Relationships

 

Charlie O’Reilly, David O’Reilly, Larry O’Reilly and Rosalie O’Reilly-Wooten, Directors of the Board, are siblings.

 

Leadership Structure

 

The Company’s leadership structure, within its Board, consists of a Chairman of the Board, two Vice Chairmen of the Board, a Lead Director, an Audit Committee, a Corporate Governance/Nominating Committee and a Compensation Committee.  The Lead Director also serves on the Audit Committee, the Compensation Committee and as Chairman of the Corporate Governance/Nominating Committee.  All Committee members are independent Directors, under the Nasdaq rules.  The Company’s Bylaws, as amended, permit the positions of Chairman of the Board and Chief Executive Officer to be held by the same person.  However, the Board

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believes these roles and their attendant responsibilities should be separate and fulfilled by two separate individuals.  The Company believes having separate roles allows its Board to effectively provide guidance to and oversight of its management.  In 2005, the Corporate Governance/Nominating Committee recommended and the Board approved the appointment of David O’Reilly to serve in the role of Chairman of the Board of the Company.  The appointment was made in recognition of the substantial role Mr. O’Reilly plays in the development of the Company’s strategic initiatives.  The appointment of Mr. O’Reilly as Chairman of the Board did not alter Greg Henslee’s duties and responsibilities as Chief Executive Officer of the Company.  

 

Lead Director

 

In the interest of sound corporate governance, the Board has adopted a practice of appointing a Lead Director who is charged with acting as a liaison among other Directors, with management and between Board committees and the Board.  The Lead Director could also preside at Board meetings in the absence of the Chairman.  This position improves the functionality of the Board and its Committees and aids in the fiduciary obligations each Director has to the Company and its shareholders.  Paul R. Lederer has served as Director, Executive Vice President and Chief Operating Officer within the automotive aftermarket industry and has over 40 years of experience in this industry.  Based upon Mr. Lederer’s experience, qualifications and skills, in 2002, the Corporate Governance/Nominating Committee nominated, and the Board approved, Mr. Lederer to serve as Lead Director.

 

Meeting Attendance

 

During 2012, four regularly scheduled meetings of the Board were held.  During such year, each Director attended (i) 100% of the total number of meetings of the Board and (ii) 100% of the total number of meetings held by all committees of the Board for which he served, with the exception of Ronald Rashkow, who was not present for one telephonic Audit Committee meeting during the year.    

 

Committees of the Board

 

The Board has three standing committees, the Audit Committee, the Compensation Committee and the Corporate Governance/Nominating Committee.  Each committee is governed by a written charter and is comprised solely of independent Directors in accordance with the Nasdaq Listing Qualifications.  Charters for each committee are available on the Company’s website at www.oreillyauto.com, and can be obtained free of charge by written request to the attention of the Secretary at the Company’s address appearing on the first page of this proxy statement or by telephone at (417) 874-7161.

 

 

As explained above, Charlie O’Reilly, David O’Reilly, Larry O’Reilly and Rosalie O’Reilly-Wooten do not qualify as independent Directors; therefore, they do not participate on any committee of the Board.

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The Company’s independent directors held four closed-session meetings during the year ended December 31, 2012, and each independent director attended all four meetings.

 

Shareholder Nominations

 

A shareholder who desires to nominate one or more persons for election as director(s) shall deliver “timely notice” (as defined in Section 12, Article II of the Company’s Bylaws) of the shareholder’s intent to make such nomination or nominations, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company at the Company’s address appearing on the first page of this proxy statement.  In accordance with Section 13, Article II of the Bylaws, such notice shall set forth (i) the name and address of record of the shareholder who intends to make the nomination; (ii) the class and number of shares of the capital stock that are beneficially owned by the shareholder on the date of such notice; (iii) the name, age, business and residential addresses, and principal occupation or employment of each proposed nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee, and other arrangements or understandings known to the shareholder, pursuant to which the nomination or nominations are to be made by the shareholder; (v) any other information regarding each proposed nominee that would be required to be included in a proxy statement filed with the SEC; and (vi) the written consent of each proposed nominee being so named to serve as a Director of the Company.  The presiding officer of a meeting may, if the facts warrant, determine at the meeting that a nomination was not made in accordance with the foregoing procedure, and if he or she should make that determination, he or she shall so declare at the Annual Meeting, and the defective nomination shall be disregarded.

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Director Attendance at Annual Meeting

 

The Company encourages, but does not require, the members of its Board attend the Annual Meeting.  Each member of the Board attended the Company’s 2012 Annual Meeting, with the exception of Charlie O’Reilly.

 

Risk Oversight

 

It is management’s responsibility to manage risk and bring to the Board’s attention the most material risks to the Company.  The Board has oversight responsibility of the processes established to report and monitor systems for material risks applicable to the Company.  In its oversight role, the Board annually reviews the Company’s strategic plan, which addresses, among other things, the risks and opportunities facing the Company.  A quarterly risk overview is provided to the Board by the Company’s General Counsel and by the Company’s Vice President of Treasury and Risk Management, which details the Company’s current litigation and current and potential self insurance risks and risk exposures.  The Board has delegated certain risk management oversight responsibility to the Board committees.  As part of its responsibilities as set forth in its charter, the Audit Committee is responsible for discussing with management the Company’s major financial risk exposures and the steps management has taken to monitor and control those exposures, including the Company’s risk assessment and risk management policies.  The Audit Committee reviews, with management, the Company’s financial performance and financing arrangements and meets with the Company’s external auditors to review the Company’s compliance with all applicable financial reporting and Sarbanes-Oxley requirements.  The Corporate Governance/Nominating Committee reviews the Company’s corporate governance guidelines and their implementation and reviews the Corporate Risk Assessment and Management Status Report.  This report identifies the material business risks (including strategic and operational) for the Company as a whole and identifies the controls that respond to and mitigate those risks.  The Corporate Governance/Nominating Committee also receives a Fraud Risk Assessment report from management which reviews the Company’s Code of Conduct and Ethics program compliance as well as the Company’s TIPS Hotline and Corporate policies and procedures.  The Compensation Committee has overall responsibility for executive officer succession planning and reviews succession plans each year.  The Compensation Committee also reviews total compensation for the Company’s management and executives including base salary, incentive compensation, benefits, and perquisites to ensure they are market competitive and consistent with the Company’s performance goals and ensures that the compensation plans and arrangements do not create inappropriate risks.  Each committee regularly reports to the full Board.

 

Board Diversity

 

The Board believes that while diversity and variety of experiences and viewpoints represented on the Board should always be considered, a Director nominee should not be chosen, nor excluded, solely or largely because of race, color, religion, disability, age, gender, national origin or sexual orientation or identity.  In selecting a Director nominee, the Corporate Governance/Nominating Committee focuses on skills, viewpoints, expertise and background that would complement the existing Board.  The Corporate Governance/Nominating Committee will also consider diversity in market knowledge, experience, employment, and other factors.  Decisions by the Board regarding continued service of Directors are made based on expected contributions to the Board in furtherance of the interests of shareholders, not based on race, color, gender or other demographic orientation or identity.  The Board does not have a formal policy on Board diversity as it relates to the selection of nominees for the Board. 

 

Compensation of Directors

 

Independent Directors

Independent Directors are paid an annual fee and meeting fees for attendance at each Board and Committee meeting, with the Lead Director receiving an additional annual fee for service on the Board.  Each Committee Chairman is paid an additional fee for service as chairman of each respective Committee.  As an incentive for recruiting and retaining qualified Directors, the Company also maintains a Director Stock Plan.  This plan provides for an annual award to each independent Director of restricted shares that vest equally over a three-year period and/or the grant of non-qualified stock options to purchase shares of the Company’s common stock at a per share exercise price equal to the fair market value of the Company’s common stock on the date the option is granted, which fully vest after six months and have a life of seven years.  Upon resignation from the Board for any reason other than retirement, death or disability, all outstanding stock awards are immediately forfeited.  The Board makes an annual determination of the number of restricted shares and/or the grant of a number of stock options to be awarded to every independent Director under the Director Stock Plan. 

 

The following table summarizes the compensation paid to the independent Directors, including stock awards, for the year ended December, 31, 2012:

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Independent Director fees in the aggregate amount of $302,000 were paid during 2012.

 

Affiliated Directors

The Affiliated Director Compensation Plan provides for an annual cash retainer of $160,000 and quarterly meeting fees of $2,500 for attendance at each Board meeting to each of the affiliated Directors (Charlie O’Reilly, Larry O’Reilly and Rosalie O’Reilly-Wooten).

 

The Company does not pay additional fees, over and above his annual salary, to David O’Reilly for his service to the Board.

 

The following table summarizes the compensation paid to all Directors, other than David O’Reilly, for the year ended December 31, 2012:

 

 

 

 

 

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In addition, all Directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at Board meetings.

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee is now, nor has ever been, an officer or an employee of the Company or any of its subsidiaries.

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COMPENSATION OF EXECUTIVE OFFICERS

 

Compensation Discussion and Analysis

 

This section describes the compensation packages of the Company’s principal executive officer, principal financial officer, two other most highly compensated executive officers and the most highly compensated Senior Vice President who were employed by the Company on December 31, 2012 (we refer to such individuals as the “Named Executive Officers” or “NEOs” in this proxy statement).  The Company’s NEOs and their positions are identified below:

 

 

Executive summary

The Compensation Committee of the Company’s Board is responsible for reviewing the performance of both the Company’s NEOs and the broader Senior Vice President group (together, its “executive officers”), recommending to the Board compensation packages and specific compensation levels for its executive officers and other management team members, establishing policies and guidelines for other benefit programs and administering the award of stock options and other stock-based incentives under the Company’s incentive plans.

 

At our 2012 Annual Meeting, over 93% of the votes cast in the advisory vote on executive compensation, which were present and entitled to vote on the matter, were in favor of the compensation of our NEOs as disclosed in our 2012 proxy statement.  We believe that the outcome of this proposal evidences the commitment of our Compensation Committee to open dialogue with our shareholders regarding our executive compensation program, and the Compensation Committee has and will continue to consider these voting results and shareholder sentiments generally as it formulates and implements an executive compensation program designed to align the long-term interests of our executive officers with our shareholders.

 

The policies and procedures of the Compensation Committee are designed to assist the Company’s Board in its oversight of the implementation and effectiveness of its policies and strategies regarding the investment in the Company’s largest asset, its employees (whom the Company refers to as “Team Members”).  These strategies and policies include, but are not limited to:

 

 

Compensation objectives and philosophy

The main objective of the Company’s compensation philosophy is to provide its executive officers and management with a total compensation package that is competitive and equitable, and which encourages and rewards performance based in part upon the Company’s performance in terms of increases in shareholder value.  The Company’s compensation objectives include both long-term, share-based incentives and short-term, cash incentives.  The Company believes that aligning the interests of its executives and management with those of its shareholders further promotes the success of not only the Company, but also its Team Members.

 

Risk assessment of compensation programs

The Compensation Committee has reviewed the potential effects of the various components of the Company’s executive officers’ compensation and benefits programs on individual and collective behavior and, ultimately, on its risk profile and overall approach to risk management.  During its review, the Committee focused on the Company’s short-term incentives, long-term incentives, and change-in-control benefits as having the greatest potential to create incentives for individual or collective risk taking.  Following a thorough review of these and the other components of the Company’s compensation and benefits programs, the Committee has determined that the programs do not create any incentives with respect to individual or collective behavior that are likely to have a material adverse effect upon either its risk profile or overall approach to risk management.

 

Additionally, the Company’s non-executive officer and management compensation policies and practices do not excessively incentivize or create need for inappropriate risk-taking by its Team Members and therefore, it is not reasonably likely that current compensation policies and practices would have a material adverse effect on the Company.

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Overview of compensation programs

The key elements of the compensation packages for the Company’s executive officers are base salary, annual cash incentive compensation and long-term, share-based incentives.  In determining the composition of elements in each compensation package, the Compensation Committee looks to create a balanced set of rewards, utilizing market-driven influences and external compensation benchmarks, as well as current cash considerations.  To ensure that the Company thrives in the competitive talent market, the Compensation Committee reviews industry resources, references and other benchmark reports to determine competitive market ranges and reasonable levels of compensation.  The Company did not engage a compensation consultant for fiscal 2012.

 

In reviewing the compensation packages of each of the Company’s executive officers and management, the Compensation Committee tallies the corresponding dollar value of each element of an individual’s compensation, including salary, incentive compensation, accumulated realized and unrealized share-based compensation gains, the dollar value to such individual and cost to the Company of all perquisites and other personal benefits, the earnings and accumulated benefits under the Company’s non-qualified deferred compensation program and the potential impact of several potential severance and change-in-control scenarios.  For new appointments to executive management, the Company’s management presents compensation recommendations to the Committee for consideration. 

 

Competitive assessments

The Company’s Human Resources Department provides the Committee with industry benchmark information and compensation survey data.  The Committee considers the Company’s relative performance compared with an established group of peer companies in the automotive aftermarket industry and other specialty retailers. 

 

The Compensation Committee reviews the Company’s peer group, as necessary, to ensure that the comparisons are meaningful.  The Committee evaluates peers which conduct business outside of the automotive aftermarket industry based on criteria such as revenue, operating margin, profit margin and market capitalization.  The Committee also considers broad-based survey data, compiled by Equilar, of total compensation for top management at companies with total revenues comparable to the total revenues of the Company.  The Committee uses the industry and market survey data as a context in reviewing the overall compensation levels and maintaining a reasonable and competitive compensation program.  The Committee does not use this data to set specific compensation benchmarks for a position.  Rather, the Committee evaluates the overall performance of the Company and the individual performance of management to set compensation at reasonable and competitive levels. 

 

The companies comprising the 2012 peer group for the Company are identified in the table below and include companies with a market capitalization ranging from $0.2 billion to $31 billion.  As of December 31, 2012, the median market capitalization of the Company’s 2012 peer group was $8 billion and the Company’s market capitalization was $10 billion.

 

 

 

Base salary

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In determining annual base salary, it is the Compensation Committee’s goal to bring the salaries of the Company’s executive officers and management in line with base compensation being paid by its peer group.  The Compensation Committee specifically reviews compensation information for other publicly traded automotive aftermarket companies and compensation surveys and data for other specialty retailers.  The Compensation Committee believes that the Company’s principal competitors for its executive officers are not necessarily the same companies that would be included in a peer group compiled for purposes of comparing shareholder returns.  Consequently, the companies that are reviewed for such compensation purposes, as noted in “Overview of Compensation Programs,” may not be the same as the companies comprising the Nasdaq Retail Trade Stocks Total Return Index, Nasdaq United States Stock Market Total Returns Index or the Standard and Poor’s 500 Index included in the Annual Shareholders’ Report of the Company for 2012 that accompanies this proxy statement.  The Compensation Committee established increased base salary levels in 2012 for the Company’s NEOs to maintain compensation at competitive levels and to reflect its performance and the individual performance of each of its NEOs.

 

Incentive compensation plan

The Compensation Committee has established an incentive compensation plan for the Company’s executive officers based upon certain objective performance goals.  At the beginning of each year, a comprehensive operating plan is developed which contains estimates for the Company’s projected performance for the year.  The operating plan is compiled by reviewing the Company’s historical performance, trends in the automotive aftermarket and retail industry and the performance of industry peers and other comparable companies.  The targets for incentive compensation plans set by the Compensation Committee generally correspond to this operating plan – the comprehensive operating plan for the 2012 fiscal year was approved by the Company’s Board of Directors in February of 2012, and reflects the projected results for the 2012 fiscal year.  The Company financial performance metrics utilized by the Compensation Committee include sales performance, operating income performance and financial returns, as well as various balance sheet measures – the metrics used for the year ended December 31, 2012, are identified in the table below: 

 

The Company’s actual performance in each of these areas is compared to the individual targets predetermined by the Committee, in order to determine the incentive amount, if any, achieved by each executive officer.  Upon achievement of such performance goals, executive officers receive incentive compensation based upon a percentage of their respective base salaries for the attainment of a defined performance goal.  The overall potential value varies depending upon the executive’s position; however, under the Company’s 2012 Incentive Award Plan, the maximum aggregate amount of cash compensation which may be paid to any one participant in any year in respect of all awards that are intended to constitute performance-based compensation is $10,000,000.    For 2012, the Company’s Chief Executive Officer had a cumulative target of 100% of his base salary, its Chief Operating Officer and Chief Financial Officer each had cumulative targets of 80% of their respective base salaries and its Senior Vice Presidents each had cumulative targets of 50% of their respective base salaries. 

 

The targets for the Company’s executive officers are highly confidential and competitively sensitive.  The Company believes that if it were to publish its targets, it would allow competitors to recreate its internal forecasts and gain valuable insight on its business strategies.  Such public disclosure could materially harm the Company’s competitive position within its industry.  Because the targets are confidential, the Company believes that the best indication of its performance against target is its track record with respect to incentive payouts.  The Company sets target achievement levels for its executives with respect to these performance metrics based on the Board-approved operating plan, which reflects projected Company performance for the upcoming fiscal year, and the targets are calibrated such that they are challenging enough to require strong and consistent effort by the executives in order to be achieved.  The Company’s actual performance above projections would result in payouts above target levels and would likely also result in an increase in total shareholder value.  Due to the Company’s strong financial performance over the past five years, annual incentive payouts under the executive plan have exceeded target each year and have ranged from 150% to 403% of target.

 

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The following table summarizes the 2012 performance incentive compensation plan targets and payouts for each of the Company’s NEOs who participated in the plan:

 

 

 

 

Long-term, stock-based incentives

The Company offers long-term incentives for executive officers and management in the form of stock option and restricted stock awards.  Stock options and restricted stock may be awarded to the Company’s NEOs, upper- and middle-managers and other key personnel.

 

The Company believes that its stock-based incentive award programs are an important component of compensation as an incentive for long-term corporate performance.  The Compensation Committee has determined that the annual award of restricted stock or grant of stock options to the Company’s executive officers is a key component of each executive officer’s total compensation package based on his duties.  The amounts of such restricted stock awards and/or stock option grants are determined by the Compensation Committee annually in conjunction with performance reviews and salary adjustments during the February Compensation Committee meeting.  In determining whether and how many restricted stock awards and/or stock options should be granted, the Compensation Committee considers the responsibilities and seniority of each of the executive officers, as well as the Company’s financial performance and other factors as it deems appropriate, consistent with its compensation philosophy and policies.  The restricted stock awards and stock options awarded by the Compensation Committee in 2012, as reflected in the Grants of Plan Based Awards table, include an annual award of restricted stock or grant of stock options, as the case may be, determined by the Compensation Committee in consideration of the factors described above.

 

In the past, the Compensation Committee has reviewed and considered using other equity-based incentives for the long-term compensation component.  After a thorough analysis, including the use prior to 2012 of a national consulting firm, stock options and restricted stock awards were determined to be the most effective methods of aligning management interests with those of the Company’s shareholders. 

 

The Compensation Committee has also established specific stock option awards to be granted upon the achievement of certain defined positions of employment.  These are automatic grants that occur on the date of promotion or appointment to such positions with an option price equal to the fair market value of the common stock underlying the option on such date.  It is the Company’s belief that these position-related grants provide additional incentive to its executives, management and other Team Members to set personal long-term employment goals.  In furtherance of this belief, the Company also has a Team Member stock purchase plan that enables Team Members to purchase its common stock at a discount through payroll deductions and a 401(k) plan under which Team Members can invest in its common stock.  In addition, the Compensation Committee may grant stock option awards in connection with a material business event, such as a large acquisition.  The Compensation Committee believes that these special stock option awards provide additional incentive to the Company’s executive officers, management and other Team Members to ensure these material acquisitions are integrated effectively and efficiently.  During 2012,  Jeff Shaw, Senior Vice President of Store Operations and Sales received a position-level stock option award upon his promotion to Executive Vice President of Store Operations and Sales.  Other than this position-level stock option award, no other position-level stock option awards, or other special stock option awards in connection with a material business event, were granted during 2012 for NEOs.  

 

Other

The Company sponsors a 401(k) Profit Sharing and Savings Plan (the “401(k) Plan”) that allows Team Members to make plan contributions on a pre-tax basis.  The Company matches 100% of the first 2% of the Team Member’s compensation, and 25% of the next 4% of the Team Member’s compensation.  Although executive officers are eligible to participate in the 401(k) plan, the application of the annual limitations on contributions under Section 401(a)(17) of the Internal Revenue Code prevents highly compensated employees, as defined by the Internal Revenue Code, from participating at the same levels as non-highly compensated employees.  The O’Reilly Automotive Deferred Compensation Plan (the “Deferred Compensation Plan”) provides executive officers who participate in the 401(k) Plan with the opportunity to defer up to the full 6% of covered compensation by making contributions to the Deferred Compensation Plan that are then matched by the Company as if they had been made under the 401(k) Plan.  The Deferred Compensation Plan is solely intended to restore contributions lost because of the application of the annual limitations under the

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Internal Revenue Code that are applicable to the 401(k) Plan.  This benefit, which assists executive officers in accumulating funds for retirement, is consistent with observed competitive practices of similarly situated companies.

 

Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly-held companies for compensation paid to certain executive officers, to the extent that compensation exceeds $1 million per officer in any year.  The limitation applies only to compensation which is not considered to be performance-based, within the meaning of Section 162(m).  The Compensation Committee believes that in establishing the cash and equity incentive compensation programs for the Company’s executive officers, the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole governing factor.  Accordingly, the Compensation Committee may provide one or more executive officers with the opportunity to earn incentive compensation, whether through cash incentive based compensation programs tied to the Company’s financial performance or share-based awards in the form of restricted stock or restricted stock units, which may be in excess of the amount deductible by reason of Section 162(m) or other provisions of the Internal Revenue Code.  The Company believes it is important to maintain incentive compensation at the requisite level to attract and retain the executive officers essential to the Company’s financial success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.

 

In addition, the Company provides its executive officers with certain perquisites which the Compensation Committee believes are reasonable and consistent with the objectives of attracting and retaining superior Team Members, as well as maintaining a competitive total compensation package for the executive officers.  Perquisites can include personal use of a Company automobile, reimbursement for health and country club memberships and reimbursements under the Company’s Executive Management Medical Reimbursement Benefit Plan.  Perquisite amounts for the Company’s NEOs are included in the below Summary Compensation Table in the column “All Other Compensation.”

 

Compensation mix

The following table summarizes the Company’s 2012 compensation mix, which includes base salary, equity and non-equity incentive compensation and/or restricted stock awards or stock options, for each of its NEOs:

 

 

 

 

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COMPENSATION COMMITTEE REPORT

 

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management.  Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in O’Reilly Automotive, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012.                                                                                                                                    

                                                                        Respectfully submitted,

 

THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF O’REILLY AUTOMOTIVE, INC.

 

Jay D. Burchfield

Chairman of the Compensation Committee

 

Paul R. Lederer

Member of the Compensation Committee

Ronald Rashkow

                                                                        Member of the Compensation Committee

 

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EXECUTIVE COMPENSATION TABLES

 

The following table summarizes the annual compensation paid to or earned by the Company’s NEOs for the fiscal years ended December 31, 2012, 2011 and 2010:

 

 

 

 

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The following table summarizes all awards granted during the year ended December 31, 2012, to each of the NEOs:

 

 

 

 

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The following table identifies information concerning unexercised stock options, stock options that have not vested and stock awards that have not vested for each of the NEOs as of December 31, 2012:

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The following table summarizes option awards exercised and shares of restricted stock awards, which vested during the year ended December 31, 2012, and the aggregate dollar values realized upon such exercise or vesting for each of the NEOs:

 

 

 

The following table identifies information regarding the contributions by each NEO and the Company under the O’Reilly Automotive, Inc. Deferred Compensation Plan for the year ended December 31, 2012, as well as information on aggregate earnings, withdrawals and balances for each NEO:

 

 

 

 

 

The Deferred Compensation Plan provides executive officers who participate in the 401(k) Plan with the opportunity to defer up to the full 6% of covered compensation, including salary and incentive based compensation, by making contributions to the Deferred Compensation Plan that are then matched by the Company as if they had been made under the 401(k) Plan.  The Deferred

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Compensation Plan is solely intended to restore contributions lost because of the application of the annual limitations under the Internal Revenue Code that are applicable to the 401(k) Plan.  Executive officers may elect to defer their base compensation, incentive compensation and/or bonuses to the Deferred Compensation Plan.  Executive officers can elect to allocate their contributions, as well as the Company matching contributions, to various equity, bond or fixed income funds, or a combination thereof, and all interest and/or earnings which may be credited to the executive officer’s account are based on the applicable fund’s market performance.  Executive officers may elect to receive distributions at retirement or starting in a specific future year before or after anticipated retirement and may elect to receive the distribution in a lump sum or in periodic payments.

 

Potential Payments on Termination or Change in Control

   

Change in Control Agreements

 

The Company has entered into change in control agreements with certain NEOs, which become effective only upon a Change in Control (as defined in such agreements).  In addition, under the Company's Incentive Plans there is acceleration of vesting with respect to options and restricted stock upon a Change in Control (as defined in the applicable Incentive Plan).

 

With respect to the change in control agreements, if upon or within six months after a Change in Control, any of the NEOs with a valid change in control agreement terminates his employment for “Good Reason” or such executive’s employment is terminated by the Company without cause or by reason of death or disability, then the executive will be entitled to:

 

The following table shows the amounts that those NEOs who have entered into change in control agreements would have received if their employment had been terminated due to a Change in Control on December 31, 2012.  Based on the calculations as of such date, no gross-up payment for excise taxes would be due to any NEO.  The unvested option grants and unvested restricted share awards vest pursuant to the terms of the Incentive Plans upon a Change in Control irrespective of a termination of employment.  This table does not include amounts related to the NEOs’ vested benefits under the Company’s deferred compensation plan or pursuant to stock option grants or restricted share awards, which are described in the tables above.

 

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In addition, if a Change in Control had occurred on December 31, 2012, Thomas McFall, who is not party to a change in control agreement, would have received $2,028,777 with respect to acceleration of Unvested Stock Option Grants pursuant to the terms of the Incentive Plans.

 

Employment Arrangements with Executive Officers

 

The Company entered into a written employment agreement effective January 1, 1993, with David O’Reilly.  Such agreement provides for Mr. O’Reilly to be employed by the Company for a minimum period of three years and automatically renews for each calendar year thereafter.  As compensation for services rendered to the Company, the agreement provides for Mr. O’Reilly to receive (i) a base annual salary adjusted annually, and (ii) a bonus, the amount of which is determined by reference to such criteria as may be established by the Compensation Committee.  Mr. O’Reilly, in consultation with the Compensation Committee, has elected to exclude himself from participating in the bonus portion of his employment agreement pursuant to his responsibilities of providing strategic direction and guidance to the company and his more limited role in the Company’s day-to-day operational activities.

 

Mr. O’Reilly’s employment may be terminated by the Company for cause (as defined in the agreement) or without cause.  If Mr. O’Reilly’s employment is terminated for cause or if Mr. O’Reilly resigns, his salary and bonus rights will cease on the date of such termination or resignation.  If the Company terminates Mr. O’Reilly without cause, all compensation payments will continue through the remainder of the agreement’s term.  If Mr. O’Reilly had terminated employment on December 31, 2012, such payments would have totaled approximately $2,141,367.  Pursuant to his agreement, Mr. O’Reilly has agreed, for so long as he is receiving payments thereunder, to adhere to certain confidentiality obligations and refrain from engaging, directly or indirectly, in any automotive parts distribution, manufacturing or sales business in the states in which the Company operates without prior written consent of the Company.

 

Director Compensation

 

Please see the "Compensation of Directors" section of this report for a discussion of the manner in which the Company's directors are compensated.

 

Certain Relationships and Related Transactions

 

The Company leases certain land and buildings related to 73 of its O’Reilly Auto Parts stores and one of its bulk facilities under fifteen- and twenty-year operating lease agreements with entities in which David O’Reilly, Larry O’Reilly, Charlie O’Reilly and Rosalie O’Reilly-Wooten, or members of their families, are affiliated.  In addition, the Company leases certain land and buildings related to four of its O’Reilly Auto Parts stores under fifteen-year operating lease agreements with certain of the Company’s executive officers.  Generally, these lease agreements provide for renewal options for an additional five years at the option of the Company and the lease agreements are periodically modified to further extend the lease term for specific stores under the agreements.  The total aggregate lease payments paid by the Company to the entities and individuals above was $4.4 million for the year ended December 31, 2012.  The Company believes that the terms and conditions of the transactions with affiliates described above were no less favorable to the Company than those that would have been available to the Company in comparable transactions with unaffiliated parties.

 

Approval or ratification of transactions with related persons

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Pursuant to the terms of the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving all proposed transactions between the Company, any of the Company’s Officers or Directors, or relatives or affiliates of any such Officers or Directors, to ensure that such related party transactions are on a similar economic basis as a like transaction that occurred at arm’s length with an independent third party, are in the Company’s overall best interest and in the best interest of the Company’s shareholders.  The quarterly Audit Committee meeting includes a standing agenda item for the review of such related party transactions.  The Audit Committee has not adopted any specific procedures for the conduct of the reviews, rather each transaction is considered in light of the individual facts and circumstances.  In the course of its review and approval of a transaction, the Audit Committee considers, among other factors it deems appropriate:

 

During the most recent fiscal year, all related party transactions were reviewed in accordance with the above procedures.

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s executive officers and Directors, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the SEC.  Such individuals are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.  To the Company’s knowledge, based solely on its review of the copies of such forms furnished to it and written representations with respect to the timely filing of all reports required to be filed, it believes that such persons complied with all Section 16(a) filing requirements applicable to them with respect to transactions for the year ended December 31, 2012, with the following exceptions:

 

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AUDIT COMMITTEE REPORT

 

The Audit Committee functions pursuant to a written charter, which may be viewed on the Company’s website at www.oreillyauto.com.  In compliance with that charter and in connection with the December 31, 2012, financial statements, the Audit Committee:

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF O’REILLY AUTOMOTIVE, INC.

 

John R. Murphy

Chairman of the Audit Committee

 

Jay D. Burchfield

Member of the Audit Committee

 

Thomas T. Hendrickson

Member of the Audit Committee

 

Paul R. Lederer

Member of the Audit Committee

 

Ronald Rashkow

Member of the Audit Committee

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PROPOSAL 2 – AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION TO ELIMINATE THE CLASSIFIED STRUCTURE OF THE BOARD OF DIRECTORS AND TO PROVIDE FOR THE ANNUAL ELECTION OF DIRECTORS

 

The Company’s Articles of Incorporation currently provide that the Board will be divided into three classes, with one class to be elected by the shareholders every year, thereby making the term of each class of Directors three years.  Upon the recommendation of the Corporate Governance and Nominating Committee, the Board has approved, and recommends to the shareholders for approval, an amendment to the Articles of Incorporation to require that all Directors be elected annually.  As discussed below, the transition to annual election of Directors will be phased in over time and will apply to all Directors beginning with the Company’s 2015 Annual Meeting of Shareholders. 

 

The proposal is a result of the Board’s ongoing review of corporate governance matters and its policy for open dialog and communication with the Company’s shareholders.  The Board, assisted by the Corporate Governance and Nominating Committee, considered the advantages and disadvantages of maintaining the current classified board structure.  In reaching its recommendation, the Board and the Corporate Governance and Nominating Committee considered a number of factors, including the growing sentiment among shareholders and the investment community in favor of annual elections.

 

Under this proposed amendment, all Directors standing for election would be elected for one-year terms as follows:

 

 

 

 

Vacancies that arise during the year will be filled by the Board, and each Director so named shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred, and if no such class exists, as shall be the case beginning with the 2015 Annual Meeting of Shareholders, each Director so named shall serve for a term that will expire at the next Annual Meeting of Shareholders.

 

In addition, the Board, upon recommendation of the Corporate Governance and Nominating Committee, has provisionally approved amendments to the Company’s Bylaws to implement the proposed declassification of the Board.  The Bylaw amendments have been approved by the Board but are conditioned upon shareholder approval of the amendment to the Articles of Incorporation pursuant to this proposal.

 

The proposed amendment to the Articles of Incorporation and the proposed amendments to the Bylaws are set forth in Appendix A to this proxy statement with deletions indicated by strikeouts and additions indicated by underlining.

 

If the amendment to the Articles of Incorporation is approved, then it will become effective upon filing of an amendment to the Articles of Incorporation with the Secretary of State of the State of Missouri, which filing would be made promptly after the 2013 Annual Meeting of Shareholders. If this proposal is not approved, neither the proposed amendment to the Articles nor the related amendments to the Bylaws will take effect.  The Board will retain its current classified structure, and each Director elected at the Company’s 2013 Annual Meeting of Shareholders will be elected for a three-year term expiring in 2016.  All other Directors will continue in office for the remainder of their full three-year terms.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE ADOPTION AND APPROVAL OF THIS AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION.

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PROPOSAL 3 – AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION TO GRANT SHAREHOLDERS OWNING NOT LESS THAN 25% OF THE VOTING POWER OF ALL OUTSTANDING SHARES OF THE COMPANY’S COMMON STOCK TO REQUIRE THE COMPANY TO CALL A SPECIAL MEETING OF SHAREHOLDERS

 

The Company’s Articles of Incorporation currently provide that a special meeting of shareholders may only be called by the Board.  After due consideration, and upon the recommendation of the Corporate Governance and Nominating Committee, the Board has approved, and recommends to the shareholders for approval, an amendment to the Articles of Incorporation that would also permit shareholders who have owned, in the aggregate, at least 25% percent of the voting power of all outstanding shares of the Company’s common stock continuously for at least one year to require the Secretary of the Company to call a special meeting of shareholders by written request filed with the Secretary of the Company, provided that such written request is made in accordance with certain procedural and informational requirements set forth in the Bylaws (which also would be amended, as described below).

 

The proposal is a result of the Board’s ongoing review of corporate governance matters and its policy for open dialog and communication with the Company’s shareholders.  The Board and Corporate Governance and Nominating Committee support the concept of providing shareholders with the right to require the Company to call special meetings, provided, that the meeting is called by shareholders owning a significant percentage of the outstanding shares of the Company for a non-transitory period of time.  The Board believes that establishing a 25% ownership threshold, and one-year holding period, to request a special meeting of shareholders strikes a reasonable balance between enhancing shareholder rights and protecting against the risk that a small minority of shareholders, including shareholders with special interests, could request the Company call one or more special meetings of shareholders that could result in unnecessary financial expense and disruption to the Company’s business.  The Board believes that special meetings of shareholders should only be called to consider extraordinary events that are of interest to a broad base of shareholders and that cannot be delayed until the next annual meeting.  Additionally, preparing for a shareholder meeting requires significant attention of our Directors, Officers and other Team Members, diverting their attention away from performing their primary function of operating the Company's business in the best interests of our shareholders.

 

The 25% voting power standard will be calculated and determined in accordance with the Bylaws. The Bylaw amendments, which have been approved by our Board but which will only become effective if this amendment to the Articles of Incorporation is approved, would determine voting power by reference to record ownership. In particular, only “net long” shares (as defined in the amendments to our Bylaws attached to this proxy statement as Appendix B) which have been held for one year or longer will be counted, to ensure that the shareholders seeking to call a special meeting have a true economic and long-term interest in the Company. In addition, the Bylaw amendments would establish the procedures by which shareholders may require the Company’s Secretary to call a special meeting. The amended Bylaws would impose certain procedural requirements on shareholders requesting such a meeting (including the provision of the same information required for shareholder proposals at annual meetings under the Company’s advance notice Bylaw provisions). The amendments would also impose qualifications designed to prevent duplicative and unnecessary meetings by eliminating proposals that, among other things:

 

 

The Bylaw amendments would provide that a special meeting shall, to the extent practicable, be called within 90 calendar days after the receipt by the Company of valid requests by holders of the requisite number of shares.

 

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The Bylaw amendments have been approved by the Board but are conditioned upon shareholder approval of the amendment to the Articles of Incorporation pursuant to this proposal.

 

The proposed amendment to the Articles of Incorporation and the proposed amendments to the Bylaws are set forth in Appendix B to this proxy statement with deletions indicated by strikeouts and additions indicated by underlining. 

 

If the amendment to the Articles of Incorporation is approved, then it will become effective upon filing of an amendment to the Articles of Incorporation with the Secretary of State of the State of Missouri, which filing would be made promptly after the 2013 Annual Meeting of Shareholders. If this proposal is not approved, neither the proposed amendment to the Articles nor the related amendments to the Bylaws will take effect.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE ADOPTION AND APPROVAL OF THIS AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION.

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PROPOSAL 4 – AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION TO ELIMINATE UNNECESSARY AND OUTDATED PROVISIONS AND TO MAKE MINOR REVISIONS TO CONFORM TO CURRENT STATE LAWS AND CLARIFY

The Company’s Articles of Incorporation currently include unnecessary and outdated provisions which are no longer needed or relevant and require minor revisions to conform to current state laws and clarify.  After careful consideration and consultation with outside counsel, the Board has unanimously determined that it would be in the best interests of the Company and its shareholders to amend the Articles of Incorporation to eliminate the unnecessary and outdated provisions and to make minor revisions to further conform the Articles of Incorporation to current state laws, as well as clarifying changes. 

 

The proposed amendments to the Articles of Incorporation provide for the deletion of the provisions in Article III relating to the Series A Junior Participating Preferred Stock. These provisions were adopted in connection with the implementation of our rights plan which expired in May 2012. Accordingly, the Board is proposing to delete these provisions.

 

The proposed amendments to the Articles of Incorporation also provide for changes to the provisions in Article IX relating to indemnification.  These minor revisions will allow the Company’s Articles of Incorporation to conform to current state laws. 

 

The proposed amendments to the Articles of Incorporation are set forth in Appendix C to this proxy statement with deletions indicated by strikeouts and additions indicated by underlining. 

 

If the amendments to the Articles of Incorporation are approved, then it will become effective upon filing of an amendment to the Articles of Incorporation with the Secretary of State of the State of Missouri, which filing would be made promptly after the 2013 Annual Meeting of Shareholders. If this proposal is not approved, the proposed amendments to the Articles will not take effect.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE ADOPTION AND APPROVAL OF THIS AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION.

 

 

 

 

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PROPOSAL 5 – ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC enacted requirements for the Company to include in this proxy statement a separate resolution, subject to an advisory (non-binding) vote, to approve the compensation of its NEOs.  This proposal is commonly referred to as a “Say on Pay” proposal.  As required by these rules, the Company is asking you to vote FOR the adoption of the following resolution:

 

“Resolved, that the compensation paid to the Company’s NEOs, as disclosed in this proxy statement pursuant to Item 402 of Regulation S-K of the Securities Exchange Act of 1934, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.”

 

In considering their vote, shareholders should review the Company’s compensation of its NEOs in the Compensation Discussion and Analysis (“CD&A”) section herein and Compensation Committee report included in these proxy materials.  As described in the CD&A, the Company’s executive officer compensation programs are designed around the following elements:

 

 

The main objective of the Company’s compensation philosophy is to provide its executive officers and management with a total compensation package that is competitive and equitable, and which encourages and rewards performance based in part upon the Company’s performance in terms of increases in share value.  The Company believes that aligning the interests of its executives and management with those of its shareholders further promotes the success of not only the Company, but also its Team Members.  The Company’s executive compensation policies are focused upon both short-term and long-term incentives and goals, and it is the Company’s belief that it does not create incentives for inappropriate individual or collective risk taking.  The Company believes that the current programs do not create any incentives with respect to individual or collective behavior that are likely to have a material adverse effect upon either its risk profile or overall approach to risk management.

 

As this vote is advisory in nature, this proposal does not bind the Company to any specific course of action.  However, the Compensation Committee, which is responsible for designing and implementing its executive compensation packages, values the opinions expressed by the Company’s shareholders in this vote, and will consider the outcome of the vote when making decisions on future executive compensation packages. 

 

At the 2012 Annual Meeting, the Company’s shareholders voted in favor of an annual frequency of future advisory votes on executive compensation.  The Board has determined, after reviewing the results of this vote and based on other considerations, that it is in the best interest of the Company and the Company’s shareholders to hold an annual advisory “Say on Pay” vote until the next advisory vote on frequency of “Say on Pay” votes.  Thus, the next advisory “Say on Pay” vote will be held at the 2014 Annual Meeting.

 

Although this vote is advisory in nature and does not impose any action on the Company or the Compensation Committee of the Board, the Company strongly encourages all shareholders to vote on this matter.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE COMPANY’S EXECUTIVE OFFICER COMPENSATION AS DESCRIBED IN THIS PROXY STATEMENT.

 

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PROPOSAL 6 – RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

 

The Audit Committee of the Board has selected Ernst & Young, LLP (“E&Y”), as the Company’s independent auditors for the year ending December 31, 2013, and has further directed that management submit the selection of independent auditors for ratification by the shareholders at the Annual Meeting.  E&Y has audited the Company’s financial statements since 1992.  Representatives of E&Y are expected to be present at the Annual Meeting.  They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

None of the Company’s Bylaws, other governing documents, Missouri or federal law, or The Nasdaq Global Select Market Listing Qualifications require shareholder ratification of the selection of E&Y as the Company’s independent auditors.  However, the Audit Committee is submitting the selection of E&Y to the shareholders for ratification as a matter of good corporate practice.  If the shareholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm.  Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of different independent auditors at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and its shareholders.

 

Fees Paid to Independent Registered Public Accounting Firm

 

The following table summarizes the fees billed by E&Y for audit and other professional services during the years ended December 31, 2012 and 2011:

 

 

 

The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax and other services performed by the independent auditor.  The policy provides for preapproval by the Audit Committee of specifically defined audit and non-audit services.  Unless the specific service has been previously approved with respect to that year, the Audit Committee must approve the permitted service before the independent auditor is engaged to perform it.  The Audit Committee has delegated to the Chairman of the Audit Committee authority to approve permitted services, provided that the Chairman reports any decisions to the Committee at its next scheduled meeting.

 

The Audit Committee, after review and discussion with E&Y of the preceding information, determined that the provision of these services was compatible with maintaining E&Y’s independence.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO RATIFY THE SELECTION OF ERNST & YOUNG, LLP, AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 2013.

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EQUITY COMPENSATION PLANS

 

The following table sets forth shares authorized for issuance under the Company’s equity compensation plans as of December 31, 2012:

 

 

 

ANNUAL SHAREHOLDERS’ REPORT

 

The Annual Shareholders’ Report of the Company for the year ended December 31, 2012, containing, among other things, audited consolidated financial statements of the Company, accompanies this proxy statement.

 

FUTURE PROPOSALS OF SHAREHOLDERS

 

Shareholder proposals intended to be presented at the 2014 Annual Meeting and included in the Company’s proxy statement and form of proxy relating to that meeting pursuant to Rule 14a-8 under the Exchange Act must be received by the Company at the Company’s principal executive offices by November 22, 2013.  In order for shareholder proposals made outside of Rule 14a-8 under the Exchange Act to be considered “timely” within the meaning of Rule 14a-4(c) under the Exchange Act, the Company’s Bylaws require that such proposals must be submitted, not later than March 8, 2014, and not earlier than February 6, 2014.    

 

OTHER BUSINESS

 

The Board knows of no business to be brought before the Annual Meeting other than as set forth in this proxy statement.  If other matters properly come before the meeting, it is the intention of the persons named in the solicited proxy to vote the proxy on such matters in accordance with their judgment as to the best interests of the Company.

 

MISCELLANEOUS

 

The Company will pay the cost of soliciting proxies in the accompanying form.  In addition to solicitation by use of the mails, certain officers and regular employees of the Company may solicit the return of proxies by telephone, telegram or personal interview and may request brokerage houses and custodians, nominees and fiduciaries to forward soliciting material to their principals and will agree to reimburse them for their reasonable out-of-pocket expenses.

 

Shareholders are urged to mark, sign, date and send in their proxies without delay or vote via telephone or Internet using the instructions on the proxy card.

 

COMMUNICATION WITH THE BOARD OF DIRECTORS

 

A shareholder who wishes to communicate with the Company’s Board, specific individual Directors or the independent Directors as a group, may do so by directing a written request addressed to such Director(s) in care of the Corporate Secretary at 233 South Patterson Avenue, Springfield, Missouri, 65802 or via e-mail through its website at www.oreillyauto.com.  Such communication will be directed to the intended Director, group of Directors or the entire Board, as the case may be.

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HOUSEHOLDING OF MATERIALS

 

In some instances, only one copy of this proxy statement or Annual Report is being delivered to multiple shareholders, sharing an address, unless we have received instructions from one or more of the shareholders to continue to deliver multiple copies.  We will deliver promptly upon oral or written request a separate copy of the proxy statement or Annual Report, as applicable, to any shareholder at your address.  If you wish to receive a separate copy of the proxy statement or Annual Report, you may call us at (417) 874-7161, or send a written request to O’Reilly Automotive, Inc., 233 South Patterson Avenue, Springfield, Missouri 65802, Attention: Secretary.  Alternatively, shareholders sharing an address who now receive multiple copies of the proxy statement or Annual Report may request delivery of a single copy, also by calling us at the number or writing to us at the address listed above.

 

ADDITIONAL INFORMATION

 

Additional information regarding the Company can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed by the Company with the SEC.

 

A copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (as filed with the SEC), including financial statements and financial statement schedules (excluding exhibits), is available to shareholders without charge, upon written request to O’Reilly Automotive, Inc., 233 South Patterson Avenue, Springfield, Missouri 65802, Attention: Secretary.

 

By Order of the Board of Directors,

Tricia Headley

Secretary

Springfield, Missouri

March [  ], 2013

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