ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2017
OR
For the transition period from ________ to ________
O’REILLY AUTOMOTIVE, INC. (Exact name of registrant as specified in its charter)
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Missouri | 000-21318 | 27-4358837 | ||
(State or other jurisdiction | | Commission file | | (I.R.S. Employer |
of incorporation or organization) | | number | | Identification No.) |
233 South Patterson Avenue
Springfield, Missouri65802
(Address of principal executive offices, Zip code)
(417) 862-6708
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on which Registered | |||||
Common Stock | $0.01 par value | | ORLY | | The | ||||
| | | | | ( | ||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | | Smaller reporting company |
Emerging growth company | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At June 30, 2017,2022, the aggregate market value of the voting stock held by non-affiliates of the Company was $13,884,808,148$33,621,309,352 based on the last price of the common stock reported by The NASDAQNasdaq Global Select Market.
At February 20, 2023, an aggregate of 61,833,215 shares of common stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 20182023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 2017,2022, are incorporated by reference into Part III.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2017
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Forward-Looking Statements
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “estimate,” “may,” “could,” “will,” “believe,” “expect,” “would,” “consider,” “should,” “anticipate,” “project,” “plan,” “intend” or similar words. In addition, statements contained within this annual report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, the impact of the U.S. Tax Cuts and Jobs Act, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the economy in general, inflation,general; inflation; consumer debt levels; product demand,demand; a public health crisis; the market for auto parts, competition, weather,parts; competition; weather; tariffs; availability of key products and supply chain disruptions; business interruptions, including terrorist activities, war and the threat of war; failure to protect our brand and reputation; challenges in international markets; volatility of the market price of our common stock; our increased debt levels; credit ratings on public debt; historical growth rate sustainability; our ability to hire and retain qualified employees; risks associated with the performance of acquired businesses, our ability to hirebusinesses; damage, failure or interruption of information technology systems, including information security and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt,cyber-attacks; and governmental regulations, terrorist activities, war and the threat of war.regulations. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section ofin this annual report on Form 10-K for the year ended December 31, 2017,2022, and subsequent Securities and Exchange Commission filings, for additional factors that could materially affect our financial performance. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
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Item 1. Business
GENERAL INFORMATION
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company,” refer to O’Reilly Automotive, Inc. and its subsidiaries, collectively “we,” “us,” “our,” the “Company,” or “O’Reilly,”Subsidiaries. O’Reilly is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States (“U.S.”), selling our products to both do-it-yourself (“DIY”) and professional service provider customers, our “dual market strategy.” The business was founded in 1957 by Charles F. O’Reilly and his son, Charles H. “Chub’’ O’Reilly, Sr., and initially operated from a single store in Springfield, Missouri. Our common stock has traded on The NASDAQNasdaq Global Select Market under the symbol “ORLY” since April 22, 1993.
At December 31, 2017,2022, we operated 5,0195,929 stores in 47 states.states in the United States and 42 stores in Mexico. Our stores carry an extensive product line, including
| ● | new and remanufactured automotive hard parts and maintenance items, such as alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts, fuel pumps, hoses, starters, temperature control, water pumps, antifreeze, appearance products, engine additives, filters, fluids, lighting, oil and wiper blades; and |
| ● | accessories, such as floor mats, seat covers and truck accessories. |
Our stores offer many enhanced services and programs to our customers, such as
| ● | battery diagnostic testing; |
| ● | battery, wiper and bulb replacement; |
| ● | check engine light code extraction, where allowed by law; |
| ● | custom hydraulic hoses; |
| ● | drum and rotor resurfacing; |
| ● | electrical and module testing; |
| ● | loaner tool program; |
| ● | professional paint shop mixing and related materials; and |
| ● | used oil, oil filter and battery recycling. |
See the “Risk Factors” section of Item 1A of this annual report on Form 10-K for a description of certain risks relevant to our business. These risk factors include, among others, risks related to deteriorating economic conditions, competition in the automotive aftermarket business, our sensitivity to regional economic and weather conditions, future growth assurance, our dependence upon key and other personnel, our relationships with key suppliers and availability of key products, our acquisition strategies, complications in our distribution centers (“DCs”),business interruptions, failure to achieve high levels of serviceprotect our brand and product quality,reputation, risks associated with international operations, unanticipated fluctuations in our quarterly results, the volatility of the market price of our common stock, our increased debt levels, a downgrade in our credit ratings, datafuture growth assurance, our dependence upon key personnel, our acquisition strategies, information and systems security, damage and failure, and litigation, environmental legislation and other regulations.
OUR BUSINESS
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values, including hard work, superior customer service and expense control. Our intentmission is to be the dominant auto parts provider in all the markets we serve by providing a higher level of customer service and a better value position than our competitors to both DIY and professional service provider customers.
Competitive Advantages
We believe our effective dual market strategy, superior customer service, technically proficient store personnel, strategic distribution network and experienced management teamTeam make up our key competitive advantages, which cannot be easily duplicated.
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Proven Ability to Execute Our Dual Market Strategy:
For more than 3540 years, we have established a track record of effectively serving, at a high level, both DIY and professional service provider customers. We believe our proven ability to effectively execute a dual market strategy is a unique competitive advantage. The execution of this strategy enables us to better compete by targeting a larger base of automotive aftermarket parts consumers, capitalizing on our existing retailstore and distribution infrastructure, operating profitably in both large markets and less densely populated geographic areas that typically attract fewer competitors and enhancing service levels offered to DIY customers through the offering of a broad inventory and the extensive product knowledge required by professional service provider customers.
In 2017,2022, we derived approximately 58%56% of our sales from our DIY customers and approximately 42%44% of our sales from our professional service provider customers. Historically, we have increased our sales to professional service provider customers at a faster pace than the increase in our sales to DIY customers due to the more fragmented nature of the professional service provider business, which offers a greater opportunity for consolidation. We believe we will continue to have a competitive advantage on the professional service provider portion of our business, due to our systems, knowledge, industry-leading parts availability and experience serving the professional service provider side of the automotive aftermarket, supportedaugmented by our approximately 780725 full-time sales staff dedicated solely to calling upon and servicing the professional service provider customer. We will also continue to expand and enhance the level of offerings focused on growing our DIY business and will continue to execute our proven dual market strategy in both existing and new markets.
Superior Customer Service:
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations with a wide selection of automotive products. We believe the satisfaction of DIY and professional service provider customers is substantially dependent upon our ability to provide, in a timely fashion, the specificcorrect automotive products needed to complete their repairs. Accordingly, each O’Reilly store carries, or has same or next day availability to, a broad selection of automotive products designed to cover a wide range of vehicle applications. We continuously refine the inventory levels and assortments carried in each of our stores and within our network, based in large part on the sales movement tracked by our inventory control system, market vehicle registration data, failure rates and management’s assessment of the changes and trends in the marketplace. We have no material backorders for the products we sell.
We seek to attract new DIY and professional service provider customers and retain existing customers by offering superior customer service, the key elements of which are identified below:
| ● | superior in-store service through highly-motivated, technically-proficient store personnel (“Professional Parts People”); |
| ● | an extensive selection and superior availability of products; |
| ● | many enhanced service programs, including battery and electrical testing, battery, wiper and bulb replacement and check engine light code extractions; |
| ● | attractive stores in convenient locations; |
| ● | competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers’ quality and value preferences; |
| ● | a robust point-of-sale system integrated with our proprietary electronic catalog, which contains a wide variety of product images, schematics and technical specifications and equips our Team Members with highly effective tools to source products in our extensive supply network; |
| ● | online ordering for our professional customers through our proprietary professional customer platform, www.FirstCallOnline.com, with local delivery available; and |
| ● | online ordering, featuring “chat with a parts professional,” parts look up assistance for our DIY customers through our retail platform, www.OReillyAuto.com, with convenient store locations for pick up in store orders or home delivery. |
Technically Proficient Professional Parts People:
Our highly-motivated, technically-proficient Professional Parts People provide us with a significant competitive advantage, particularly over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be knowledgeable, particularly with respect to hard part repairs, in order to better serve the technically-oriented professional
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Strategic Regional Tiered Distribution Network:
We believe our commitment to a robust, regional, tiered distribution network provides superior replenishment and access to hard-to-find parts and enables us to optimize product availability and inventory levels throughout our store network. Our strategic, regional, tiered distribution network includes DCsdistribution centers (“DCs”) and Hub stores. Our inventory management and distribution systems electronically link each of our stores to one or more DCs, which provides for efficient inventory control and management. We currently operate 2728 regional DCs, which provide our stores with same-day or overnight access to an average of 157,000154,000 stock keeping units (“SKUs”), many of which are hard-to-find items not typically stocked by other auto parts retailers. To augment our robust distribution network, we operate 331a total of 383 Hub stores that also provide delivery service and same-day access to an average of 48,000 SKUs to other stores within the surrounding area.areas to an average of 49,000 SKUs, with Hubs in select markets carrying further enhanced inventory levels up to approximately 94,000 SKUs. More than 95% of our stores receive multiple same-day deliveries and deliveries on weekends of hard to find parts from our DCs and Hub stores. We believe this timely access to a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business.
Experienced Management Team:
Our Company philosophy is to “promote from within”within,” and the vast majority of our senior management,managers, district managers and store managers have been promoted from within the Company. We augment this promote from within philosophy by pursuing strategic hires with a strong emphasis on automotive aftermarket experience.experience, technical proficiency or subject matter expertise. We have a strong management team comprised of 190 senior managers who average 19 years of service; 244 corporate managers who average 16 years of service; and 496 district managers who average 12 years of service. Our management teamTeam that has demonstrated the consistent ability to successfully execute our business plan and growth strategy by generating 2530 consecutive years of record revenues and earnings and positive comparable store sales results since becoming a public company in April of 1993.
Growth Strategy
Aggressively Open New Stores:
We intend to continue to consolidate the fragmented automotive aftermarket. During 2017,2022, we opened 170 net, new domestic stores and 17 new stores in Mexico. In 2023, we plan to open 180 to 190 net, new stores, and we plan to open approximately 200 net, new stores in 2018, which will increase our penetration in existing markets and allow for expansion into new, contiguous markets. The sites for these new stores have been identified, and to date, we have not experienced significant difficulties in locating suitable sites for construction of new stores or identifying suitable acquisition targets for conversion to O’Reilly stores. We typically open new stores by
| (i) | constructing a new facility or renovating an existing one on property we purchase or lease and stocking the new store with fixtures and inventory; |
| (ii) | acquiring an independently owned auto parts store (“jobber store”), typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store; or |
| (iii) | purchasing multi-store chains. |
New store sites are strategically located in clusters within geographic areas that complement our distribution network in order to achieve economies of scale in management, advertising and distribution. Other key factors we consider in the site selection process include population density and growth patterns, demographic lifestyle segmentation, age and per capita income, vehicle traffic counts, vehicles in operation, number and type of existing automotive repair facilities and competing auto parts stores within a predetermined radius.
We target both small and large markets for expansion of our store network. While we have, faced, and expect to continue to face, aggressive competition in the more densely populated markets, we believe we have competed effectively, and are well positioned to continue to compete effectively, in such markets and to achieve our goal of continued profitable sales growth within these markets. We also believe that with our dual market strategy, we are better able to operate stores in less densely populated areas, which would not otherwise support a national chain store selling primarily to the retail automotive aftermarket. Therefore, we continue to pursue opening new stores in less densely populated market areas as part of our growth strategy.
Grow Sales in Existing Stores:
Profitable comparable store sales growth is also an important part of our growth strategy. To achieve improved sales and profitability at existing O’Reilly stores, we continually strive to improve the service provided to our customers. We believe that while competitive pricing is an essential component of successful growth in the automotive aftermarket business, it is customer satisfaction, whether of the DIY consumer or professional service provider, resulting from superior customer service, that generates sustainable increased sales and profitability.
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Selectively Pursue Strategic Acquisitions:
The automotive aftermarket industry is still highly fragmented, and we believe the ability of national auto parts chains, such as ourselves,like O’Reilly, to operate more efficiently and effectively than smaller independent operators will result in continued industry consolidation. Our intention is to continue to selectively pursue strategic acquisitions that will strengthen our position as a leading automotive aftermarket parts supplier in existing markets and provide a springboard for expansion into new domestic and international markets.
Continually Enhance Store Design and Location:
Our current prototype store design features optimized square footage, high ceilings, convenient interior store layouts, in-store signage, multilingual signage, bright lighting, convenient ingress and egress, andample parking and dedicated counters to serve professional service provider customers, each designed to increase sales and operating efficiencies andto enhance overall customer service. We continually update the location and condition of our store network through systematic renovation and relocation of our existing stores to enhance store performance. During 2017,2022, while experiencing macroeconomic constraints to construction timing and the supply of material and equipment, we relocated 2211 stores and renovated 25performed minor to major updates or renovations to approximately 1,300 additional stores. We believe that our ability to consistently achieve growth in comparable store sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best attract and serve our customers.
Omnichannel Growth Strategy:
Our Omnichannel growth strategies reflect the continued evolution of customer preferences in researching and Improve Customercompleting purchases. More than ever before, our customers’ purchase decisions are informed by a range of interactions, whether in-person, over the phone, or through a variety of digital channels, as they seek to find the professional parts knowledge and the product availability they need to meet their automotive repair and maintenance needs. Our Omnichannel Experience:
Team Members and 29,849 part-time Team Members), of whom 64,104 were employed at our stores, 8,148 were employed at our DCs and 3,037 were employed at our corporate and regional offices. A union represents 49 stores (477 Team Members) in the Greater Bay Area in California and has for many years. In addition, approximately 67 Team Members who drive over-the-road trucks in two of our DCs are represented by labor unions. Except for these Team Members, our Team Members are not represented by labor unions. Human Capital Management
Our tradition for 6166 years has been to treat all of our Team Members with honesty and respect and to commit significant resources to instill in them our “Live Green” culture, which emphasizes the importance of each Team Member’s contribution to the success of O’Reilly. This focus on professionalism and respect has created an industry-leading team,Team, and we consider our relations with our Team Members to be excellent.
We are committed to providing a work environment that allows Team Members to feel highly valued and to be productive and effective in their jobs by maintaining an inclusive environment and healthy work/life balance, which we believe increases employee engagement. Our ongoing emphasis on diversity and inclusion, including our policies, recruitment and selection procedures, onboarding processes and training efforts, positively builds upon our successful “promote from within” philosophy and growth strategies.
Talent Acquisition, Retention and Training:
Our Company knows the value of a tenured Team, which is why our philosophy is to “promote from within” first. As management opportunities arise, we look first within the Company and promote those who have performed well, have the right expertise and have shown leadership potential before looking outside the Company; however, we augment this philosophy by pursuing strategic hires with a strong emphasis on automotive aftermarket experience, customer service excellence, subject matter expertise, and strong culture fit. This comprehensive approach increases Team Member commitment and has resulted in a very experienced leadership Team. As of December 31, 2022, our strong management Team was comprised of 226 senior managers who average 20 years of service, 293 corporate managers who average 16 years of service and 591 district managers who average 14 years of service.
Each of our stores is staffed with a store manager and one or more assistant managers, in addition to parts specialists, retail and/or installer service specialists and other positions required to meet the specific needs of each store. Each of our 591 district managers has general supervisory responsibility for an average of 10 stores, which provides our stores with strong operational support.
We offer a variety of specific training programs that address a broad spectrum of topics from store and distribution center operations to customer service. We believe our highly trained Team of Professional Parts People is essential in providing superior customer service to both DIY and professional service provider customers. A significant portion of our business is from professional service provider customers; therefore, our Professional Parts People are required to be highly technically proficient in automotive products. In addition, we have found that the typical DIY customer often seeks assistance from Professional Parts People, particularly when purchasing hard
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parts. The ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression and is a significant factor in generating repeat DIY business.
We screen prospective Team Members to identify highly motivated individuals who either have experience with automotive parts and repairs or automotive aptitude. New store Team Members go through a comprehensive orientation focused on the culture of our Company, as well as the requirements for their specific position. Additionally, during their first year of employment, our parts specialists go through extensive automotive systems and product knowledge training to ensure they are able to provide high levels of service to our customers. Once all of the required training has been satisfied, our parts specialists become eligible to take the O’Reilly Certified Parts Professional test. Passing the O’Reilly test helps prepare them to become certified by the National Institute for Automotive Service Excellence (“ASE”).
All of our stores have the ability to service professional service provider customers. For this reason, select Team Members in each store complete extensive sales call training with a regional field sales manager. These Team Members then spend at least one day per week calling on existing and potential professional service provider customers. Each Team Member engaged in such sales activities participates in quarterly advanced training programs for sales and business development.
Additionally, store and district managers complete a comprehensive training program to ensure each has a thorough understanding of customer service, leadership, inventory management and store profitability, as well as all other sales and operational aspects of our business model. Store and district managers are also required to complete a structured training program that is specific to their position, including attending a week-long manager development program at the corporate headquarters in Springfield, Missouri. Store and district managers also receive continuous training through online training programs, field workshops, regional meetings and our annual leadership conference.
Diversity and Inclusion:
At O’Reilly, valuing diversity and inclusion is about creating an environment in which our Team Members feel included, respected and have opportunities to do their best work and achieve their greatest potential. We believe diversity within the workplace is crucial in running our business and building the best Team of Professional Parts People to serve our customers. We are committed to recruiting and building a diverse team through inclusive talent acquisition, ongoing leadership development and actively identifying emerging talent. We have worked to expand opportunities for all of our Team Members through programs designed to prepare them to take on more responsibilities at every level of the organization. We firmly believe that promoting from within is a differentiator in maximizing our diversity across the entire company. In order to ensure our diversity and inclusion efforts are successful, we survey our Team Members, provide enhanced, collaborative learning through diversity and inclusion training and resources, and build network groups, action plans and programs aimed at improving our work environments for our Team Members and customers.
Compensation, Benefits and Recognition:
Our compensation philosophy has always been to incentivize Team Members to “run it like you own it,” and we continually evaluate and benchmark our comprehensive compensation programs to ensure they remain competitive, providing an important tool to attract and retain the best and most qualified Team Members in every market. We provide financial incentives to all store Team Members through various incentive compensation programs. Store team members have the opportunity to earn incentive pay that increases their base hourly wage consistent with their individual performance or the performance of their store. Store managers, district managers, region directors and division vice presidents have the ability to earn additional compensation above their salary or base hourly wage based upon the performance of their stores. In addition, beginning with the district manager level, we augment our competitive programs with share-based compensation. We believe our incentive compensation programs significantly increase the motivation and overall performance of our Team Members.
Just as pay, benefits, and growth opportunities are critically important to our Team Members’ success, we believe it is equally important to recognize Team Members for a job well done. We regularly present many awards that range from recognizing individual service longevity to performance, allowing peer-to-peer recognition or management nomination of an individual’s excellent performance.
Team Composition:
We recognize that each and every one of our Team Members plays a very important role in our ability to provide outstanding customer service and achieve consistent, successful performance. As of January 31, 2023, we employed 87,745 Team Members (71,612 full-time Team Members and 16,133 part-time Team Members), of whom 71,582 were employed at our stores, 11,789 were employed at our DCs and 4,374 were employed at our corporate and regional offices. Ours is an increasingly technical business creating the need for knowledgeable Professional Parts People, and our ongoing focus on developing a technically proficient Team has resulted in the growth of the mix of our full-time work force, increasing from 65% at January 31, 2020 to 82% at January 31, 2023. While full-time Professional Parts People play a vital role in our ongoing success, the flexibility of incorporating part-time employment into our work force is also
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an important component of providing excellent customer service. Many of our part-time Team Members choose to work at O’Reilly while attending school, or during other transitional periods in their lives, or simply because of their passion for cars and knowledge of auto parts. Part-time Team Members have the opportunity to become career Professional Parts People because of our promote from within philosophy, and many of our leaders today began their careers as part-time Team Members in our stores or distribution centers.
A union represents 435 Team Members in 47 stores in the Greater Bay Area in California and has for many years. There are 52 Team Members that drive over-the-road trucks in two of our domestic DCs that are also represented by a labor union. Additionally, two unions represent approximately 1,076 Team Members in Mexico. We consider our current relationship with these unions and union Team Members to be excellent. With the exception of the previously described Team Members, our Team Members are not represented by labor unions.
Additional information about our Team Member population and human capital management practices can be found in our most recent Sustainability, Social, and Governance report, which is available on our website at www.OReillyAuto.com. Our Sustainability, Social, and Governance report is not, and will not be deemed to be, a part of this annual report on Form 10-K for the year ended December 31, 2022, or incorporated by reference into any of our other filings with the Securities and Exchange Commission.
Store Network
New Store Site Selection:
In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in management, advertising and distribution. Other key factors we consider in the site selection process are
| ● | population density; |
| ● | demographics, including age, life style and per capita income; |
| ● | market economic strength, retail draw and growth patterns; |
| ● | number, age and percent of makes and models of registered vehicles; |
| ● | the number, type and sales potential of existing automotive repair facilities; |
| ● | the number of auto parts stores and other competitors within a predetermined radius; |
| ● | physical location, traffic count, size, economics and presentation of the site; |
| ● | financial review of adjacent existing locations; and |
| ● | the type and size of store that should be developed. |
When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve economies of scale. After opening this initial cluster of new stores, we begin penetrating the less densely populated surrounding areas. As these store clusters mature, we evaluate the need to open additional locations in the more densely populated markets where we believe opportunities exist to expand our market share or to improve the level of service provided in high volume areas. This strategy enables us to achieve additional distribution and advertising efficiencies in each market.
Store Locations and Size:
As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and small, less densely populated areas that would not otherwise support a national chain selling primarily to the retail automotive aftermarket. Our U.S. stores, on average, carry approximately 23,00022,000 SKUs and average approximately 7,3007,500 total square feet in size. At December 31, 2017,2022, we had a total of approximately 3745 million square feet in our 5,0195,929 domestic stores. Our domestic stores are served primarily by the nearest DC, which averages 157,000154,000 SKUs, but also have same-day access to the broad selection of inventory available at one of our 331383 Hub stores which, onthat average carry approximately 48,000 SKUs and average approximately 10,90012,700 square feet in size.
We believe that our stores are “destination stores’’stores” generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity. Consequently, most of our stores are freestanding buildings or prominent end caps situated on or near major traffic thoroughfares and offer ample parking, easy customer access and are generally located in close proximity to our professional service provider customers.
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The following table sets forth the geographic distribution and opening activity of our stores as of December 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | 2022 Net, New Stores | | December 31, 2022 | ||||||||||||
| | |
|
| | |
| % of Total | | |
|
| | Cumulative | ||||
| | Store | | % of Total | | Store | | Store | | Store | | % of Total | | % of Total | ||||
State | | Count | | Store Count | | Growth | | Growth | | Count | | Store Count | | Store Count | ||||
Texas | | 775 | | 13.5 | % | | 23 |
| 13.5 | % | | 798 | | 13.5 | % | | 13.5 | % |
California | | 570 | | 9.9 | % | | 9 |
| 5.3 | % | | 579 | | 9.8 | % | | 23.3 | % |
Florida | | 259 | | 4.5 | % | | 16 |
| 9.4 | % | | 275 | | 4.6 | % | | 27.9 | % |
Georgia | | 231 | | 4.0 | % | | 2 |
| 1.2 | % | | 233 | | 3.9 | % | | 31.8 | % |
Illinois | | 220 | | 3.8 | % | | 7 |
| 4.1 | % | | 227 | | 3.8 | % | | 35.6 | % |
Ohio | | 217 | | 3.8 | % | | 7 |
| 4.1 | % | | 224 | | 3.8 | % | | 39.4 | % |
North Carolina | | 211 | | 3.7 | % | | 5 |
| 2.8 | % | | 216 | | 3.6 | % | | 43.0 | % |
Missouri | | 206 | | 3.6 | % | | 1 |
| 0.6 | % | | 207 | | 3.5 | % | | 46.5 | % |
Tennessee | | 191 | | 3.3 | % | | 8 |
| 4.7 | % | | 199 | | 3.4 | % | | 49.9 | % |
Michigan | | 186 | | 3.2 | % | | 1 |
| 0.6 | % | | 187 | | 3.2 | % | | 53.1 | % |
Indiana | | 160 | | 2.7 | % | | 8 |
| 4.7 | % | | 168 | | 2.8 | % | | 55.9 | % |
Washington | | 161 | | 2.7 | % | | 4 |
| 2.4 | % | | 165 | | 2.8 | % | | 58.7 | % |
Alabama | | 156 | | 2.6 | % | | 1 |
| 0.6 | % | | 157 | | 2.6 | % | | 61.3 | % |
Arizona | | 145 | | 2.5 | % | | 3 |
| 1.8 | % | | 148 | | 2.5 | % | | 63.8 | % |
Louisiana | | 136 | | 2.4 | % | | 7 |
| 4.1 | % | | 143 | | 2.3 | % | | 66.1 | % |
Wisconsin | | 129 | | 2.2 | % | | 3 |
| 1.8 | % | | 132 | | 2.2 | % | | 68.3 | % |
Minnesota | | 128 | | 2.2 | % | | 3 |
| 1.8 | % | | 131 | | 2.2 | % | | 70.5 | % |
Oklahoma | | 125 | | 2.2 | % | | — |
| — | % | | 125 | | 2.1 | % | | 72.6 | % |
South Carolina | | 119 | | 2.1 | % | | 6 |
| 3.4 | % | | 125 | | 2.1 | % | | 74.7 | % |
Arkansas | | 119 | | 2.1 | % | | 3 |
| 1.8 | % | | 122 | | 2.1 | % | | 76.8 | % |
Colorado | | 111 | | 1.9 | % | | 8 |
| 4.7 | % | | 119 | | 2.0 | % | | 78.8 | % |
Kentucky | | 108 | | 1.9 | % | | 1 |
| 0.6 | % | | 109 | | 1.8 | % | | 80.6 | % |
Virginia | | 94 | | 1.6 | % | | 5 |
| 2.8 | % | | 99 | | 1.7 | % | | 82.3 | % |
Kansas | | 86 | | 1.5 | % | | 1 |
| 0.6 | % | | 87 | | 1.5 | % | | 83.8 | % |
Mississippi | | 84 | | 1.5 | % | | 1 |
| 0.6 | % | | 85 | | 1.4 | % | | 85.2 | % |
Iowa | | 81 | | 1.4 | % | | 2 |
| 1.2 | % | | 83 | | 1.4 | % | | 86.6 | % |
Oregon | | 72 | | 1.3 | % | | 2 |
| 1.2 | % | | 74 | | 1.2 | % | | 87.8 | % |
Utah | | 67 | | 1.2 | % | | 4 |
| 2.4 | % | | 71 | | 1.2 | % | | 89.0 | % |
New Mexico | | 62 | | 1.1 | % | | 3 |
| 1.8 | % | | 65 | | 1.1 | % | | 90.1 | % |
Nevada | | 59 | | 1.0 | % | | 1 |
| 0.6 | % | | 60 | | 1.0 | % | | 91.1 | % |
Massachusetts | | 56 | | 1.0 | % | | 2 |
| 1.2 | % | | 58 | | 1.0 | % | | 92.1 | % |
Idaho | | 48 | | 0.8 | % | | 4 |
| 2.4 | % | | 52 | | 0.9 | % | | 93.0 | % |
Nebraska | | 51 | | 0.9 | % | | — |
| — | % | | 51 | | 0.9 | % | | 93.9 | % |
Pennsylvania | | 39 | | 0.7 | % | | 5 |
| 2.8 | % | | 44 | | 0.7 | % | | 94.6 | % |
Maine | | 34 | | 0.6 | % | | 3 |
| 1.8 | % | | 37 | | 0.6 | % | | 95.2 | % |
New Hampshire | | 35 | | 0.6 | % | | 1 |
| 0.6 | % | | 36 | | 0.6 | % | | 95.8 | % |
Connecticut | | 27 | | 0.5 | % | | 3 |
| 1.8 | % | | 30 | | 0.5 | % | | 96.3 | % |
Montana | | 28 | | 0.5 | % | | 1 |
| 0.6 | % | | 29 | | 0.5 | % | | 96.8 | % |
New York | | 24 | | 0.4 | % | | 2 |
| 1.2 | % | | 26 | | 0.4 | % | | 97.2 | % |
Vermont | | 24 | | 0.4 | % | | — |
| — | % | | 24 | | 0.4 | % | | 97.6 | % |
Wyoming | | 23 | | 0.4 | % | | — |
| — | % | | 23 | | 0.4 | % | | 98.0 | % |
West Virginia | | 22 | | 0.4 | % | | 1 |
| 0.6 | % | | 23 | | 0.4 | % | | 98.4 | % |
South Dakota | | 20 | | 0.3 | % | | 1 |
| 0.6 | % | | 21 | | 0.4 | % | | 98.8 | % |
Alaska | | 16 | | 0.3 | % | | — |
| — | % | | 16 | | 0.3 | % | | 99.1 | % |
North Dakota | | 16 | | 0.3 | % | | — |
| — | % | | 16 | | 0.3 | % | | 99.4 | % |
Rhode Island | | 15 | | 0.3 | % | | — |
| — | % | | 15 | | 0.3 | % | | 99.7 | % |
Hawaii | | 13 | | 0.2 | % | | 2 |
| 1.2 | % | | 15 | | 0.3 | % | | 100.0 | % |
Total U.S. stores | | 5,759 | | 100.0 | % | | 170 | | 100.0 | % | | 5,929 | | 100.0 | % | | | |
| | | | | | | | | | | | | | | | | | |
Mexico | | 25 | | | | | 17 | | | | | 42 | | | | | | |
Total stores |
| 5,784 |
| | | | 187 |
| | | | 5,971 |
| | | |
| |
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| December 31, 2016 | 2017 Net, New Stores | December 31, 2017 | |||||||||||||||||||
| State | Store Count | % of Total Store Count | Store Change | % of Total Store Change | Store Count | % of Total Store Count | Cumulative % of Total Store Count | ||||||||||||||
| Texas | 667 | 13.8 | % | 23 | 12.1 | % | 690 | 13.7 | % | 13.7 | % | ||||||||||
| California | 534 | 11.0 | % | 7 | 3.7 | % | 541 | 10.8 | % | 24.5 | % | ||||||||||
| Missouri | 195 | 4.0 | % | 5 | 2.6 | % | 200 | 4.0 | % | 28.5 | % | ||||||||||
| Georgia | 187 | 3.9 | % | 9 | 4.7 | % | 196 | 3.9 | % | 32.4 | % | ||||||||||
| Illinois | 186 | 3.9 | % | 7 | 3.7 | % | 193 | 3.8 | % | 36.2 | % | ||||||||||
| Florida | 163 | 3.4 | % | 17 | 8.9 | % | 180 | 3.6 | % | 39.8 | % | ||||||||||
| Ohio | 169 | 3.5 | % | 11 | 5.8 | % | 180 | 3.6 | % | 43.4 | % | ||||||||||
| Tennessee | 162 | 3.4 | % | 5 | 2.6 | % | 167 | 3.3 | % | 46.7 | % | ||||||||||
| Michigan | 158 | 3.3 | % | 4 | 2.1 | % | 162 | 3.2 | % | 49.9 | % | ||||||||||
| North Carolina | 155 | 3.2 | % | 7 | 3.7 | % | 162 | 3.2 | % | 53.1 | % | ||||||||||
| Washington | 155 | 3.2 | % | 1 | 0.5 | % | 156 | 3.1 | % | 56.2 | % | ||||||||||
| Arizona | 136 | 2.8 | % | 1 | 0.5 | % | 137 | 2.7 | % | 58.9 | % | ||||||||||
| Alabama | 125 | 2.6 | % | 7 | 3.7 | % | 132 | 2.6 | % | 61.5 | % | ||||||||||
| Indiana | 120 | 2.5 | % | 6 | 3.2 | % | 126 | 2.5 | % | 64.0 | % | ||||||||||
| Minnesota | 119 | 2.5 | % | 3 | 1.6 | % | 122 | 2.4 | % | 66.4 | % | ||||||||||
| Oklahoma | 121 | 2.5 | % | — | 0.0 | % | 121 | 2.4 | % | 68.8 | % | ||||||||||
| Wisconsin | 118 | 2.4 | % | 2 | 1.1 | % | 120 | 2.4 | % | 71.2 | % | ||||||||||
| Louisiana | 109 | 2.3 | % | 7 | 3.7 | % | 116 | 2.3 | % | 73.5 | % | ||||||||||
| Arkansas | 107 | 2.2 | % | 3 | 1.6 | % | 110 | 2.2 | % | 75.7 | % | ||||||||||
| South Carolina | 91 | 1.9 | % | 13 | 6.7 | % | 104 | 2.1 | % | 77.8 | % | ||||||||||
| Colorado | 99 | 2.1 | % | 2 | 1.1 | % | 101 | 2.0 | % | 79.8 | % | ||||||||||
| Kentucky | 77 | 1.6 | % | 11 | 5.8 | % | 88 | 1.8 | % | 81.6 | % | ||||||||||
| Kansas | 82 | 1.7 | % | 2 | 1.1 | % | 84 | 1.7 | % | 83.3 | % | ||||||||||
| Mississippi | 75 | 1.6 | % | — | 0.0 | % | 75 | 1.5 | % | 84.8 | % | ||||||||||
| Iowa | 73 | 1.5 | % | 1 | 0.5 | % | 74 | 1.5 | % | 86.3 | % | ||||||||||
| Virginia | 66 | 1.4 | % | 8 | 4.2 | % | 74 | 1.5 | % | 87.8 | % | ||||||||||
| Oregon | 66 | 1.4 | % | 3 | 1.6 | % | 69 | 1.4 | % | 89.2 | % | ||||||||||
| Utah | 61 | 1.3 | % | — | 0.0 | % | 61 | 1.2 | % | 90.4 | % | ||||||||||
| Nevada | 54 | 1.1 | % | 1 | 0.5 | % | 55 | 1.1 | % | 91.5 | % | ||||||||||
| New Mexico | 52 | 1.1 | % | 1 | 0.5 | % | 53 | 1.1 | % | 92.6 | % | ||||||||||
| Nebraska | 41 | 0.8 | % | 2 | 1.1 | % | 43 | 1.0 | % | 93.6 | % | ||||||||||
| Idaho | 40 | 0.8 | % | 2 | 1.1 | % | 42 | 0.9 | % | 94.5 | % | ||||||||||
| Maine | 35 | 0.7 | % | — | 0.0 | % | 35 | 0.7 | % | 95.2 | % | ||||||||||
| New Hampshire | 38 | 0.8 | % | (3 | ) | (1.6 | )% | 35 | 0.7 | % | 95.9 | % | |||||||||
| Massachusetts | 30 | 0.6 | % | 2 | 1.1 | % | 32 | 0.6 | % | 96.5 | % | ||||||||||
| Montana | 27 | 0.6 | % | — | 0.0 | % | 27 | 0.5 | % | 97.0 | % | ||||||||||
| Vermont | 24 | 0.5 | % | — | 0.0 | % | 24 | 0.5 | % | 97.5 | % | ||||||||||
| Wyoming | 20 | 0.4 | % | 1 | 0.5 | % | 21 | 0.4 | % | 97.9 | % | ||||||||||
| Pennsylvania | 12 | 0.2 | % | 5 | 2.6 | % | 17 | 0.3 | % | 98.2 | % | ||||||||||
| South Dakota | 16 | 0.3 | % | 1 | 0.5 | % | 17 | 0.3 | % | 98.5 | % | ||||||||||
| Alaska | 15 | 0.3 | % | — | 0.0 | % | 15 | 0.3 | % | 98.8 | % | ||||||||||
| North Dakota | 15 | 0.3 | % | — | 0.0 | % | 15 | 0.3 | % | 99.1 | % | ||||||||||
| West Virginia | 12 | 0.2 | % | 3 | 1.6 | % | 15 | 0.3 | % | 99.4 | % | ||||||||||
| Connecticut | 5 | 0.1 | % | 7 | 3.7 | % | 12 | 0.2 | % | 99.6 | % | ||||||||||
| Hawaii | 12 | 0.2 | % | — | 0.0 | % | 12 | 0.2 | % | 99.8 | % | ||||||||||
| Rhode Island | 3 | 0.1 | % | 2 | 1.1 | % | 5 | 0.1 | % | 99.9 | % | ||||||||||
| New York | 2 | — | % | 1 | 0.5 | % | 3 | 0.1 | % | 100.0 | % | ||||||||||
| Total | 4,829 | 100.0 | % | 190 | 100.0 | % | 5,019 | 100.0 | % | ||||||||||||
Distribution Systems
We believe that our tiered distribution model provides industry-leading parts availability and store in-stock positions, while loweringoptimizing our inventory carrying costsinvestment by controlling the depth of our store stocked inventory. Moreover, we believeOur distribution expansion strategy, supported by our ongoing, significant capital investments, made in our DC network allow us to efficiently service new stores that are planned to open in contiguous market areas as well as servicing our existing store network. Our distribution expansion strategy complements our new store opening strategy by supporting newly established clusters of stores, and additional penetration into existing markets, in the regions surrounding each DC.
Distribution Centers:
As of December 31, 2022, we operated 2728 domestic DCs comprised of approximately 10.812.1 million operating square feet (see the “Properties” table in Item 2 of this annual report on Form 10-K for a detailed listing ofmore information about DC operating square footages). Our DCs stock an average of 157,000154,000 SKUs and most DCs are linked to and have the abilityaccess to access multiple other regional DCs’ inventory. Our DCs provide five-night-a-week delivery, primarily via a Company-owned fleet, to substantially all of our stores in the continental United States. In addition, stores within an individual DC’s metropolitan area receive multiple daily deliveries from the DC’s “city counter,” many of which receive this service seven days per week. Our DCs provide weekend service to not only the stores they service via their city counters but also to strategic Hub locations, which redistribute products to surrounding stores. Our national Hub store network provides additional service throughout the week, and on weekends, to surrounding stores.
As part of our continuing efforts to enhance our distribution network in 2018,2023, we plan to
| ● | continue to enhance our distribution network through the engineering, design, expansion or relocation of new or current DCs; |
| ● | continue to utilize routing software to enhance logistics efficiencies; |
| ● | continue to implement labor management software to improve DC productivity and overall operating efficiency; |
| ● | continue to define and implement best practices in all DCs; |
| ● | make proven, return-on-investment based capital enhancements to material handling equipment in DCs, including conveyor systems, picking modules, lift equipment and computer hardware; and |
| ● | continue to augment our robust distribution network, when and where appropriate, through the use of strategically located Hubs. |
Hub stores:
We currently operate 331a total of 383 strategically located Hub stores. In addition to serving DIY and professional service provider customers in their markets, Hub stores also provide delivery service to our other stores within the surrounding area and access to an expanded selection of SKUs on a same-day basis. Our Hub storesstore network consists of 383 Hubs that average approximately 10,90012,700 square feet and carry an average of 48,00049,000 SKUs, with Hubs in select markets carrying further enhanced inventory levels up to approximately 94,000 SKUs.
Products and Purchasing
Our stores offer DIY and professional service provider customers a wide selection of products for domestic and imported automobiles, vans and trucks. Our merchandise generally consists of nationally recognized, well-advertised, premium name brand products, such as AC Delco, Armor All, Bosch, BWD, Cardone, Castrol, Dorman, Fel-Pro, Gates Rubber, Lucas Oil, Mobil1, Monroe, Moog, Pennzoil, Prestone, Quaker State,Standard, STP, Turtle Wax, Valvoline, Wagner, and Wix, and a wide selection of quality proprietary private label products, which span the entire good, better and best value spectrum, under our BestTest®BesTest®, BrakeBest®, Cartek®, Import Direct®, Master Pro®MasterPro®, Micro-Gard®MicroGard®, Murray®, Omnispark®, O’Reilly Auto Parts®, Precision®, Power Torque®, Super Start®, Syntec®, and Ultima® brands. Our proprietary private label products are produced by nationally recognizedrespected automotive manufacturers, meet or exceed original equipment manufacturer specifications and consist of house brands and nationally recognized proprietary bands, which we have acquired or developed over time. Our “good” proprietary brands provide a great combination of quality and value, a characteristic important to our DIY customers, while our “better” and “best” proprietary brands offer options for our more heavy-duty DIY customers, as well as our professional service provider customers, who often prefer higher quality products that can be relied upon to support and grow their businesses.
We have no long-term contracts with material purchase commitments with any of our suppliers, nor have we experienced difficulty in obtaining satisfactory alternative supply sources for automotive parts. We believe that alternative supply sources exist at competitive costs for substantially all of the automotive products that we sell. It is our policy to take advantage of payment and seasonal purchasing discounts offered by our suppliers and to utilize extended dating terms available from suppliers. We have entered into various programs
12
and arrangements with certain suppliers that provided for extended dating and payment terms for inventory purchases. As a whole, we consider our relationships with our suppliers to be very good.
We purchase automotive products in substantial quantities from over 950815 suppliers, the five largest of which accounted for approximately 24% of our total purchases in 2017.2022. Our largest supplier in 20172022 accounted for approximately 6%7% of our total purchases and the next four largest suppliers each accounted for approximately 3% to 5%6% of our total purchases.
Marketing
Retail and Online Marketing:
Our integrated marketing program, which includes radio, direct mailstrategy and newspaper distribution,Omnichannel efforts include national media channels, in-store, digital and social media promotions,activation, as well as marketing the O’Reilly brand through automotive event sponsorships and on-site appearances throughout the country. Our O’Rewards loyalty program encourages repeat customers, as they accumulate points from their O’Reilly purchases that are redeemable for rewards at various purchase levels. Our marketing efforts also target the Spanish-speaking market through broadcast media, print and sports and event sponsorships, to aggressively attract DIY customers. The marketing, strategy we employ is highly effective and has led to a measurable increase in awareness of the O’Reilly Brand across our geographic footprint. We utilize a combination of brand, product and price messaging to drive retail traffic and purchases, which frequently coincide with key sales events. We also utilize a problem-resolution communication strategy, which encourages vehicle owners to perform regular maintenance on their vehicles, protecting their long-term automotive investment and establishing O’Reilly as their partner for auto parts needs.
Professional Marketing:
To develop our customers. Search engine optimization and paid search strategies are used to drive traffic to our website, and popular social media platforms are used to provide excellent customer service through interaction and dialoguecontinued relationships with our customers.
INDUSTRY ENVIRONMENT
The automotive aftermarket industry includes all products and services purchased for light and heavy-duty vehicles after the original sale. The total size of the automotive aftermarket is estimated to be approximately $287$357 billion, according to Thethe Auto Care Association. This market is made up of four segments: labor share of professional service provider sales, auto parts share of professional service provider sales, DIY sales and tire sales. We estimate that O’Reilly’s addressable market within this industry is approximately $90$130 billion to $140 billion, which includes the auto parts share of professional service provider sales at wholesale and DIY sales.sales at retail. We do not sell tires or perform for-fee automotive repairs or installations.
Competition
The sale of automotive aftermarket items is highly competitive in many areas, including customer service, product availability, store location, brand recognition and price. We compete in both the DIY and professional service provider portions of the automotive aftermarket and are one of the largest specialty retailers within that market. We compete primarily with
| ● | national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, CARQUEST and NAPA); |
| ● | regional retail and wholesale automotive parts chains; |
| ● | wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as NAPA, CARQUEST, Bumper to Bumper and Auto Value); |
| ● | automobile dealers; and |
| ● | mass merchandisers and online retailers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc. and Amazon.com, Inc.). |
We compete on the basis of customer service, which includes merchandise selection and availability, technical proficiency and helpfulness of store personnel, price, store layout, the Omnichannel experience and convenient and accessible store locations. Our dual market strategy requires significant capital, such asincluding the capital expenditures required for our distribution and store networks and working capital needed to
13
Inflation and Seasonality
We have generally been successful in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition costs increaseincreased due to price increases industry wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations have been materially, adversely affected by inflation.
To some extent our business is seasonal, primarily as a result of the impact of weather conditions on customer buying patterns. StoreWhile we have historically realized operating profits in each quarter of the year, our store sales, profits and inventory levels have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
Regulations
We are subject to federal, state and local laws and governmental regulations relating to our business, as well as the health and safety of our Team Members and customers, including, but not limited to, those related to the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants and the ownership and operation of real property.
As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous materials onto our property in connection with, for example, our used oil, oil filter and battery recycling programs. We currently provide a recycling program for batteries and the collection of used lubricants at certain stores as a service to our customers pursuant to agreements with third-party suppliers. The batteries and used lubricants are collected by our Team Members, deposited into supplier-provided containers and pallets and then disposed ofrecycled by the third-party suppliers. In general, our agreements with such suppliers contain provisions that are designed to limit our potential liability under applicable environmental regulations for any damage or contamination, which may be caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused by the supplier.
Compliance with any such laws and regulations has not had a material adverse effect on our operations to date. However, we cannot give any assurance that we will not incur significant expenses in the future in order to comply with any such laws or regulations.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Gregory D. Johnson, age 57, Chief Executive Officer, has been an O’Reilly Team Member for 33 years. Mr. Henslee’s O’Reilly career began as40 years, which includes continuous years of service with a Parts Specialist and progressed through the roles of Assistant Store Manager, District Manager, Computer Operations Manager, Director of Computer Operations and Loss Prevention, Vice President of Store Operations, Senior Vice President of Information Systems, Inventory Control, Customer Service, Computer Operations, Pricing and Loss Prevention, Co-President, Chief Executive Officer and Co-President, and Chief Executive Officer and President. Mr. Henslee has held the position of Chief Executive Officer since 2005. In November 2017, Mr. Henslee was appointed to the Board of Directors. Mr. Henslee has been nominated as Executive Vice Chairman of the Board and will serve in that role, subject to his election as a director at O’Reilly’s Annual Shareholders’ Meeting on May 8, 2018.
Brad Beckham, age 55,44, Co-President, has been an O’Reilly Team Member for 29 years. Mr. Shaw’s primary areas of responsibility are Store Operations, Sales, Distribution Operations, Real Estate, Jobber Sales and Acquisitions. Mr. Shaw’s O’Reilly career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Vice President of the Southern Division, Vice President of Sales and Operations, Senior Vice President of Sales and Operations, and Executive Vice President
Brent G. Kirby, age 54, Co-President, has been an O’Reilly Team Member since 2018. Mr. Kirby’s primary areas of responsibility are Merchandise, Distribution, Logistics, Inventory Management, Pricing, Store Design, Marketing, Advertising/Marketing, Electronic Catalog, Customer Satisfaction, Omnichannel and Information Technology. Mr. Kirby began his retail career of over 35 years with Lowe’s Companies, Inc. (“Lowe’s”) as a hardware associate and progressed through various positions at the store, district and, regional levels before being promoted to Senior Vice President of Store Operations and later Chief Omnichannel Officer. In 2018, Mr. Kirby O’Reilly career began as Senior Vice President of Omnichannel and progressed through the roles of Executive Vice President of Supply Chain and Executive Vice President and Chief Supply Chain Officer. Mr. Kirby has held the position of Co-President since January of 2023.
14
Doug Bragg, age 53, Executive Vice President of Operations and Sales, has been an O’Reilly Team Member for 32 years. Mr. Bragg’s primary areas of responsibility are Store Operations and Sales for O’Reilly U.S. Store Operations. Mr. Bragg’s O’Reilly career began as a Distribution Center Team Member and progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Manager, Divisional Vice President, and Senior Vice President of Central Store Operations.Operations and Sales. Mr. BeckhamBragg has held the position of Executive Vice President of Store Operations and Sales since January of 2018.
Jeremy Fletcher, age 47,45, Executive Vice President and Chief Financial Officer, has been an O’Reilly Team Member for 1117 years. Mr. Fletcher’s primary areas of responsibility are Finance, Accounting, Credit and Collections, Financial Planning, Tax, Treasury, and Investor Relations. Mr. Fletcher’s O’Reilly career began as the Financial Reporting and Budgeting Manager and progressed through the roles of Director of Finance, Vice President of Finance and Controller, and Senior Vice President of Finance and Controller. Prior to joining O’Reilly, Mr. Fletcher worked as a Certified Public Accountant in public practice and in a financial reporting and planning role for a Fortune 1000 corporation. Mr. Fletcher has held the position of Executive Vice President and Chief Financial Officer since May of 2022.
Tom McFall, age 52, Executive Vice President, has been an O’Reilly Team Member for 16 years. Mr. McFall’s primary areas of responsibility are Finance, Accounting, Information Technology, Legal, Real Estate and Risk Management. Mr. McFall’s career began with Ernst & Young LLP in Detroit, Michigan, where he achieved the position of Audit Manager, before accepting a position with Murray’s Discount Auto Stores (“Murray’s”). Mr. McFall served Murray’s for eight years through the roles of Controller, Vice President of Finance, and Chief Financial Officer, with direct responsibility for finance, accounting and distribution and logistics operations. After Murray’s was acquired by CSK Auto Corporation (“CSK”) in 2005, Mr. McFall held the position of Chief Financial Officer of Midwest Operation for CSK. In May of 2006, Mr. McFall joined O’Reilly as Senior Vice President of Finance and Chief Financial Officer. Mr. McFall held the position of Chief Financial Officer from 2006 until May of 2022. Mr. McFall has held the position of Executive Vice President since 2007 and Chief Financial Officer since 2007.
Jonathan Andrews, age 48,55, Senior Vice President of Central Store OperationsHuman Resources and Sales,Training, has been an O’Reilly Team Member for 2710 years. Mr. Bragg’sAndrews’s primary areas of responsibility are Store OperationsHuman Resources and SalesTraining. Mr. Andrews has over 30 years of human resources experience. Mr. Andrews’s career includes human resource positions with Cargill, Inc., Tyson Foods, Inc. and AutoNation, Inc. Mr. Andrews served AutoNation for 10 years as Director of Human Resources and Senior Director of Human Resources. In 2012, Mr. Andrews joined O’Reilly Central Store Operations. Mr. Bragg’s O’Reilly career began as a Distribution Center Team MemberVice President of Human Resources and progressed through the rolesrole of Assistant Store Manager, Store Manager, District Manager, Regional Manager,Vice President of Human Resources and Divisional Vice President.Training. Mr. BraggAndrews has held the position of Senior Vice President of Central Store OperationsHuman Resources and Training since January of 2018.
Robert Dumas
, age
Larry L. Ellis
,age
Jeffrey L. Groves
, age
Philip M. Hopper, age 41, Senior Vice President of Real Estate and Expansion, has been an O’Reilly Team Member for 1911 years. Mr. Kraus’sHopper’s primary areas of responsibility are Real Estate Expansion and Acquisitions. Mr. Kraus’sHopper’s O’Reilly career began as a Parts SpecialistReal Estate Counsel and progressed through the roles of Store Manager, District Manager, Regional Field Sales Manager, Regional Manager, DivisionalDirector of Property Management, Vice President of Real Estate Expansion and Property Management, and Vice President of Real Estate.Estate Development. Mr. KrausHopper has held the position of Senior Vice President of Real Estate and Expansion since 2016.
15
Jeffrey A. Lauro, age 51,56, Senior Vice President of Information Technology, has been an O’Reilly Team Member since 2015.for seven years. Mr. Lauro’s primary area of responsibility is Information Technology. Mr. Lauro has over 2535 years of information technology experience
Chris Mancini, age 37,45, Senior Vice President of Central Store Operations and Sales, has been an O’Reilly Team Member for 19 years. Mr. Mancini’s primary areas of responsibility are Store Operations and Sales for O’Reilly Central Store Operations. Mr. Mancini’s O’Reilly career began as an Installer Service Specialist and progressed through the roles of Store Manager, District Manager, Regional Director, Mid-Atlantic Division Vice President, and Western Division Vice President. Mr. Mancini has held the position of Senior Vice President of Central Store Operations and Sales since January of 2022.
Mark J. Merz, age 51, Senior Vice President of Finance, has been an O’Reilly Team Member for 15 years. Mr. Merz’s primary areas of responsibility are Finance, Accounting, Credit and Collections, Financial Planning, Tax, Treasury, and Investor Relations. Mr. Merz’s O’Reilly career began as a Senior Accountant and progressed through the roles of External Reporting and Investor Relations Manager, Director of External Reporting and Investor Relations, and Vice President of Investor Relations, Financial Reporting and Planning. Prior to joining O’Reilly, Mr. Merz worked for nine years as a Controller for a privately held company. Mr. Merz has held the position of Senior Vice President of Finance since May of 2022.
Chuck Rogers, age 55, Senior Vice President of Professional Sales and Store Operations Support, has been an O’Reilly Team Member for 32 years. Mr. Rogers’s primary areas of responsibility are Professional Sales, Store Operations and Retail Systems, and Jobber Sales. Mr. Rogers’s O’Reilly career began as a Delivery Specialist and progressed through the roles of various store positions, Assistant Computer Sales and Services Coordinator, Installer Systems Manager, National Accounts/Installer Systems Manager, Director of Sales Administration, and Vice President of Professional Sales. Mr. Rogers has held the position of Senior Vice President of Professional Sales and Store Operations Support since January of 2022.
Jason Tarrant, age 42, Senior Vice President of Western Store Operations and Sales, has been an O’Reilly Team Member for 16 years*.21 years, which includes continuous years of service with a company acquired by O’Reilly. Mr. Tarrant’s primary areas of responsibility are Store Operations and Sales for O’Reilly Western Store Operations. Mr. Tarrant’s O’Reilly career began as a Parts Specialist and progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Field Sales Manager, Regional Manager, and Divisional Vice President. Mr. Tarrant has held the position of Senior Vice President of Western Store Operations and Sales since January of 2018.
Darin Venosdel
, age
David Wilbanks
, age
SERVICE MARKS AND TRADEMARKS
We have registered, acquired and/or been assigned the following service marks and trademarks:trademarks in the United States: BENNETT AUTO SUPPLY®; BESTEST®; BETTER PARTS. BETTER PRICES.®; BETTER PARTS, BETTER PRICES....EVERYDAY!®; BOND AUTO PARTS®; BRAKEBEST®; BRAKEBEST HD®; BRAKEBEST SELECT®; CARTEK®; CARTEK PRO®; CERTIFIED AUTO REPAIR®; CHECKER AUTO PARTS®; CUSTOMIZE YOUR RIDE®; CSK PROSHOP®DEPENDABILITY YOU CAN COUNT ON®; DO IT RIGHT DEALS®; DO IT RIGHT REBATE®; EARN POINTS EVERY WAY YOU SHOP®; FIRST CALL®; FLEET & HEAVY
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DUTY PROFESSIONAL PARTS PEOPLE®; FORMULATED FOR TODAY’S ENGINES®; FRIENDLIEST PARTS STORE IN TOWN®; FROM OUR STORE TO YOUR DOOR®; IMPORT DIRECT®; IMPORT DIRECT OE REPLACEMENT PARTS®; KRAGEN AUTO PARTS®; MASTER PRO®; MASTER PRO REFINISHING®; MASTERPRO SELECT®; MASTERPRO UNDERCAR®; MICROGARD®; MICROGARD HEPA®; MURRAY®; MURRAY CLIMATE CONTROL®; MURRAY TEMPERATURE CONTROL®; MURRAY’S MASCOT® (Design only); MURRAY PLUS®; MURRAY ULTRA®; MURRAY’S AUTO PARTS®; O LOW PRICE GUARANTEE! ®; O® (Shamrock inside of “O”); OMNISPARK®; O’REILLY®; O’REILLY AUTO COLOR PROFESSIONAL PAINT PEOPLE®; O’REILLY AUTO PARTS®; O’REILLY AUTO PARTS PROFESSIONAL PARTS PEOPLE®; O’REILLY AUTOMOTIVE®; O’REILLY O’REWARDS®; O’REILLY RACING®SELECT®; O’REWARDS®; ORIGINAL BRAND PROXONE EST. 2007®; PARTNERSHIP NETWORK®; PARTS CITY®; PARTS CITY AUTO COLOR PROFESSIONAL PAINT PEOPLE®; PARTS CITY AUTO PARTS®; PARTS CITY TOOL BOX®; PARTS FOR YOUR CAR WHEREVER YOU ARE®; PARTS PAYOFF®; POWER TORQUE®; PRECISION®; PRECISION HUB ASSEMBLIES®; PRIORITY PARTS®PROFESSIONAL PARTS PEOPLE®; PROXONE®PROFESIONALES EN AUTOPARTES®; PROTECTION YOU CAN TRUST®; QUIETECH®; REAL WORLD TRAINING®; SCHUCK’S®¡SIGUE ADELANTE CON O’REILLY!®; SERIOUS ABOUT YOUR CAR…SO ARE WE!®SCHUCK’S AUTO SUPPLY®; SUPER START®; SYNTEC®; TOOLBOX®; ULTIMA®; and ULTIMA SELECT®; ULTIMA SELECT MOTOR PRODUCTS®; WORK AT THE O®; and X® (design mark associated with PRECISION). Some of the service marks and trademarks listed above may also have a design associated therewith. Each of the service marks and trademarks are in duration for as long as we continue to use and seek renewal of such marks. WeThe above list includes only the trademarks and service marks that are currently and validly registered with the United States Patent and Trademark Office. It does not include trademarks or service marks which may also be in use, but are not yet registered or trademarks or service marks used and/or registered in other countries. Except for the trademarks and service marks listed or referred to in this Item 1, we believe that our business is not otherwise dependent upon any patent, trademark, service mark or copyright.
Solely for convenience, our service marks and trademarks may appear in this report without the ® or ™ symbol, which is not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights or the right to these service marks and trademarks.
AVAILABLE INFORMATION
Our Internet address is
Item 1A. Risk Factors
Our future performance is subject to a variety of risks and uncertainties. Although the risks described below are the risks that we believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the information available to us that later may prove to be material. Interested parties should be aware that the occurrence of the events described in these risk factors, elsewhere in this Form 10-K and in our other filings with the Securities and Exchange Commission could have a material adverse effect on our business, operating results and financial condition. Actual results, therefore, may materially differ from anticipated results described in our forward-looking statements.
RISKS SPECIFIC TO OUR BUSINESS AND INDUSTRY
Deteriorating economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others, with which we do business, to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Although demand for many of our products is primarily non-discretionary in nature and tend to be purchased by consumers out of necessity, rather than on an impulse basis, our sales are impacted by constraints on the economic health of our customers. The economic health of our customers is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, fuel prices, unemployment levels, a prolonged public health crisis or pandemic and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. Our customers’ purchases, including purchases of our products, could decline during periods when income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions or political uncertainty. In addition, restrictions on access to telematics, diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulations may force vehicle owners to rely on dealers to perform maintenance and repairs. If any of these events occur, or if unfavorable economic conditions challenge the consumer environment, our business, results of operations, financial condition and cash flows could be adversely affected.
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Overall demand for products sold in the automotive aftermarket is dependent upon many factors including the total number of vehicle miles driven in the U.S., the total number of registered vehicles in the U.S., the age and quality of these registered vehicles and the level of unemployment in the U.S. Changes in vehicle technology used by the original equipment manufacturers (“OEM”) on future vehicles, including but not limited to electric, hybrid and internal combustion engines, may result in less frequent repairs, parts lasting longer or elimination of certain repairs. In addition, restrictions on access to telematics, diagnostic tools and repair information imposed by the OEMs or by governmental regulations may force vehicle owners to rely on dealers to perform maintenance and repairs. Adverse changes in these factors could lead to a decreased level of demand for our products, which could negatively impact our business, results of operations, financial condition and cash flows.
In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial institutions that are counterparties to our credit facilities. Furthermore, the ability of these third parties to overcome these difficulties may increase.worsen. If third parties, on whom we rely for merchandise, are unable to overcome difficulties resulting from the deterioration in economic conditions, the cause of which could include a prolonged public health crisis or pandemic, and provide us with the merchandise we need, or if counterparties to our credit facilities do not perform their obligations, our business, results of operations, financial condition and cash flows could be adversely affected.
The automotive aftermarket business is highly competitive, and we may have to risk our capital to remain competitive, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Both the do-it-yourself (“DIY”)DIY and professional service provider portions of our business are highly competitive, particularly in the more densely populated areas that we serve. Some of our competitors are larger than we are and have greater financial resources. In addition, some of our competitors are smaller than we are, but have a greater presence than we do in a particular market. Online and mobile platforms may allow customers to quickly compare prices and product assortmentsassortment and availability between us and a range of competitors, which could result in pricing pressure. Some online competitors may have a lower cost structure than we do, as a result of our strategy of providing an exceptional in-store experience and superior parts availability supported by our extensive store network and robust, regional distribution footprint, which could also create pricing pressure. We may have to expend more resources and risk additional capital to remain competitive and our results of operations, financial condition and cash flows could be adversely affected. For a list of our principal competitors, see the “Competition” section of Item 1 of this annual report on Form 10-K.
We are sensitive to regional economic and weather conditions that could impact our costs and sales.
Our business is sensitive to national and regional economic and weather conditions and natural disasters. Unusually inclement weather, such as significant rain, snow, sleet, freezing rain, flooding, seismic activity and hurricanes, has historically discouraged our customers from visiting our stores during the affected period and reduced our sales, particularly to DIY customers. Extreme weather conditions, such as extreme heat and extreme cold temperatures, may enhance demand for our products due to increased failure rates of our customers’ automotive parts, while temperate weather conditions may have a lesser impact on failure rates of automotive parts. In addition, our stores and distribution centers (“DCs”)DCs located in coastal regions may be subject to increased insurance claimsunrecoverable losses resulting from regional weather conditions and our results of operations, financial condition and cash flows could be adversely affected.
A change in the relationship with any of our key suppliers, the limited supply or unavailability of our key products, at competitive pricessupply chain disruptions or changes in trade policies could affect our financial health.
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability or willingness to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. For example, financial or operational difficulties that our suppliers may face could increase the cost of the products we purchase from them or our ability to source products from them. In addition, the trend toward consolidation among automotive parts suppliers, as well as the off-shoring of manufacturing capacity to foreign countries, may disrupt or end our relationship with some suppliers and could lead to less competition and result in higher prices. We could also be negatively impacted bywhen our suppliers who might experienceor our supply chain experiences work stoppages,stoppages; labor strikesstrikes; a prolonged public health crisis or pandemic; shipping and transportation disruptions or increased costs; currency fluctuations or inflation; or other interruptions to, or difficulties in, the manufacture or supply of the products we purchase from them. Changespurchase. If we are unable to effectively respond to such disruptions to our supply chain, or manage them more effectively than our competitors, our business and competitive position may be negatively impacted. In addition, changes in U.S. trade policies, sanctions, practices, tariffs or taxes, import limitations and other factors relating to foreign trade and port agreements could affect our ability to source products and our suppliers’ ability to source productmaterials or provide products at current volumes and/or prices.
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Business interruptions in our distribution centers or other facilities may affect our store hours, operabilitystability of our computer systems we rely on, and/or availability and distribution of merchandise, which may affect our business.
Business interruptions, including from a prolonged public health crisis or pandemic, weather-related events, terrorist activities, war, political or civil unrest, or other disasters, or the threat of them, may result in a disruption of operations or the closure of one or more of our DCs or other facilities, or may adversely affect our ability to deliver inventory to our stores on a nightly basis. This may affect our ability to timely provide products to our customers, resulting in lost sales or a potential loss of customer loyalty.loyalty, among other things. Some of our merchandise is imported from other countries and these goods could become difficult or impossible to bring into the United States, and we may not be able to obtain such merchandise from other sources at similar prices. Such a disruption in revenue could potentially have a negative impact on our results of operations, financial condition and cash flows.
In addition, we rely extensively on our computervarious systems, some of which are provided by third-party service providers, to manage inventory, process transactions and timely provide products to our stores and customers. OurThese systems are subject to failure, damage or interruption, fromincluding power outages, telecommunications failures, computer viruses, cyber-attacks, security breaches or other catastrophic events. If ourthese systems are damaged or fail to function properly, we may experience loss of critical data and interruptions or delays in our ability to manage inventories, deliver product or process customer transactions. Such a disruption of ourthese systems, and the response to remedy, could negatively impact revenue and potentially haveresult in a negative impact on our business operations and increased costs, which could have an adverse effect on our results of operations, financial condition and cash flows.
Failure to achieve and maintain a high level of product and service quality may reduceprotect our brand value and negatively impactreputation could have a material adverse effect on our business.
We believe our Company has built an excellent reputation as a leading retailer in the automotive aftermarket industry. We believe our continued success depends, in part, on our ability to preserve, grow and leverage the value of our brand. Brand valueOur reputation is based, in large part, on perceptions of subjective qualitiesqualities; negative publicity involving the Company, our merchandise or our industry in general that erode customer trust or confidence could adversely affect our reputation and even isolated incidents can erode trustbusiness. Failure to comply with ethical, social, product, labor, health and confidence, particularly if they result in adverse publicity, governmental investigationssafety, accounting or litigation, which can negatively impact these perceptionsenvironmental standards, or existing or future laws or regulations, as well as failure or perceived failure to achieve or make progress with environmental, social and governance goals, could also jeopardize our reputation and potentially lead to various adverse effectsactions from consumer or environmental groups, employees or regulatory bodies, which could require us to incur substantial legal fees and costs. In addition, negative claims or publicity, including the availability of information and opinions on social media, as its impact is immediate, could adversely affect our reputation. The opportunity for the rapid dissemination of information, including inaccurate and inflammatory information and opinions, is virtually limitless and easily accessible. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have an adverse effect on our business, results of operations, financial condition or Team Members.
Risks associated with international operations could result in additional costs and inefficiencies.
In addition to many of the risks we face in our U.S. operations, international operations present a unique set of risks and challenges, including local laws and customs, U.S. laws applicable to foreign operations and political and socio-economic conditions. Our ability to operate effectively and grow in international markets could be impacted by these risks resulting in legal liabilities, additional costs and the distraction of management’s attention. Compliance with the Foreign Corrupt Practices Act and protection of intellectual property rights surrounding items such as tradenames and trademarks in foreign jurisdictions can pose significant challenges.
In addition, our operations in international markets are conducted primarily in the local currency of those countries. Given that our Consolidated Financial Statements are denominated in U.S. dollars, amounts of assets, liabilities, net sales and other revenues and expenses denominated in local currencies must be translated into U.S. dollars using exchange rates for the current period. As a result, foreign currency exchange rates and fluctuations in those rates may adversely impact our financial performance.
RISKS RELATED TO OUR COMMON STOCK
Risks related to us and unanticipated fluctuations in our quarterly operating results could affect our stock price.
We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating results and should not be relied on as an indication of future performance. If our quarterly operating results fail to meet the expectations of analysts, the trading price of our common stock could be negatively affected. We cannot be certain that our growth plans and business strategies will be successful or that they will successfully meet the expectations of these analysts. If we fail to adequately address any of these risks or difficulties, our stock price would likely suffer.
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions.conditions and potentially being targeted through the selling and buying of our common stock by a group of individuals, whose interests
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and reasoning behind such actions may not align with an average market participant. The market price of our common stock may also be affected by our ability to meet analysts’ expectations and failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock.
In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common stock to decline. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been institutedinitiated against such companies. If similar litigation were institutedinitiated against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCING
Our increased debt levels could adversely affect our cash flow and prevent us from fulfilling our obligations.
We have an unsecured revolving credit facility and unsecured senior notes, which could have important consequences tofor our financial health. For example, our level of indebtedness could, among other things,
| ● | make it more difficult to satisfy our financial obligations, including those relating to the senior unsecured notes and our credit facility; |
| ● | increase our vulnerability to adverse economic and industry conditions; |
| ● | limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage; |
| ● | require us to dedicate a substantial portion of our cash flows to service the principal and interest on our debt, reducing the funds available for other business purposes, such as working capital, capital expenditures or other cash requirements; |
| ● | limit our ability to incur additional debt with acceptable terms, if at all; and |
| ● | expose us to fluctuations in interest rates, including changes that may result from the implementation of new benchmark rates that replace LIBOR. |
In addition, the terms of our financing obligations include restrictions, such as affirmative, negative and financial covenants, conditions on borrowing and subsidiary guarantees. A failure to comply with these restrictions could result in a default under our financing obligations or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could have a material adverse effect on our business, financial condition, results of operations and cash flows.
A downgrade in our credit rating would impact our cost of capital and could impact the market value of our unsecured senior notes, as well as limit our access to attractive supplier financing programs.
Credit ratings are an important component of our cost of capital. These ratings are based upon, among other factors, our financial strength. Our current credit ratings provide us with the ability to borrow funds at favorable rates. A downgrade in our current credit rating from either rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed funds under our unsecured revolving credit facility and a higher facility fee on commitments under our unsecured revolving credit facility. A downgrade in our current credit rating could also adversely affect the market price and/or liquidity of our unsecured senior notes, preventing a holder from selling the unsecured senior notes at a favorable price, as well as adversely affect our ability to issue new notes in the future. In addition, a downgrade in our current credit rating could limit the financial institutions willing to commit funds to ourthe supplier financing programs our suppliers participate in at attractive rates. Decreased participation in our supplier financing programs would lead to an increase in working capital needed to operate the business, adversely affecting our cash flows.
RISK RELATED TO INFORMATION TECHNOLOGY AND DATA PRIVACY
Damage, failure or interruptions of information technology systems could adversely affect our business operations and results.
We rely extensively on information technology systems, some of which are managed or provided by third-party service providers, to collect, analyze, process, store, manage, transmit and protect business operations, processes, transactions and data. Delays in the maintenance, updates, upgrading or patching of these systems, applications or processes could adversely impact their effectiveness or could expose us to risks. Our systems, and the third-party systems with which we interact, are subject to damage, failure or interruption due to various reasons, including, but not limited to, power or other critical infrastructure outages; facility damage; physical theft; telecommunications failures; malware; security incidents; cyber-attacks, including the use of malicious codes, worms, phishing, spyware, denial of service attacks and ransomware; natural disasters and catastrophic events; inadequate or ineffective redundancy measures; and design or usage errors by Team Members, contractors or third-party service providers. Although we seek to effectively
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maintain and safeguard our systems, and we seek to ensure our third-party service providers effectively maintain and safeguard their systems, such measures are not guaranteed to be successful. As a result, we or our service providers could experience one or more errors, interruptions, delays or cessations of service impacting the integrity or availability of our information technology infrastructure. A material incident could significantly disrupt our operations and business processes; result in the impairment or loss of critical data; be costly and resource-intensive to remedy; and/or harm our reputation and relationship with customers, Team Members, suppliers and other stakeholders, all of which could have a material adverse impact on our results of operations, financial condition and cash flows.
In addition, our information technology systems, infrastructure and personnel require substantial investments, such as replacing systems, maintaining or enhancing systems or designing or acquiring new systems. These efforts can result in significant potential risks, including failure of the systems to operate as designed, potential loss or corruption of data, incurring more costs than expected or implementation delays or errors, and may result in operational challenges, security control failures, reputational harm, and increased costs, all of which could have a material adverse impact on our results of operations, financial condition and cash flows.
A breach of customer, supplier, Team Member or Company information could damage our reputation or result in substantial additional costs or possible litigation.
Our business involves the receiving, storage and transmitting of certain personally identifiable or confidential information about our customers, suppliers, Team Members and the Company, some of which is entrusted to third-party service providers and vendors.suppliers. We and our third-party service providers and vendorssuppliers have taken reasonablesignificant and appropriate steps to protect this information; however,information, including maintaining compliance with payment card industry and National Clearing House standards and a security program that includes updating technology and security policies, employee training and monitoring and routine testing of our systems. However, these security measures are costly and require constant, ongoing attention and may be breachednot prevent a security breach due to cyber-attacks, computer malware viruses, exploitation of hardware or software vulnerabilities, Team Member error, malfeasance, system compromises, fraud, hacking, trickery or other intentional or unintentional acts, which could result in unauthorized parties gaining access to such information. The methods used to obtain unauthorized access are constantly evolving and may be difficult to anticipate or detect for long periods of time. If we experience a significant data security breach, we could be exposed to damage to our reputation, additional costs, lost sales or possible regulatory action. In addition, the regulatory environment related to information security and privacy is constantly evolving and compliance with those requirements could result in additional costs. There is no guarantee that the proceduressecurity measures that we and our third-party service providers and vendorssuppliers have implemented, or will introduce in the future, to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches, or provide us with sufficient visibility to determine if a data security breaches has occurred. A compromise of our security measures or those of a third-party party we entrust could result in information related to our customers, suppliers, Team Members or the Company being obtained or misused by unauthorized persons; damage to our reputation; adverse operational effects or interruptions; costs to the Company to address the breach, which could require extensive time and such a breachfinancial resources to resolve; or claims, litigation or possible regulatory action against us, all of which could potentially have a negativematerial adverse impact on our results of operations, financial condition and cash flows.
In addition, the regulatory environment related to information security and data collection, processing, use and privacy is complex and constantly evolving. The effects of complying with stricter and more complex data collection, processing, use and privacy and information security laws, regulations and standards can be far-reaching and may increase our responsibility and liability, which may increase our costs by needing to invest significant, additional time and resources and make changes to our existing practice and processes. Failure to comply with data collection, processing, use and privacy and information security laws, regulations and standards by us or our third-party service providers or suppliers could subject us to fines, sanctions, governmental investigations, lawsuits or reputational damage, which could have a material adverse impact on our results of operations, financial condition and cash flows.
GENERAL RISKS
We cannot assure future growth will be achieved.
We believe that our ability to open additional, profitable stores at a high growth rate will be a significant factor in achieving our growth objectives for the future. Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel and general business and economic conditions. We cannot be sure that our growth plans for 2023 and beyond will be achieved. Failure to achieve our growth objectives may negatively impact the trading price of our common stock. For a discussion of our growth strategies, see the “Growth Strategy” section of Item 1 of this annual report on Form 10-K.
In order to be successful, we will need to attract, retain and motivate qualified employees.
Our success has been largely dependent on the efforts of certain key personnel. In order to be successful, we will need to attract, retain and motivate executives and other key employees. Experienced management and technical personnel are in high demand and competition for their talents is intense. In addition, we compete with other retail businesses to fill many of our hourly positions, which historically have had high turnover rates, which can lead to increased training and retention costs, particularly in a competitive labor market. We must also continue to motivate employees and keep them focused on our strategies and goals. Our business, results of
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operations and cash flows could be materially adversely affected by the unexpected loss of the services of one or more of our key employees. We cannot be certain that we will be able to continue to attract and retain qualified personnel, which could cause us to be less efficient, in particular in a significant inflationary wage pressured environment, and, as a result, may adversely impact our sales and profitability. For a discussion of our management, see the “Business” section of Item 1 of this annual report on Form 10-K.
Risks associated with future acquisitions may not lead to expected growth and could result in increased costs and inefficiencies.
We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth and profitability to differ from our expectations. Examples of such risks include the following:
| ● | We may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or on other favorable terms. |
| ● | Our management’s attention may be distracted. |
| ● | We may fail to retain key personnel from acquired businesses. |
| ● | We may assume unanticipated legal liabilities and other problems. |
| ● | We may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize economic, operational and other benefits. |
We may fail, or be unable, to discover liabilities of businesses that we acquire for which we or the subsequent owner or operator may be liable.
Litigation, governmental proceedings, environmental, legislationemployment and regulations and employmenttax legislation and regulations may affect our business, financial condition, results of operations and cash flows.
We are, and in the future may become, involved in lawsuits, regulatory inquiries and governmental and other legal proceedings, arising out of the ordinary course of our business. The damages sought against us in some of these litigation proceedings may be material and may adversely affect our business, results of operations, financial condition and cash flows.
Environmental legislation and regulations, like the initiatives to limit greenhouse gas emissions and bills related to climate change, could adversely impact all industries. While it is uncertain whether these initiatives will become law, additionalnew or more stringent climate change relatedchange-related mandates, laws or regulations, or stricter interpretations of existing mandates, laws or regulations could potentially be forthcoming and theseforthcoming. These matters, if enacted, could adversely impact our costs, by, among other things, increasing fuel prices.
Our business is subject to employment legislation and regulations, including requirements related to minimum wage. Our success depends, in part, on our ability to manage operating costs and identify opportunities to reduce costs. Our ability to meet labor needs, while controlling costs is subject to external factors, such as minimum wage legislation. A violation of, or change in, employment legislation and/or regulations could hinder our ability to control costs, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
New tax reform policies,laws, statutes, rules, regulations or changes in tax legislation or policies may affectordinances could harm our business financial condition,operations, results of operations and cash flows.
None.
Stores, distribution centers stores, and other properties
Of the 5,0195,971 stores that we operated at December 31, 2017, 2,0142022, 2,465 stores were owned, 2,9303,436 stores were leased from unaffiliated parties, 38 of which were located in Mexico, and 7570 stores were leased from entities in which certainthat include one or more of our affiliated directors or members of our affiliated director’stheir immediate family, are affiliated.family. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses and an original term of, at a minimum, 10 years, subject to one or more renewals at our option. We have entered into separate master lease agreements with each of the affiliated entities for the occupancy of the stores covered thereby.
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Such master lease agreements with onetwo of the sevenfive affiliated entities have been modified to extend the term of the lease agreement for specific stores. The master lease agreements or modifications thereto expire on dates ranging from JulyDecember 31, 2018,2023, to September 30, 2031.December 31, 2029. We believe that the lease agreements with the affiliated entities are on terms comparable to those obtainable fromof third parties.
The following table provides information regarding our U.S. regional DCs in operation as of December 31, 2022:
| | | | | | |
| | | | |
| Operating Square Footage (1) |
Principal Use | | Nature of Occupancy | | Number of Locations | | (in thousands) |
Distribution center | | Owned | | 21 |
| 9,599 |
Distribution center | | Leased (2) | | 7 |
| 2,483 |
Total | | | | 28 |
| 12,082 |
| (1) | DC operating square footage includes floor and mezzanine operating square footage and excludes subleased square footage. |
| (2) | Terms expiring on dates ranging from October 31, 2024, to June 30, 2035. |
In addition, we operate six small distribution centers in Mexico; these distribution centers do not serve U.S. stores and are immaterial in the aggregate. Further enhancing our distribution capabilities in 2023, we plan to open our first DC in Puerto Rico and a large DC in Guadalajara, Mexico.
We believe that our present facilities are in good condition, are adequatelysufficiently insured and are adequate for the conduct of our current operations. The store servicing capability of our 2728 existing U.S. DCs is approximately 5,7156,075 stores, providing a growth capacity of more than 695150 to 300 U.S. stores. We believe the growth capacity in our 27 existing DCs will provide us with the DC infrastructure needed for near-term expansion. However, as we expand our geographic footprint, we will continue to evaluate our existing distribution system infrastructure and will adjust our distribution system capacity as needed to support our future growth.
Our corporate office operations occur primarily in Springfield, Missouri, and as of December 31, 2022, the total square footage was 0.6 million square feet, substantially all of which was owned.
Item 3. Legal Proceedings
The Company is currently involved in litigation incidental to the ordinary conduct of the Company’s business. TheBased on existing facts and historical patterns, the Company accrues for litigation losses in instances where a materialan adverse outcome is probable and the Company is able to reasonably estimate the probable loss.loss in accordance with Accounting Standard Codification 450-20. The Company also accrues for an estimate of material legal costs to be incurred in pendingfor litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from any of theselegal matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market Forfor Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common stock:
Shares of O’Reilly Automotive, Inc. (the “Company”)the Company’s common stock are traded on The NASDAQNasdaq Global Select Market (“Nasdaq”) under the symbol “ORLY.” The Company’s common stock began trading on April 22, 1993; no cash dividends have been declared since that time, and the Company does not anticipate paying any cash dividends in the foreseeable future.
As of February 21, 2018,16, 2023, the Company had approximately 244,000827,000 shareholders of common stock based on the number of holders of record and an estimate of individual participants represented by security position listings.
| 2017 | 2016 | ||||||||||||||
| High | Low | High | Low | ||||||||||||
| First Quarter | $ | 282.81 | $ | 254.35 | $ | 276.64 | $ | 232.16 | |||||||
| Second Quarter | 269.28 | 216.04 | 277.82 | 253.32 | |||||||||||
| Third Quarter | 220.41 | 172.85 | 290.63 | 271.33 | |||||||||||
| Fourth Quarter | 251.07 | 202.72 | 285.53 | 253.00 | |||||||||||
| For the Year | $ | 282.81 | $ | 172.85 | $ | 290.63 | $ | 232.16 | |||||||
Sales of unregistered securities:
There were no sales of unregistered securities during the year ended December 31, 2017.
Issuer purchases of equity securities:
The following table identifies all repurchases during the fourth quarter ended December 31, 2017,2022, of any of the Company’s securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, by or on behalf of the Company or any affiliated purchaser (in thousands, except per share price data):
| | | | | | | | | | |
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| |
| | |
| Total Number of |
| Maximum Dollar Value | |
| | Total | | Average | | Shares Purchased as | | of Shares that May Yet | ||
| | Number of | | Price Paid | | Part of Publicly | | Be Purchased Under the | ||
Period | | Shares Purchased | | per Share | | Announced Programs | | Programs (1) | ||
October 1, 2022, to October 31, 2022 |
| 236 | | $ | 730.16 |
| 236 | | $ | 471,502 |
November 1, 2022, to November 30, 2022 |
| 58 | |
| 831.62 |
| 58 | |
| 1,923,010 |
December 1, 2022, to December 31, 2022 |
| 241 | |
| 830.22 |
| 241 | | $ | 1,723,320 |
Total as of December 31, 2022 |
| 535 | | $ | 786.19 |
| 535 | |
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| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (1) | ||||||||||
| October 1, 2017, to October 31, 2017 | 336 | $ | 209.12 | 336 | $ | 924,560 | ||||||||
| November 1, 2017, to November 30, 2017 | 508 | 214.81 | 508 | 815,367 | ||||||||||
| December 1, 2017, to December 31, 2017 | 410 | 243.67 | 410 | $ | 715,389 | |||||||||
| Total as of December 31, 2017 | 1,254 | $ | 222.73 | 1,254 | ||||||||||
| (1) | |
24
Stock performance graph:
The graph below shows the cumulative total shareholder return assuming the investment of $100, on December 31, 2012,2017, and the reinvestment of dividends thereafter, if any, in the Company’s common stock versus the Standard and Poor’s S&P 500 Retail Index (“S&P 500 Retail Index”) and the Standard and Poor’s S&P 500 Index (“S&P 500”).
| December 31, | ||||||||||||||||||||||||
| Company/Index | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||
| O’Reilly Automotive, Inc. | $ | 100 | $ | 144 | $ | 215 | $ | 283 | $ | 311 | $ | 269 | ||||||||||||
| S&P 500 Retail Index | 100 | 144 | 158 | 197 | 206 | 265 | ||||||||||||||||||
| S&P 500 | $ | 100 | $ | 130 | $ | 144 | $ | 143 | $ | 157 | $ | 187 | ||||||||||||
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| | December 31, | ||||||||||||||||
Company/Index |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 | ||||||
O’Reilly Automotive, Inc. | | $ | 100 | | $ | 143 | | $ | 182 | | $ | 188 | | $ | 294 | | $ | 351 |
S&P 500 Retail Index | |
| 100 | |
| 113 | |
| 141 | |
| 206 | |
| 245 | |
| 159 |
S&P 500 | | $ | 100 | | $ | 94 | | $ | 121 | | $ | 140 | | $ | 178 | | $ | 144 |
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| Years ended December 31, | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share, Team Members, stores and ratio data) | ||||||||||||||||||||
| INCOME STATEMENT DATA: | ||||||||||||||||||||
| Sales ($) | 8,977,726 | 8,593,096 | 7,966,674 | 7,216,081 | 6,649,237 | 6,182,184 | 5,788,816 | 5,397,525 | 4,847,062 | 3,576,553 | ||||||||||
| Cost of goods sold, including warehouse and distribution expenses | 4,257,043 | 4,084,085 | 3,804,031 | 3,507,180 | 3,280,236 | 3,084,766 | 2,951,467 | 2,776,533 | 2,520,534 | 1,948,627 | ||||||||||
| Gross profit | 4,720,683 | 4,509,011 | 4,162,643 | 3,708,901 | 3,369,001 | 3,097,418 | 2,837,349 | 2,620,992 | 2,326,528 | 1,627,926 | ||||||||||
| Selling, general and administrative expenses | 2,995,283 | 2,809,805 | 2,648,622 | 2,438,527 | 2,265,516 | 2,120,025 | 1,973,381 | 1,887,316 | 1,788,909 | 1,292,309 | ||||||||||
| Former CSK officer clawback | — | — | — | — | — | — | (2,798 | ) | — | — | — | |||||||||
| Legacy CSK Department of Justice investigation charge | — | — | — | — | — | — | — | 20,900 | — | — | ||||||||||
| Operating income | 1,725,400 | 1,699,206 | 1,514,021 | 1,270,374 | 1,103,485 | 977,393 | 866,766 | 712,776 | 537,619 | 335,617 | ||||||||||
| Write-off of asset-based revolving credit agreement debt issuance costs | — | — | — | — | — | — | (21,626 | ) | — | — | — | |||||||||
| Termination of interest rate swap agreements | — | — | — | — | — | — | (4,237 | ) | — | — | — | |||||||||
| Gain on settlement of note receivable | — | — | — | — | — | — | — | 11,639 | — | — | ||||||||||
| Other income (expense), net | (87,596 | ) | (62,015 | ) | (53,655 | ) | (48,192 | ) | (44,543 | ) | (35,872 | ) | (25,130 | ) | (35,042 | ) | (40,721 | ) | (33,085 | ) |
| Total other income (expense) | (87,596 | ) | (62,015 | ) | (53,655 | ) | (48,192 | ) | (44,543 | ) | (35,872 | ) | (50,993 | ) | (23,403 | ) | (40,721 | ) | (33,085 | ) |
| Income before income taxes | 1,637,804 | 1,637,191 | 1,460,366 | 1,222,182 | 1,058,942 | 941,521 | 815,773 | 689,373 | 496,898 | 302,532 | ||||||||||
| Provision for income taxes (a)(b) | 504,000 | 599,500 | 529,150 | 444,000 | 388,650 | 355,775 | 308,100 | 270,000 | 189,400 | 116,300 | ||||||||||
| Net income ($) (a)(b) | 1,133,804 | 1,037,691 | 931,216 | 778,182 | 670,292 | 585,746 | 507,673 | 419,373 | 307,498 | 186,232 | ||||||||||
| Basic earnings per common share: | ||||||||||||||||||||
| Earnings per share – basic ($) | 12.82 | 10.87 | 9.32 | 7.46 | 6.14 | 4.83 | 3.77 | 3.02 | 2.26 | 1.50 | ||||||||||
| Weighted-average common shares outstanding – basic | 88,426 | 95,447 | 99,965 | 104,262 | 109,244 | 121,182 | 134,667 | 138,654 | 136,230 | 124,526 | ||||||||||
| Earnings per common share -assuming dilution: (a)(b) | ||||||||||||||||||||
| Earnings per share – assuming dilution ($) | 12.67 | 10.73 | 9.17 | 7.34 | 6.03 | 4.75 | 3.71 | 2.95 | 2.23 | 1.48 | ||||||||||
| Weighted-average common shares outstanding – assuming dilution | 89,502 | 96,720 | 101,514 | 106,041 | 111,101 | 123,314 | 136,983 | 141,992 | 137,882 | 125,413 | ||||||||||
| SELECTED OPERATING DATA: | ||||||||||||||||||||
| Number of Team Members at year end | 75,552 | 74,580 | 71,621 | 67,569 | 61,909 | 53,063 | 49,324 | 46,858 | 44,880 | 40,735 | ||||||||||
| Number of stores at year end (c) | 5,019 | 4,829 | 4,571 | 4,366 | 4,166 | 3,976 | 3,740 | 3,570 | 3,421 | 3,285 | ||||||||||
| Total store square footage at year end (d) | 36,685 | 35,123 | 33,148 | 31,591 | 30,077 | 28,628 | 26,530 | 25,315 | 24,200 | 23,205 | ||||||||||
| Sales per weighted-average store (e)($) | 1,807 | 1,826 | 1,769 | 1,678 | 1,614 | 1,590 | 1,566 | 1,527 | 1,424 | 1,379 | ||||||||||
| Sales per weighted-average square foot (d)(f)($) | 248 | 251 | 244 | 232 | 224 | 224 | 221 | 216 | 202 | 201 | ||||||||||
| Percentage increase in comparable store sales (g)(h) | 1.4 | % | 4.8 | % | 7.5 | % | 6.0 | % | 4.6 | % | 3.5 | % | 4.6 | % | 8.8 | % | 4.8 | % | 1.3 | % |
| Years ended December 31, | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share, Team Members, stores and ratio data) | ||||||||||||||||||||
| SELECT BALANCE SHEET AND CASH FLOW DATA: | ||||||||||||||||||||
| Working capital (i)($) | (249,694 | ) | (142,674 | ) | (36,372 | ) | 252,082 | 430,832 | 478,093 | 1,028,330 | 1,029,861 | 900,857 | 749,276 | |||||||
| Total assets (i)($) | 7,571,885 | 7,404,189 | 6,676,684 | 6,532,083 | 6,057,895 | 5,741,241 | 5,494,174 | 5,031,950 | 4,695,536 | 4,551,586 | ||||||||||
| Inventory turnover (j) | 1.4 | 1.5 | 1.5 | 1.4 | 1.4 | 1.4 | 1.5 | 1.4 | 1.4 | 1.6 | ||||||||||
| Accounts payable to inventory (k) | 106.0 | % | 105.7 | % | 99.1 | % | 94.6 | % | 86.6 | % | 84.7 | % | 64.4 | % | 44.3 | % | 42.8 | % | 46.9 | % |
| Current portion of long-term debt and short-term debt ($) | — | — | — | 25 | 67 | 222 | 662 | 1,431 | 106,708 | 8,131 | ||||||||||
| Long-term debt, less current portion (i)($) | 2,978,390 | 1,887,019 | 1,390,018 | 1,388,397 | 1,386,828 | 1,087,789 | 790,585 | 357,273 | 684,040 | 724,564 | ||||||||||
| Shareholders’ equity ($) (a) | 653,046 | 1,627,136 | 1,961,314 | 2,018,418 | 1,966,321 | 2,108,307 | 2,844,851 | 3,209,685 | 2,685,865 | 2,282,218 | ||||||||||
| Capital expenditures ($) | 465,940 | 476,344 | 414,020 | 429,987 | 395,881 | 300,719 | 328,319 | 365,419 | 414,779 | 341,679 | ||||||||||
| Free cash flow (l)(m)($) | 889,059 | 978,375 | 868,390 | 760,443 | 512,145 | 950,836 | 790,672 | 338,268 | (129,579 | ) | (43,137 | ) | ||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including
| ● | an overview of the key drivers and other influences on the automotive aftermarket industry; |
| ● | our results of operations for the years ended December 31, 2022 and 2021; |
| ● | our liquidity and capital resources; |
| ● | our critical accounting estimates; and |
| ● | recent accounting pronouncements that may affect our Company. |
The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this annual report.
OVERVIEW
We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States.States and Mexico. We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both do-it-yourself (“DIY”)DIY customers and professional service providers – our “dual market strategy.” Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment.
Our extensive product line includes an assortment of products that are differentiated by quality and price for most of the product lines we offer. For many of our product offerings, this quality differentiation reflects “good,” “better,” and “best” alternatives. Our sales and total gross profit dollars are, generally, highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point on the value spectrum is a driver of enhanced sales and profitability in our industry. We have ongoing initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.
Our stores also offer enhanced services and programs to our customers, including used oil, oil filter and battery recycling; battery, wiper and bulb replacement; battery diagnostic testing; electrical and module testing; check engine light code extraction; loaner tool program; drum and rotor resurfacing; custom hydraulic hoses; professional paint shop mixing and related materials; and machine shops. As of December 31, 2017,2022, we operated 5,0195,929 stores in 47 states.
We are influenced by a number of general macroeconomic factors that impact both our industry and consumers, including, but not limited to, inflation, including rising consumer staples, fuel and energy costs, unemployment trends, interest rates and other economic factors. Future changes, such as continued broad-based inflation and rapid increases in fuel costs unemployment rates, consumer preferences and spending habits, and competition. We have ongoing initiatives aimed at tailoringthat exceed wage growth, may negatively impact our product offering to adjust to customers’ changing preferences,consumers’ level of disposable income, and we alsocannot predict the degree these changes, or other future changes, may have initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.
We believe the key drivers of current and future demand over the long-term for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, newannual rate of light vehicle registrations,sales and average vehicle age and unemployment.
Number of Miles Driven
The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation. According to the U.S. Department of Transportation, the number of total miles driven in the U.S. decreased 13.2% in 2020, as a result of responses to the coronavirus pandemic, including work from home arrangements and reduced travel. In 2021, miles driven improved and increased 1.2%11.2%, 2.4% and 3.5%year-to-date through November of 2022, miles driven continued to improve, increasing 1.2%. Total miles driven can be impacted by macroeconomic factors, including rapid increases in 2017, 2016 and 2015, respectively, andfuel cost, but we expectare unable to continue to see modest improvements in totalpredict the degree of impact these factors may have on miles driven in the U.S., supported by an increasing numberfuture.
Size and Age of registered vehicles on the road, resulting in continued demand for automotive aftermarket products.
The total number of vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the automotive aftermarket industry. As reported by Thethe Auto Care Association, the total number of registered vehicles increased 7%12.1% from 20062011 to 2016,2021, bringing the number of light vehicles on the road to 264279 million by the end of 2016. For2021. In 2022, the year ended December 31, 2017,rate of new
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vehicle sales was pressured due to supply chain constraints experienced by manufacturers, and the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was below the historical average at approximately 17.813.3 million contributingvehicles for the year ended December 31, 2022. From 2011 to the continued growth in the total number of registered vehicles on the road. In the past decade,2021, vehicle scrappage rates have remained relatively stable, ranging from 4.3%4.1% to 5.7% annually. As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 22%11.0%, from 9.510.9 years in 20062011 to 11.612.1 years in 2016. 2021. While the annual changes to the vehicle population resulting from new vehicle sales and the fluctuation in vehicle scrappage rates in any given year represent a small percentage of the total light vehicle population and have a muted impact on the total number and average age of vehicles on the road over the short term, we believe our business benefits from the current environment of new vehicle scarcity and higher than typical used vehicle prices, as consumers are more willing to continue to invest in their current vehicle.
We believe thisthe increase in average vehicle age over the long term can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains, and interiors and exteriors, and the consumer’s willingness to invest in maintaining these higher-mileage, better built vehicles. As the average age of vehicles on the road increases, a larger percentage of miles are being driven by vehicles that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet, will support continued demand for automotive aftermarket products.
Inflationary cost pressures impact our business; however, historically we have been successful, in many cases, in reducing the threateffects of future joblessnessmerchandise cost increases, principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the uncertainty surroundingextent our acquisition costs increase due to base commodity price increases or other input cost increases affecting the overall economic health ofentire industry, we have typically been able to pass along these cost increases through higher selling prices for the U.S. haveaffected products. As a negative impactresult, we do not believe inflation has had a material adverse effect on consumer confidence and the level of consumer discretionary spending. Long-term trends of high unemployment have historically impeded the growth of annual miles driven, as well as decrease consumer discretionary spending, both of which negatively impact demand for products sold in the automotive aftermarket industry. As of December 31, 2016, the U.S. unemployment rate was 4.7%, and as of December 31, 2017, the U.S. unemployment rate decreased to 4.1%. We believe total employment should remain at healthy levels supporting the trend of modest growth in total miles driven in the U.S. and the continued demand for automotive aftermarket products.
We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values of hard work and excellent customer service.
27
RESULTS OF OPERATIONS
The table below compares the Company’s selected financial data over a ten-year period:
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Year ended December 31, |
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||
(In thousands, except per share, Team Members, stores and ratio data) |
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SELECT INCOME STATEMENT RELATED DATA: |
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Percentage increase in comparable store sales (a)(b) |
| 6.4 | % | 13.3 | % | 10.9 | % | 4.0 | % | 3.8 | % | 1.4 | % | 4.8 | % | 7.5 | % | 6.0 | % | 4.6 | % |
Sales ($) |
| 14,409,860 | 13,327,563 | 11,604,493 | 10,149,985 | 9,536,428 | 8,977,726 | 8,593,096 | 7,966,674 | 7,216,081 | 6,649,237 | ||||||||||
Gross profit |
| 7,381,706 | 7,019,949 | 6,085,692 | 5,394,691 | 5,039,966 | 4,720,683 | 4,509,011 | 4,162,643 | 3,708,901 | 3,369,001 | ||||||||||
Operating income |
| 2,954,491 | 2,917,168 | 2,419,336 | 1,920,726 | 1,815,184 | 1,725,400 | 1,699,206 | 1,514,021 | 1,270,374 | 1,103,485 | ||||||||||
Net income ($) (c)(d) |
| 2,172,650 | 2,164,685 | 1,752,302 | 1,391,042 | 1,324,487 | 1,133,804 | 1,037,691 | 931,216 | 778,182 | 670,292 | ||||||||||
Earnings per share – basic ($) |
| 33.75 | 31.39 | 23.74 | 18.07 | 16.27 | 12.82 | 10.87 | 9.32 | 7.46 | 6.14 | ||||||||||
Earnings per share – assuming dilution ($) (c)(d) |
| 33.44 | 31.10 | 23.53 | 17.88 | 16.10 | 12.67 | 10.73 | 9.17 | 7.34 | 6.03 | ||||||||||
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SELECT BALANCE SHEET AND CASH FLOW RELATED DATA: | | | | | | | | | | | | | | | | | | | | | |
Total assets ($) (e) |
| 12,627,979 | 11,718,707 | 11,596,642 | 10,717,160 | 7,980,789 | 7,571,885 | 7,204,189 | 6,676,684 | 6,532,083 | 6,057,895 | ||||||||||
Total debt ($) (e) | | 4,371,653 | 3,826,978 | 4,123,217 | 3,890,527 | 3,417,122 | 2,978,390 | 1,887,019 | 1,390,018 | 1,388,422 | 1,386,895 | ||||||||||
Shareholders’ equity ($) (c) |
| (1,060,752) | (66,423) | 140,258 | 397,340 | 353,667 | 653,046 | 1,627,136 | 1,961,314 | 2,018,418 | 1,966,321 | ||||||||||
Inventory turnover (f) |
| 1.7 | 1.7 | 1.5 | 1.4 | 1.4 | 1.4 | 1.5 | 1.5 | 1.4 | 1.4 | ||||||||||
Accounts payable to inventory (g) |
| 134.9 | % | 127.4 | % | 114.5 | % | 104.4 | % | 105.7 | % | 106.0 | % | 105.7 | % | 99.1 | % | 94.6 | % | 86.6 | % |
Cash provided by operating activities ($) (h) |
| 3,148,250 | 3,207,310 | 2,836,603 | 1,708,479 | 1,727,555 | 1,403,687 | 1,510,713 | 1,345,488 | 1,190,430 | 908,026 | ||||||||||
Capital expenditures ($) |
| 563,342 | 442,853 | 465,579 | 628,057 | 504,268 | 465,940 | 476,344 | 414,020 | 429,987 | 395,881 | ||||||||||
Free cash flow ($) (h)(i) |
| 2,371,123 | 2,548,922 | 2,189,995 | 1,020,649 | 1,188,584 | 889,059 | 978,375 | 868,390 | 760,443 | 512,145 | ||||||||||
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SELECT OPERATING DATA: |
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Number of Team Members at year end |
| 87,377 | 82,852 | 77,654 | 82,484 | 78,882 | 75,552 | 74,580 | 71,621 | 67,569 | 61,909 | ||||||||||
Total number of stores at year end (j)(k) |
| 5,971 | 5,784 | 5,616 | 5,460 | 5,219 | 5,019 | 4,829 | 4,571 | 4,366 | 4,166 | ||||||||||
Number of U.S. stores at year end (j) | | 5,929 | 5,759 | 5,594 | 5,439 | 5,219 | 5,019 | 4,829 | 4,571 | 4,366 | 4,166 | ||||||||||
Number of Mexico stores at year end (k) | | 42 | 25 | 22 | 21 | — | — | — | — | — | — | ||||||||||
Store square footage at year end (a)(l) | | 44,604 | 43,185 | 41,668 | 40,227 | 38,455 | 36,685 | 35,123 | 33,148 | 31,591 | 30,077 | ||||||||||
Sales per weighted-average store ($) (a)(m) |
| 2,415 | 2,298 | 2,057 | 1,881 | 1,842 | 1,807 | 1,826 | 1,769 | 1,678 | 1,614 | ||||||||||
Sales per weighted-average square foot ($) (a)(l)(n) |
| 322 | 307 | 277 | 255 | 251 | 248 | 251 | 244 | 232 | 224 | ||||||||||
(a) | Represents O’Reilly’s U.S. operations only. |
(b) | Comparable store sales are calculated based on the change in sales of U.S. stores open at least one year and excludes sales of specialty machinery, sales to independent parts stores, sales to Team Members, and sales from Leap Day during the years ended December 31, 2020 and 2016. Online sales, resulting from ship-to-home orders and pick-up-in-store orders for U.S. stores open at least one year are included in the comparable store sales calculation. |
(c) | During the year ended December 31, 2017, the Company adopted a new accounting standard that requires excess tax benefits related to share-based compensation payments to be recorded through the income statement. In compliance with the standard, the Company did not restate prior period amounts to conform to current period presentation. The Company recorded a cumulative effect adjustment to opening retained earnings, due to the adoption of the new accounting standard. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information. |
(d) | Following the enactment of the U.S. Tax Cuts and Jobs Act in December of 2017, the Company revalued its deferred income tax liabilities, which resulted in a one-time benefit to the Company’s Consolidated Statement of Income for the years ended December 31, 2018 and 2017. See Note 13 “Income Taxes” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2018, for more information. |
(e) | Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of new accounting standards during the fourth quarter ended December 31, 2015. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2015, for more information. |
(f) | Inventory turnover is calculated as cost of goods sold for the last 12 months divided by average inventory. Average inventory is calculated as the average of inventory for the trailing four quarters used in determining the denominator. |
(g) | Accounts payable to inventory is calculated as accounts payable divided by inventory. |
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(h) | Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard during the first quarter ended March 31, 2017. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information. |
(i) | Free cash flow is calculated as net cash provided by operating activities less capital expenditures, excess tax benefit from share-based compensation payments and investment in tax credit equity investments for the period. |
(j) | In 2016 and 2018, the Company acquired materially all assets of Bond Auto Parts (“Bond”) and Bennett Auto Supply, Inc. (“Bennett”), respectively. After the close of business on December 31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett, including 33 stores that were not included in the 2018 store count and were not operated by the Company in 2018, but beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, and during the year ended December 31, 2019, the Company merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores. Financial results for these acquired companies have been included in the Company’s consolidated financial statements from the dates of the acquisitions forward. |
(k) | In 2019, the Company acquired Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), which added 21 stores to the O’Reilly store count. Financial results for this acquired company have been included in the Company’s consolidated financial statements beginning from the date of the acquisition. |
(l) | Square footage includes normal selling, office, stockroom and receiving space. |
(m) | Sales per weighted-average store are weighted to consider the approximate dates of store openings, acquisitions or closures. |
(n) | Sales per weighted-average square foot are weighted to consider the approximate dates of domestic store openings, acquisitions, expansions or closures. |
The following table includes income statement data as a percentage of sales, which is calculated independently and may not compute to presented totals due to rounding differences, for the years ended December 31, 2017, 20162022 and 2015:
| For the Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Cost of goods sold, including warehouse and distribution expenses | 47.4 | 47.5 | 47.7 | |||||
| Gross profit | 52.6 | 52.5 | 52.3 | |||||
| Selling, general and administrative expenses | 33.4 | 32.7 | 33.2 | |||||
Operating income (1) | 19.2 | 19.8 | 19.0 | |||||
| Interest expense | (1.0 | ) | (0.8 | ) | (0.7 | ) | ||
| Interest income | — | 0.1 | — | |||||
| Income before income taxes | 18.2 | 19.1 | 18.3 | |||||
| Provision for income taxes | 5.6 | 7.0 | 6.6 | |||||
| Net income | 12.6 | % | 12.1 | % | 11.7 | % | ||
| | | | | | |
| | For the Year Ended | ||||
| | December 31, | ||||
|
| 2022 | | 2021 | ||
Sales |
| 100.0 | % | | 100.0 | % |
Cost of goods sold, including warehouse and distribution expenses |
| 48.8 | | | 47.3 |
|
Gross profit |
| 51.2 | | | 52.7 |
|
Selling, general and administrative expenses |
| 30.7 | | | 30.8 |
|
Operating income |
| 20.5 |
| | 21.9 |
|
Interest expense |
| (1.1) | | | (1.1) |
|
Interest income |
| — | | | 0.1 |
|
Income before income taxes |
| 19.4 | | | 20.9 | |
Provision for income taxes |
| 4.3 | | | 4.6 |
|
Net income (1) |
| 15.1 | % | | 16.2 | % |
(1) Each percentage of sales amount is calculated independently and may not compute to presented totals.
2022 Compared to 2016
Sales:
Sales for the year ended December 31, 2017,2022, increased $385 million$1.08 billion, or 8%, to $8.98$14.41 billion from $8.59$13.33 billion for the same period one year ago, representing an increase of 4%.in 2021. Comparable store sales for stores open at least one year increased 1.4%6.4% and 4.8%13.3% for the years ended December 31, 20172022 and 2016,2021, respectively. Comparable store sales are calculated based on the changechanges in sales offor U.S. stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team MembersMembers. Online sales, resulting from ship-to-home orders and pickup in-store orders for U.S. stores open at least one year are included in the comparable store sales from Leap Day during the year ended December 31, 2016.calculation.
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The following table presents the components of the increase in sales for the year ended December 31, 20172022 (in millions):
| Increase in Sales for the Year Ended December 31, 2017, Compared to the Same Period in 2016 | |||
| Store sales: | |||
| Comparable store sales, including sales from the 48 acquired Bond stores | $ | 182 | |
| Non-comparable store sales: | |||
| Sales for stores opened throughout 2016, excluding stores open at least one year that are included in comparable store sales | 126 | ||
| Sales for stores opened throughout 2017 | 108 | ||
| Sales from Leap Day in 2016 | (25 | ) | |
| Sales in 2016 for stores that have closed | (5 | ) | |
| Non-store sales: | |||
| Includes sales of machinery and sales to independent parts stores and Team Members | (1 | ) | |
| Total increase in sales | $ | 385 | |
| | | |
|
| Increase in Sales for the Year Ended | |
| | December 31, 2022, | |
| | Compared to the Same Period in 2021 | |
Store sales: |
| |
|
Comparable store sales | | $ | 835 |
Non-comparable store sales: | |
| |
Sales for U.S. stores opened throughout 2021, excluding stores open at least one year that are included in comparable store sales, and Mexico store sales | |
| 95 |
Sales for U.S. stores opened throughout 2022 | |
| 137 |
Sales for stores that have closed, including temporarily closed stores | |
| (6) |
Non-store sales: | |
| |
Includes sales of machinery, sales to independent parts stores and sales to Team Members | |
| 21 |
Total increase in sales | | $ | 1,082 |
We believe the increased sales achieved by our stores wereare the result of store growth, sales from the 48 acquired Bond stores, the high levels of customer service provided by our well-trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory infrom our regional distribution centers and hub store network, enhanced services and programs offered in our stores, a broader selection of product offerings in most stores with a dynamic catalog system to identify and source parts, a targeted promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of our stores, the Omnichannel experience, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers.
Our comparable store sales increase for the year ended December 31, 2017,2022, was driven by increases in average ticket values for both professional service provider and DIY customers and positive transaction counts from professional service provider customers, partially offset by negative customer transaction counts from both our DIY and
| Increase in Sales for the Year Ended December 31, 2016, Compared to the Same Period in 2015 | |||
| Store sales: | |||
| Comparable store sales | $ | 375 | |
| Non-comparable store sales: | |||
| Sales for stores opened throughout 2015, excluding stores open at least one year that are included in comparable store sales | 115 | ||
| Sales for stores opened throughout 2016 and sales from acquired Bond stores | 106 | ||
| Sales from Leap Day | 24 | ||
| Sales in 2015 for stores that have closed | (4 | ) | |
| Non-store sales: | |||
| Includes sales of machinery and sales to independent parts stores and Team Members | 10 | ||
| Total increase in sales | $ | 626 | |
We opened 210187 and 168 net, new stores and acquired 48 Bond stores during the yearyears ended December 31, 2016, compared2022 and 2021, respectively. We anticipate new store growth will be 180 to opening 205190 net, new stores for the year ended December 31, 2015. As of December 31, 2016, we operated 4,829 storesstore openings in 47 states compared to 4,571 stores in 44 states at December 31, 2015.
Gross profit:
Gross profit for the year ended December 31, 2016,2022, increased 5% to $4.51$7.38 billion (or 52.5%51.2% of sales) from $4.16$7.02 billion (or 52.3%52.7% of sales) for the same period one year prior, representing an increase of 8%.in 2021. The increase in gross profit dollars for the year ended December 31, 2016,2022, was primarily athe result of new store sales and the increase in comparable store sales at existing stores, sales from new stores and one additional day due to Leap Day.stores. The increasedecrease in gross profit as a percentage of sales for the year ended December 31, 2016,2022, was primarily due to productthe impact from the rollout of our professional pricing initiative, which was a strategic investment aimed at ensuring we are more competitively priced on the professional side of our business; a greater percentage of our total sales mix generated from professional service provider customers, which carry a lower gross margin than DIY sales; and a greater benefit in the prior year from selling through inventory purchased prior to recent acquisition cost improvements, partially offset by a larger LIFO impact. Product acquisitionincreases and corresponding selling price increases. We determine inventory cost improvements areusing the result of our ongoing negotiations with our suppliers to improve our inventory purchase costs based on our increasing scale. The non-cash LIFO impact is the result of these continued product acquisition cost reductions, and due to these reductions, we fully depletedlast-in, first-out (“LIFO”) method but had, over time, seen our LIFO reserve balance exhausted, which resulted in 2013. Oura LIFO inventory value above replacement cost prior to September 30, 2021. As our policy is to not write upwrite-up inventory in excess of replacement cost, and accordingly, we werehad been effectively valuing our inventory at replacement cost.cost, which resulted in a benefit when selling prices increased as we sold through this lower cost inventory. In the third quarter of 2021, our LIFO reserve reverted back to a more typical credit balance, due to the significant inflationary acquisition cost increases. During the yearsthree months ended DecemberMarch 31, 2016 and 2015, our LIFO costs were written down by approximately $49 million and $28 million, respectively, to reflect2022, we realized the final benefit from selling through inventory valued at the older, lower replacement cost.cost, at a lesser amount than the full year benefit received in 2021.
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Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A&A”) for the year ended December 31, 2016,2022, increased 8% to $2.81$4.43 billion (or 32.7%30.7% of sales) from $2.65$4.10 billion (or 33.2%30.8% of sales) for the same period one year prior, representing an increase of 6%.in 2021. The increase in total SG&A dollars for the year ended December 31, 2016,2022, was primarily the result of additional Team Members, facilities and vehicles to support our increased sales and store count, inflationary pressures on wages, benefits and fuel costs, as compared to the same period one additional day dueyear ago, and a non-cash charge associated with our transition to Leap Day.an enhanced paid time-off program for our Team Members. The decrease in SG&A as a percentage of sales for the year ended December 31, 2016,2022, was primarily the result of increasedprincipally due to leverage of fixed store occupancyoperating costs on strong comparable store sales, growthpartially offset by inflationary pressures on wages, benefits and a $19 million litigation lossfuel costs, as compared to the same period one year ago, and the charge in 2015, resulting fromassociated with our transition to an adverse verdict in a contract dispute with a former service provider.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2016,2022, increased 1% to $1.70$2.95 billion (or 19.8%20.5% of sales) from $1.51$2.92 billion (or 19.0%21.9% of sales) for the same period one year prior, representing an increase of 12%.
Other income and expense:
Total other expense for the year ended December 31, 2016,2022, increased 15% to $62$156 million (or 0.7%1.1% of sales), from $54$135 million (or 0.7%1.0% of sales) for the same period one year prior, representing an increase of 16%.in 2021. The increase in total other expense for the year ended December 31, 2016,2022, was primarily the result of increased interest expense on higher average outstanding borrowings, and increased amortization of debt issuance costs, partially offset by an increaseas well as a decrease in the value of our trading securities.
Income taxes:
Our provision for income taxes for the year ended December 31, 2016,2022, increased 1% to $600$626 million (36.6%(22.4% effective tax rate) from $529$617 million (36.2%(22.2% effective tax rate) for the same period one year prior, representing an increase of 13%.in 2021. The increase in our provision for income taxes for the year ended December 31, 2016,2022, was the result of higher taxable income in 2016, primarily driven by our strong operating results, and higher effectivelower excess tax rates.benefits from share-based compensation. The increase in our effective tax rate for the year ended December 31, 2016,2022, was primarily due to a larger amountthe result of favorable resolutions of historicalthe lower excess tax matters in 2015, compared to 2016, and a smaller benefit in 2016benefits from the realization of employment tax credits.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2016,2022, increased to $1.04$2.17 billion (or 12.1%15.1% of sales), from $931 million$2.16 billion (or 11.7%16.2% of sales) for the same period one year prior, representing an increase of 11%.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2016,2022, increased 17%8% to $10.73$33.44 on 9765 million shares from $9.17$31.10 on 10270 million shares for the same period onein 2021.
2021 Compared to 2020
A discussion of the changes in our results of operations for the year prior.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to invest open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain our existing stores, develop enhanced information technology systems and tools and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. TheOur material cash requirements necessary to maintain the current operations of our long-term business strategy include, but are not limited to, inventory purchases, human capital obligations, including payroll and benefits, contractual obligations, including debt and interest obligations, capital expenditures, payment of income taxes and other operational priorities. We expect to fund our short- and long-term cash and capital requirements with our primary sources of our liquidity, arewhich include funds generated from the normal course of our business operations, and borrowedborrowings under our unsecured
31
products or changes in customer buying patternspatterns. Additionally, these factors could negatively impact our ability to generate funds from operations. Additionally, decreased demand or changes in buying patterns couldalso impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.
Our material contractual cash obligations as of December 31, 2022, included commitments for short and long-term debt arrangements and interest payments related to long-term debt, future minimum payments under non-cancelable lease arrangements, self-insurance reserves, projected obligations related to future payments under the Company’s nonqualified deferred compensation plan, purchase obligations for construction contract commitments, uncertain tax positions and associated estimated interest and penalties, payments for certain deferred income taxes and commitments for the purchase of inventory. We believe thatexpect to fund these various commitments and obligations primarily with operating cash flows expected to be provided by operating activities and availabilitygenerated in the normal course of business or through borrowings under our unsecured revolving credit facility will be sufficientfacility. See Note 5 “Leases,” Note 12 “Share-Based Compensation and Benefit Plans,” Note 13 “Commitments” and Note 15 “Income Taxes” to fund boththe Consolidated Financial Statements for further information on our short-termleasing arrangements, share-based compensation payments, construction commitments and long-term capital and liquidity needs foruncertain tax positions, respectively, which are not reflected in the foreseeable future. However, there can be no assurance that we will continue to generate cash flows at or above recent levels.
The following table highlights our liquidityidentifies the estimated payments for each of the next five years, and in the aggregate thereafter, of the Company’s debt instruments and related ratiosinterest payments and self-insurance reserves as of December 31, 2017 and 2016 (dollars in millions)2022 (in thousands):
| December 31, | Percentage Change | ||||||||||
| Liquidity and Related Ratios | 2017 | 2016 | |||||||||
| Current assets | $ | 3,398 | $ | 3,258 | 4.3 | % | |||||
| Current liabilities | 3,647 | 3,401 | 7.2 | % | |||||||
Working capital (1) | (250 | ) | (143 | ) | (74.8 | )% | |||||
| Total debt | 2,978 | 1,887 | 57.8 | % | |||||||
| Total equity | $ | 653 | $ | 1,627 | (59.9 | )% | |||||
Debt to equity (2) | 4.56:1 | 1.16:1 | 293.1 | % | |||||||
| | | | | | |
| | December 31, 2022 | ||||
| | Long-Term Debt Principal | | Self-Insurance | ||
|
| and Interest Payments (1) |
| Reserves (2) | ||
2023 | | $ | 463,275 | | $ | 138,926 |
2024 | |
| 157,500 | |
| 40,347 |
2025 | |
| 157,500 | |
| 27,803 |
2026 | |
| 647,650 | |
| 16,736 |
2027 | | | 887,950 | |
| 8,192 |
Thereafter | | | 3,153,025 | |
| 13,558 |
Contractual cash obligations | | $ | 5,466,900 | | $ | 245,562 |
(1) | See Note 7 “Financing” to the Consolidated Financial Statements for further information on our debt instruments and related interest payments. |
(2) | See Note 13 “Commitments” and Note 1 “Summary of Significant Accounting Policies” to |
Due to the increase in inventory, resultingabsence of scheduled maturities, the nature of the account or the commitment’s cancellation terms, the timing of payments for certain deferred income taxes, uncertain tax positions and commitments related to future payments under the Company’s nonqualified compensation plan cannot be determined and are therefore excluded from the opening of 190 net, new storesabove table, except for amounts estimated to be payable in 2017. The increase2023, which are included in current liabilities was primarily due“Current liabilities” on our Consolidated Balance Sheets.
Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity, for which we have an obligation to the increaseentity that is not recorded in accounts payable, resulting from inventory growth relatedour consolidated financial statements. We have entered into an agreement to new store openings. Our accounts payablemake capital contributions to inventory ratio was 106.0% ascertain tax credit equity investments for the purpose of December 31, 2017, as comparedreceiving renewable energy tax credits. We are required to 105.7% inmake capital contributions totaling $3.4 million upon achievement of project milestones by the prior year. The increase in total debt was attributablesolar or wind energy farms, the timing of which is variable and outside of the Company’s control. See Note 7 “Financing” to the issuance of $750 million of 3.600% Senior Notes due 2027 and borrowings of $346 millionConsolidated Financial Statements for further information on our revolving credit facility at December 31, 2017. The decrease in total equity resulted from the impactstand-by letters of share repurchase activity, undercredit.
We do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our share repurchase program, on retained deficit and additional paid-in-capital, partially offset by a decrease in retained deficit from net income for the year ended December 31, 2017.financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.
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The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31, 2017, 20162022, 2021 and 20152020 (in thousands):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
Liquidity: |
| 2022 |
| 2021 |
| 2020 | |||
Total cash provided by/(used in): |
| |
|
| |
|
| |
|
Operating activities | | $ | 3,148,250 | | $ | 3,207,310 | | $ | 2,836,603 |
Investing activities | |
| (739,985) | |
| (615,620) | |
| (614,895) |
Financing activities | |
| (2,662,536) | |
| (2,694,858) | |
| (1,796,577) |
Effect of exchange rate changes on cash | | | 741 | | | (359) | | | 103 |
Net (decrease) increase in cash and cash equivalents | | $ | (253,530) | | $ | (103,527) | | $ | 425,234 |
| | | | | | | | | |
Capital expenditures | | $ | 563,342 | | $ | 442,853 | | $ | 465,579 |
Free cash flow (1) | | | 2,371,123 | | | 2,548,922 | |
| 2,189,995 |
| For the Year Ended December 31, | ||||||||||||
| Liquidity: | 2017 | 2016 | 2015 | |||||||||
| Total cash provided by/(used in): | ||||||||||||
Operating activities (1) | $ | 1,403,687 | $ | 1,510,713 | $ | 1,345,488 | ||||||
| Investing activities | (464,223 | ) | (529,096 | ) | (407,188 | ) | ||||||
Financing activities (1) | (1,039,714 | ) | (951,320 | ) | (1,072,559 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (100,250 | ) | $ | 30,297 | $ | (134,259 | ) | ||||
| Capital expenditures | $ | 465,940 | $ | 476,344 | $ | 414,020 | ||||||
Free cash flow (2) | 889,059 | 978,375 | 868,390 | |||||||||
| (1) | |
| Calculated as net cash provided by operating activities, less capital expenditures, |
Cash and cash equivalents balances held outside of the U.S. were $11.1 million and $7.5 million as of December 31, 2022 and 2021, respectively, which was generally utilized to support the liquidity needs of foreign operations in Mexico.
Operating activities:
The decrease in net cash provided by operating activities in 20172022 compared to 20162021 was primarily due to a smallerlarger decrease in our net inventory investment, partially offset by an increase in net income. Net inventory investment reflects our investment in inventory, net of the amount of accounts payable to suppliers. Our accounts payable to inventory ratio was 106.0%, 105.7%accrued benefits and 99.1% as of December 31, 2017, 2016 and 2015, respectively.withholdings. The smaller increase in our accounts payable to inventory ratio in 2017 was primarily attributable to fewer new suppliers entering our supplier financing programs in 2017 and a smallerlarger decrease in net inventory, due to a softer sales environment, as compared to 2016.
Investing activities:
The increase in net cash used in investing activities in 20162022 compared to 20152021 was primarily the result of an increase in capital expenditures and other investing activities in 2016. Total capital expenditures were $476 million and $414 million in 2016 and 2015, respectively, and the increase was primarily related to the timing of property acquisitions, closing and construction costs for new stores and our distribution expansion projects during 2016, as compared to 2015.expenditures. The increase in other investing activitiescapital expenditures was primarily due to small acquisitions during 2016.
We opened 190, 210,187 and 205168 net, new stores in 2017, 20162022 and 2015, respectively, and acquired 48 Bond stores in 2016.2021, respectively. We plan to open 200180 to 190 net, new stores in 2018.2023. The current costs associated with the openingexpected openings of a newowned store locations in 2023, including the cost of land acquisition, building improvements,construction, fixtures, vehicles, net inventory investment and computer equipment, are estimated to average approximately $1.6$2.8 million to $1.8 million;$3.0 million per store; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.
Financing activities:
The decrease in net cash used in financing activities in 20162022 compared to 20152021 was primarily attributable to net proceeds from the issuance of long-term debt during 2016,in 2022, partially offset by a greater impact from thean increase in repurchases of our common stock underin 2022.
2021 Compared to 2020:
A discussion of the changes in our share repurchase program during 2016,operating activities, liquidity activities and financing activities for the year ended December 31, 2021, as compared to 2015.
Debt instruments:
See Note 7 “Financing” to the Consolidated Financial Statements for information concerning the Company’s credit facility:
Debt covenants:
The indentures governing our senior notes contain covenants that limit our ability and the ability of certain of our subsidiaries to, among other things, create certain liens on assets to secure certain debt and enter into certain sale and leaseback transactions, and limit our ability to merge or consolidate with another company or transfer all or substantially all of our property, in each case as set forth in the
33
indentures. These covenants are, however, subject to a number of important limitations and exceptions. As of December 31, 2017,2022, we were in compliance with the covenants applicable to our senior notes.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments and five-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that we should default on any covenant contained within the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from our lenders.
We had a consolidated fixed charge coverage ratio of 5.726.71 times and 6.156.97 times as of December 31, 20172022 and 2016,2021, respectively, and a consolidated leverage ratio of 1.981.73 times and 1.511.59 times as of December 31, 20172022 and 2016,2021, respectively, remaining in compliance with all covenants related to the borrowing arrangements.
34
The table below outlines the calculations of the consolidated fixed charge coverage ratio and consolidated leverage ratio covenants, as defined in the Credit Agreement governing the Revolving Credit Facility, for the years ended December 31, 20172022 and 20162021 (dollars in thousands):
| | | | | | | |
| | | For the Year Ended | ||||
| | | December 31, | ||||
| |
| 2022 |
| 2021 | ||
GAAP net income | | $ | 2,172,650 | | $ | 2,164,685 | |
Add: | Interest expense | |
| 157,720 | |
| 144,768 |
| Rent expense (1) | |
| 393,032 | |
| 372,022 |
| Provision for income taxes | |
| 626,005 | |
| 617,229 |
| Depreciation expense | |
| 352,224 | |
| 320,352 |
| Amortization expense | |
| 5,709 | |
| 7,865 |
| Non-cash share-based compensation | |
| 26,458 | |
| 24,656 |
Non-GAAP EBITDAR | | $ | 3,733,798 | | $ | 3,651,577 | |
| | | | | | | |
| Interest expense | | $ | 157,720 | | $ | 144,768 |
| Capitalized interest | |
| 5,488 | |
| 7,001 |
| Rent expense (1) | |
| 393,032 | |
| 372,022 |
Total fixed charges | | $ | 556,240 | | $ | 523,791 | |
| | | | | | | |
Consolidated fixed charge coverage ratio | |
| 6.71 | |
| 6.97 | |
| | | | | | | |
GAAP debt | | $ | 4,371,653 | | $ | 3,826,978 | |
Add: | Stand-by letters of credit | |
| 101,741 | |
| 83,985 |
| Discount on senior notes | |
| 6,285 | |
| 4,360 |
| Debt issuance costs | |
| 22,062 | |
| 18,662 |
| Five-times rent expense | |
| 1,965,160 | |
| 1,860,110 |
Non-GAAP adjusted debt | | $ | 6,466,901 | | $ | 5,794,095 | |
| | | | | | | |
Consolidated leverage ratio | |
| 1.73 | |
| 1.59 | |
(1) | The table below outlines the calculation of Rent expense and reconciles Rent expense to Total lease cost, per Accounting Standard Codification 842 (“ASC 842”), the most directly comparable GAAP financial measure, for the years ended December 31, 2022 and 2021 (in thousands): |
| | | | |
Total lease cost, per ASC 842, for the year ended December 31, 2022 |
| $ | 467,758 | |
Less: | Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2022 | |
| 74,726 |
Rent expense for the year ended December 31, 2022 | | $ | 393,032 | |
| | | | |
Total lease cost, per ASC 842, for the year ended December 31, 2021 | | $ | 443,484 | |
Less: | Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2021 | | | 71,462 |
Rent expense for the year ended December 31, 2021 | | $ | 372,022 | |
| For the Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| GAAP net income | $ | 1,133,804 | $ | 1,037,691 | |||
| Add: Interest expense | 91,349 | 70,931 | |||||
| Rent expense | 298,614 | 283,253 | |||||
| Provision for income taxes | 504,000 | 599,500 | |||||
| Depreciation expense | 232,674 | 217,009 | |||||
| Amortization expense | 1,171 | 857 | |||||
| Non-cash share-based compensation | 19,401 | 18,859 | |||||
| Non-GAAP EBITDAR | $ | 2,281,013 | $ | 2,228,100 | |||
| Interest expense | $ | 91,349 | $ | 70,931 | |||
| Capitalized interest | 8,548 | 7,933 | |||||
| Rent expense | 298,614 | 283,253 | |||||
| Total fixed charges | $ | 398,511 | $ | 362,117 | |||
| Consolidated fixed charge coverage ratio | 5.72 | 6.15 | |||||
| GAAP debt | $ | 2,978,390 | $ | 1,887,019 | |||
| Add: Stand-by letters of credit | 36,843 | 38,680 | |||||
| Discount on senior notes | 3,721 | 3,149 | |||||
| Debt issuance costs | 13,889 | 9,832 | |||||
| Five-times rent expense | 1,493,070 | 1,416,265 | |||||
| Non-GAAP adjusted debt | $ | 4,525,913 | $ | 3,354,945 | |||
| Consolidated leverage ratio | 1.98 | 1.51 | |||||
The table below outlines the calculation of Free cash flow and reconciles Free cash flow to Net cash provided by operating activities, the most directly comparable GAAP financial measure, for the years ended December 31, 2017, 20162022, 2021 and 20152020 (in thousands):
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
Cash provided by operating activities (1) | $ | 1,403,687 | $ | 1,510,713 | $ | 1,345,488 | |||||
| Less: Capital expenditures | 465,940 | 476,344 | 414,020 | ||||||||
| Excess tax benefit from share-based compensation | 48,688 | 55,994 | 63,078 | ||||||||
| Free cash flow | $ | 889,059 | $ | 978,375 | $ | 868,390 | |||||
| | | | | | | | | | |
| | | For the Year Ended | |||||||
| | | December 31, | |||||||
| |
| 2022 |
| 2021 |
| 2020 | |||
Cash provided by operating activities | | $ | 3,148,250 | | $ | 3,207,310 | | $ | 2,836,603 | |
Less: | Capital expenditures | |
| 563,342 | |
| 442,853 | |
| 465,579 |
| Excess tax benefit from share-based compensation payments | |
| 25,503 | |
| 35,202 | |
| 16,918 |
| Investment in tax credit equity investments | |
| 188,282 | |
| 180,333 | |
| 164,111 |
Free cash flow | | $ | 2,371,123 | | $ | 2,548,922 | | $ | 2,189,995 | |
Free cash flow, the consolidated fixed charge coverage ratio and the consolidated leverage ratio discussed and presented in the tables above are not derived in accordance with United States generally accepted accounting principles (“GAAP”). We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial
35
information. We believe that the presentation of our free cash flow, consolidated fixed charge coverage ratio and consolidated leverage ratio provides meaningful supplemental information to both management and investors and reflects the required covenants under the Credit Agreement. We include these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the tables above, a reconciliation to the most directly comparable GAAP measures.
Share repurchase program:
| For the Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Shares repurchased | 9,301 | 5,698 | |||||
| Average price per share | $ | 233.57 | $ | 264.21 | |||
| Total investment | $ | 2,172,437 | $ | 1,505,371 | |||
See Note 9 “Share-Based Compensation and Benefit Plans” and Note 10 “Commitments” to the Consolidated Financial Statements. We expect to fund these commitments primarily with operating cash flows expected to be generated in the normal course of business or through borrowings under our Revolving Credit Facility.
| Payments Due By Period | ||||||||||||||||||||
| Contractual Obligations | Total | Before 1 Year | Years 1 and 2 | Years 3 and 4 | Years 5 and Over | |||||||||||||||
Long-term debt principal and interest payments (1) | $ | 3,749,456 | $ | 123,845 | $ | 245,440 | $ | 1,628,581 | $ | 1,751,590 | ||||||||||
Future minimum lease payments under operating leases (2) | 2,367,161 | 293,317 | 535,669 | 433,506 | 1,104,669 | |||||||||||||||
Self-insurance reserves (3) | 147,661 | 71,695 | 47,306 | 18,490 | 10,170 | |||||||||||||||
| Construction commitments | 54,368 | 54,368 | — | — | — | |||||||||||||||
| Total contractual cash obligations | $ | 6,318,646 | $ | 543,225 | $ | 828,415 | $ | 2,080,577 | $ | 2,866,429 | ||||||||||
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by management. Management bases its assumptions, estimates and adjustments on historical experience, current trends and other factors believed to be relevant at the time the consolidated financial statements are prepared. Management believes that the following policies are critical due to the inherent uncertainty of these matters and the complex and subjective judgments required in establishing these estimates. Management continues to review these critical accounting policiesestimates and estimatesassumptions to ensure that the consolidated financial statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates and such differences could be material.
Self-Insurance Reserves:
We use a combination of insurance and Shrink:
When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. The assumptions made by management as they relate to each of these factors represent our judgment as to the lowermost probable cumulative impact of cost or market. The extended natureeach factor to our future obligations. Certain of the life cycleself-insurance liabilities are determined at an estimate of our products is such thattheir net present value, using the riskU.S. treasury risk-free rate. Our calculation of obsolescenceself-insurance liabilities requires management to apply a significant amount of our inventory is minimal.subjective judgment to estimate the ultimate cost to resolve reported claims and claims incurred but not yet reported as of the balance sheet date. The products that we sell generally have applications in our markets for a long periodapplication of time in conjunction with the corresponding vehicle population. We have developed sophisticated systems for monitoring the life cycle of a given product and, accordingly, have historically been very successful in adjusting the volume of our inventory in conjunction with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory through a charge to cost of sales in the isolated instances where we believe that the market value of products is lower than our recorded cost. This reserve is based on ouralternative assumptions about the marketability of our existing inventory and is subject to uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be sold in future periods. Ultimately, our projections could differ from actual results and could result in a different estimate of these liabilities. Management believes the assumptions developed and used to determine the estimate for our self-insurance reserve are reasonable. Actual claim activity or development may vary from our assumptions and estimates, which may result in material impactlosses or gains.
As we obtain additional information that affects the assumptions and estimates we used to recognize liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on this additional information. These liabilities are recorded at our estimate of their net present value. These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We could apply alternative assumptions regarding the timing of payments that could result in materially different estimates of the net present value of the liabilities.
Our self-insurance reserve estimate included on our Consolidated Balance Sheets increased $11 million from 2021 to 2022, which is primarily due to our stated inventory balances. We have historically not had to materially adjustgrowing operations, inflation, increases in healthcare costs, the number of vehicles and the number of hours worked, as well as our obsolescence reserves due to the factors discussed above and do not anticipate that we will experience material changes in our estimates in the future.
Valuation of Long-Lived Assets and Goodwill:
We evaluate the carrying value of finite and indefinite long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. As parta component of the finite long-lived assets evaluation, we review performance at the store level to identify any stores with current period operating losses that should be considered for impairment. A potential impairment has occurred if the projected future undiscounted cash flows realized from the best possible use of the asset are less than the carrying value of the asset. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. If the carrying amount of an asset exceeds its estimated future
36
cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets.
As a component of the indefinite long-lived assets evaluation, we perform a qualitative assessment to determine if events or circumstances that could affect the inputs used to determine the fair value of the intangible asset have occurred, as well as if they continue to support an indefinite useful life. Areas evaluated include changes in cost factors such as raw materials or labor, financial performance including declining revenues or cash flows, the legal, regulatory and political environment, and other industry and market considerations, including the competitive environment and changes in product demand. If events or market conditions exist that would more likely than not indicate that impairment may be necessary, a detailed quantitative assessment would be performed.
Based on our qualitative assessment, we do not believe there has been a change of events or circumstances that would indicate that a calculation of fair value of indefinite long-lived assets is required as of December 31, 2022. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual results could differ from these estimates, which could materially impact our impairment assessment.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 “Summary of these assets in the period in which the impairment occurs; however, we do not believe there has been any change of events or circumstances that would indicate that a reevaluation of goodwill is required as of December 31, 2017, nor do we believe goodwill is at risk of failing impairment testing. If the price of O’Reilly’s stock, which was a primary input used to determine our market capitalization during step one of goodwill impairment testing, changed by 10% from the value used during testing, the results and our conclusions would not have changed and no further steps would have been required.
37
| Fiscal 2017 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Comparable store sales | 0.8 | % | 1.7 | % | 1.8 | % | 1.3 | % | |||||||
| Sales | $ | 2,156,259 | $ | 2,290,829 | $ | 2,339,830 | $ | 2,190,808 | |||||||
| Gross profit | 1,131,147 | 1,200,062 | 1,230,294 | 1,159,180 | |||||||||||
| Operating income | 403,157 | 457,445 | 461,963 | 402,835 | |||||||||||
| Net income | 264,934 | 282,821 | 283,734 | 302,315 | |||||||||||
Earnings per share – basic (1) | $ | 2.88 | $ | 3.14 | $ | 3.26 | $ | 3.56 | |||||||
Earnings per share – assuming dilution (1) | $ | 2.83 | $ | 3.10 | $ | 3.22 | $ | 3.52 | |||||||
| Fiscal 2016 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Comparable store sales | 6.1 | % | 4.3 | % | 4.2 | % | 4.8 | % | |||||||
| Sales | $ | 2,096,150 | $ | 2,176,689 | $ | 2,220,955 | $ | 2,099,302 | |||||||
| Gross profit | 1,097,579 | 1,127,179 | 1,170,026 | 1,114,227 | |||||||||||
| Operating income | 418,626 | 425,061 | 447,809 | 407,710 | |||||||||||
| Net income | 255,374 | 257,794 | 278,493 | 246,030 | |||||||||||
Earnings per share – basic (1) | $ | 2.63 | $ | 2.69 | $ | 2.93 | $ | 2.62 | |||||||
Earnings per share – assuming dilution (1) | $ | 2.59 | $ | 2.65 | $ | 2.90 | $ | 2.59 | |||||||
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk:
We are subject to interest rate risk to the extent we borrow against our unsecured revolving credit facility (the “Revolving Credit Facility”) with variable interest rates based on either aan Alternative Base Rate or EurodollarAdjusted LIBO Rate, as defined in the credit agreement governing the Revolving Credit Facility. As of December 31, 2017,2022, we had no outstanding borrowings under our Revolving Credit Facility in the amount of $346 million, at the weighted-average variable interest rate of 2.675%. At this borrowing level, a 0.25% increase in interest rates would have had an unfavorable annual impact on our pre-tax earnings and cash flows in the amount of $0.9 million.
We had outstanding fixed rate debt of $2.65$4.4 billion and $1.90$3.9 billion as of December 31, 20172022 and 2016,2021, respectively. The fair value of our fixed rate debt was estimated at $2.73 billion and $1.98$4.1 billion as of December 31, 20172022 and 2016,2021, respectively, which was determined by reference to quoted market prices.
Cash equivalents risk:
We invest certain of our excess cash balances in short-term, highly-liquid instruments with maturities of 90 days or less. We do not expect any material losses from our invested cash balances and we believe that our interest rate exposure is minimal. As of December 31, 2017,2022, our cash and cash equivalents totaled $46$108.6 million.
Foreign currency risk:
Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than our entities’ functional currencies. To minimize our risk, we generally enter into transactions denominated in the respective functional currencies. Our foreign currency exposure arises from Mexican peso-denominated revenues and profits and their translation into U.S. dollars.
We view our investments in Mexican subsidiaries as long-term. The net asset exposure in the Mexican subsidiaries translated into U.S. dollars using the year-end exchange rates was $228.0 million at December 31, 2022. The year ended December 31, 2022, exchange rates of the Mexican peso, relative to the U.S. dollar, strengthened by approximately 5.2% from December 31, 2021. The potential loss in value of our net assets in the Mexican subsidiaries resulting from a 10% change in quoted foreign currency exchange rates at December 31, 2022, would be approximately $20.7 million. Any changes in our net assets in the Mexican subsidiaries relating to foreign currency exchange rates would be reflected in the financial statement through the foreign currency translation component of accumulated other comprehensive income, unless the Mexican subsidiaries are sold or otherwise disposed. A 10% change in average exchange rates would not have had a material impact on our results of operations.
38
The management of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”), under the supervision and with the participation of the Company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting includes all policies and procedures that
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company’s consolidated financial statements and has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, as stated in their report, which is included herein.
| | | | | ||
/s/ | Gregory D. Johnson | | /s/ | Jeremy A. Fletcher | ||
Gregory D. Johnson | | Jeremy A. Fletcher | ||||
Chief Executive Officer | | Executive Vice President and | ||||
February 28, | | Chief Financial Officer | ||||
| | February 28, | ||||
40
To the Shareholders and the Board of Directors of O’Reilly Automotive, Inc. and Subsidiaries
Opinion on Internal Control overOver Financial Reporting
We have audited O’Reilly Automotive, Inc.
and
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31, 20172022 and 2016, and2021, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 28, 2018,2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 28, 2018
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of O’Reilly Automotive, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”)Company) as of December 31, 20172022 and 2016, and2021, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172022 and 2016,2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)and our report dated February 28, 2018,2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
| | |
| | Valuation of Self-insurance Reserves |
Description of the Matter | | At December 31, 2022, the Company’s self-insurance reserve was $233 million. As discussed in Note 1 of the financial statements, self-insurance liabilities are estimated based upon historical claim experience and trend-lines. Auditing management’s self-insurance reserves was complex and judgmental and required us to use our actuarial specialists for certain reserves due to the estimation required in determining the ultimate claim value. The estimate is sensitive to assumptions such as the projected cost inflation, claim growth patterns and exposure forecasts. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design of controls over the Company’s self-insurance estimation process and tested the operating effectiveness of those controls including management’s controls over reviewing the appropriateness of assumptions and the completeness and accuracy of the data underlying the reserves. To test the Company’s determination of the estimated self-insurance reserves, we performed audit procedures that included, among others, involving a specialist to assist in the development of an independent actuarial |
42
estimate for certain of the reserve balances based upon current industry and economic trends, comparing certain selected assumptions used by management to our independent estimates which were developed with the assistance of our specialists, testing the underlying data used by management in the development of the reserves and testing the mathematical accuracy of the calculations. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1992.
Kansas City, Missouri
February 28, 2018
43
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 46,348 | $ | 146,598 | |||
| Accounts receivable, less allowance for doubtful accounts $12,717 in 2017 and $12,040 in 2016 | 216,251 | 197,274 | |||||
| Amounts receivable from suppliers | 76,236 | 82,105 | |||||
| Inventory | 3,009,800 | 2,778,976 | |||||
| Other current assets | 49,037 | 53,022 | |||||
| Total current assets | 3,397,672 | 3,257,975 | |||||
| Property and equipment, at cost | 5,191,135 | 4,832,342 | |||||
| Less: accumulated depreciation and amortization | 1,847,329 | 1,708,911 | |||||
| Net property and equipment | 3,343,806 | 3,123,431 | |||||
| Goodwill | 789,058 | 785,399 | |||||
| Other assets, net | 41,349 | 37,384 | |||||
| Total assets | $ | 7,571,885 | $ | 7,204,189 | |||
| Liabilities and shareholders’ equity | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 3,190,029 | $ | 2,936,656 | |||
| Self-insurance reserves | 71,695 | 67,921 | |||||
| Accrued payroll | 77,147 | 71,717 | |||||
| Accrued benefits and withholdings | 69,308 | 74,454 | |||||
| Other current liabilities | 239,187 | 249,901 | |||||
| Total current liabilities | 3,647,366 | 3,400,649 | |||||
| Long-term debt | 2,978,390 | 1,887,019 | |||||
| Deferred income taxes | 85,406 | 90,166 | |||||
| Other liabilities | 207,677 | 199,219 | |||||
| Shareholders’ equity: | |||||||
| Preferred stock, $0.01 par value: | |||||||
| Authorized shares - 5,000,000 | |||||||
| Issued and outstanding shares - none | — | — | |||||
| Common stock, $0.01 par value: | |||||||
| Authorized shares – 245,000,000 | |||||||
| Issued and outstanding shares – | |||||||
| 84,302,187 as of December 31, 2017, and | |||||||
| 92,851,815 as of December 31, 2016 | 843 | 929 | |||||
| Additional paid-in capital | 1,265,043 | 1,336,707 | |||||
| Retained (deficit) earnings | (612,840 | ) | 289,500 | ||||
| Total shareholders’ equity | 653,046 | 1,627,136 | |||||
| Total liabilities and shareholders’ equity | $ | 7,571,885 | $ | 7,204,189 | |||
| | | | | | |
| | December 31, | ||||
| | 2022 | | 2021 | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 108,583 | | $ | 362,113 |
Accounts receivable, less allowance for doubtful accounts $14,695 in 2022 and $11,870 in 2021 | |
| 343,155 | |
| 272,562 |
Amounts receivable from suppliers | |
| 127,019 | |
| 113,112 |
Inventory | |
| 4,359,126 | |
| 3,686,383 |
Other current assets | |
| 110,376 | |
| 70,092 |
Total current assets | |
| 5,048,259 | |
| 4,504,262 |
| | | | | | |
Property and equipment, at cost | |
| 7,438,065 | |
| 6,948,038 |
Less: accumulated depreciation and amortization | |
| 3,014,024 | |
| 2,734,523 |
Net property and equipment | |
| 4,424,041 | |
| 4,213,515 |
| | | | | | |
Operating lease, right-of-use assets | | | 2,112,267 | | | 1,982,478 |
Goodwill | |
| 884,445 | |
| 879,340 |
Other assets, net | |
| 158,967 | |
| 139,112 |
Total assets | | $ | 12,627,979 | | $ | 11,718,707 |
| | | | | | |
Liabilities and shareholders’ deficit | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 5,881,157 | | $ | 4,695,312 |
Self-insurance reserves | |
| 138,926 | |
| 128,794 |
Accrued payroll | |
| 126,888 | |
| 107,588 |
Accrued benefits and withholdings | |
| 166,433 | |
| 234,872 |
Current portion of operating lease liabilities | | | 366,721 | | | 337,832 |
Other current liabilities | |
| 383,692 | |
| 370,217 |
Total current liabilities | |
| 7,063,817 | |
| 5,874,615 |
| | | | | | |
Long-term debt | |
| 4,371,653 | |
| 3,826,978 |
Operating lease liabilities, less current portion | | | 1,806,656 | | | 1,701,757 |
Deferred income taxes | |
| 245,347 | |
| 175,212 |
Other liabilities | |
| 201,258 | |
| 206,568 |
| | | | | | |
Shareholders’ equity (deficit): | |
|
| |
|
|
Preferred stock, $0.01 par value: | |
| | | | |
Authorized shares – 5,000,000 | | | | | | |
Issued and outstanding shares – none | | | — | |
| — |
Common stock, $0.01 par value: | |
| | | | |
Authorized shares – 245,000,000 | | | | | | |
Issued and outstanding shares – | | | | | | |
62,353,221 as of December 31, 2022, and | | | | | | |
67,029,042 as of December 31, 2021 | | | 624 | |
| 670 |
Additional paid-in capital | |
| 1,311,488 | |
| 1,305,508 |
Retained deficit | |
| (2,375,860) | |
| (1,365,802) |
Accumulated other comprehensive income (loss) | | | 2,996 | | | (6,799) |
Total shareholders’ deficit | |
| (1,060,752) | |
| (66,423) |
| | | | | | |
Total liabilities and shareholders’ deficit | | $ | 12,627,979 | | $ | 11,718,707 |
See accompanying Notes to consolidated financial statements.
44
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Sales | $ | 8,977,726 | $ | 8,593,096 | $ | 7,966,674 | |||||
| Cost of goods sold, including warehouse and distribution expenses | 4,257,043 | 4,084,085 | 3,804,031 | ||||||||
| Gross profit | 4,720,683 | 4,509,011 | 4,162,643 | ||||||||
| Selling, general and administrative expenses | 2,995,283 | 2,809,805 | 2,648,622 | ||||||||
| Operating income | 1,725,400 | 1,699,206 | 1,514,021 | ||||||||
| Other income (expense): | |||||||||||
| Interest expense | (91,349 | ) | (70,931 | ) | (57,129 | ) | |||||
| Interest income | 2,347 | 4,224 | 2,340 | ||||||||
| Other, net | 1,406 | 4,692 | 1,134 | ||||||||
| Total other expense | (87,596 | ) | (62,015 | ) | (53,655 | ) | |||||
| Income before income taxes | 1,637,804 | 1,637,191 | 1,460,366 | ||||||||
| Provision for income taxes | 504,000 | 599,500 | 529,150 | ||||||||
| Net income | $ | 1,133,804 | $ | 1,037,691 | $ | 931,216 | |||||
| Earnings per share-basic: | |||||||||||
| Earnings per share | $ | 12.82 | $ | 10.87 | $ | 9.32 | |||||
| Weighted-average common shares outstanding – basic | 88,426 | 95,447 | 99,965 | ||||||||
| Earnings per share-assuming dilution: | |||||||||||
| Earnings per share | $ | 12.67 | $ | 10.73 | $ | 9.17 | |||||
| Weighted-average common shares outstanding – assuming dilution | 89,502 | 96,720 | 101,514 | ||||||||
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Sales | | $ | 14,409,860 | | $ | 13,327,563 | | $ | 11,604,493 |
Cost of goods sold, including warehouse and distribution expenses | |
| 7,028,154 | |
| 6,307,614 | |
| 5,518,801 |
Gross profit | |
| 7,381,706 | |
| 7,019,949 | |
| 6,085,692 |
| | | | | | | | | |
Selling, general and administrative expenses | |
| 4,427,215 | |
| 4,102,781 | |
| 3,666,356 |
Operating income | |
| 2,954,491 | |
| 2,917,168 | |
| 2,419,336 |
| | | | | | | | | |
Other income (expense): | |
|
| |
|
| |
|
|
Interest expense | |
| (157,720) | |
| (144,768) | |
| (161,126) |
Interest income | |
| 4,763 | |
| 1,971 | |
| 2,491 |
Other, net | |
| (2,879) | |
| 7,543 | |
| 5,704 |
Total other expense | |
| (155,836) | |
| (135,254) | |
| (152,931) |
| | | | | | | | | |
Income before income taxes | |
| 2,798,655 | |
| 2,781,914 | |
| 2,266,405 |
Provision for income taxes | |
| 626,005 | |
| 617,229 | |
| 514,103 |
Net income | | $ | 2,172,650 | | $ | 2,164,685 | | $ | 1,752,302 |
| | | | | | | | | |
Earnings per share-basic: | |
|
| |
|
| |
|
|
Earnings per share | | $ | 33.75 | | $ | 31.39 | | $ | 23.74 |
Weighted-average common shares outstanding – basic | |
| 64,372 | |
| 68,967 | |
| 73,817 |
| | | | | | | | | |
Earnings per share-assuming dilution: | |
|
| |
|
| |
|
|
Earnings per share | | $ | 33.44 | | $ | 31.10 | | $ | 23.53 |
Weighted-average common shares outstanding – assuming dilution | |
| 64,962 | |
| 69,611 | |
| 74,462 |
See accompanying Notes to consolidated financial statements.
45
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Total | |||||||||||||||
| Shares | Par Value | |||||||||||||||||
| Balance at December 31, 2014 | 101,603 | $ | 1,016 | $ | 1,194,929 | $ | 822,473 | $ | 2,018,418 | |||||||||
| Net income | — | — | — | 931,216 | 931,216 | |||||||||||||
| Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes | 59 | — | 11,630 | — | 11,630 | |||||||||||||
| Net issuance of common stock upon exercise of stock options | 976 | 10 | 52,901 | — | 52,911 | |||||||||||||
| Excess tax benefit from share-based compensation | — | — | 63,078 | — | 63,078 | |||||||||||||
| Share based compensation | — | — | 20,274 | — | 20,274 | |||||||||||||
| Share repurchases, including fees | (4,901 | ) | (49 | ) | (61,315 | ) | (1,074,849 | ) | (1,136,213 | ) | ||||||||
| Balance at December 31, 2015 | 97,737 | $ | 977 | $ | 1,281,497 | $ | 678,840 | $ | 1,961,314 | |||||||||
| Net income | — | — | — | 1,037,691 | 1,037,691 | |||||||||||||
| Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes | 56 | 1 | 12,613 | — | 12,614 | |||||||||||||
| Net issuance of common stock upon exercise of stock options | 757 | 8 | 47,386 | — | 47,394 | |||||||||||||
| Excess tax benefit from share-based compensation | — | — | 55,994 | — | 55,994 | |||||||||||||
| Share based compensation | — | — | 17,566 | — | 17,566 | |||||||||||||
| Share repurchases, including fees | (5,698 | ) | (57 | ) | (78,349 | ) | (1,427,031 | ) | (1,505,437 | ) | ||||||||
| Balance at December 31, 2016 | 92,852 | $ | 929 | $ | 1,336,707 | $ | 289,500 | $ | 1,627,136 | |||||||||
| Cumulative effective adjustment from adoption of ASU 2016-09 (See Note 1) | — | — | 434 | (266 | ) | 168 | ||||||||||||
| Net income | — | — | — | 1,133,804 | 1,133,804 | |||||||||||||
| Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes | 66 | — | 13,466 | — | 13,466 | |||||||||||||
| Net issuance of common stock upon exercise of stock options | 685 | 7 | 33,222 | — | 33,229 | |||||||||||||
| Share based compensation | — | — | 17,773 | — | 17,773 | |||||||||||||
| Share repurchases, including fees | (9,301 | ) | (93 | ) | (136,559 | ) | (2,035,878 | ) | (2,172,530 | ) | ||||||||
| Balance at December 31, 2017 | 84,302 | $ | 843 | $ | 1,265,043 | $ | (612,840 | ) | $ | 653,046 | ||||||||
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Net income | | $ | 2,172,650 | | $ | 2,164,685 | | $ | 1,752,302 |
Other comprehensive income (loss): | | | | | | | | | |
Foreign currency translation adjustments | |
| 9,795 | |
| (4,644) | |
| (7,045) |
Total other comprehensive income (loss) | | | 9,795 | | | (4,644) | | | (7,045) |
| | | | | | | | | |
Comprehensive income | | $ | 2,182,445 | | $ | 2,160,041 | | $ | 1,745,257 |
See accompanying Notes to consolidated financial statements.
46
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (As Adjusted, Note) | (As Adjusted, Note) | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | 1,133,804 | $ | 1,037,691 | $ | 931,216 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization of property, equipment and intangibles | 233,845 | 217,866 | 210,256 | ||||||||
| Amortization of debt discount and issuance costs | 2,871 | 2,451 | 2,106 | ||||||||
| Deferred income taxes | (4,593 | ) | 10,394 | (22,650 | ) | ||||||
| Share-based compensation programs | 19,401 | 18,859 | 21,899 | ||||||||
| Other | 11,790 | 6,434 | 6,839 | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (27,742 | ) | (38,548 | ) | (23,858 | ) | |||||
| Inventory | (231,802 | ) | (119,270 | ) | (76,226 | ) | |||||
| Accounts payable | 253,265 | 322,427 | 191,064 | ||||||||
| Income taxes payable | 14,220 | 26,880 | 81,617 | ||||||||
| Accrued payroll | 5,430 | 12,616 | (19,341 | ) | |||||||
| Accrued benefits and withholdings | 3,042 | (256 | ) | 18,904 | |||||||
| Other | (9,844 | ) | 13,169 | 23,662 | |||||||
| Net cash provided by operating activities | 1,403,687 | 1,510,713 | 1,345,488 | ||||||||
| Investing activities: | |||||||||||
| Purchases of property and equipment | (465,940 | ) | (476,344 | ) | (414,020 | ) | |||||
| Proceeds from sale of property and equipment | 4,464 | 5,119 | 2,758 | ||||||||
| Payments received on notes receivable | — | 1,047 | 4,074 | ||||||||
| Other | (2,747 | ) | (58,918 | ) | — | ||||||
| Net cash used in investing activities | (464,223 | ) | (529,096 | ) | (407,188 | ) | |||||
| Financing activities: | |||||||||||
| Proceeds from borrowings on revolving credit facility | 3,101,000 | — | — | ||||||||
| Payments on revolving credit facility | (2,755,000 | ) | — | — | |||||||
| Proceeds from the issuance of long-term debt | 748,800 | 499,160 | — | ||||||||
| Payment of debt issuance costs | (7,590 | ) | (4,125 | ) | — | ||||||
| Principal payments on capital leases | — | — | (25 | ) | |||||||
| Repurchases of common stock | (2,172,530 | ) | (1,505,437 | ) | (1,136,213 | ) | |||||
| Net proceeds from issuance of common stock | 45,762 | 59,634 | 64,613 | ||||||||
| Other | (156 | ) | (552 | ) | (934 | ) | |||||
| Net cash used in financing activities | (1,039,714 | ) | (951,320 | ) | (1,072,559 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (100,250 | ) | 30,297 | (134,259 | ) | ||||||
| Cash and cash equivalents at beginning of the year | 146,598 | 116,301 | 250,560 | ||||||||
| Cash and cash equivalents at end of the year | $ | 46,348 | $ | 146,598 | $ | 116,301 | |||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Income taxes paid | $ | 496,728 | $ | 569,677 | $ | 485,824 | |||||
| Interest paid, net of capitalized interest | 77,766 | 63,648 | 55,061 | ||||||||
| | | | | | | | | | | | | | | | | |
|
| | | | |
| |
| | | Accumulated |
| | | |||
| | | | | | | Additional | | | | Other | | | | |||
| | Common Stock | | Paid-In | | Retained | | Comprehensive | | | | ||||||
|
| Shares |
| Par Value |
| Capital |
| Deficit | | Income (Loss) |
| Total | |||||
Balance at December 31, 2019 |
| 75,619 | | $ | 756 | | $ | 1,280,760 | | $ | (889,066) | | $ | 4,890 | | $ | 397,340 |
Net income |
| — | |
| — | |
| — | |
| 1,752,302 | |
| — | |
| 1,752,302 |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (7,045) | | | (7,045) |
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes |
| 48 | |
| — | |
| 17,314 | |
| — | |
| — | |
| 17,314 |
Net issuance of common stock upon exercise of stock options |
| 288 | |
| 3 | |
| 46,279 | |
| — | |
| — | |
| 46,282 |
Share based compensation |
| — | |
| — | |
| 21,259 | |
| — | |
| — | |
| 21,259 |
Share repurchases, including fees |
| (4,832) | |
| (48) | |
| (84,771) | |
| (2,002,375) | |
| — | |
| (2,087,194) |
Balance at December 31, 2020 |
| 71,123 | | $ | 711 | | $ | 1,280,841 | | $ | (1,139,139) | | $ | (2,155) | | $ | 140,258 |
Net income |
| — | |
| — | |
| — | |
| 2,164,685 | |
| — | |
| 2,164,685 |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (4,644) | | | (4,644) |
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes |
| 39 | |
| — | |
| 18,511 | |
| — | |
| — | |
| 18,511 |
Net issuance of common stock upon exercise of stock options |
| 404 | |
| 4 | |
| 67,757 | |
| — | |
| — | |
| 67,761 |
Share based compensation |
| — | |
| — | |
| 23,054 | |
| — | |
| — | |
| 23,054 |
Share repurchases, including fees |
| (4,537) | |
| (45) | |
| (84,655) | |
| (2,391,348) | |
| — | |
| (2,476,048) |
Balance at December 31, 2021 |
| 67,029 | | $ | 670 | | $ | 1,305,508 | | $ | (1,365,802) | | $ | (6,799) | | $ | (66,423) |
Net income |
| — | |
| — | |
| — | |
| 2,172,650 | |
| — | |
| 2,172,650 |
Other comprehensive income | | — | | | — | | | — | | | — | | | 9,795 | | | 9,795 |
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes |
| 34 | |
| — | |
| 19,864 | |
| — | |
| — | |
| 19,864 |
Net issuance of common stock upon exercise of stock options |
| 251 | |
| 3 | |
| 60,974 | |
| — | |
| — | |
| 60,977 |
Share based compensation |
| — | |
| — | |
| 24,650 | |
| — | |
| — | |
| 24,650 |
Share repurchases, including fees |
| (4,961) | |
| (49) | |
| (99,508) | |
| (3,182,708) | |
| — | |
| (3,282,265) |
Balance at December 31, 2022 |
| 62,353 | | $ | 624 | | $ | 1,311,488 | | $ | (2,375,860) | | $ | 2,996 | | $ | (1,060,752) |
See accompanying Notes to consolidated financial statements.
47
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Operating activities: |
| |
|
| |
|
| |
|
Net income | | $ | 2,172,650 | | $ | 2,164,685 | | $ | 1,752,302 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
| | |
|
|
Depreciation and amortization of property, equipment and intangibles | |
| 357,933 | |
| 328,217 | |
| 314,635 |
Amortization of debt discount and issuance costs | |
| 4,704 | |
| 4,388 | |
| 4,580 |
Deferred income taxes | |
| 69,575 | |
| 20,383 | |
| 12,381 |
Share-based compensation programs | |
| 26,458 | |
| 24,656 | |
| 22,747 |
Other | |
| 885 | |
| 2,128 | |
| 4,686 |
Changes in operating assets and liabilities: | |
| | |
| | |
|
|
Accounts receivable | |
| (75,859) | |
| (47,427) | |
| (20,515) |
Inventory | |
| (669,046) | |
| (32,634) | |
| (198,864) |
Accounts payable | |
| 1,184,858 | |
| 510,911 | |
| 580,608 |
Income taxes payable | |
| 151,063 | |
| 152,339 | |
| 197,739 |
Accrued payroll | |
| 19,300 | |
| 18,714 | |
| (11,941) |
Accrued benefits and withholdings | |
| (60,072) | |
| 9,214 | |
| 189,332 |
Other | |
| (34,199) | |
| 51,736 | |
| (11,087) |
Net cash provided by operating activities | |
| 3,148,250 | |
| 3,207,310 | |
| 2,836,603 |
| | | | | | | | | |
Investing activities: | |
|
| |
|
| |
|
|
Purchases of property and equipment | |
| (563,342) | |
| (442,853) | |
| (465,579) |
Proceeds from sale of property and equipment | |
| 14,803 | |
| 9,494 | |
| 15,770 |
Investment in tax credit equity investments | | | (188,282) | | | (180,333) | | | (164,111) |
Other | |
| (3,164) | |
| (1,928) | |
| (975) |
Net cash used in investing activities | |
| (739,985) | |
| (615,620) | |
| (614,895) |
| | | | | | | | | |
Financing activities: | |
|
| |
|
| |
|
|
Proceeds from borrowings on revolving credit facility | |
| 785,800 | |
| — | |
| 1,162,000 |
Payments on revolving credit facility | |
| (785,800) | |
| — | |
| (1,423,000) |
Proceeds from the issuance of long-term debt | |
| 847,314 | |
| — | |
| 997,515 |
Principal payments on long-term debt | | | (300,000) | | | (300,000) | | | (500,000) |
Payment of debt issuance costs | |
| (6,591) | |
| (3,412) | |
| (7,929) |
Repurchases of common stock | |
| (3,282,265) | |
| (2,476,048) | |
| (2,087,194) |
Net proceeds from issuance of common stock | |
| 79,356 | |
| 84,915 | |
| 62,284 |
Other | |
| (350) | |
| (313) | |
| (253) |
Net cash used in financing activities | |
| (2,662,536) | |
| (2,694,858) | |
| (1,796,577) |
| | | | | | | | | |
Effect of exchange rate changes on cash | | | 741 | | | (359) | | | 103 |
Net (decrease) increase in cash and cash equivalents | |
| (253,530) | |
| (103,527) | |
| 425,234 |
Cash and cash equivalents at beginning of the period | |
| 362,113 | |
| 465,640 | |
| 40,406 |
Cash and cash equivalents at end of the period | | $ | 108,583 | | $ | 362,113 | | $ | 465,640 |
| | | | | | | | | |
Supplemental disclosures of cash flow information: | |
|
| |
|
| |
|
|
Income taxes paid | | $ | 415,165 | | $ | 450,935 | | $ | 305,087 |
Interest paid, net of capitalized interest | |
| 155,853 | |
| 144,293 | |
| 159,717 |
See accompanying Notes to Consolidated Financial Statementsconsolidated financial statements.
48
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
NOTE 1
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
O’Reilly Automotive, Inc. and its subsidiaries,Subsidiaries, collectively, “O’Reilly” or the “Company,” is a specialty retailer and supplier of automotive aftermarket parts. The Company’s stores carry an extensive product line, including new and remanufactured automotive hard parts, maintenance items and various automotive accessories. As of December 31, 2017,2022, the Company owned and operated 5,0195,929 stores in 47 U.S. states and 42 stores in Mexico, servicing both do-it-yourself (“DIY”) and the professional service provider customers. The Company’s robust distribution system provides stores with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of other auto parts retailers.
Segment reporting:
The Company is managed and operated by a single management teamTeam reporting to the chief operating decision maker. O’ReillyProduct sales are the only material source of revenue for the Company and the products sold by the Company have similar economic characteristics, are sourced from the Company’s suppliers in a similar manner, and are available for sale to all of the Company’s customers through the Company’s stores. The Company’s stores have similar characteristics, including the nature of the products and services, the type and class of customers and the methods used to distribute products and provide service to its customers and, as a whole, make up a single operating segment. The Company does not regularly prepare for review by the chief operating decision maker discrete financial information with respect to product lines,categories or types of customers or geographic locations and, as such, has one reportable segment.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of the consolidated financial statements, in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Cash equivalents:
Cash equivalents include investments with maturities of 90 days or less on the date of purchase.
Foreign Currency:
The Company accounts for its Mexican operations using the local market currency, the Mexican peso, and converts its financial statements compiled for these operations from the Mexican peso to U.S. dollars. The cumulative gain or loss on currency translation is included as a component of “Accumulated other comprehensive income” on the accompanying Consolidated Balance Sheets. See Note 10 for further information concerning the Company’s accumulated other comprehensive income.
Accounts receivable:
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current expectations of future economic and industry trends, and changes in customer payment terms.terms and management’s expectations. Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable.
The Company grants credit to certain professional service provider and jobber customers who meet the Company’s pre-established credit requirements. Concentrations of credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of relatively small customers, spreading the credit risk across a broad base regarded as a single class of financing receivable by the Company. The Company also controls this credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures. Generally, the Company does not require security when credit is granted to customers. Credit is granted to customers on a short-term basis, consisting primarily of daily, weekly or monthly accounts. Credit losses are provided for in the Company’s consolidated financial statements and have consistently been within management’s expectations.
49
Management does not believe there is a reasonable likelihood that the Company will be unable to collect the aggregate amounts receivable from suppliers, and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as of December 31, 2022 and 2021.
Amounts due to the Company from its Team Members are included in “Accounts receivable” on the accompanying Consolidated Balance Sheets. These amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts receivable due from Team Members was approximately $0.9$0.8 million and $1.2$0.7 million as of December 31, 20172022 and 2016,2021, respectively.
Amounts receivable from suppliers:
The Company receives concessions from its suppliers through a variety of programs and arrangements, including allowances for new stores and warranties, volume purchase rebates and co-operative advertising. Co-operative advertising allowances that are incremental to the Company’s advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred. All other supplier concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also include amounts due to the Company for changeover merchandise and product returns. The Company regularly reviews supplier receivables for collectability and assesses the need for a reserve for uncollectable amounts based on an evaluation of the Company’s suppliers’ financial positions and corresponding abilities to meet financial obligations. Management does not believe there is a reasonable likelihood that the Company will be unable to collect the amounts receivable from suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as of December 31, 20172022 or 2016.
Inventory:
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Inventory also includes capitalized costs related to procurement, warehousing and distribution centers (“DC”s)DCs”). Cost has been determined using the last-in, first-out (“LIFO”) method, which more accurately matches costs with related revenues. Over time, as the Company’s merchandise inventory purchases have increased, the Company negotiated improved acquisition costs from its suppliers and the corresponding price deflation exhausted the Company’s LIFO reserve balance. The Company’s policy is to not write up the value of its inventory in excess of its replacement cost, and accordingly, the Company’s merchandise inventory has been effectively recorded at replacement cost since December 31, 2013. The replacement cost of inventory was $3.01$4.70 billion and $2.78$3.92 billion as of December 31, 20172022 and 2016,2021, respectively. LIFO costs exceeded replacement costs by $157.3 million and $132.0 million at December 31, 2017 and 2016, respectively.
Fair value of financial instruments:
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company uses the income and market approaches to determine the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below:
| ● | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. |
| ● | Level 2 – Inputs other than quoted prices in active markets included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| ● | Level 3 – Unobservable inputs for the asset or liability. |
See Note 2 for further information concerning the Company’s financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method, generally over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease term includes renewal options determined by management at lease inception, for which failure to execute renewal options would result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is recognized in the Company’s Consolidated Statements of Income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at December 31, 20172022 and 2016,2021, include goodwill and other intangible assets recorded as the result of acquisitions. The Company reviewsoperates a single reporting unit and evaluates goodwill and indefinite-lived intangibles for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. During 2017 and 2016, theThe goodwill impairment test included a quantitativeincludes an optional qualitative assessment. The Company’s
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qualitative assessment which compared the fair value of the reporting unitfound no evidence to its carrying amount, including goodwill. The Company operates as a single reporting unit, and the Company determinedsuggest it is more likely than not that its fair value exceededis less than its carrying value,amount, including goodwill, as of December 31, 20172022 and 2016; as2021. As such, no goodwill impairment adjustment was required as of December 31, 20172022 and 2016.2021. Finite-lived intangibles are carried at amortized cost and amortization is calculated using the straight-line method, generally over the estimated useful lives of the intangibles.
Leases:
The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases. The Company does not separate non-lease components from lease components for any current lease contracts. Leases generally include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or incremental step increase provisions. The exercise of renewal options is typically at the Company’s sole discretion and all operating lease expense is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain surplus real estate to third parties. Right-of-use assets and corresponding operating lease liabilities are recognized for all leases with an initial term greater than 12 months. See Note 5 for further information concerning the Company’s operating leases.
Impairment of long-lived assets:
The Company reviews its long-lived assets, including its right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not historically recorded any material impairment charges to its long-lived assets andassets. See Note 4 for further information concerning the Company did not record a materialCompany’s impairment charge to itsof long-lived assets during the year ended December 31, 2017 or 2016.
Valuation of investments:
The Company has an unsecured obligation to pay, in the future, the value of deferred compensation and a Company match relating to employee participation in the Company’s nonqualified deferred compensation plan (the “Deferred Compensation Plan”). See Note 9 for further information concerning the Company’s benefit plans. The future obligation is adjusted to reflect the performance, whether positive or negative, of selected investment measurement options, chosen by each participant. The Company invests in various marketable securities with the intention of selling these securities to fulfill its future obligations under the Deferred Compensation Plan. The investments in this plan were stated at fair value based on quoted market prices, were accounted for as trading securities and were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 2016.2021. See Note 2 for further information concerning the fair value measurements of the Company’s marketable securities. See Note 12 for further information concerning the Company’s benefit plans.
Variable Interest Entities:
The Company invests in certain tax credit funds that promote renewable energy. These investments generate a return primarily through the realization of federal tax credits and other tax benefits. The Company accounts for the tax attributes of its renewable energy investments using the deferral method. Under this method, realized investment tax credits and other tax benefits are recognized as a reduction of the renewable energy investments.
The Company has determined its investment in these tax credit funds were investments in variable interest entities (“VIEs”). The Company analyzes any investments in VIEs at inception and again if certain triggering events are identified to determine if it is the primary beneficiary. The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIEs’ economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. As of December 31, 2022, the Company had invested in six unconsolidated tax credit fund entities that were considered to be VIEs and concluded it was not the primary beneficiary of any of the entities, as it did not have the power to control the activities that most significantly impact the entities, and has therefore accounted for these investments using the equity method. The Company’s maximum exposure to losses associated with these VIEs is generally limited to its net investment, which was $38.0 million as of December 31, 2022, and was included in “Other assets, net” on the accompanying Consolidated Balance Sheets. During the years ended December 31, 2022, 2021 and 2020, the Company recognized investment tax credits in the amounts of $167.6 million, $177.1 million and $170.5 million, respectively, all of which were realized through reductions in cash income taxes paid and were reflected as a component of the change in Income taxes payable on the accompanying Consolidated Statements of Cash Flows for the respective years.
During the year ended December 31, 2022, the Company entered into two agreements to invest in additional tax credit funds, which promote renewable energy through the development of solar energy farms, primarily for the purpose of receiving renewable energy tax
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credits. As of December 31, 2022, the Company had commitments to make certain additional capital contributions to its tax credit funds totaling approximately $3.4 million upon achievement of project milestones by the solar energy farms, the timing of which is uncertain and outside of the Company’s control. See Note 15 for further information concerning the Company’s investment in renewable energy tax credits.
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure. The Company estimates its self-insurance liabilities by considering a number of factors, including historical claims experience and trend-lines, projected medical and legalcost inflation, growth patterns and exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value, using a credit-adjusted discount rate.
The following table identifies the components of the Company’s self-insurance reserves as of December 31, 20172022 and 20162021 (in thousands):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Self-insurance reserves (undiscounted) | $ | 147,664 | $ | 138,687 | |||
| Self-insurance reserves (discounted) | 137,970 | 129,437 | |||||
| | | | | | |
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Self-insurance reserves (undiscounted) | | $ | 245,562 | | $ | 233,185 |
Self-insurance reserves (discounted) | |
| 233,017 | |
| 222,273 |
The current portion of the Company’s discounted self-insurance reserves totaled $71.7$138.9 million and $67.9$128.8 million as of December 31, 20172022 and 2016,2021, respectively, which was included in “Self-insurance reserves” on the accompanying ConsolidateConsolidated Balance Sheets as of December 31, 20172022 and 2016.2021. The remainder was included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 2016.
Warranties:
The Company offersprovides warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. See Note 78 for further information concerning the Company’s aggregate product warranty liabilities.
Litigation reserves:
The Company is currently involved in litigation incidental to the ordinary conduct of the Company’s business. TheBased on existing facts and historical patterns, the Company records reservesaccrues for litigation losses in instances where a materialan adverse outcome is probable and the Company is able to reasonably estimate the probable loss.loss in accordance with Accounting Standard Codification 450-20. The Company reservesalso accrues for an estimate of material legal costs to be incurred in pendingfor litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from any of theselegal matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and reserves,accruals, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period. See Note 14 for further information concerning the Company’s litigation reserves.
Share repurchases:
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying Consolidated Balance Sheets. See Note 89 for further information concerning the Company’s share repurchase program.
Revenue recognition:
The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts and merchandise to its customers. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, in an amount representing the consideration the Company expects to receive in exchange for transferring goods to the customer. Generally, the
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Company’s performance obligations are satisfied when the customer takes possession of the merchandise, which normally occurs immediately at the point of sale or through same day delivery of the merchandise. All sales are recorded net of estimated returns allowances, discounts and taxes. The Company does not recognize revenue related to product warranties, as these are considered assurance warranty obligations.
Over-the-counter retail sales to DIY customers are recorded when the customer takes possession of the merchandise. Internet retail sales, included in sales to DIY customers, are recorded when the merchandise is shipped or when the customer picks up the merchandise at a store. Sales to professional service provider customers, also referred to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at the customer’s place of business. WholesaleOther sales and sales adjustments primarily includes sales to Team Members, wholesale sales to other retailers also referred(“jobber sales”), equipment sales, discounts, rebates, deferred revenue adjustments relating to as “jobberthe Company’s retail loyalty program and adjustments to estimated sales” returns allowances. Sales to Team Members are recorded when the Team Member takes possession of the merchandise. Jobber sales are recorded upon shipment of the merchandise from a regional DCdistribution center with same-day delivery to the jobber customer’s location. Internet retail sales are recorded when the merchandise is shipped or when the merchandise is picked up in a store. All sales are recorded net of estimated returns allowances, discounts and taxes.
The Company maintains a retail loyalty program named O’Reilly O’Rewards, designed to build brand recognition. The program allowswhich represents a retail customer to enroll at no charge, does not impose a membership fee and provides members with the ability to earn loyalty points by making qualifying purchases at the Company’s stores. Upon reaching established thresholds, the members are automatically issued coupons, which expire 90 days after issuance, have no cash value and may be redeemed for most items in the Company’s stores with a total purchase price equal to or greater than the value of the coupon. Points accrued in a member’s account, which have not been awarded to the member with a coupon, expire 12 months after the date that they were earned.performance obligation. The Company records a deferred revenue liability, based on a breakage adjusted, estimated redemption rate and a corresponding reduction in revenue in periods when loyalty points are earned by members. The Company recognizes revenue and a corresponding reduction to the deferred revenue liability in periods when loyalty program issued coupons are redeemed by members.
Cost of goods sold and selling, general and administrative expenses:
Below follows the primary costs classified in each major expense category:
Cost of goods sold, including warehouse and distribution expenses:
| ● | ||
| Total cost of merchandise sold, | ||
| ● | ||
| Supplier allowances and incentives, | ||
| ● | ||
| Costs associated with the Company’s supply chain, |
Selling general and administrative expenses:
| ● | Payroll benefit costs for store and corporate Team Members; |
| ● | Occupancy costs of store and corporate facilities; |
| ● | Depreciation and amortization related to store and corporate assets; |
| ● | Vehicle expenses for store and Hub delivery services; |
| ● | Self-insurance costs; |
| ● | Closed store expenses; and |
| ● | Other administrative costs, | |
Advertising expenses:
Advertising expense consists primarily of expenses related to the Company’s integrated marketing program, which includes television, radio, in-store, digital and social media promotions, as well as sports and event sponsorships and direct mail and newspaper distribution, in-store and online promotions, and sports and event sponsorships.promotional distribution. The Company expenses advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its suppliers. Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the advertising program, specific
Share-based compensation and benefit plans:
The Company sponsors employee share-based benefitcompensation plans and employee and director share-based compensationbenefit plans. The Company recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the date of the grant, award or issuance.issuance and
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accounts for forfeitures as they occur. Share-based plans include stock option awards, restricted stock awards and stock appreciation rights issued under the Company’s employee incentive plans and director stock plan, stock issued through the Company’s employee stock purchase plan and restricted stock awarded to employees and directors through other compensation plans.plan. See Note 912 for further information concerning the Company’s share-based compensation and benefit plans.
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income as incurred. Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are included in “Cost of goods sold, including warehouse and distribution expenses” on the accompanying Consolidated Statements of Income as incurred.
Interest expense:
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates incurred on its long-term borrowings. Total interest costs capitalized for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, were $8.5$5.5 million, $7.9$7.0 million and $7.4$10.2 million, respectively, which were included in “Interest expense” on the accompanying Consolidated Statements of Income.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs, including debt registration fees, accounting and legal fees and underwriter and book runner fees. Debt issuance costs related to the Company’s long-term unsecured senior notes are recorded as a reduction of the principal amount of the corresponding unsecured senior notes. Debt issuance costs related to the Company’s unsecured revolving credit facility are recorded as an asset. These debt issuance costs have been deferred and are being amortized over the term of the corresponding debt instrument and the amortization expense is included in “Interest expense” on the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $15.9$24.7 million and $10.6$22.0 million net of accumulated amortization, as of December 31, 20172022 and 2016,2021, respectively, of which $2.0$2.6 million and $0.7$3.4 million were included in “Other assets, net” as of December 31, 20172022 and 2016,2021, respectively, with the remainder included in “Long-term debt” on the accompanying Consolidated Balance Sheets.
The Company issued its long-term unsecured senior notes at a discount. The original issuance discountdiscounts on the senior notes isare recorded as a reduction of the principal amount due forof the corresponding senior notes and isare accreted over the term of the applicable senior note, with the accretion expense included in “Interest expense” on the accompanying Consolidated Statements of Income. Original issuance discounts, net of accretion, totaled $3.7$6.3 million and $3.1$4.4 million as of December 31, 20172022 and 2016,2021, respectively.
See Note 57 for further information concerning debt issuance costs and original issuance discounts associated with the Company’s issuances of long-term debt instruments.
Income taxes:
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on differences between the U.S. GAAP basis and tax basis of assets and liabilities using enacted tax rules and rates currently scheduled to be in effect for the year in which the differences are expected to reverse. Tax carry forwards are also recognized in deferred tax assets and liabilities under this method. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date. The Company would record a valuation allowance against deferred tax assets to the extent it is more likely than not the amount will not be realized, based upon evidence available at the time of the determination and any change in the valuation allowance is recorded in the period of a change in such determination.
The Company regularly reviews its potential tax liabilities for tax years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. In management’s opinion, adequate provisions for income taxes have been made for all years presented. The estimates of the Company’s potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated with the Company’s various tax positions and actual results could differ from estimates. See Note 1215 for further information concerning the Company’s income taxes.
Earnings per share:
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding plus the common stock equivalents associated with the potential impact of dilutive stock options. Certain common stock equivalents that
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could potentially dilute basic earnings per share in the future were not included in the fully diluted computation because they would have been antidilutive. Generally, stock options are antidilutive and excluded from the earnings per share calculation when the exercise price exceeds the market price of the common shares. See Note 1316 for further information concerning the Company’s common stock equivalents.
New accounting pronouncements:
In MaySeptember of 2014,2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)2022- 04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” (“ASU 2014-09”).2022-04 enhances the transparency of supplier finance programs. Under ASU 2014-09, an entity is required to follow2022-04, a five-step process to determine the amount of revenue to recognize when promised goods or services are transferred to customers. ASU 2014-09 offers specific accounting guidance for costs to obtain or fulfillbuyer in a contract with a customer. In addition, an entity issupplier finance program would be required to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, amount, timing,activity during the period, changes from period to period and uncertainty of revenue and cash flows arising from contracts with customers. In August of 2015, the FASB issuedpotential magnitude. ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), to defer the effective date of ASU 2014-09 by one year. For public companies, ASU 2015-14 changes ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. These ASUs can be adopted retrospectively or as a cumulative-effective adjustment at the date of adoption. The Company has substantially completed its evaluation of the impact of the adoption of ASU 2014-09, and the Company will adopt this guidance beginning with its first quarter ending March 31, 2018, using the modified retrospective transition method. Results for annual reporting periods beginning after December 31, 2017, will be presented under ASU 2014-09, while prior period amounts will not be adjusted and will continue to be reported under the accounting standards in effect for the prior periods. The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts to its customers, and generally, the Company’s performance obligations are satisfied immediately when the parts are delivered to the customer, which normally occurs the same day the customer orders the part. As such, the adoption of the new standard will not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows; further, the Company does not expect significant changes to its business process, internal controls or systems as a result of adopting ASU 2014-09.
NOTE 2 – FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis:
The Company invests in various marketable securities with the intention of selling these securities to fulfill its future unsecured obligations under the Company’s nonqualified deferred compensation plan. See Note 12 for further information concerning the Company’s benefit plans.
The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 2016.2021. The Company recorded an increasea decrease in fair value related to its marketable securities in the amountsamount of $3.6$8.3 million and $1.9an increase in fair value to its related to its marketable securities in the amount of $5.7 million for the years ended December 31, 20172022 and 2016,2021, respectively, which were included in “Other income (expense)” on the accompanying Consolidated Statements of Income.
The tables below identify the estimated fair value of the Company’s marketable securities, determined by reference to quoted market prices (Level 1), as of December 31, 20172022 and 20162021 (in thousands):
| December 31, 2017 | |||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Marketable securities | $ | 25,706 | $ | — | $ | — | $ | 25,706 | |||||||
| December 31, 2016 | |||||||||||||||
| Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Marketable securities | $ | 20,462 | $ | — | $ | — | $ | 20,462 | |||||||
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
| | Quoted Priced in Active Markets | | Significant Other | | Significant | | | | |||
| | for Identical Instruments | | Observable Inputs | | Unobservable Inputs | | | | |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Marketable securities | | $ | 49,371 | | $ | — | | $ | — | | $ | 49,371 |
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
| | Quoted Prices in Active Markets | | Significant Other | | Significant | | | ||||
| | for Identical Instruments | | Observable Inputs | | Unobservable Inputs | | | ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Marketable securities | | $ | 52,456 | | $ | — | | $ | — | | $ | 52,456 |
Non-financial assets and liabilities measured at fair value on a nonrecurring basis:
Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. These non-financial assets and liabilities may include assets acquired in a business combination or property and equipment that are determined to be impaired. As of December 31, 20172022 and 2016,2021, the Company did not have any material non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.
Fair value of financial instruments:
The carrying amounts of the Company’s senior notes and unsecured revolving credit facility borrowings are included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 2016. See Note 5 for further information concerning the Company’s senior notes and unsecured revolving credit facility.2021.
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The table below identifies the estimated fair value of the Company’s senior notes, using the market approach. The fair values as of December 31, 20172022 and 2016,2021, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):
| December 31, 2017 | December 31, 2016 | ||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||
| Senior Notes | $ | 2,632,390 | $ | 2,728,167 | $ | 1,887,019 | $ | 1,977,510 | |||||||
| | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 | ||||||||
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | ||||
Senior Notes | | $ | 4,371,653 | | $ | 4,119,777 | | $ | 3,826,978 | | $ | 4,135,629 |
The carrying amount of the Company’s unsecured revolving credit facility approximates fair value (Level 2), as borrowings under the facility bear variable interest at current market rates.
The accompanying Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts receivable, amounts receivable from suppliers and accounts payable. Due to the short-term nature of these financial instruments, the Company believes that the carrying values of these instruments approximate their fair values.
NOTE 3 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table identifies the changes in the Company’s allowance for doubtful accounts included in “Accounts receivable” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021 (in thousands):
| | | | | | |
| | 2022 | | 2021 | ||
Allowance for doubtful accounts, balance at January 1 | | $ | 11,870 | | $ | 12,670 |
Reserve accruals | |
| 6,718 | |
| 4,158 |
Uncollectable accounts written-off | | | (3,928) | | | (4,937) |
Foreign currency translation | |
| 35 | |
| (21) |
Allowance for doubtful accounts, balance at December 31 | | $ | 14,695 | | $ | 11,870 |
NOTE 34 – PROPERTY AND EQUIPMENT
The following table identifies the types and balances of property and equipment included in “Property and equipment, at cost” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 2016,2021, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):
| Original Useful Lives | December 31, 2017 | December 31, 2016 | |||||||
| Land | $ | 695,669 | $ | 648,689 | |||||
| Buildings and building improvements | 15 – 39 years | 1,968,079 | 1,805,347 | ||||||
| Leasehold improvements | 3 – 25 years | 626,714 | 593,785 | ||||||
| Furniture, fixtures and equipment | 3 – 20 years | 1,250,690 | 1,215,929 | ||||||
| Vehicles | 5 – 10 years | 392,130 | 359,362 | ||||||
| Construction in progress | 257,853 | 209,230 | |||||||
| Total property and equipment | 5,191,135 | 4,832,342 | |||||||
| Less: accumulated depreciation and amortization | 1,847,329 | 1,708,911 | |||||||
| Net property and equipment | $ | 3,343,806 | $ | 3,123,431 | |||||
| | | | | | | | |
|
| Original Useful |
| | | | ||
| | Lives | | December 31, 2022 | | December 31, 2021 | ||
Land | | | | $ | 931,993 |
| $ | 888,558 |
Buildings and building improvements | | 15 – 39 years | |
| 2,896,071 |
| | 2,737,212 |
Leasehold improvements | | 3 – 25 years | |
| 951,652 |
| | 864,169 |
Furniture, fixtures and equipment | | 3 – 20 years | |
| 1,847,248 |
| | 1,700,149 |
Vehicles | | 5 – 10 years | |
| 571,328 |
| | 502,643 |
Construction in progress | | | |
| 239,773 |
| | 255,307 |
Total property and equipment | | | |
| 7,438,065 |
| | 6,948,038 |
Less: accumulated depreciation and amortization | | | |
| 3,014,024 |
| | 2,734,523 |
Net property and equipment | | | | $ | 4,424,041 | | $ | 4,213,515 |
The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $232.7$343.6 million, $217.0$320.4 million and $203.4$303.0 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
The Company recorded charges of $7.6 million related to property and equipment for the year ended December 31, 2022, primarily due to the write-down on surplus land and buildings that exceeded market value and certain hardware and software projects that disposed or were no longer expected to provide a long-term benefit, $12.6 million related to property and equipment for the year ended December 31, 2021, primarily due to certain hardware and software projects that disposed or were no longer expected to provide a long-term benefit, and $3.4 million related to property and equipment for the year ended December 31, 2020, primarily due to the write-down on surplus land and buildings that exceeded market value, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
56
NOTE 5 – LEASES
Operating lease commitments:
The following table summarizes Total lease cost for the years ended December 31, 2022, 2021 and 2020, which was primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in thousands):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 | | 2021 | | 2020 | |||
Operating lease cost | | $ | 367,724 | | $ | 351,296 | | $ | 336,156 |
Short-term operating lease cost | |
| 11,314 | |
| 7,694 | |
| 6,131 |
Variable operating lease cost | |
| 93,940 | |
| 89,065 | |
| 82,868 |
Sublease income | |
| (5,220) | |
| (4,571) | |
| (4,790) |
Total lease cost | | $ | 467,758 | | $ | 443,484 | | $ | 420,365 |
The following table summarizes other lease related information for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | |
|
| For the Year Ended | |||||
| | December 31, | |||||
| | 2022 | | 2021 | |||
Cash paid for amounts included in the measurement of operating lease liabilities: |
| |
| | | | |
| Operating cash flows from operating leases | | $ | 366,866 | | $ | 343,749 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | 416,615 | | | 257,830 | |
The following table identifies the future minimum lease payments under all of the Company’s operating leases for each of the next five years, and in the aggregate thereafter, and reconciles to the present value of the “Operating lease liabilities, less current portion” included in the accompanying Consolidated Balance Sheet as of December 31, 2022 (in thousands):
| | | | | | | | | |
| | December 31, 2022 | |||||||
|
| Related Parties |
| Non-Related Parties |
| Total | |||
2023 | | $ | 4,779 | | $ | 356,996 | | $ | 361,775 |
2024 | | | 3,068 | | | 339,047 | | | 342,115 |
2025 | |
| 2,296 | |
| 301,716 | |
| 304,012 |
2026 | |
| 1,680 | |
| 265,109 | |
| 266,789 |
2027 | |
| 704 | |
| 216,950 | |
| 217,654 |
Thereafter | |
| 1,314 | |
| 1,006,239 | |
| 1,007,553 |
Total operating lease payments | |
| 13,841 | |
| 2,486,057 | |
| 2,499,898 |
Less: present value discount | |
| 1,087 | |
| 325,434 | |
| 326,521 |
Total operating lease liabilities | |
| 12,754 | |
| 2,160,623 | |
| 2,173,377 |
Less: current portion of operating lease liabilities | |
| 4,779 | |
| 361,942 | |
| 366,721 |
Operating lease liabilities, less current portion | | $ | 7,975 | | $ | 1,798,681 | | $ | 1,806,656 |
See Note 14 for further information concerning the Company’s related party operating leases.
The future minimum lease payments under the Company’s operating leases, in the table above, do not include potential amounts for percentage rent and other variable operating lease related costs and have not been reduced by expected future minimum sublease income under non-cancelable subleases, which was approximately $13.2 million as of December 31, 2022. The weighted-average remaining lease term and weighted-average discount rate for the Company’s operating leases was 9.6 years and 4.0%, respectively, as of December 31, 2022.
The present value discount component of the future minimum lease payments under the Company’s operating leases, in the table above, was primarily calculated using the Company’s incremental borrowing rate based on information available at the lease commencement or modification date. Inputs for the calculation of the Company’s incremental borrowing rate include valuations and yields of U.S. domestic investment grade corporate bonds and the applicable credit spread over comparable U.S. Treasury rates, adjusted to a collateralized basis by estimating the credit spread improvement that would result from an upgrade of one ratings classification. When the implicit rate of a lease is available, the implicit rate is used in the calculation and not the Company’s incremental borrowing rate.
57
NOTE 46 – GOODWILL AND OTHER INTANGIBLES
Goodwill:
Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in business conditionscircumstances indicate that impairment may exist. Goodwill is not amortizable for financial statement purposes. The Company did not record any goodwill impairment during the years ended December 31, 20172022, 2021 or 2016.
The following table identifies the changes in goodwill and certain acquisition intangibles, which were included in “Goodwill” on the accompanying Consolidated Balance Sheets for the years ended December 31, 20172022 and 20162021 (in thousands):
| 2017 | 2016 | ||||||
| Goodwill, balance at January 1, | $ | 785,399 | $ | 757,142 | |||
| Change in goodwill | 3,659 | 28,257 | |||||
| Goodwill, balance at December 31, | $ | 789,058 | $ | 785,399 | |||
| | | | | | |
|
| 2022 |
| 2021 | ||
Goodwill, balance at January 1, | | $ | 879,340 | | $ | 881,030 |
Change in goodwill related to small acquisitions | |
| 1,452 | |
| 493 |
Foreign currency translation | | | 3,653 | | | (2,183) |
Goodwill, balance at December 31, | | $ | 884,445 | | $ | 879,340 |
Intangibles other than goodwill:
The following table identifies the components of the Company’s amortizable intangibles asintangible assets, inclusive of foreign currency translation adjustments, which were included in “Other assets, net” on the accompanying Consolidated Balance Sheets for the years ended December 31, 20172022 and 20162021 (in thousands):
| Cost of Amortizable Intangibles | Accumulated Amortization (Expense) Benefit | Net Amortizable Intangibles | |||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||||||||
| Favorable leases | $ | 22,500 | $ | 27,960 | $ | (14,495 | ) | $ | (18,104 | ) | $ | 8,005 | $ | 9,856 | |||||||||
| Non-compete agreements | 1,851 | 1,887 | (464 | ) | (414 | ) | 1,387 | 1,473 | |||||||||||||||
| Total amortizable intangible assets | $ | 24,351 | $ | 29,847 | $ | (14,959 | ) | $ | (18,518 | ) | $ | 9,392 | $ | 11,329 | |||||||||
| Unfavorable leases | $ | 14,470 | $ | 19,950 | $ | 11,853 | $ | 15,840 | $ | 2,617 | $ | 4,110 | |||||||||||
| | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 | ||||||||||||||
|
| Cost of |
| Accumulated | | Net | | Cost of |
| Accumulated |
| Net | ||||||
| | Intangibles | | Amortization | | Intangibles | | Intangibles | | Amortization | | Intangibles | ||||||
Finite-lived intangible assets: |
| |
|
| |
| | |
| | |
|
| |
|
| |
|
Trade names (1) | | $ | 8,532 | | $ | (5,532) | | $ | 3,000 | | $ | 8,110 | | $ | (3,553) | | $ | 4,557 |
Non-compete agreements (2) | | | 7,010 | | | (5,965) | | | 1,045 | | | 6,915 | | | (4,275) | | | 2,640 |
Other intangible assets (3) | | | 12,446 | | | (6,406) | | | 6,040 | | | 11,832 | | | (4,181) | | | 7,651 |
Total finite-lived intangible assets | | | 27,988 | | | (17,903) | | | 10,085 | | | 26,857 | | | (12,009) | | | 14,848 |
| | | | | | | | | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | |
Trade names | | | 36,134 | | | — | | | 36,134 | | | 34,348 | | | — | | | 34,348 |
| | | | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 64,122 | | $ | (17,903) | | $ | 46,219 | | $ | 61,205 | | $ | (12,009) | | $ | 49,196 |
(1) | Weighted-average remaining useful life of approximately 3.1 years as of December 31, 2022. |
(2) | Weighted-average remaining useful life of approximately 1.6 years as of December 31, 2022. |
(3) | Includes internally-developed software and customer relationships and has an estimated weighted-average remaining useful life of approximately 6.9 years as of December 31, 2022. |
During the years ended December 31, 20172022 and 2016,2021, the Company recorded non-compete agreement assets in conjunction with small acquisitions in the amountsamount of $0.2 million and $1.1 million, respectively.
Indefinite-lived intangible assets, such as trade names, are reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that impairment may exist. The Company did not record any indefinite-lived intangible asset impairment during the years ended December 31, 2022, 2021 or 2020.
58
The following table identifies the estimated amortization expense of $1.6 million, $2.1 millionthe Company’s intangibles for each of the next five years, and $2.7 million, respectively, relatedthe aggregate thereafter, and reconciles to its amortizablenet, finite-lived intangible assets which were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016.
| December 31, 2017 | |||||||||||
| Amortization Expense | Amortization Benefit | Total Amortization Expense | |||||||||
| 2018 | $ | (1,622 | ) | $ | 923 | $ | (699 | ) | |||
| 2019 | (1,405 | ) | 713 | (692 | ) | ||||||
| 2020 | (1,228 | ) | 541 | (687 | ) | ||||||
| 2021 | (1,001 | ) | 389 | (612 | ) | ||||||
| 2022 | (883 | ) | 51 | (832 | ) | ||||||
| Total | $ | (6,139 | ) | $ | 2,617 | $ | (3,522 | ) | |||
| | | |
| | December 31, 2022 | |
|
| Amortization Expense | |
2023 | | $ | 2,787 |
2024 | |
| 1,436 |
2025 | |
| 1,429 |
2026 | |
| 1,405 |
2027 | |
| 1,269 |
Thereafter | | | 1,759 |
Total net, finite-lived intangible assets | | $ | 10,085 |
The following table identifies the amounts of the Company’s financing facilities, which were included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 20162021 (in thousands):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Revolving Credit Facility, weighted-average variable interest rate of 2.675% | $ | 346,000 | $ | — | |||
$500 million, 4.875% Senior Notes due 2021(1), effective interest rate of 4.956% | 497,565 | 496,758 | |||||
$300 million, 4.625% Senior Notes due 2021(2), effective interest rate of 4.645% | 298,961 | 298,679 | |||||
$300 million, 3.800% Senior Notes due 2022(3), effective interest rate of 3.845% | 298,214 | 297,868 | |||||
$300 million, 3.850% Senior Notes due 2023(4), effective interest rate of 3.851% | 298,583 | 298,355 | |||||
$500 million, 3.550% Senior Notes due 2026(5), effective interest rate of 3.570% | 495,792 | 495,359 | |||||
$750 million, 3.600% Senior Notes due 2027(6), effective interest rate of 3.619% | 743,275 | — | |||||
| Long-term debt | $ | 2,978,390 | $ | 1,887,019 | |||
| | | | | | |
| | December 31, | ||||
| | | 2022 | | | 2021 |
3.800% Senior Notes due 2022, effective interest rate of 3.845% | | $ | — | | $ | 300,000 |
3.850% Senior Notes due 2023, effective interest rate of 3.851% | |
| 300,000 | |
| 300,000 |
3.550% Senior Notes due 2026, effective interest rate of 3.570% | |
| 500,000 | |
| 500,000 |
3.600% Senior Notes due 2027, effective interest rate of 3.619% | |
| 750,000 | |
| 750,000 |
4.350% Senior Notes due 2028, effective interest rate of 4.383% | |
| 500,000 | |
| 500,000 |
3.900% Senior Notes due 2029, effective interest rate of 3.901% | | | 500,000 | | | 500,000 |
4.200% Senior Notes due 2030, effective interest rate of 4.205% | | | 500,000 | | | 500,000 |
1.750% Senior Notes due 2031, effective interest rate of 1.798% | | | 500,000 | | | 500,000 |
4.700% Senior Notes due 2032, effective interest rate of 4.740% | | | 850,000 | | | — |
Total principal amount of debt | | | 4,400,000 | | | 3,850,000 |
Less: Unamortized discount and debt issuance costs | | | 28,347 | | | 23,022 |
Total long-term debt | | $ | 4,371,653 | | $ | 3,826,978 |
The following table identifies the principal maturitiesmaturity payments of the Company’s financing facilities for each of the next five years, and in the aggregate thereafter, as of December 31, 20172022 (in thousands):
| Scheduled Maturities | |||
| 2018 | $ | — | |
| 2019 | — | ||
| 2020 | — | ||
| 2021 | 800,000 | ||
| 2022 | 646,000 | ||
| Thereafter | 1,550,000 | ||
| Total | $ | 2,996,000 | |
| | | |
|
| December 31, 2022 | |
| | Scheduled Maturities | |
2023 | | $ | 300,000 |
2024 | |
| — |
2025 | |
| — |
2026 | |
| 500,000 |
2027 | |
| 750,000 |
Thereafter | |
| 2,850,000 |
Total principal amount of debt | | $ | 4,400,000 |
Unsecured revolving credit facility:
The Company entered intois party to a new credit agreement dated June 15, 2021 (the “Credit Agreement”). The new Credit Agreement provides for a $1.2five-year $1.8 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in April 2022.June of 2026. The new Credit Agreement includes a $200 million sub-limit for the issuance of letters of credit and a $75 million sub-limit for swing line borrowings under the Revolving Credit Facility. As described in the new Credit Agreement governing the Revolving Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $600$900 million, provided that the aggregate amount of the commitments does not exceed $1.8$2.7 billion at any time.
As of December 31, 20172022 and 2016,2021, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, under the Credit Agreement in the amounts of $36.8$5.1 million and $38.7 $84.0
59
million, respectively, reducing the aggregate availability under the Revolving Credit FacilityAgreement by those amounts.
Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company’s option, at either an Alternate Base Rate or an Adjusted LIBO Rate (both as defined in the new Credit Agreement) plus an applicable margin.margin, which will vary from 0.000% to 0.250% in the case of loans bearing interest at the Alternate Base Rate and 0.680% to 1.250% in the case of loans bearing interest at the Adjusted LIBO Rate, in each case based upon the better of the ratings assigned to our debt by Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, subject to limited exceptions. The Credit Agreement includes customary provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate. Swing line loans made under the Revolving Credit Facility bear interest at an Alternate Base Rate plus the applicable margin for Alternate Base Rate loans. In addition, the Company pays a facility fee on the aggregate amount of the commitments under the new Credit Agreement in an amount equal to a percentage of such commitments.commitments, varying from 0.070% to 0.250% per annum. The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions. As of December 31, 2017,2022, based upon the Company’s current credit ratings, its margin for Alternate Base Rate loans was 0.000%, its margin for Eurodollar Revolving Loans was 0.900% and its facility fee was 0.100%.
The new Credit Agreement contains certain covenants, including limitations on subsidiary indebtedness, a minimum consolidated fixed charge coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments and five-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that the Company should default on any covenant (subject to customary grace periods, cure rights and materiality thresholds) contained in the new Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the new Credit Agreement and litigation from lenders.
In addition to the letters of credit issued under the Credit Agreement described above, as of December 31, 2022, the Company had other outstanding letters of credit, primarily to support obligations under workers’ compensation, general liability and other insurance policies, in the amount of $96.6 million. Substantially all of these letters of credit have a one-year term from the date of issuance and were not issued under the Company’s Credit Agreement or another committed facility.
Senior notes:
On August 17, 2017,June 15, 2022, the Company issued $750$850 million aggregate principal amount of unsecured 3.600%4.700% Senior Notes due 20272032 (“3.600%4.700% Senior Notes due 2027”2032”) at a price to the public of 99.840%99.684% of their face value with UMBU.S. Bank N.A.Trust Company, National Association (“UMB”U.S. Bank”) as trustee. Interest on the 3.600%4.700% Senior Notes due 20272032 is payable on March 1June 15 and September 1December 15 of each year, beginning on March 1, 2018,December 15, 2022, and is computed on the basis of a 360-day year.
On September 1, 2022, the Company’s $300 million aggregate principal amount of unsecured 3.800% Senior Notes due 2022 matured, and the Company repaid these notes using available cash on hand.
As of December 31, 2022, the Company has issued and outstanding a cumulative $2.7$4.4 billion aggregate principal amount of unsecured senior notes, which are due between 20212023 and 2027,2032, with UMB Bank, N.A. and U.S. Bank Trust Company as trustee.trustees. Interest on the senior notes, ranging from 3.550%1.750% to 4.875%4.700%, is payable semi-annually and is computed on the basis of a 360-day year. The $300 million aggregate principal amount of unsecured 3.850% Senior Notes due 2023 were included in “Long-term debt” on the accompanying Consolidated Balance Sheet as of December 31, 2022, as the Company has the ability and intent to refinance these notes on a long-term basis. None of the Company’s subsidiaries is a guarantor under the senior notes. Each of the senior notes is subject to certain customary covenants, with which the Company complied as of December 31, 2017.
60
| December 31, 2017 | |||||||||||
| Related Parties | Non-Related Parties | Total | |||||||||
| 2018 | $ | 4,663 | $ | 288,654 | $ | 293,317 | |||||
| 2019 | 3,210 | 274,694 | 277,904 | ||||||||
| 2020 | 2,389 | 255,376 | 257,765 | ||||||||
| 2021 | 1,922 | 227,392 | 229,314 | ||||||||
| 2022 | 1,164 | 203,028 | 204,192 | ||||||||
| Thereafter | 4,476 | 1,100,193 | 1,104,669 | ||||||||
| Total | $ | 17,824 | $ | 2,349,337 | $ | 2,367,161 | |||||
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Minimum operating lease expense | $ | 289,245 | $ | 273,559 | $ | 263,479 | |||||
| Contingent rents | 1,049 | 892 | 947 | ||||||||
| Other lease related occupancy costs | 12,478 | 13,241 | 12,852 | ||||||||
| Total rent expense | 302,772 | 287,692 | 277,278 | ||||||||
| Less: sublease income | 4,158 | 4,439 | 4,019 | ||||||||
| Net rent expense | $ | 298,614 | $ | 283,253 | $ | 273,259 | |||||
The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 2016.2021. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31, 20172022 and 20162021 (in thousands):
| 2017 | 2016 | ||||||
| Warranty liabilities, balance at January 1, | $ | 36,623 | $ | 35,223 | |||
| Warranty claims | (79,660 | ) | (73,925 | ) | |||
| Warranty accruals | 87,435 | 75,325 | |||||
| Warranty liabilities, balance at December 31, | $ | 44,398 | $ | 36,623 | |||
| | | | | | |
|
| 2022 |
| 2021 | ||
Warranty liabilities, balance at January 1, | | $ | 77,199 | | $ | 65,886 |
Warranty claims | |
| (152,777) | |
| (126,632) |
Warranty accruals | |
| 174,118 | |
| 137,960 |
Foreign currency translation | | | 24 | | | (15) |
Warranty liabilities, balance at December 31, | | $ | 98,564 | | $ | 77,199 |
NOTE 89 – SHARE REPURCHASE PROGRAM
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at
The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly announced share repurchase program for the years ended December 31, 2022 and 2021 (in thousands, except per share data):
| For the Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Shares repurchased | 9,301 | 5,698 | |||||
| Average price per share | $ | 233.57 | $ | 264.21 | |||
| Total investment | $ | 2,172,437 | $ | 1,505,371 | |||
| | | | | | |
| | For the Year Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Shares repurchased |
| | 4,961 | | | 4,537 |
Average price per share | | $ | 661.66 | | $ | 545.78 |
Total investment | | $ | 3,282,215 | | $ | 2,476,003 |
As of December 31, 2017,2022, the Company had $715.4 million$1.7 billion remaining under its share repurchase program. Subsequent to the end of the year and through February 28, 2018,2023, the Company repurchased an additional 1.10.7 million shares of its common stock under its share repurchase program, at an average price of $255.48,$816.69, for a total investment of $289.9$539.6 million. The Company has repurchased a total of 67.491.2 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through February 28, 2018,2023, at an average price of $138.38,$225.56, for a total aggregate investment of $9.3$20.6 billion. As of February 28, 2023, we had approximately $1.2 billion remaining under our share repurchase program.
NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes adjustments for foreign currency translations. The table below summarizes activity for changes in accumulated other comprehensive loss included in “Accumulated other comprehensive income (loss)” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021 (in thousands):
| | | | | | |
| | Foreign | | Total Accumulated Other | ||
| | Currency (1) | | Comprehensive Income (Loss) | ||
Accumulated other comprehensive loss, balance at December 31, 2020 | | $ | (2,155) | | $ | (2,155) |
Change in accumulated other comprehensive loss | | | (4,644) | | | (4,644) |
Accumulated other comprehensive loss, balance at December 31, 2021 | | $ | (6,799) | | $ | (6,799) |
Change in accumulated other comprehensive income | | | 9,795 | | | 9,795 |
Accumulated other comprehensive income, balance at December 31, 2022 | | $ | 2,996 | | $ | 2,996 |
| (1) | Foreign currency translation is not shown net of additional U.S. tax, as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested. |
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NOTE 11 – REVENUE
The table below identifies the Company’s revenues disaggregated by major customer type for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Sales to do-it-yourself customers | | $ | 7,903,359 | | $ | 7,643,832 | | $ | 6,684,183 |
Sales to professional service provider customers |
| | 6,170,239 |
| | 5,368,657 |
| | 4,647,189 |
Other sales and sales adjustments |
| | 336,262 |
| | 315,074 |
| | 273,121 |
Total sales | | $ | 14,409,860 | | $ | 13,327,563 | | $ | 11,604,493 |
As of December 31, 2022 and 2021, the Company had recorded a deferred revenue liability of $5.0 million and $3.4 million, respectively, related to its loyalty program, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $12.2 million, $13.6 million and $14.4 million, respectively, of revenue related to its loyalty program, which were included in “Sales” on the accompanying Consolidated Statements of Income.
See Note 8 for information concerning the expected costs associated with the Company’s assurance warranty obligations.
NOTE 912 – SHARE-BASED COMPENSATION AND BENEFIT PLANS
The Company recognizes share-based compensation expense based on the fair value of the grants, awards or shares at the time of the grant, award or issuance. Share-based compensation includes stock option awards, restricted stock awards and stock appreciation rights issued under the Company’s employee incentive plans and director stock plan, restricted stock awarded under the Company’s employee incentive plans and director stock plan and stock issued through the Company’s employee stock purchase plan.
The table below identifies the shares that have been authorized for issuance and the shares available for future issuance under the Company plans, as of December 31, 20172022 (in thousands):
| December 31, 2017 | ||||||
| Plans | Total Shares Authorized for Issuance under the Plans | Shares Available for Future Issuance under the Plans | ||||
| Employee Incentive Plans | 34,000 | 5,834 | ||||
| Director Stock Plan | 1,000 | 263 | ||||
| Performance Incentive Plan | 650 | 370 | ||||
| Employee Stock Purchase Plans | 4,250 | 646 | ||||
| Profit Sharing and Savings Plan | 4,200 | 349 | ||||
| | | | |
| | December 31, 2022 | ||
|
| Total Shares Authorized for |
| Shares Available for Future |
Plans | | Issuance under the Plans | | Issuance under the Plans |
Incentive Plans |
| 35,650 |
| 5,575 |
Employee Stock Purchase Plan |
| 4,250 |
| 438 |
Profit Sharing and Savings Plan |
| 4,200 |
| 349 |
Stock options:
The Company’s employee incentive plans provide for the granting of stock options for the purchase of common stock of the Company to certain key employees of the Company. Employee stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant. Employee stock options granted under the plans expire after ten10 years and typically vest 25% per year, over four years. The Company records compensation expense for the grant date fair value of the option awards evenly over the vesting period or minimum required service period.
The table below identifies the employee stock option activity under these plans during the year ended December 31, 2017:2022:
| | | | | | | | | | | |
|
| |
| |
| Average |
| Aggregate | |||
| | Shares | | Weighted- Average | | Remaining | | Intrinsic Value | |||
| | (in thousands) | | Exercise Price | | Contractual Terms | | (in thousands) | |||
Outstanding at December 31, 2021 |
| 1,206 | | $ | 300.09 |
|
| |
| |
|
Granted |
| 130 | |
| 676.48 |
|
| |
| |
|
Exercised |
| (251) | |
| 242.51 |
|
| |
| |
|
Forfeited or expired |
| (16) | |
| 475.16 |
|
| |
| |
|
Outstanding at December 31, 2022 |
| 1,069 | | $ | 356.76 |
| 5.6 | Years | | $ | 520,691 |
Vested or expected to vest at December 31, 2022 |
| 1,049 | | $ | 353.40 |
| 5.6 | Years | | $ | 514,833 |
Exercisable at December 31, 2022 |
| 739 | | $ | 280.98 |
| 4.5 | Years | | $ | 416,152 |
62
Shares (in thousands) | Weighted-Average Exercise Price | Average Remaining Contractual Terms | Aggregate Intrinsic Value (in thousands) | |||||||||
| Outstanding at December 31, 2016 | 2,789 | $ | 105.11 | |||||||||
| Granted | 282 | 251.26 | ||||||||||
| Exercised | (674 | ) | 48.58 | |||||||||
| Forfeited or expired | (33 | ) | 215.46 | |||||||||
| Outstanding at December 31, 2017 | 2,364 | $ | 137.08 | 5.3 Years | $ | 244,562 | ||||||
| Vested or expected to vest at December 31, 2017 | 2,319 | $ | 135.11 | 5.2 Years | $ | 244,492 | ||||||
| Exercisable at December 31, 2017 | 1,571 | $ | 85.00 | 3.8 Years | $ | 244,360 | ||||||
| Shares (in thousands) | Weighted-Average Exercise Price | Average Remaining Contractual Terms | Aggregate Intrinsic Value (in thousands) | ||||||||||
| Outstanding at December 31, 2016 | 11 | $ | 48.31 | ||||||||||
| Granted | — | — | |||||||||||
| Exercised | (11 | ) | 48.31 | ||||||||||
| Forfeited | — | — | |||||||||||
| Outstanding at December 31, 2017 | — | $ | — | — | $ | — | |||||||
| Vested or expected to vest at December 31, 2017 | — | $ | — | — | $ | — | |||||||
| Exercisable at December 31, 2017 | — | $ | — | — | $ | — | |||||||
The fair value of each stock option award 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 the risk freerisk-free rate, expected life, expected volatility and expected dividend yield.
| ● | Risk-free interest rate – The United States Treasury rates in effect at the time the options are granted for the options’ expected life. |
| ● | Expected life – Represents the period of time that options granted are expected to be outstanding. The Company uses historical experience to estimate the expected life of options granted. |
| ● | Expected volatility – Measure of the amount, by which the Company’s stock price is expected to fluctuate, based on a historical trend. |
| ● | Expected dividend yield – The Company has not paid, nor does it have plans in the foreseeable future to pay, any dividends. |
The table below identifies the weighted-average assumptions used for grants awarded during the years ended December 31, 2017, 20162022, 2021 and 2015:
| December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Risk free interest rate | 1.98 | % | 1.44 | % | 1.52 | % | ||
| Expected life | 5.4 Years | 5.5 Years | 5.7 Years | |||||
| Expected volatility | 22.4 | % | 22.3 | % | 22.3 | % | ||
| Expected dividend yield | — | % | — | % | — | % | ||
| | | | | | | | | |
| | December 31, | |||||||
|
| 2022 | | 2021 | | 2020 | |||
Risk free interest rate |
| 2.09 | % | | 0.82 | % | | 0.86 | % |
Expected life |
| 6.3 | Years | | 5.9 | Years | | 5.9 | Years |
Expected volatility |
| 28.9 | % | | 30.0 | % | | 26.4 | % |
Expected dividend yield |
| — | % | | — | % | | — | % |
The following table summarizes activity related to stock options awarded by the Company for the years ended December 31, 2017, 20162022, 2021 and 2015:
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Compensation expense for stock options awarded (in thousands) | $ | 15,561 | $ | 15,404 | $ | 18,209 | |||||
| Income tax benefit from compensation expense related to stock options (in thousands) | 5,934 | 5,753 | 6,811 | ||||||||
| Total intrinsic value of stock options exercised (in thousands) | 135,533 | 157,115 | 169,248 | ||||||||
| Cash received from exercise of stock options (in thousands) | 33,229 | 47,394 | 105,822 | ||||||||
| Weighted-average grant-date fair value of options awarded | $ | 62.79 | $ | 63.42 | $ | 51.56 | |||||
| Weighted-average remaining contractual life of exercisable options | 3.8 Years | 3.9 Years | 4.2 Years | ||||||||
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 | | 2021 | | 2020 | |||
Compensation expense for stock options awarded (in thousands) | | $ | 21,412 | | $ | 20,035 | | $ | 18,435 |
Income tax benefit from compensation expense related to stock options (in thousands) | |
| 5,332 | |
| 4,989 | |
| 4,620 |
Total intrinsic value of stock options exercised (in thousands) | |
| 123,911 | |
| 163,722 | |
| 79,451 |
Cash received from exercise of stock options (in thousands) | |
| 60,976 | |
| 67,761 | |
| 46,282 |
Weighted-average grant-date fair value of options awarded | | $ | 221.19 | | $ | 146.57 | | $ | 106.76 |
Weighted-average remaining contractual life of exercisable options (in years) | |
| 4.5 | |
| 4.7 | |
| 4.5 |
At December 31, 2017,2022, the remaining unrecognized compensation expense related to unvested stock option awards was $26.8$35.2 million, and the weighted-average period of time, over which this cost will be recognized, is 2.52.6 years.
Restricted stock:
The Company’s performance incentive plans provide for the awardawarding of shares of restricted stock to its corporate and senior managementcertain key employees that vest evenly over a three-year period and are held in escrow until such vesting has occurred. Generally, unvested shares are forfeited when an employee ceases employment. The fair value of shares awarded under these plans is based on the closing market price of the Company’s common stock on the date of award and compensation expense is recorded over the vesting period or minimum required service period.
The table below identifies the employee restricted stock activity under these plans during the year ended December 31, 20172022 (in thousands, except per share data):
| | | | | |
| | | | Weighted-Average Grant-Date | |
|
| Shares |
| Fair Value | |
Non-vested at December 31, 2021 |
| 3 | | $ | 419.47 |
Granted during the period |
| 1 | |
| 660.48 |
Vested during the period (1) |
| (1) | |
| 400.23 |
Forfeited during the period |
| — | |
| — |
Non-vested at December 31, 2022 |
| 3 | | $ | 531.66 |
| Shares | Weighted-Average Grant-Date Fair Value | |||||
| Non-vested at December 31, 2016 | 3 | $ | 204.33 | |||
| Granted during the period | 1 | 256.69 | ||||
Vested during the period (1) | (1 | ) | 182.10 | |||
| Forfeited during the period | — | — | ||||
| Non-vested at December 31, 2017 | 3 | $ | 244.06 | |||
| (1) | |
| Includes less than one thousand shares withheld to cover employees’ taxes upon vesting. |
63
The Company’s director stock plan providesincentive plans provide for the awardawarding of shares of restricted stock to the non-employee directors of the Company that vest after one-year or evenly over a three-year period and are held in escrow until such vesting has occurred. Unvested shares are forfeited when a director ceases their service on the Company’s Board of Directors for reasons other than death or retirement. The fair value of shares awarded under this planthese plans is based on the closing market price of the Company’s common stock on the date of award, and compensation expense is recorded evenly over the vestingminimum required service period.
The table below identifies thenon-employee director restricted stock activity under this planthese plans during the year ended December 31, 20172022 (in thousands, except per share data):
| Shares | Weighted-Average Grant-Date Fair Value | |||||
| Non-vested at December 31, 2016 | 6 | $ | 222.77 | |||
| Granted during the period | 3 | 252.45 | ||||
| Vested during the period | (4 | ) | 200.81 | |||
| Forfeited during the period | — | — | ||||
| Non-vested at December 31, 2017 | 5 | $ | 250.85 | |||
| | | | | |
| | | | Weighted-Average Grant-Date | |
|
| Shares |
| Fair Value | |
Non-vested at December 31, 2021 |
| 2 | | $ | 508.45 |
Granted during the period |
| 2 | |
| 635.62 |
Vested during the period |
| (2) | |
| 508.45 |
Forfeited during the period |
| — | |
| — |
Non-vested at December 31, 2022 |
| 2 | | $ | 635.62 |
The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2017, 20162022, 2021 and 20152020 (in thousands, except per share data):
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Compensation expense for restricted shares awarded | $ | 1,628 | $ | 1,293 | $ | 1,625 | |||||
| Income tax benefit from compensation expense related to restricted shares | $ | 621 | $ | 483 | $ | 610 | |||||
| Total fair value of restricted shares at vest date | $ | 1,202 | $ | 2,384 | $ | 3,284 | |||||
| Shares awarded under the plans | 4 | 4 | 4 | ||||||||
| Weighted-average grant-date fair value of shares awarded under the plans | $ | 253.78 | $ | 264.24 | $ | 208.56 | |||||
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Compensation expense for restricted shares awarded | | $ | 1,808 | | $ | 1,602 | | $ | 1,488 |
Income tax benefit from compensation expense related to restricted shares | | $ | 450 | | $ | 399 | | $ | 373 |
Total fair value of restricted shares at vest date | | $ | 2,595 | | $ | 2,815 | | $ | 1,591 |
Shares awarded under the plans | |
| 3 | |
| 3 | |
| 4 |
Weighted-average grant-date fair value of shares awarded under the plans | | $ | 645.31 | | $ | 509.24 | | $ | 412.67 |
At December 31, 2017,2022, the remaining unrecognized compensation expense related to unvested restricted share awards was $0.3$0.5 million, and the weighted-average period of time, over which this cost will be recognized, is 0.10.3 years
Employee stock purchase plan:
The Company’s employee stock purchase plan (the “ESPP”) permits eligible employees to purchase shares of the Company’s common stock at 85% of the fair market value. Employees may authorize the Company to withhold up to 5% of their annual salary to participate in the plan. The fair value of shares issued under the ESPP is based on the average of the high and low market prices of the Company’s common stock during the offering periods. Compensationperiods, and compensation expense is recognized based on the discount between the grant-date fair value and the employee purchase price for the shares sold to employees.
The table below summarizes activity related to the Company’s ESPP for the years ended December 31, 2017, 20162022, 2021 and 20152020 (in thousands, except per share data):
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Compensation expense for shares issued under the ESPP | $ | 2,212 | $ | 2,162 | $ | 2,065 | |||||
| Income tax benefit from compensation expense for shares issued under the ESPP | $ | 844 | $ | 807 | $ | 773 | |||||
| Shares issued under the ESPP | 64 | 54 | 60 | ||||||||
| Weighted-average price of shares issued under the ESPP | $ | 196.72 | $ | 227.12 | $ | 195.04 | |||||
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 | �� | 2021 |
| 2020 | |||
Compensation expense for shares issued under the ESPP | | $ | 3,238 | | $ | 3,019 | | $ | 2,824 |
Income tax benefit from compensation expense related to shares issued under the ESPP | | $ | 806 | | $ | 752 | | $ | 708 |
Shares issued under the ESPP | |
| 31 | |
| 36 | |
| 45 |
Weighted-average price of shares issued under the ESPP | | $ | 592.22 | | $ | 473.22 | | $ | 353.04 |
Profit sharing and savings plan:
The Company sponsors a contributory profit sharing and savings plan (the “401(k) Plan”) that covers substantially all employees who are at least 21 years of age and have completed one year of service. The Company makes matching contributions equal to 100% of the first 2% of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed. An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. The Company may also make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The Company did not make any discretionary contributions to the 401(k) Plan during the years ended
64
December 31, 2017, 20162022, 2021 or 2015.2020. The Company expensed matching contributions under the 401(k) Plan in the amounts of $22.6$36.7 million, $20.6$32.5 million and $18.5$31.0 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
Nonqualified deferred compensation plan:
The Company sponsors a nonqualified deferred compensation plan (the “Deferred Compensation Plan”) for highly compensated employees whose contributions to the 401(k) Plan are limited due to the application of the annual limitations under the Internal Revenue Code. The Deferred Compensation Plan provides these employees with the opportunity to defer the full 6% of matched compensation, including salary and incentive based compensation, that was precluded under the Company’s 401(k) Plan, which is then matched by the Company using the same formula as the 401(k) Plan. An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The Company has an unsecured obligation to pay, in the future, the value of the deferred compensation and Company match, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. The timing related to the ultimate payment of these future share-based compensation related payments cannot be determined. The liability for compensation deferred under the Deferred Compensation Plan was $25.7$49.4 million and $20.5$52.5 million as of December 31, 20172022 and 2016,2021, respectively, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amount of $0.1$0.2 million for each of the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
Stock appreciation rights:
The Company’s incentive plans provide for the granting of stock appreciation rights, which expire after 10 years and vest 25% per year, over four years, and are settled in cash. There were 13,159 and 9,811 stock appreciation rights outstanding as of December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, there were 3,348 stock appreciation rights granted. The liability for compensation to be paid for redeemed stock appreciation rights was $2.9 million and $1.3 million as of December 31, 2022 and 2021, respectively, which were included in “Other liabilities” on the Consolidated Balance Sheets. The Company recorded compensation expense for stock appreciation rights in the amounts of $1.7 million and $1.0 million and $0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
NOTE 1013 – COMMITMENTS
Construction commitments:
As of December 31, 2017,2022, the Company had purchase obligations for construction contract commitments in the amount of $54.4$152.3 million.
Letters of credit commitments:
As of December 31, 2017,2022, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of $36.8$101.7 million. See Note 57 for further information concerning the Company’s letters of credit commitments.
Debt financing commitments:
Each series of senior notes areis redeemable in whole, at any time, or in part, from time to time, at the Company’s option upon not less than 30 nor more than 60 days notice at a redemption price, plus any accrued and unpaid interest to, but not including, the redemption date, equal to the greater of (i) 100% of the principal amount thereof or (ii) the sum of the present valuevalues of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semiannual basis at the applicable Treasury Yield plus basis points identified in the indenturesindenture governing such series of senior notes; provided, that on or after the notes.date that is three months prior to the maturity date of the series of senior notes, such series of senior notes is redeemable at a redemption price equal to par plus accrued and unpaid interest to, but not including, the redemption date. In addition, if at any time the Company undergoes a Change of Control Triggering Event, as defined in the indenturesindenture governing thesuch series of senior notes, the holders may require the Company to repurchase all or a portion of their senior notes at a price equal to 101% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, but not including the repurchase date. See Note 57 for further information concerning the Company’s debt financing commitments.
65
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure to this obligation.
Renewable energy tax credit equity investments:
The Company has entered into agreements to make capital contributions to certain tax credit equity investments for the purpose of receiving renewable energy tax credits. As of December 31, 2022, the Company is required to make capital contributions totaling approximately $3.4 million upon achievement of project milestones by the solar energy farms, the timing of which is uncertain and outside of the Company’s control. See Note 1 for further information concerning the Company’s renewable energy tax credit equity investments.
NOTE 1114 – RELATED PARTIES
The Company leases certain land and buildings related to 7570 of its O’Reilly Auto Parts stores and two surplus properties under fifteen-fifteen- or twenty-year operating lease agreements with entities in which certainthat include one or more of the Company’s affiliated directors or members of an affiliated director’s immediate family are affiliated.family. 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. Lease payments under these operating leases totaled $4.6$4.7 million $4.5 million and $4.5 million duringfor each of the years ended December 31, 2017, 20162022, 2021 and 2015, respectively.2020. The Company believes that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties. See Note 65 for further information concerning the Company’s operating leases.
NOTE 1215 – INCOME TAXES
The following table identifies components of income from continuing operations before income taxes included in “Income before income taxes” on the accompanying Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December��31, | |||||||
| | 2022 | | 2021 | | 2020 | |||
Domestic | | $ | 2,786,866 | | $ | 2,770,485 | | $ | 2,260,385 |
International | | | 11,789 | | | 11,429 | | | 6,020 |
Income before income taxes | | $ | 2,798,655 | | $ | 2,781,914 | | $ | 2,266,405 |
Provision for income taxes:
The following tables reconcile the amounts included in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Current: | | | | | | | | | |
Federal income tax expense | | $ | 455,779 | | $ | 485,988 | | $ | 401,331 |
State income tax expense | |
| 95,388 | |
| 104,837 | |
| 97,085 |
International income tax expense | | | 5,263 | | | 6,021 | | | 3,306 |
Total current | | | 556,430 | | | 596,846 | | | 501,722 |
| | | | | | | | | |
Deferred: | | | | | | | | | |
Federal income tax expense | | | 62,719 | | | 20,543 | | | 16,749 |
State income tax expense (benefit) | | | 8,583 | | | 2,432 | | | (2,865) |
International income tax benefit | | | (1,727) | | | (2,592) | | | (1,503) |
Total deferred | | | 69,575 | | | 20,383 | | | 12,381 |
| | | | | | | | | |
Net income tax expense | | $ | 626,005 | | $ | 617,229 | | $ | 514,103 |
66
The following table outlines the reconciliation of the “Provision for income taxes” amounts included on the accompanying Consolidated Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Federal income taxes at statutory rate | | $ | 587,716 | | $ | 584,202 | | $ | 474,681 |
State income taxes, net of federal tax benefit | |
| 87,352 | |
| 90,360 | |
| 76,810 |
Excess tax benefit from share-based compensation | |
| (25,503) | |
| (35,202) | |
| (16,918) |
Benefit from investment in renewable energy tax credits | | | (17,593) | | | (18,592) | | | (17,904) |
Other items, net | |
| (5,967) | |
| (3,539) | |
| (2,566) |
Total provision for income taxes | | $ | 626,005 | | $ | 617,229 | | $ | 514,103 |
The Company has invested in tax credit equity investments for the purposes of receiving renewable energy tax credits. During the years ended December 31, 2022, 2021 and 2020, the Company recognized investment tax credits in the amount of $167.6 million, $177.1 million and $170.5 million, respectively, all of which were realized through reductions in cash income taxes paid and were reflected as a component of the change in Income taxes payable on the accompanying Consolidated Statements of Cash Flows for the respective years. See Note 1 for further information concerning the Company’s investment in tax credit funds.
Deferred income tax assets and liabilities:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.
The following table identifies significant components of the Company’s net deferred tax liabilities included in “Deferred income taxes” on the accompanying Consolidated Balance Sheets as of December 31, 20172022 and 20162021 (in thousands):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Deferred tax assets: | |||||||
| Allowance for doubtful accounts | $ | 1,885 | $ | 2,686 | |||
| Tax credits | 7,179 | 9,363 | |||||
| Other accruals | 97,247 | 153,955 | |||||
| Net operating losses | 346 | 304 | |||||
| Other | 14,784 | 19,870 | |||||
| Total deferred tax assets | 121,441 | 186,178 | |||||
| Deferred tax liabilities: | |||||||
| Inventories | 55,965 | 76,694 | |||||
| Property and equipment | 122,354 | 157,228 | |||||
| Other | 28,528 | 42,422 | |||||
| Total deferred tax liabilities | 206,847 | 276,344 | |||||
| Net deferred tax liabilities | $ | (85,406 | ) | $ | (90,166 | ) | |
| For the Year Ended December 31, 2017 | |||||||||||
| Current | Deferred | Total | |||||||||
| Federal income tax expense (benefit) | $ | 467,577 | $ | (13,053 | ) | $ | 454,524 | ||||
| State income tax expense | 41,183 | 8,293 | 49,476 | ||||||||
| Net income tax expense (benefit) | $ | 508,760 | $ | (4,760 | ) | $ | 504,000 | ||||
| For the Year Ended December 31, 2016 | |||||||||||
| Current | Deferred | Total | |||||||||
| Federal income tax expense | $ | 540,090 | $ | 7,558 | $ | 547,648 | |||||
| State income tax expense | 49,016 | 2,836 | 51,852 | ||||||||
| Net income tax expense | $ | 589,106 | $ | 10,394 | $ | 599,500 | |||||
| For the Year Ended December 31, 2015 | |||||||||||
| Current | Deferred | Total | |||||||||
| Federal income tax expense (benefit) | $ | 504,558 | $ | (21,973 | ) | $ | 482,585 | ||||
| State income tax expense (benefit) | 47,242 | (677 | ) | 46,565 | |||||||
| Net income tax expense (benefit) | $ | 551,800 | $ | (22,650 | ) | $ | 529,150 | ||||
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Federal income taxes at statutory rate | $ | 573,231 | $ | 573,020 | $ | 511,128 | |||||
| State income taxes, net of federal tax benefit | 39,062 | 35,285 | 32,137 | ||||||||
| Excess tax benefit from share-based compensation | (48,688 | ) | — | — | |||||||
| Revaluation of deferred tax liability | (53,240 | ) | — | — | |||||||
| Other items, net | (6,365 | ) | (8,805 | ) | (14,115 | ) | |||||
| Total provision for income taxes | $ | 504,000 | $ | 599,500 | $ | 529,150 | |||||
| | | | | | |
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Deferred tax assets: |
| |
|
| |
|
Allowance for doubtful accounts | | $ | 2,196 | | $ | 1,538 |
Tax credits | |
| — | |
| 284 |
Other accruals | |
| 137,474 | |
| 142,714 |
Operating lease liability | | | 538,890 | | | 513,492 |
Other | |
| 17,115 | |
| 16,117 |
Total deferred tax assets | |
| 695,675 | |
| 674,145 |
| | | | | | |
Deferred tax liabilities: | |
|
| |
|
|
Inventories | |
| 104,572 | |
| 64,562 |
Property and equipment | |
| 233,288 | |
| 212,649 |
Operating lease asset | | | 521,541 | | | 496,996 |
Other | |
| 81,621 | |
| 75,150 |
Total deferred tax liabilities | |
| 941,022 | |
| 849,357 |
| | | | | | |
Net deferred tax liabilities | | $ | (245,347) | | $ | (175,212) |
Unrecognized tax benefits:
The following table summarizes the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2017, 20162022, 2021 and 20152020 (in thousands):
| | | | | | | | | |
|
| 2022 |
| 2021 |
| 2020 | |||
Unrealized tax benefit, balance at January 1, | | $ | 26,847 | | $ | 30,967 | | $ | 31,475 |
Additions based on tax positions related to the current year | |
| 4,146 | |
| 5,446 | |
| 4,795 |
Payments related to items settled with taxing authorities | |
| (1,000) | |
| (2,570) | |
| — |
Reductions due to the lapse of statute of limitations and settlements | |
| (5,195) | |
| (6,996) | |
| (5,303) |
Unrealized tax benefit, balance at December 31, | | $ | 24,798 | | $ | 26,847 | | $ | 30,967 |
67
| 2017 | 2016 | 2015 | |||||||||
| Unrealized tax benefit, balance at January 1, | $ | 34,798 | $ | 36,928 | $ | 49,598 | |||||
| Additions based on tax positions related to the current year | 6,299 | 6,116 | 5,405 | ||||||||
| Additions based on tax positions related to prior years | — | — | 995 | ||||||||
| Payments related to items settled with taxing authorities | — | (195 | ) | (4,012 | ) | ||||||
| Reductions due to the lapse of statute of limitations and settlements | (5,709 | ) | (8,051 | ) | (15,058 | ) | |||||
| Unrealized tax benefit, balance at December 31, | $ | 35,388 | $ | 34,798 | $ | 36,928 | |||||
For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $40.9$28.3 million, $40.6$30.7 million and $43.6$35.9 million, respectively. The timing related to the ultimate resolution or settlement of these uncertain tax positions cannot be determined. All of the unrecognized tax benefits recorded as of December 31, 2017, 20162022, 2021 and 2015,2020, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $8.3$6.2 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, 20162022, 2021 and 2015,2020, the Company had accrued approximately $5.5$3.5 million, $5.8$3.8 million and $6.7$5.0 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for interest on state and federal returns. During the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.0$1.5 million, $2.4$1.6 million and $2.8$2.2 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2018,2023, the Company expects a reduction of $7.5$5.7 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2017,2022, resulting from settlement or expiration of the statute of limitations.
The Company’s United States federal income tax returns for tax years 20152019 and beyond remain subject to examination by the Internal Revenue Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2012 and 2013 federal income tax returns in the second quarter of 2015. The statute of limitations for the Company’s federal income tax returns for tax years 2013 and prior expired on September 15, 2017. The statute of limitations for the Company’s U.S. federal income tax return for 2014 will expire on September 15, 2018, unless otherwise extended. The IRS is currently conducting an examination of the Company’s consolidated returns for tax years 2014 and 2015.Service. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 20062011 through 2016.
NOTE 1316 – EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2017, 20162022, 2021 and 20152020 (in thousands, except per share data):
| | | | | | | | | |
| | For the Year Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Numerator (basic and diluted): |
| |
|
| |
|
| |
|
Net income | | $ | 2,172,650 | | $ | 2,164,685 | | $ | 1,752,302 |
| | | | | | | | | |
Denominator: | |
|
| |
|
| |
|
|
Weighted-average common shares outstanding – basic | |
| 64,372 | |
| 68,967 | |
| 73,817 |
Effect of stock options (1) | |
| 590 | |
| 644 | |
| 645 |
Weighted-average common shares outstanding – assuming dilution | |
| 64,962 | |
| 69,611 | |
| 74,462 |
| | | | | | | | | |
Earnings per share: | |
|
| |
|
| ��� |
|
|
Earnings per share-basic | | $ | 33.75 | | $ | 31.39 | | $ | 23.74 |
Earnings per share-assuming dilution | | $ | 33.44 | | $ | 31.10 | | $ | 23.53 |
| | | | | | | | | |
Antidilutive potential common shares not included in the calculation of diluted earnings per share: | |
|
| |
|
| |
|
|
Stock options (1) | |
| 144 | |
| 111 | |
| 291 |
Weighted-average exercise price per share of antidilutive stock options (1) | | $ | 663.36 | | $ | 479.90 | | $ | 393.42 |
| For the Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Numerator (basic and diluted): | |||||||||||
| Net income | $ | 1,133,804 | $ | 1,037,691 | $ | 931,216 | |||||
| Denominator: | |||||||||||
| Weighted-average common shares outstanding – basic | 88,426 | 95,447 | 99,965 | ||||||||
Effect of stock options (1) | 1,076 | 1,273 | 1,549 | ||||||||
| Weighted-average common shares outstanding – assuming dilution | 89,502 | 96,720 | 101,514 | ||||||||
| Earnings per share: | |||||||||||
| Earnings per share-basic | $ | 12.82 | $ | 10.87 | $ | 9.32 | |||||
| Earnings per share-assuming dilution | $ | 12.67 | $ | 10.73 | $ | 9.17 | |||||
| Antidilutive potential common shares not included in the calculation of diluted earnings per share: | |||||||||||
Stock options (1) | 715 | 332 | 245 | ||||||||
Weighted-average exercise price per share of antidilutive stock options (1) | $ | 252.16 | $ | 265.77 | $ | 216.29 | |||||
| (1) | |
| See Note |
See Note 9 for information concerning the Company’s subsequent share repurchases.
68
The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 20172022 and 2016.2021. The unaudited quarterly information includes all adjustments, which the Company considers necessary for a fair presentation of the information shown (in thousands, except per share data):
| | | | | | | | | | | | |
| | Fiscal 2022 | ||||||||||
|
| First |
| Second |
| Third |
| Fourth | ||||
| | Quarter | | Quarter | | Quarter | | Quarter | ||||
Sales | | $ | 3,296,011 | | $ | 3,670,737 | | $ | 3,798,619 | | $ | 3,644,493 |
Gross profit | |
| 1,708,072 | |
| 1,884,718 | |
| 1,934,962 | |
| 1,853,954 |
Operating income | |
| 669,530 | |
| 798,550 | |
| 804,194 | |
| 682,217 |
Net income | |
| 481,880 | |
| 576,760 | |
| 585,438 | |
| 528,572 |
Earnings per share – basic (1) | | $ | 7.24 | | $ | 8.86 | | $ | 9.25 | | $ | 8.45 |
Earnings per share – assuming dilution (1) | | $ | 7.17 | | $ | 8.78 | | $ | 9.17 | | $ | 8.37 |
| | | | | | | | | | | | |
| | Fiscal 2021 | ||||||||||
|
| First |
| Second |
| Third |
| Fourth | ||||
| | Quarter | | Quarter | | Quarter | | Quarter | ||||
Sales | | $ | 3,090,899 | | $ | 3,465,601 | | $ | 3,479,570 | | $ | 3,291,493 |
Gross profit | |
| 1,640,795 | |
| 1,826,378 | |
| 1,818,240 | |
| 1,734,536 |
Operating income | |
| 691,105 | |
| 795,583 | |
| 754,599 | |
| 675,881 |
Net income | |
| 501,609 | |
| 585,451 | |
| 558,652 | |
| 518,973 |
Earnings per share – basic (1) | | $ | 7.13 | | $ | 8.41 | | $ | 8.14 | | $ | 7.71 |
Earnings per share – assuming dilution (1) | | $ | 7.06 | | $ | 8.33 | | $ | 8.07 | | $ | 7.64 |
| Fiscal 2017 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Sales | $ | 2,156,259 | $ | 2,290,829 | $ | 2,339,830 | $ | 2,190,808 | |||||||
| Gross profit | 1,131,147 | 1,200,062 | 1,230,294 | 1,159,180 | |||||||||||
| Operating income | 403,157 | 457,445 | 461,963 | 402,835 | |||||||||||
| Net income | 264,934 | 282,821 | 283,734 | 302,315 | |||||||||||
Earnings per share – basic (1) | $ | 2.88 | $ | 3.14 | $ | 3.26 | $ | 3.56 | |||||||
Earnings per share – assuming dilution (1) | $ | 2.83 | $ | 3.10 | $ | 3.22 | $ | 3.52 | |||||||
| Fiscal 2016 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Sales | $ | 2,096,150 | $ | 2,176,689 | $ | 2,220,955 | $ | 2,099,302 | |||||||
| Gross profit | 1,097,579 | 1,127,179 | 1,170,026 | 1,114,227 | |||||||||||
| Operating income | 418,626 | 425,061 | 447,809 | 407,710 | |||||||||||
| Net income | 255,374 | 257,794 | 278,493 | 246,030 | |||||||||||
Earnings per share – basic (1) | $ | 2.63 | $ | 2.69 | $ | 2.93 | $ | 2.62 | |||||||
Earnings per share – assuming dilution (1) | $ | 2.59 | $ | 2.65 | $ | 2.90 | $ | 2.59 | |||||||
| (1) | |
| Earnings per share amounts are computed independently for each quarter and annual period. The quarterly earnings per share amounts may not sum to equal the full-year earnings per share amount. |
The unaudited operating data presented above should be read in conjunction with the Company’s consolidated financial statements and related notes and the other financial information included therein.
69
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company’s management, of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”), under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) and as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company, including its consolidated subsidiaries, in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2017,2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting includes all policies and procedures that
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company’s consolidated financial statements and has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is included in Item 8 of this annual report on Form 10-K.
70
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by Part III is incorporated by reference from O’Reilly Automotive, Inc. and Subsidiaries’ (the “Company”)the Company’s Proxy Statement on Schedule 14A for the 20182023 Annual Meeting of Shareholders (“Proxy Statement”), which will be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of the end of the Company’s most recent fiscal year. Except for those portions specifically incorporated in this Annual Report on Form 10-K by reference to the Company’s Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this Annual Report on Form 10-K.
Directors and Officers:
The information regarding the directors of the Company will be included in the Company’s Proxy Statement under the caption “Proposal 1 - Election of Directors” and “Information Concerning the Board of Directors” and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days of the end of the Company’s most recent fiscal year. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form 10-K, for the Company’s executive officers who are not also directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended:
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), required by Item 405 of Regulation S-K, will be included in the Company’s Proxy Statement under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports,” if applicable, and is incorporated herein by reference.
Code of Ethics:
The Company’s Board of Directors has adopted a code of ethics that applies to all of its directors, officers (including its chief executive officer, chief operating officer, chief financial officer, chief accounting officer, controller and any person performing similar functions), and Team Members. The Company’s Code of Ethics is available on its website at
Corporate Governance:
The Corporate Governance/Nominating Committee of the Board of Directors does not have a written policy on the consideration of Director candidates recommended by shareholders. It is the view of the Board of Directors that all candidates, whether recommended by a shareholder or the Corporate Governance/Nominating Committee, shall be evaluated based on the same established criteria for persons to be nominated for election to the Board of Directors and its committees.
The Board of Directors has established an Audit Committee pursuant to Section 3(a)(58)(A) of the Exchange Act. The Audit Committee currently consists of Jay D. Burchfield, Thomas T. Hendrickson, Paul R. Lederer, John R. Murphy, Dana M. Perlman, Maria A. Sastre, Andrea M. Weiss, and Ronald Rashkow,Fred Whitfield, each an independent director in accordance with The Nasdaq Stock Market Marketplace Rule 5605(a)(2), the standards of Rule 10A-3 of the Exchange Act and the requirements of The Nasdaq Stock Market Marketplace Rule 5605(c)(2). In addition, our Board of Directors has determined that Mr. Murphy, ChairmanHendrickson, Chairperson of the Audit Committee, qualifies as an audit committee financial expert under Item 407(d)(5) of Regulation S-K.
Item 11. Executive Compensation
Director and Officer Compensation:
The information required by Item 402 of Regulation S-K will be included in O’Reilly Automotive, Inc. and Subsidiaries’ (the “Company”)the Company’s Proxy Statement on Schedule 14A for the 2018 Annual Meeting of Shareholders (“Proxy Statement”) under the captions “Compensation of Executive Officers” and “Compensation of Directors” and is incorporated herein by reference.
Human Capital and Compensation Committee:
The information required by Item 407(e)(4) and (e)(5) of Regulation S-K will be included in the Company’s Proxy Statement under the captions “Compensation“Human Capital and Compensation Committee Interlocks and Insider Participation” and “Compensation“Human Capital and Compensation Committee Report” and is incorporated herein by reference.
72
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 201(d) of Regulation S-K will be included in O’Reilly Automotive, Inc. and Subsidiaries’ (the “Company”)the Company’s Proxy Statement on Schedule 14A for the 2018 Annual Meeting of Shareholders (“Proxy Statement”) under the caption “Equity Compensation Plans” and is incorporated herein by reference.
The information required by Item 403 of Regulation S-K will be included in the Company’s Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Directors and Management” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 404 of Regulation S-K will be included in the O’Reilly Automotive, Inc. and Subsidiaries’ (the “Company”)Company’s Proxy Statement on Schedule 14A for the 2018 Annual Meeting of Shareholders (“Proxy Statement”) under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference.
The information required by Item 407(a) of Regulation S-K will be included in the Company’s Proxy Statement under the caption “Director Independence” and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A will be included in O’Reilly Automotive, Inc. and Subsidiaries’the Company’s Proxy Statement on Schedule 14A for the 2018 Annual Meeting of Shareholders under the caption “Fees Paid to Independent Registered Public Accounting Firm” and is incorporated herein by reference.
73
| (a) | The following documents are filed as part of this Annual Report on Form 10-K: |
| 1. | Financial Statements - O’Reilly Automotive, Inc. and Subsidiaries |
The following consolidated financial statements of O’Reilly Automotive, Inc. and Subsidiaries included in the Annual Shareholders’ Report of the registrant for the year ended December 31, 2017,2022, are filed with this Annual Report in Part II, Item 8:
| ● | Management’s Report on Internal Control over Financial Reporting |
| ● | Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting |
| ● | Report of Independent Registered Public Accounting Firm – Financial Statements |
| ● | Consolidated Balance Sheets as of December 31, 2022 and 2021 |
| ● | Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 |
| ● | Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 |
| ● | Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020 |
| ● | Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 |
| ● | Notes to Consolidated Financial Statements for the years ended December 31, 2022, 2021 and 2020 |
| 2. | Financial Statement Schedules - O’Reilly Automotive, Inc. and Subsidiaries |
Any schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.
| 3. | Exhibits |
| | | ||
|---|---|---|---|---|
Exhibit No. | Description | |||
| | | ||
3.1 | ||||
| ||||
| ||||
4.1 | | Form of Stock Certificate for Common Stock, filed as Exhibit 4.1 to the Registration Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference. | ||
| ||||
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | |
4.7 | | |
74
| | |
|---|---|---|
Exhibit No. | Description | |
| | |
4.8 | | |
4.9 | | |
4.10 | | |
4.11 | | |
4.12 | | |
4.13 | | |
4.14 | | |
4.15 | | |
4.16 | | |
4.17 | | |
4.18 | | |
4.19 | | |
4.20 | | |
10.1 (a) | | Form of Employment Agreement between the Registrant and David E. O’Reilly, filed as Exhibit 10.1 to the Registration Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference. |
10.2 (a) | ||
| ||
O’Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as Exhibit 4.1 to the Registration Statement of the Registrant on Form S-8, File No. 33-73892, is incorporated herein by this reference. | ||
| ||
| ||
| ||
75
| | | ||
|---|---|---|---|---|
Exhibit No. | Description | |||
| | | ||
10.6 (a) | ||||
| ||||
| ||||
| ||||
| ||||
10.10 (a) | ||||
| ||||
| ||||
10.12 (a) | ||||
| ||||
| ||||
10.14 (a) | | |||
| ||||
10.16 (a) | | |||
| ||||
10.18 (a) | ||
| ||
10.19 | | |
| ||
10.21 (a) | | |
10.22 (a) | | |
76
| | |
|---|---|---|
Exhibit No. | Description | |
| | |
10.23 (a) | | |
10.24 (a) | | |
21.1 | | |
| Consent of Ernst & Young LLP, independent registered public accounting firm, filed herewith. | |
| ||
| ||
| ||
| ||
101.INS | | iXBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | iXBRL Taxonomy Extension |
101.CAL | | iXBRL Taxonomy Extension Calculation |
101.DEF | | iXBRL Taxonomy Extension Definition |
101.LAB | | iXBRL Taxonomy Extension Label |
101.PRE | | iXBRL Taxonomy Extension Presentation |
104 | | Cover Page Interactive Data File, formatted as Inline XBRL, contained in Exhibit 101 attachments. |
| | |
(a) | | Management contract or compensatory plan or arrangement. |
* | | Furnished (and not filed) herewith pursuant to Item 601 (b)(32)(ii) of Regulation S-K. |
Not applicable.
77
| Description | Balance at Beginning of Period | Additions - Charged to Costs and Expenses | Additions - Charged to Other Accounts - Describe | Deductions - Describe | Balance at End of Period | ||||||||||||||||
| Sales and returns allowances: | |||||||||||||||||||||
| For the year ended December 31, 2017 | $ | 9,595 | $ | 1,347 | $ | — | $ | — | $ | 10,942 | |||||||||||
| For the year ended December 31, 2016 | 7,978 | 1,617 | — | — | 9,595 | ||||||||||||||||
| For the year ended December 31, 2015 | $ | 6,855 | $ | 1,123 | $ | — | $ | — | $ | 7,978 | |||||||||||
| Allowance for doubtful accounts: | |||||||||||||||||||||
| For the year ended December 31, 2017 | $ | 12,040 | $ | 8,598 | $ | — | $ | 7,921 | (1) | $ | 12,717 | ||||||||||
| For the year ended December 31, 2016 | 9,637 | 9,587 | — | 7,184 | (1) | 12,040 | |||||||||||||||
| For the year ended December 31, 2015 | $ | 8,713 | $ | 7,119 | $ | — | $ | 6,195 | (1) | $ | 9,637 | ||||||||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| |||||
O’REILLY AUTOMOTIVE, INC. | | ||||
| (Registrant) | | |||
| | | | | |
| Date: | February 28, | | ||
| | | | | |
| By: | /s/ | Gregory D. Johnson | | |
| | Gregory D. Johnson | | ||
| | Chief Executive Officer | | ||
| | | | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| | | | | | ||||
Date: | February 28, 2023 | | | | |||||
| | | | | |||||
| | | | | |||||
| /s/ | Greg Henslee | | /s/ | David O’Reilly | ||||
| Greg Henslee | | David O’Reilly | ||||||
| |||||||||
Director and Executive Chairman of the Board | | Director and Executive Vice Chairman of the Board | |||||||
| | | | | | ||||
| | | | | | ||||
| /s/ | Larry O’Reilly | | /s/ | Jay D. Burchfield | ||||
| Larry O’Reilly | | Jay D. Burchfield | ||||||
| Director and Vice Chairman of the Board | | Director | ||||||
| | | | | | ||||
| | | | | | ||||
| /s/ | ||||||||
Thomas T. Hendrickson | | /s/ | John R. Murphy | ||||||
| Thomas T. Hendrickson | ||||||||
| |||||||||
John R. Murphy | |||||||||
| Director | | Director | ||||||
| | | | | | ||||
| | | | | | ||||
| /s/ | ||||||||
Dana M. Perlman | | /s/ | Maria A. Sastre | ||||||
| Dana M. Perlman | | Maria A. Sastre | ||||||
| Director | | Director | ||||||
| | | | | | ||||
| | | | | | ||||
| /s/ | Andrea M. Weiss | | /s/ | Fred Whitfield | ||||
| Andrea M. Weiss | | Fred Whitfield | ||||||
| Director | | Director | ||||||
| | | | | | ||||
| | | | | | ||||
| /s/ | Gregory D. Johnson | | /s/ | Jeremy A. Fletcher | ||||
| Gregory D. Johnson | | Jeremy A. Fletcher | ||||||
| Chief Executive Officer | | Executive Vice President and | ||||||
| |||||||||
(Principal Executive Officer) | | Chief Financial Officer | |||||||
| | | (Principal Financial and Accounting Officer) | ||||||
78