UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
   
FORM 10-Q
   
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2019
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

   
O’REILLY AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
   

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, Missouri 65802
(Address of principal executive offices, Zip code)
(417) 862-6708
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on which Registered
Common Stock, $0.01 par valueORLYThe NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: Common stock, $0.01 par value - 85,027,69778,276,726 shares outstanding as of October 30, 2017.April 29, 2019.







O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017MARCH 31, 2019


TABLE OF CONTENTS
 Page
  
  
  
  
  
  

  





PART I. FINANCIAL INFORMATION


Item 1. Financial Statements
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


September 30, 2017 December 31, 2016March 31, 2019 December 31, 2018
(Unaudited) (Note)(Unaudited) (Note)
Assets      
Current assets:      
Cash and cash equivalents$37,287
 $146,598
$56,717
 $31,315
Accounts receivable, net219,631
 197,274
250,680
 192,026
Amounts receivable from suppliers79,491
 82,105
66,452
 78,155
Inventory2,987,592
 2,778,976
3,228,901
 3,193,344
Other current assets34,480
 53,022
46,896
 48,262
Total current assets3,358,481
 3,257,975
3,649,646
 3,543,102
      
Property and equipment, at cost5,114,804
 4,832,342
5,761,729
 5,645,552
Less: accumulated depreciation and amortization1,822,123
 1,708,911
2,085,019
 2,058,550
Net property and equipment3,292,681
 3,123,431
3,676,710
 3,587,002
      
Operating lease, right-of-use assets1,886,364
 
Goodwill787,210
 785,399
808,717
 807,260
Other assets, net40,956
 37,384
40,125
 43,425
Total assets$7,479,328
 $7,204,189
$10,061,562
 $7,980,789
      
Liabilities and shareholders’ equity      
Current liabilities:      
Accounts payable$3,154,250
 $2,936,656
$3,438,679
 $3,376,403
Self-insurance reserves72,223
 67,921
77,359
 77,012
Accrued payroll80,953
 71,717
94,192
 86,520
Accrued benefits and withholdings65,574
 74,454
65,106
 89,082
Income taxes payable6,175
 
92,816
 11,013
Current portion of operating lease liabilities296,605
 
Other current liabilities249,325
 249,901
261,575
 253,990
Total current liabilities3,628,500
 3,400,649
4,326,332
 3,894,020
      
Long-term debt2,900,816
 1,887,019
3,460,921
 3,417,122
Operating lease liabilities, less current portion1,629,311
 
Deferred income taxes131,847
 90,166
109,480
 105,566
Other liabilities203,986
 199,219
163,153
 210,414
      
Shareholders’ equity:      
Common stock, $0.01 par value:      
Authorized shares – 245,000,000   
Authorized shares - 245,000,000   
Issued and outstanding shares –      
85,338,294 as of September 30, 2017, and   
92,851,815 as of December 31, 2016853
 929
78,262,099 as of March 31, 2019, and   
79,043,919 as of December 31, 2018783
 790
Additional paid-in capital1,267,810
 1,336,707
1,268,032
 1,262,063
Retained (deficit) earnings(654,484) 289,500
Retained deficit(896,450) (909,186)
Total shareholders’ equity614,179
 1,627,136
372,365
 353,667
      
Total liabilities and shareholders’ equity$7,479,328
 $7,204,189
$10,061,562
 $7,980,789
Note: The balance sheet at December 31, 2016,2018, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.
See accompanying Notes to condensed consolidated financial statements.


O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
For the Three Months Ended 
 March 31,
2017 2016 2017 20162019 2018
Sales$2,339,830
 $2,220,955
 $6,786,918
 $6,493,794
$2,410,608
 $2,282,681
Cost of goods sold, including warehouse and distribution expenses1,109,536
 1,050,929
 3,225,415
 3,099,010
1,131,318
 1,081,423
Gross profit1,230,294
 1,170,026
 3,561,503
 3,394,784
1,279,290
 1,201,258
          
Selling, general and administrative expenses768,331
 722,217
 2,238,938
 2,103,288
834,504
 778,412
Operating income461,963
 447,809
 1,322,565
 1,291,496
444,786
 422,846
          
Other income (expense):          
Interest expense(24,324) (18,706) (64,555) (52,228)(34,291) (28,217)
Interest income592
 1,227
 1,768
 3,172
554
 572
Other, net1,299
 1,563
 1,302
 3,821
3,103
 205
Total other expense(22,433) (15,916) (61,485) (45,235)(30,634) (27,440)
          
Income before income taxes439,530
 431,893
 1,261,080
 1,246,261
414,152
 395,406
Provision for income taxes155,796
 153,400
 429,591
 454,600
93,000
 90,500
Net income$283,734
 $278,493
 $831,489
 $791,661
$321,152
 $304,906
          
Earnings per share-basic:          
Earnings per share$3.26
 $2.93
 $9.28
 $8.25
$4.09
 $3.65
Weighted-average common shares outstanding – basic86,947
 94,891
 89,641
 95,994
78,484
 83,530
          
Earnings per share-assuming dilution:          
Earnings per share$3.22
 $2.90
 $9.15
 $8.14
$4.05
 $3.61
Weighted-average common shares outstanding – assuming dilution88,025
 96,120
 90,869
 97,309
79,297
 84,523


See accompanying Notes to condensed consolidated financial statements.






O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)
 For the Three Months Ended March 31, 2019
 Common Stock Additional Paid-In Capital  Retained Deficit Total
 Shares Par Value   
Balance at December 31, 201879,044
 $790
 $1,262,063
 $(909,186) $353,667
Cumulative effective adjustment from adoption of ASU 2016-02
 
 
 (1,410) (1,410)
Net income
 
 
 321,152
 321,152
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes12
 
 3,772
 
 3,772
Net issuance of common stock upon exercise of stock options133
 2
 11,953
 
 11,955
Share based compensation
 
 5,085
 
 5,085
Share repurchases, including fees(927) (9) (14,841) (307,006) (321,856)
Balance at March 31, 201978,262
 $783
 $1,268,032
 $(896,450) $372,365
          
 For the Three Months Ended March 31, 2018
 Common Stock Additional Paid-In Capital  Retained Deficit Total
 Shares Par Value   
Balance at December 31, 201784,302
 $843
 $1,265,043
 $(612,840) $653,046
Net income
 
 
 304,906
 304,906
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes17
 
 3,633
 
 3,633
Net issuance of common stock upon exercise of stock options137
 2
 6,856
 
 6,858
Share based compensation
 
 4,835
 
 4,835
Share repurchases, including fees(2,188) (22) (33,001) (516,427) (549,450)
Balance at March 31, 201882,268
 $823
 $1,247,366
 $(824,361) $423,828
See accompanying Notes to condensed consolidated financial statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 For the Three Months Ended 
 March 31,
 2019 2018
    
Operating activities:   
Net income$321,152
 $304,906
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization of property, equipment and intangibles63,964
 69,920
Amortization of debt discount and issuance costs918
 795
Deferred income taxes4,312
 4,370
Share-based compensation programs5,424
 5,176
Other2,245
 2,244
Changes in operating assets and liabilities:   
Accounts receivable(60,914) (10,421)
Inventory(35,405) (42,643)
Accounts payable60,918
 32,756
Income taxes payable82,476
 79,380
Other(4,468) (14,206)
Net cash provided by operating activities440,622
 432,277
    
Investing activities:   
Purchases of property and equipment(152,914) (114,843)
Proceeds from sale of property and equipment1,811
 752
Other(295) (375)
Net cash used in investing activities(151,398) (114,466)
    
Financing activities:   
Proceeds from borrowings on revolving credit facility874,000
 755,000
Payments on revolving credit facility(831,000) (541,000)
Repurchases of common stock(321,856) (549,450)
Net proceeds from issuance of common stock15,224
 11,972
Other(190) (2,156)
Net cash used in financing activities(263,822) (325,634)
    
Net increase (decrease) in cash and cash equivalents25,402
 (7,823)
Cash and cash equivalents at beginning of the period31,315
 46,348
Cash and cash equivalents at end of the period$56,717
 $38,525
    
Supplemental disclosures of cash flow information:   
Income taxes paid$5,335
 $7,939
Interest paid, net of capitalized interest47,796
 48,763
 For the Nine Months Ended 
 September 30,
 2017 2016
   (As Adjusted, Note)
Operating activities:   
Net income$831,489
 $791,661
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization of property, equipment and intangibles173,500
 161,447
Amortization of debt discount and issuance costs2,078
 1,811
Deferred income taxes41,848
 4,439
Share-based compensation programs14,835
 14,371
Other8,174
 4,174
Changes in operating assets and liabilities:   
Accounts receivable(28,761) (35,312)
Inventory(208,338) (158,877)
Accounts payable217,486
 390,849
Income taxes payable32,124
 39,636
Other2,984
 60
Net cash provided by operating activities1,087,419
 1,214,259
    
Investing activities:   
Purchases of property and equipment(347,756) (356,234)
Proceeds from sale of property and equipment1,906
 2,489
Payments received on notes receivable
 1,047
Other(2,072) 
Net cash used in investing activities(347,922) (352,698)
    
Financing activities:   
Proceeds from borrowings on revolving credit facility2,487,000
 
Payments on revolving credit facility(2,218,000) 
Proceeds from the issuance of long-term debt748,800
 499,160
Payment of debt issuance costs(7,490) (4,125)
Repurchases of common stock(1,893,148) (959,789)
Net proceeds from issuance of common stock34,186
 47,419
Other(156) (207)
Net cash used in financing activities(848,808) (417,542)
    
Net (decrease) increase in cash and cash equivalents(109,311) 444,019
Cash and cash equivalents at beginning of the period146,598
 116,301
Cash and cash equivalents at end of the period$37,287
 $560,320
    
Supplemental disclosures of cash flow information:   
Income taxes paid$359,838
 $416,901
Interest paid, net of capitalized interest72,252
 59,547
Note: Certain prior period amounts have been reclassified to conform to current period presentation. See Note 9 “Recent Accounting Pronouncements” to the condensed consolidated financial statements in this report for more information.
See accompanying Notes to condensed consolidated financial statements.


O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2017March 31, 2019


NOTE 1 - BASIS OF PRESENTATION


The accompanying unaudited condensed consolidated financial statements of O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017,March 31, 2019, are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, shareholders’ equity, cash flows or net income. See Note 9 “Recent Accounting Pronouncements” to the condensed consolidated financial statements in this report for more information.


NOTE 2 – FAIR VALUE MEASUREMENTS


The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company uses the income and market approaches to determine the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below:
Level 1 – 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.


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 obligation under the Company’s nonqualified deferred compensation plan. See Note 68 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 Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2019, and December 31, 20162018. The Company recorded an increase in fair value related to its marketable securities in the amountsamount of $1.0 million and $0.9$2.8 million for the three months ended September 30, 2017March 31, 2019 and 2016, respectively,a decrease in fair value related to its marketable securities in the amount of $0.1 million for the three months ended March 31, 2018, which were included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income. The Company recorded an increase in fair value related to its marketable securities in the amounts of $2.6 million and $1.4 million for the nine months ended September 30, 2017 and 2016, respectively, which were included in “Other income (expense)” on the accompanying Condensed 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 September 30, 2017March 31, 2019, and December 31, 20162018 (in thousands):
 March 31, 2019
 Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 Significant Other Observable Inputs
(Level 2)
 Significant Unobservable Inputs
(Level 3)
 Total
Marketable securities$28,149
 $
 $
 $28,149
 September 30, 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$24,528
 $
 $
 $24,528

 December 31, 2018
 Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 Significant Other Observable Inputs
(Level 2)
 Significant Unobservable Inputs
(Level 3)
 Total
Marketable securities$25,493
 $
 $
 $25,493

 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


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 September 30, 2017,March 31, 2019, and December 31, 2016,2018, the Company did not have any 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 Condensed Consolidated Balance Sheets as of September 30, 2017,March 31, 2019, and December 31, 2016.2018. See Note 34 for further information concerning the Company’s senior notes and unsecured revolving credit facility.


The table below identifies the estimated fair value of the Company’s senior notes, using the market approach. The fair value as of September 30, 2017,March 31, 2019, and December 31, 2016,2018, was determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):
 March 31, 2019 December 31, 2018
 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Senior Notes$3,130,921
 $3,209,279
 $3,130,122
 $3,116,046

 September 30, 2017 December 31, 2016
 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Senior Notes$2,631,816
 $2,733,350
 $1,887,019
 $1,977,510


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 Condensed 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 – LEASES

Operating lease commitments:
The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases. Lease components are not accounted for separately from nonlease components. 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 11 for further information concerning the Company’s adoption of Accounting Standard Codification 842 - Leases.

The following table summarizes Total lease cost for the three months ended March 31, 2019, which was primarily included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income (in thousands):
 For the Three Months Ended March 31, 2019
Operating lease cost$78,814
Short-term operating lease cost2,058
Variable operating lease cost18,378
Sublease income(957)
Total lease cost$98,293


The following table summarizes other lease related information for the three months ended March 31, 2019:
  For the Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities: 
 Operating cash flows from operating leases (in thousands)$78,298
Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands)$10,940
Weighted-average remaining lease term - operating leases10.5 years
Weighted-average discount rate - operating leases4.2%



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 Condensed Consolidated Balance Sheet as of March 31, 2019 (in thousands):
 March 31, 2019
 Related Parties Non-Related Parties Total
April 1, 2019 to December 31, 2019$3,561
 $233,211
 $236,772
20203,988
 297,993
 301,981
20213,521
 270,127
 273,648
20222,763
 245,803
 248,566
20232,540
 215,476
 218,016
Thereafter3,544
 1,172,067
 1,175,611
Total operating lease payments19,917
 2,434,677
 2,454,594
Less: present value discount2,180
 526,498
 528,678
Total operating lease liabilities17,737
 1,908,179
 1,925,916
Less: current portion of operating lease liabilities4,598
 292,007
 296,605
Operation lease liabilities, less current portion$13,139
 $1,616,172
 $1,629,311


The Company leases certain land and buildings related to 74 of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating lease agreements with entities that include one or more of the Company’s affiliated directors or members of an affiliated director’s immediate 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 $1.2 million for the three months ended March 31, 2019. The Company believes that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties.

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 $16.3 million as of March 31, 2019. 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; for leases that commenced prior to January 1, 2019, the incremental borrowing rate used was as of January 1, 2019. 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.


NOTE 4 – FINANCING


The following table identifies the amounts included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2017,March 31, 2019, and December 31, 20162018 (in thousands):
 September 30, 2017 December 31, 2016
Revolving Credit Facility, weighted-average variable interest rate of 2.283%$269,000
 $
$500 million, 4.875% Senior Notes due 2021(1), effective interest rate of 4.957%
497,363
 496,758
$300 million, 4.625% Senior Notes due 2021(2), effective interest rate of 4.646%
298,891
 298,679
$300 million, 3.800% Senior Notes due 2022(3), effective interest rate of 3.845%
298,126
 297,868
$300 million, 3.850% Senior Notes due 2023(4), effective interest rate of 3.851%
298,525
 298,355
$500 million, 3.550% Senior Notes due 2026(5), effective interest rate of 3.570%
495,682
 495,359
$750 million, 3.600% Senior Notes due 2027(6), effective interest rate of 3.619%
743,229
 
Long-term debt$2,900,816
 $1,887,019
 March 31, 2019 December 31, 2018
Revolving Credit Facility, weighted-average variable interest rate of3.740% $330,000
 $287,000
$500 million,4.875%Senior Notes due 2021,effective interest rate of 4.952%
(1) 
498,573
 498,371
$300 million,4.625%Senior Notes due 2021,effective interest rate of 4.644%
(2) 
299,315
 299,244
$300 million,3.800%Senior Notes due 2022,effective interest rate of 3.845%
(3) 
298,666
 298,574
$300 million,3.850%Senior Notes due 2023,effective interest rate of 3.851%
(4) 
298,881
 298,821
$500 million,3.550%Senior Notes due 2026,effective interest rate of 3.570%
(5) 
496,354
 496,240
$750 million,3.600%Senior Notes due 2027,effective interest rate of 3.619%
(6) 
744,020
 743,868
$500 million,4.350%Senior Notes due 2028,effective interest rate of 4.383%
(7) 
495,112
 495,004
Long-term debt$3,460,921
 $3,417,122
(1) 
Net of unamortized discount of $1.2 million as of September 30, 2017, and $1.4 million as of December 31, 2016, and debt issuance costs of $1.5 million as of September 30, 2017, and $1.8 million as of December 31, 2016.
(2)
Net of unamortized discount of $0.2 million as of September 30, 2017, and December 31, 2016, and debt issuance costs of $0.9 million as of September 30, 2017, and $1.1 million as of December 31, 2016.
(3)
Net of unamortized discount of $0.6 million as of September 30, 2017,March 31, 2019, and $0.7 million as of December 31, 2016,2018, and debt issuance costs of $1.3$0.8 million as of September 30, 2017,March 31, 2019, and $1.5$0.9 million as of December 31, 2016.2018.
(2)
Net of unamortized discount of $0.1 million as of March 31, 2019, and December 31, 2018, and debt issuance costs of $0.6 million as of March 31, 2019, and December 31, 2018.
(3)
Net of unamortized discount of $0.4 million as of March 31, 2019, and $0.5 million as of December 31, 2018, and debt issuance costs of $0.9 million as of March 31, 2019, and $1.0 million as of December 31, 2018.
(4) 
Net of unamortized discount of less than $0.1 million as of September 30, 2017,March 31, 2019, and December 31, 2016,2018, and debt issuance costs of $1.5$1.1 million as of September 30, 2017,March 31, 2019, and $1.6$1.2 million as of December 31, 2016.2018.
(5) 
Net of unamortized discount of $0.7$0.6 million as of September 30, 2017,March 31, 2019, and $0.8December 31, 2018, and debt issuance costs of $3.0 million as of March 31, 2019, and $3.1 million as of December 31, 2016, and debt issuance costs of $3.6 million as of September 30, 2017, and $3.9 million as of December 31, 2016.2018.
(6) 
Net of unamortized discount of $1.0 million as of March 31, 2019, and $1.1 million as of December 31, 2018, and debt issuance costs of $4.9 million as of March 31, 2019 and $5.1 million as of December 31, 2018.
(7)
Net of unamortized discount of $1.2 million as of September 30, 2017,March 31, 2019, and $1.3 million as of December 31, 2018, and debt issuance costs of $5.6$3.6 million as of September 30, 2017.March 31, 2019, and $3.7 million as of December 31, 2018.



Unsecured revolving credit facility:
On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $1.2 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in April 2022. The 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 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 million, provided that the aggregate amount of the commitments does not exceed $1.8 billion at any time.

In conjunction with the closing of the Credit Agreement, the Company’s previous credit agreement, which was originally entered into on January 14, 2011, as amended, was terminated (the “Terminated Credit Agreement”), and all outstanding loans and commitments, including the guarantees of each of the subsidiary guarantors, under the Terminated Credit Agreement were terminated and replaced by the loans and commitments under the Credit Agreement. None of the Company’s subsidiaries are guarantors or obligors under the Credit Agreement.


As of September 30, 2017,March 31, 2019, and December 31, 2016,2018, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amounts of $41.3$39.2 million and $38.7$35.1 million, respectively, reducing the aggregate availability under the credit agreementsCredit Agreement 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 Credit Agreement) plus an applicable margin. 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 Credit Agreement in an amount equal to a percentage of such commitments. 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 September 30, 2017,March 31, 2019, 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 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, 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 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 lenders. As of September 30, 2017,March 31, 2019, the Company remained in compliance with all covenants under the Credit Agreement.


Senior notes:
On August 17, 2017, the Company issued $750 million aggregate principal amount of unsecured 3.600% Senior Notes due 2027 (“3.600% Senior Notes due 2027”) at a price to the public of 99.840% of their face value with UMB Bank, N.A. (“UMB”) as trustee. Interest on the 3.600% Senior Notes due 2027 is payable on March 1 and September 1 of each year, beginning on March 1, 2018, and is computed on the basis of a 360-day year.

The Company has issued a cumulative $2.7$3.2 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2027,2028, with UMB Bank, N.A. as trustee. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year. 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 September 30, 2017.March 31, 2019.

In connection with entering into the Credit Agreement (under which none of the Company’s subsidiaries are guarantors or obligors), and upon termination of the Terminated Credit Agreement, the guarantees by the Company’s subsidiary guarantors with respect to all of the Company’s then outstanding senior notes were automatically released in accordance with the terms of the respective indentures governing these senior notes. The 3.600% Senior Notes due 2027 also are not guaranteed by any of the Company’s subsidiaries.


NOTE 45 – WARRANTIES


The Company provides 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.


The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2017,March 31, 2019, and December 31, 2016.2018. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the ninethree months ended September 30, 2017March 31, 2019 (in thousands):
Warranty liabilities, balance at December 31, 2018$52,220
Warranty claims(21,537)
Warranty accruals22,943
Warranty liabilities, balance at March 31, 2019$53,626

Warranty liabilities, balance at December 31, 2016$36,623
Warranty claims(60,173)
Warranty accruals65,450
Warranty liabilities, balance at September 30, 2017$41,900




NOTE 56 – 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 prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 10, 2017, and September 1, 2017,November 13, 2018, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a cumulative authorization amount of $9.8$11.8 billion. EachThe additional authorization is effective for a three-year period,three years, beginning on its respective announcement date.


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 three months ended March 31, 2019 and 2018 (in thousands, except per share data):
 For the Three Months Ended 
 March 31,
 2019 2018
Shares repurchased927
 2,188
Average price per share$347.09
 $251.08
Total investment$321,846
 $549,428

 For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
 2017 2016 2017 2016
Shares repurchased2,743
 367
 8,047
 3,673
Average price per share$200.70
 $281.04
 $235.26
 $261.32
Total investment$550,530
 $102,941
 $1,893,068
 $959,743


As of September 30, 2017,March 31, 2019, the Company had $994.8$679.6 million remaining under its share repurchase program. Subsequent to the end of the thirdfirst quarter and through November 7, 2017,May 6, 2019, the Company repurchased an additional 0.40.1 million shares of its common stock under its share repurchase program, at an average price of $209.61,$377.59, for a total investment of $85.2$52.1 million. The Company has repurchased a total of 65.473.4 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through November 7, 2017,May 6, 2019, at an average price of $135.17,$151.58, for a total aggregate investment of $8.8$11.1 billion.


NOTE 7 – REVENUE

The table below identifies the Company’s revenues disaggregated by major customer type for the three months ended March 31, 2019 and 2018 (in thousands):
 For the Three Months Ended 
 March 31,
 2019 2018
Sales to do-it-yourself customers$1,337,029
 $1,272,414
Sales to professional service provider customers1,038,781
 975,009
Other sales and sales adjustments34,798
 35,258
Total sales$2,410,608
 $2,282,681


As of March 31, 2019, and December 31, 2018, the Company had recorded a deferred revenue liability of $4.9 million and $4.3 million, respectively, related to its loyalty program, which were included in “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets. During the three months ended March 31, 2019 and 2018, the Company recognized $3.9 million and $3.2 million, respectively, of deferred revenue related to its loyalty program, which were included in “Sales” on the accompanying Condensed Consolidated Statements of Income.

See Note 5 for information concerning the expected costs associated with the Company’s assurance warranty obligations.

NOTE 68 – 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 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.


Stock options:
The Company’s stock-based incentive plans provide for the granting of stock options for the purchase of common stock of the Company to directors and certain key employees of the Company. Options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant. Director options granted under the plans expire after seven years and are fully vested after six months. Employee options granted under the plans expire after ten 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 the minimum required service period.


The table below identifies stock option activity under these plans during the ninethree months ended September 30, 2017March 31, 2019 (in thousands, except per share data):
Shares 
Weighted-Average
Exercise Price
Shares 
Weighted-Average
Exercise Price
Outstanding at December 31, 20162,800
 $104.90
Outstanding at December 31, 20181,860
 $178.57
Granted240
 257.39
136
 355.99
Exercised(483) 51.35
(133) 89.66
Forfeited(26) 207.45
(10) 250.31
Outstanding at September 30, 20172,531
 $128.50
Exercisable at September 30, 20171,705
 $75.65
Outstanding at March 31, 20191,853
 $197.62
Exercisable at March 31, 20191,215
 $154.27


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 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.

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.
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 ninethree months ended September 30, 2017March 31, 2019 and 2016:2018:
For the Nine Months Ended 
 September 30,
For the Three Months Ended 
 March 31,
2017 20162019 2018
Risk free interest rate1.98% 1.45%2.50% 2.58%
Expected life5.5 Years
 5.6 Years
6.2 Years
 6.3 Years
Expected volatility22.2% 22.4%25.0% 23.7%
Expected dividend yield% %% %


The following table summarizes activity related to stock options awarded by the Company for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (in thousands, except per share data):
For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
For the Three Months Ended 
 March 31,
2017 2016 2017 20162019 2018
Compensation expense for stock options awarded$3,679
 $3,653
 $11,826
 $11,793
$4,508
 $4,292
Income tax benefit from compensation expense related to stock options1,402
 1,365
 4,507
 4,405
1,112
 1,078
Weighted-average grant-date fair value of options awarded$108.74
 $75.42


The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2017, was $64.45 compared to $64.00 for the nine months ended September 30, 2016. The remaining unrecognized compensation expense related to unvested stock option awards at September 30, 2017,March��31, 2019, was $28.6$40.9 million, and the weighted-average period of time over which this cost will be recognized is 2.62.9 years.


Other share-based compensation plans:
The Company sponsors other share-based compensation plans: an employee stock purchase plan (the “ESPP”), which permits all eligible employees to purchase shares of the Company’s common stock at 85% of the fair market value, an employee incentive plan, which provides for the award of shares of restricted stock to certain of the Company’s affiliated directors, that vest evenly over three years and are held in escrow until such vesting has occurred, and a director stock plan, which provides for the award of shares of restricted stock to the Company’s independent directors, that vest evenly over a three-year periodthree years and are held in escrow until such vesting has occurred. 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, and compensation expense is recognized based on the discount

between the fair value and the employee purchase price for the shares sold to employees. The fair value of shares awarded under the employee incentive plan and director stock plan is based on the closing market price of the Company’s common stock on the date of the award, and compensation expense is recorded evenly over the vesting period or the minimum required service period.


The table below summarizes activity related to the Company’s other share-based compensation plans for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (in thousands):
For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
For the Three Months Ended 
 March 31,
2017 2016 2017 20162019 2018
Compensation expense for shares issued under the ESPP$545
 $538
 $1,659
 $1,610
$577
 $543
Income tax benefit from compensation expense related to shares issued under the ESPP208
 201
 632
 601
142
 136
Compensation expense for restricted shares awarded258
 327
 1,350
 968
339
 341
Income tax benefit from compensation expense related to restricted awards$98
 $122
 $515
 $361
$84
 $86


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 three or nine months ended September 30, 2017March 31, 2019 or 2016.2018. The Company expensed matching contributions under the 401(k) Plan in the amounts of $5.7$6.0 million and $5.3$5.7 million for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income. The Company expensed matching contributions under the 401(k) Plan in the amounts of $17.0 million and $15.5 million for the nine months ended September 30, 2017 and 2016, respectively, which were included in “Selling, general and administrative expense” on the accompanying Condensed 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 liability for compensation deferred under the Deferred Compensation Plan was $24.5$28.1 million and $20.5$25.5 million as of September 30, 2017,March 31, 2019, and December 31, 2016,2018, respectively, which was included in “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amountamounts of $0.1 million and less than $0.1 million for the three months ended September 30, 2017March 31, 2019 and 2016, which were included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income. The Company expensed matching contributions under the Deferred Compensation Plan in the amount of $0.1 million for the nine months ended September 30, 2017 and 2016,2018, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income.



NOTE 79 – EARNINGS PER SHARE


The following table illustrates the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (in thousands, except per share data):
 For the Three Months Ended 
 March 31,
 2019 2018
Numerator (basic and diluted):   
Net income$321,152
 $304,906
    
Denominator:   
Weighted-average common shares outstanding – basic78,484
 83,530
Effect of stock options (1)
813
 993
Weighted-average common shares outstanding – assuming dilution79,297
 84,523
    
Earnings per share:   
Earnings per share-basic$4.09
 $3.65
Earnings per share-assuming dilution$4.05
 $3.61
    
Antidilutive potential common shares not included in the calculation of diluted earnings per share:   
Stock options (1)
176
 761
Weighted-average exercise price per share of antidilutive stock options (1)
$347.98
 $259.28
 For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
 2017 2016 2017 2016
Numerator (basic and diluted):       
Net income$283,734
 $278,493
 $831,489
 $791,661
        
Denominator:       
Weighted-average common shares outstanding – basic86,947
 94,891
 89,641
 95,994
Effect of stock options (1)
1,078
 1,229
 1,228
 1,315
Weighted-average common shares outstanding – assuming dilution88,025
 96,120
 90,869
 97,309
        
Earnings per share:       
Earnings per share-basic$3.26
 $2.93
 $9.28
 $8.25
Earnings per share-assuming dilution$3.22
 $2.90
 $9.15
 $8.14
        
Antidilutive potential common shares not included in the calculation of diluted earnings per share:       
Stock options (1)
784
 271
 620
 319
Weighted-average exercise price per share of antidilutive stock options (1)
$246.65
 $267.66
 $258.75
 $264.88

(1) 
See Note 68 for further information concerning the terms of the Company’s share-based compensation plans.


For the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, the computation of diluted earnings per share did not include certain securities. These securities represent underlying stock options not included in the computation of diluted earnings per share, because the inclusion of such equity awards would have been antidilutive.


Subsequent to the end of the thirdfirst quarter and through November 7, 2017,May 6, 2019, the Company repurchased an additional 0.40.1 million shares of its common stock under its share repurchase program, at an average price of $209.61,$377.59, for a total investment of $85.2$52.1 million.


NOTE 810 – LEGAL MATTERS


O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company accrues for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable loss. The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and 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.

As previously reported, on June 18, 2015, a jury in Greene County, Missouri, returned an unfavorable verdict in a litigated contract dispute in the matter Meridian Creative Alliance vs. O’Reilly Automotive Stores, Inc. et. al. in the amount of $12.5 million. As previously reported, the verdict was appealed, reversed in part and remanded to the trial court for a new trial. The matter has been set for trial to commence May 7, 2018, in the Circuit Court of Greene County, Missouri. The Company will continue to vigorously defend the matter. As of September 30, 2017, the Company had accrued $18.6 million with respect to this matter.


NOTE 9 -11 – RECENT ACCOUNTING PRONOUNCEMENTS

In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity is required to follow 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 fulfill a contract with a customer. In addition, an entity is required to disclose sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with

customers. In August of 2015, the FASB issued 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, with early adoption allowed, but not before December 15, 2016. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The Company has established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on the Company’s recognition of customer related accounts receivable, warranty costs that are not the responsibility of the Company’s suppliers, the application of the Company’s retail O’Rewards loyalty program and all applicable financial statement disclosures required by the new guidance. At this time, the task force has not completed its evaluation of the impact or means of adoption.


In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will beis required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In July of 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvement” (“ASU 2018-11”), to provide an additional, optional transition method for adopting ASU 2016-02, which allows for an entity to choose to apply the new lease standard at adoption date and recognize a cumulative-effective adjustment to the opening balance of retained earnings in the period of adoption, while comparative periods presented will continue to be in accordance with current U.S. GAAP Topic 840. For public companies, ASU 2016-02Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The Company has established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the new guidance, all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force has not completed its full evaluation; however, the Company believes the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on the Company’s consolidated balance sheets.

In March of 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, several aspects of the accounting for share-based payment transactions, including tax consequence, classification of awards as equity or liabilities, and classification on the statement of cash flows, were changed.period. The Company adopted this new guidance with its first quarter ending March 31, 2017. Upon2019, using the additional, optional transition method, the package of transitional practical expedients relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842, the transitional practical expedient for the treatment of existing land easements and the practical expedient to make an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components; however, the Company did not elect the hindsight transitional practical expedient. The Company made an accounting policy election to not apply recognition requirements of the guidance to short-term leases. Due to the adoption of ASU 2016-09,this new guidance, the Company elected to change its accounting policy to account for forfeituresrecognized right-of-use assets and lease liabilities of $1.9 billion each on the accompanying Condensed Consolidated Balance Sheets as they occur; this change was applied usingof March 31, 2019. The difference between the modified retrospective transition method with a cumulative effect adjustment of $0.3 million to opening “Retained earnings”right-of-use assets and lease liabilities on the accompanying Condensed Consolidated Balance Sheet as of September 30, 2017.was primarily due to the accrual for straight-line rent expense. The Company applied the amendments relatedmade an adjustment to the presentation of tax withholdings on the statements of cash flows using the retrospective transition method, which resulted in $0.2 million of tax withholdings being reclassified from “Net cash provided by operating activities” to “Net cash used in financing activities”opening “Retained Deficit” on the accompanying Condensed Consolidated StatementBalance Sheet in the amount of Cash Flows for$1.4 million, net of the nine months ended September 30, 2016. The Company elected to apply the amendmentsdeferred tax impact, related to the presentationadoption of excess tax benefitsthis new guidance. With the adoption of this new guidance, the Company’s favorable lease assets and unfavorable lease liabilities, from a previous acquisition, were eliminated through an adjustment to opening “Operating lease, right-of-use assets” on the statements of cash flows using the retrospective transition method, which resulted in $46.0 million of excess tax benefits related to share-based compensation being reclassified from “Net cash used in financing activities” to “Net cash provided by operating activities” in the accompanying Condensed Consolidated StatementBalance Sheet. The adoption of Cash Flows for the nine months ended September 30, 2016. ASU 2016-09 amendments related to accounting for excess tax benefits in the income statementthis new guidance did not have been adopted prospectively, resulting in the reduction of $2.8 million and $35.3 million in “Provision for income taxes” in the accompanying Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2017, respectively, which lowereda material impact on the Company’s effective tax rate, increased dilutive shares outstanding and increased diluted earnings per share forresults of operations, cash flows, liquidity or the three and nine months ended September 30, 2017, by $0.02 and $0.35, respectively.Company’s covenant compliance under its existing credit agreement.


In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2020. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.


In August of 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice for eight specific parts on cash flow statement presentation and classification: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. For public companies, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In January of 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 revises the definition of a business in the Accounting Standards Codification and clarifies the guidance for determining whether the purchase or disposal of an asset or group of assets qualifies as the purchase or disposal of a business. For public companies, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted with certain conditions. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.


In January of 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step in the previous process for goodwill impairment testing; instead, the test is now a one-step process that calls for goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. For public companies, ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires prospective adoption, with early adoption after January 1, 2017. The Company will adoptearly adopted this guidance beginning with its first quarter ending March 31, 2019. The application of this new guidance isdid not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In May of 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarity and reduces both the diversity in practice and cost and complexity when applying stock compensation guidance to a change to the terms or conditions of a share-based payment award. For public companies, ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.



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


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


In Management’s Discussion and Analysis, 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 of the automotive aftermarket industry;
recent developments within our Company;
our results of operations for the three and nine months ended September 30, 2017March 31, 2019 and 2016;2018;
our liquidity and capital resources;
any contractual obligations, to which we are committed;
our critical accounting estimates;
the inflation and seasonality of our business; and
recent accounting pronouncements that may affect our Company.


The review of Management’s Discussion and Analysis should be made in conjunction with our condensed consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this quarterly report.


FORWARD-LOOKING STATEMENTS


We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “estimate,” “may,” “could,” “will,” “believe,” “expect,” “would,” “consider,” “should,” “anticipate,” “project,” “plan,” “intend” or similar words. In addition, statements contained within this quarterly report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the economy in general, inflation, tariffs, product demand, the market for auto parts, competition, weather, risks associated with the performance of acquired businesses, our ability to hire and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt, governmental regulations, information security and cyber-attacks, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2016,2018, 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.


OVERVIEW


We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both do-it-yourself (“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 margin dollars are highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point on the value spectrum is a driver of sales and profitability in our industry. 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.


Our strategy is to open new stores to achieve greater penetration into existing markets and expansion into new, contiguous markets. We typically open new stores either 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, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store; or (iii) purchasing multi-store chains. We plan to open 190200 to 210 net, new stores in 2017, in addition to2019 and will net an additional 20 stores, as we will merge 13 of the conversion of 48acquired 33 Bennett Auto Supply, Inc. (“Bennett”) stores acquired from Bond Auto Parts (“Bond”) in December 2016, as previously announced, and plan to open 200 net, newinto existing O’Reilly stores in 2018.during 2019. We believe our investment in store growth will be funded with the cash

flows expected to be generated by our existing operations and through available borrowings under our existing unsecured revolving

credit facility. During the three months ended September 30, 2017,March 31, 2019, we opened 5264 stores, merged eight of the acquired Bennett stores and closed two stores. During the nine months ended September 30, 2017, we opened 162 stores and closed seven stores and, as of that date, operated 4,9845,306 stores in 47 states.


Operating within the retail industry, we are influenced by a number of general macroeconomic factors including, but not limited to, fuel costs, unemployment rates, consumer preferences and spending habits, and competition. We have ongoing initiatives aimed at tailoring our product offering to adjust to customers’ changing preferences, and we also 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 for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations, 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 Department of Transportation, the number of total miles driven in the U.S. increased 0.4%, 1.2% and 2.4% in 2018, 2017 and 2016, respectively, and through February of 2019, year-to-date miles driven increased 0.8%. We would expect to continue to see modest improvements in total miles driven in the U.S., supported by an increasing number of registered vehicles on the road, resulting in continued demand for automotive aftermarket products.
Number of U.S. Registered Vehicles, New Light Vehicle Registrations and Average Vehicle Age – 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 The Auto Care Association, the total number of registered vehicles increased 8.5% from 2007 to 2017, bringing the number of light vehicles on the road to 270 million by the end of 2017. For the year ended December 31, 2018, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 17.5 million, and for 2019, the SAAR is estimated to again be approximately 17.5 million, contributing to the continued growth in the total number of registered vehicles on the road. In the past decade, vehicle scrappage rates have remained relatively stable, ranging from 4.2% to 5.7% annually. As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 21.9%, from 9.6 years in 2007 to 11.7 years in 2017. We believe this increase in average age 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.
Unemployment – Unemployment, underemployment, the threat of future joblessness and the uncertainty surrounding the overall economic health of the U.S. have a negative impact 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. The U.S. unemployment rate was 3.9% as of December 31, 2018, and as of March 31, 2019, the U.S. unemployment rate decreased to 3.8%. We believe total employment should remain at healthy levels supporting the trend of modest growth of total miles driven in the U.S. and the continued demand for automotive aftermarket products.
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 Department of Transportation, the number of total miles driven in the U.S. increased 2.4%, 3.5% and 1.8% in 2016, 2015 and 2014, respectively, and through August of 2017, year-to-date miles driven increased 1.4%. We would expect to continue to see modest improvements in total miles driven in the U.S., supported by an increasing number of registered vehicles on the road, resulting in continued demand for automotive aftermarket products.
Number of U.S. Registered Vehicles, New Light Vehicle Registrations and Average Vehicle Age – 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 The Auto Care Association, the total number of registered vehicles increased 7% from 2006 to 2016, bringing the number of light vehicles on the road to 264 million by the end of 2016. For the year ended December 31, 2016, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 18.3 million, and for 2017, the SAAR is estimated to be approximately 18.5 million, contributing to the continued growth in the total number of registered vehicles on the road. In the past decade, vehicle scrappage rates have remained relatively stable, ranging from 4.3% to 5.7% annually. As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 22%, from 9.5 years in 2006 to 11.6 years in 2016. We believe this increase in average age 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.
Unemployment – Unemployment, underemployment, the threat of future joblessness and the uncertainty surrounding the overall economic health of the U.S. have a negative impact 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 September 30, 2017, the U.S. unemployment rate was 4.2%. We believe total employment should remain at healthy levels with marginal improvements, and we would expect to see an increase in commuter traffic with a growing work force, further aiding the positive trend of growth of total miles driven in the U.S. and 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.


RECENT DEVELOPMENTS

After the close of business on December 31, 2018, we completed an asset purchase of Bennett, a privately held automotive parts supplier operating 33 stores and a warehouse in Florida. Beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, consolidated financial statements and results of operations.

RESULTS OF OPERATIONS


Sales:
Sales for the three months ended September 30, 2017,March 31, 2019, increased $119$128 million or 6% to $2.34$2.41 billion from $2.22$2.28 billion for the same period one year ago, representing an increase of 5%. Sales for the nine months ended September 30, 2017, increased $293 million to $6.79 billion from $6.49 billion for the same period one year ago, representing an increase of 5%.ago. Comparable store sales for stores open at least one year increased 1.8%3.2% and 4.2%3.4% for the three months ended September 30, 2017March 31, 2019 and 2016, respectively. Comparable store sales for stores open at least one year increased 1.5% and 4.8% for the nine months ended September 30, 2017 and 2016,2018, respectively. Comparable store sales are calculated based on the change in sales offor stores open at least one year and

exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members, as well asMembers. Online sales, resulting from Leap Day duringship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the nine months ended September 30, 2016.comparable store sales calculation.



The following table presents the components of the increase in sales for the three and nine months ended September 30, 2017March 31, 2019 (in millions):
Increase in Sales for the Three Months Ended
September 30, 2017,
Compared to the Same Period in 2016
 Increase in Sales for the Nine Months Ended
September 30, 2017,
Compared to the Same Period in 2016
Increase in Sales for the Three Months Ended
March 31, 2019
Compared to the Same Period in 2018
Store sales:    
Comparable store sales, including sales from the 48 acquired Bond stores$57
 $144
Comparable store sales$72
Non-comparable store sales:    
Sales for stores opened throughout 2016, excluding stores open at least one year that are included in comparable store sales29
 117
Sales for stores opened throughout 201735
 63
Sales from Leap Day in 2016
 (25)
Sales in 2016 for stores that have closed(1) (4)
Sales for stores opened throughout 2018, excluding stores open at least one year that are included in comparable store sales41
Sales for stores opened throughout 2019 and sales from the acquired Bennett stores19
Decline in sales for stores that have closed(3)
Non-store sales:    
Includes sales of machinery and sales to independent parts stores and Team Members(1) (2)(1)
Total increase in sales$119
 $293
$128


We believe the increased sales achieved by our stores are the result of store growth, sales from the 48 acquired Bond stores andacquisition of Bennett, 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 in our regional distribution centers, 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, 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 increasesincrease for the three and nine months ended September 30, 2017, wereMarch 31, 2019, was driven by increasesan increase in average ticket values for both DIY and professional service provider customers, partially offset by slightly negative customer transaction counts, from both ourcomprised of negative transaction counts for DIY andcustomers, partially offset by positive transaction counts for professional service provider customers. The improvementsimprovement in average ticket values werewas the result of the increasing complexity and cost of replacement parts necessary to maintain the current population of better engineeredbetter-engineered and more technically advanced vehicles. These better engineered,better-engineered and more technically advanced vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of time. Whentime, creating pressure on customer transaction counts. However, when repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit tobenefits average ticket values; however,values. Average ticket values also benefited from increased selling prices on a SKU-by-SKU basis, as compared to the decreaseprior year, driven by increases in repair frequency creates pressureacquisition cost of inventory, which were passed on customer transaction counts. Customer transactionin market prices. Transaction counts duringfor the current periodsthree months ended March 31, 2019, as compared to the same period in the prior year, were also negatively impacted by softer industry demand, resulting, in part, from the second consecutive, unseasonably mild winter weatherpressure on disposable income, primarily driven by slightly lower annual income tax refunds, and a cool, wet summer in manyan unfavorable amount of our markets. The mild winter weather did not stress vehicle components to the degree more typical harsh winter weather would, which resulted in a lower level of automobile parts breakage and associated demand for our products. The cool, wet summerprecipitation in many of our markets, resulted inwhich is a lower level of demand, as the absence of typical seasonally high temperatures resulted in fewer temperature related vehicle repairs.headwind to DIY business.


We opened 5062 net, new stores, began operating the 33 acquired Bennett stores, and 155after completing the planned merge of eight of the acquired Bennett store stores into existing O’Reilly stores, we had a net newincrease of 87 stores during the three and nine months ended September 30, 2017, respectively,March 31, 2019, compared to 52 and 141opening 78 net, new stores for the three and nine months ended September 30, 2016, respectively.March 31, 2018. As of September 30, 2017,March 31, 2019, we operated 4,9845,306 stores in 47 states compared to 4,7125,097 stores in 4547 states at September 30, 2016.March 31, 2018. We anticipate total new store growth to be 190200 to 210 net, new store openings in 2017, slightly below2019, and we will merge an additional five of the 201625 remaining acquired Bennett stores into existing O’Reilly stores during the second quarter of 2019 for a net new store openings due to the resources necessary to convert the 48 Bond storesaddition of 20 acquired in December 2016 to our systems, inventory selection and décor packages during 2017, and 200 net, new store openings in 2018.Bennett stores.


Gross profit:
Gross profit for the three months ended September 30, 2017,March 31, 2019, increased 6% to $1.23$1.28 billion (or 52.6%53.1% of sales) from $1.17$1.20 billion (or 52.7%52.6% of sales) for the same period one year ago, representing an increase of 5%. Gross profit for the nine months ended September 30, 2017, increased to $3.56 billion (or 52.5% of sales) from $3.39 billion (or 52.3% of sales) for the same period one year ago, representing an increase of 5%.ago. The increase in gross profit dollars for the three months ended September 30, 2017,March 31, 2019, was primarily the result of sales from new stores, the acquired Bennett stores and the increase in comparable store sales at existing stores and sales from the 48 acquired Bond stores. The increase in gross profit dollars for the nine months ended September 30, 2017, was the result of sales from new stores, the increase in comparable store sales at existing stores and sales from the 48 acquired Bond stores, partially offset by prior year gross profit dollars generated from one additional day due to Leap Day. The decrease in gross profit as a percentage of sales for the three months ended September 30, 2017,March 31, 2019, was primarily due to a mix of products and a benefit from selling through inventory purchased prior to recent industry-wide acquisition cost increases at market selling prices, which have increased in response to the rise in costs. Beginning in the last six months of 2018, inventory acquisition costs in our industry increased primarily as a result of tariffs on products imported from China, as well as increases in supplier input costs for wages and interest; these cost increases were passed through in higher retail and wholesale prices in our industry. We determine inventory cost using the last-in, first-

due to lower merchandise margin, higher inventory shrinkage and deleverage of fixed costs, partially offset by a smaller non-cash last-in, first-outout (“LIFO”) impact. The lower merchandise margin was primarily themethod, but have, over time, seen our LIFO reserve balance exhausted as a result of merchandise mix, driven by the unfavorable weather conditions during the three months ended September 30, 2017. The higher inventory shrinkage was primarily cyclical in nature, following a period of lower than average shrinkage trends. The deleverage of fixed costs was the result of soft comparable store sales during the three months ended September 30, 2017. The smaller non-cash LIFO impact is the result of fewer productcumulative historical acquisition cost improvements during the three months ended September 30, 2017, as compared to the same period in the prior year.decreases. Our policy is to not write up inventory in excess of replacement cost, and accordingly, we are effectively valuing our inventory at replacement cost. During the three months ended September 30, 2017 and 2016, our LIFO costs were written down by approximately $3 million and $10 million, respectively, to reflect replacement cost. The increase in gross profit as a percentage of sales for the nine months ended September 30, 2017, was primarily due to a smaller LIFO impact, partially offset by lower merchandise margin and deleverage of fixed costs. During the nine months ended September 30, 2017 and 2016, our LIFO costs were written down by approximately $20 million and $47 million, respectively, to reflect replacement cost. The lower merchandise margin was primarily the result of merchandise mix, driven by the unfavorable weather conditions during the nine months ended September 30, 2017. The deleverage of fixed costs was the result of soft comparable store sales during the nine months ended September 30, 2017.

Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2017,March 31, 2019, increased 7% to $768$835 million (or 32.8%34.6% of sales) from $722$778 million (or 32.5%34.1% of sales) for the same period one year ago, representing an increase of 6%. SG&A for the nine months ended September 30, 2017, increased to $2.24 billion (or 33.0% of sales) from $2.10 billion (or 32.4% of sales) for the same period one year ago, representing an increase of 6%.ago. The increase in total SG&A dollars for the three months ended September 30, 2017,March 31, 2019, was primarily the result of additional Team Members, facilities and vehicles to support our increased sales and store count. The increase in total SG&A dollars for the nine months ended September 30, 2017, was primarily the result of additional Team Members, facilities and vehicles to support our increased sales and store count, partially offset by a $9.1 million benefit from the reduction in our legal accrual following the expiration of the statute of limitations related to a legacy claim and prior year incremental SG&A expenses incurred from one additional day due to Leap Day. The increases in SG&A as a percentage of sales for the three and nine months ended September 30, 2017, wereMarch 31, 2019, was primarily due to deleverage of store operatingwage pressure and other variable costs, on soft comparable store sales during the current periods.driven by a low unemployment, inflationary environment.


Operating income:
As a result of the impacts discussed above, operating income for the three months ended September 30, 2017,March 31, 2019, increased 5% to $462$445 million (or 19.7%18.5% of sales) from $448$423 million (or 20.2%18.5% of sales) for the same period one year ago, representing an increase of 3%. As a result of the impacts discussed above, operating income for the nine months ended September 30, 2017, increased to $1.32 billion (or 19.5% of sales) from $1.29 billion (or 19.9% of sales) for the same period one year ago, representing an increase of 2%.ago.


Other income and expense:
Total other expense for the three months ended September 30, 2017,March 31, 2019, increased 12% to $22$31 million (or 1.0%1.3% of sales) from $16$27 million (or 0.7%1.2% of sales) for the same period one year ago, representing an increase of 41%. Total other expense for the nine months ended September 30, 2017, increased to $61 million (or 0.9% of sales) from $45 million (or 0.7% of sales) for the same period one year ago, representing an increase of 36%.ago. The increases in total other expense for the three and nine months ended September 30, 2017, wereMarch 31, 2019, was primarily the result of increased interest expense on higher average outstanding borrowings, and increased amortizationpartially offset by an increase in the value of debt issuance costs.our trading securities.


Income taxes:
Our provision for income taxes for the three months ended September 30, 2017,March 31, 2019, increased 3% to $156$93 million (or 6.7%3.9% of sales) from $153$91 million (or 6.9%4.0% of sales) for the same period one year ago, representing an increase of 2%. Our provision for income taxes for the nine months ended September 30, 2017, decreased to $430 million (or 6.3% of sales) from $455 million (or 7.0% of sales) for the same period one year ago, representing a decrease of 6%. Our effective tax rate for the three months ended September 30, 2017, was 35.4% of income before income taxes, compared to 35.5% for the same period one year ago. Our effective tax rate for the ninethree months ended September 30, 2017,March 31, 2019, was 34.1%22.5% of income before income taxes, compared to 36.5%22.9% for the same period one year ago. The increase in our provision for income taxes for the three months ended September 30, 2017,March 31, 2019, was primarily the result of higher taxable income, in the three months ended September 30, 2017, partially offset by the adoption of Accounting Standard Update No. 2016-09, which provided a benefit of $3 million to the provision for income taxes. The decrease in our provision for income taxes for the nine months ended September 30, 2017, was primarily the result of the adoption of Accounting Standard Update No. 2016-09 in 2017, which provided a benefit of $35 million to the provision for income taxes, partially offset by higher taxable income.excess tax benefits from share-based compensation. The decreasesdecrease in our effective tax rate for the three and nine months ended September 30, 2017, wereMarch 31, 2019 was primarily the result of the adoption of Accounting Standard Update No. 2016-09 in 2017, which provided a benefit of 63 basis points and 279 basis points to the effectivehigher excess tax rate for the three and nine months ended September 30, 2017, respectively.benefits from share-based compensation.



Net income:
As a result of the impacts discussed above, net income for the three months ended September 30, 2017,March 31, 2019, increased 5% to $284$321 million (or 12.1%13.3% of sales) from $278$305 million (or 12.5%13.4% of sales) for the same period one year ago, representing an increase of 2%. As a result of the impacts discussed above, net income for the nine months ended September 30, 2017, increased to $831 million (or 12.3% of sales) from $792 million (or 12.2% of sales) for the same period one year ago, representing an increase of 5%.ago.


Earnings per share:
Our diluted earnings per common share for the three months ended September 30, 2017,March 31, 2019, increased 11%12% to $3.22$4.05 on 8879 million shares from $2.90$3.61 on 9685 million shares for the same period one year ago. Our diluted earnings per common share for the nine months ended September 30, 2017, increased 12% to $9.15 on 91 million shares from $8.14 on 97 million shares for the same period one year ago. Due to the adoption of Accounting Standard Update No. 2016-09, our diluted earnings per common share for the three and nine months ended September 30, 2017, included a benefit of $0.02 and $0.35, respectively, comprised of a $0.03 and $0.39 earnings per share increase, respectively, from a lower effective tax rate, partially offset by a $0.01 and $0.04, respectively, earnings per share decrease from an increase in the number of weighted-average common shares outstanding - assuming dilution.


LIQUIDITY AND CAPITAL RESOURCES


Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured revolving credit facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate funds from operations. Additionally, decreased demand or changes in buying patterns could 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. We believe that cash expected to be provided by operating activities and availability under our unsecured revolving credit facility will be sufficient to fund both our short-term and long-term capital and liquidity needs for 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 identifies cash provided by/(used in) our operating, investing and financing activities for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 (in thousands):
For the Nine Months Ended 
 September 30,
For the Three Months Ended 
 March 31,
Liquidity:2017 20162019 2018
Total cash provided by/(used in):      
Operating activities (1)
$1,087,419
 $1,214,259
$440,622
 $432,277
Investing activities(347,922) (352,698)(151,398) (114,466)
Financing activities (1)
(848,808) (417,542)(263,822) (325,634)
Net (decrease) increase in cash and cash equivalents$(109,311) $444,019
Net increase (decrease) in cash and cash equivalents$25,402
 $(7,823)
      
Capital expenditures$347,756
 $356,234
$152,914
 $114,843
Free cash flow (2)(1)
$704,381
 $811,991
$279,195
 $311,116
(1) 
Prior period amount has 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.
(2)
Calculated as net cash provided by operating activities, less capital expenditures and excess tax benefit from share-based compensation payments for the period.


Operating activities:
The decreaseincrease in net cash provided by operating activities during the ninethree months ended September 30, 2017,March 31, 2019, compared to the same period in 2016,2018, was primarily due to a smaller decrease in our net inventory investment partially offset byand an increase in net income, andpartially offset by a larger increase in deferred income taxes.accounts receivable. The smaller decrease in our net inventory investment iswas primarily the result of fewer new suppliers entering our supplier financing programs in 2017, as compared to 2016. The largera smaller increase in deferred income taxes is primarilyinventory in the result of additional depreciation recognized for income tax purposes,current period, as compared to the same period in the prior year. The larger increase in accounts receivable was primarily due to an increase in credit card receivables in the current period due to the timing of period end dates.


Investing activities:
The decreaseincrease in net cash used in investing activities during the ninethree months ended September 30, 2017,March 31, 2019, compared to the same period in 2016,2018, was primarily the result of a decreasean increase in capital expenditures. The decreaseincrease in capital expenditures was primarily related to the

timing of property acquisitions, closings and construction costs for new stores, technology investments and the mix of owned versus leased stores openedour distribution expansion projects during the current period, as compared to the same period in the prior year.


Financing activities:
The increasedecrease in net cash used in financing activities during the ninethree months ended September 30, 2017,March 31, 2019, compared to the same period in 2016,2018, was primarily attributable to an increase ina lower level of repurchases of our common stock duringin the current period, as compared to the same period in the prior year, partially offset by a higherlower level of net borrowings during the current period, as compared to the same period in the prior year.


Unsecured revolving credit facility:
On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a five-year $1.20 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in April 2022. The 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. As described in the 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 million, provided that the aggregate amount of the commitments does not exceed $1.80 billion at any time.

In conjunction with the closing of the Credit Agreement, the Company’s previous credit agreement, which was originally entered into on January 14, 2011, as amended, was terminated (the “Terminated Credit Agreement”), and all outstanding loans and commitments, including the guarantees of each of the subsidiary guarantors, under the Terminated Credit Agreement were terminated and replaced by the loans and commitments under the Credit Agreement. None of our subsidiaries are guarantors or obligors under the Credit Agreement.


As of September 30, 2017,March 31, 2019, we had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amount of $41$39 million, reducing the aggregate availability under the Credit Agreement by that amount. As of September 30, 2017,March 31, 2019, we had outstanding borrowings under the Revolving Credit Facility in the amount of $269$330 million.


Senior Notes:
On August 17, 2017, we issued $750 million aggregate principal amount of unsecured 3.600% Senior Notes due 2027 (“3.600% Senior Notes due 2027”) at a price to the public of 99.840% of their face value with UMB Bank, N.A. (“UMB”) as trustee. Interest on the 3.600% Senior Notes due 2027 is payable on March 1 and September 1 of each year, beginning on March 1, 2018, and is computed on the basis of a 360-day year.

We have issued a cumulative $2.65$3.15 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2027,2028, with UMB Bank, N.A. as trustee. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year. None of our subsidiaries are guarantorsis a guarantor under the Senior Notes.our senior notes.


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 indentures.

These covenants are, however, subject to a number of important limitations and exceptions. As of September 30, 2017,March 31, 2019, 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, 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 5.905.29 times and 6.145.64 times as of September 30, 2017March 31, 2019 and 2016,2018, respectively, and a consolidated leverage ratio of 1.952.11 times and 1.532.05 times as of September 30, 2017March 31, 2019 and 2016,2018, respectively, remaining in compliance with all covenants related to the borrowing arrangements.



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 twelve months ended September 30, 2017March 31, 2019 and 20162018 (dollars in thousands):
For the Twelve Months Ended
September 30,
For the Twelve Months Ended
March 31,
2017 20162019 2018
GAAP net income$1,077,519
 $1,010,237
$1,340,733
 $1,173,776
Add: Interest expense83,258
 66,340
128,203
 100,162
Rent expense295,083
 279,863
Rent expense (1)
322,881
 301,822
Provision for income taxes574,491
 585,650
372,100
 474,210
Depreciation expense228,815
 212,208
250,023
 245,569
Amortization expense1,104
 1,430
2,958
 1,188
Non-cash share-based compensation19,323
 19,614
20,424
 19,149
Non-GAAP EBITDAR$2,279,593
 $2,175,342
$2,437,322
 $2,315,876
      
Interest expense$83,258
 $66,340
$128,203
 $100,162
Capitalized interest8,298
 7,976
9,716
 8,724
Rent expense295,083
 279,863
322,881
 301,822
Total fixed charges$386,639
 $354,179
$460,800
 $410,708
      
Consolidated fixed charge coverage ratio5.90 6.145.29 5.64
      
GAAP debt$2,900,816
 $1,886,501
$3,460,921
 $3,193,066
Stand-by letters of credit41,258
 38,618
39,201
 36,943
Discount on senior notes3,894
 3,295
4,090
 3,548
Debt issuance costs14,290
 10,204
14,989
 13,386
Five-times rent expense1,475,415
 1,399,315
1,614,405
 1,509,110
Non-GAAP adjusted debt$4,435,673
 $3,337,933
$5,133,606
 $4,756,053
      
Consolidated leverage ratio1.95 1.532.11 2.05

(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”), adopted and effective January 1, 2019, the most directly comparable GAAP financial measure, for the three and twelve months ended March 31, 2019 (in thousands):
Total lease cost, per ASC 842, for the three months ended March 31, 2019$98,293
Less:Variable non-contract operating lease components, related to property taxes and insurance, for the three months ended March 31, 201914,567
Rent expense for the three months ended March 31, 201983,726
Add:Rent expense for the nine months ended December 31, 2018, as previously reported prior to the adoption of ASC 842239,155
Rent expense for the twelve months ended March 31, 2019$322,881

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 ninethree months ended September 30, 2017March 31, 2019 and 20162018 (in thousands):
 For the Nine Months Ended 
 September 30,
 For the Three Months Ended 
 March 31,
 2017 2016 2019 2018
Cash provided by operating activities (1)
Cash provided by operating activities (1)
$1,087,419
 $1,214,259
Cash provided by operating activities (1)
$440,622
 $432,277
Less:Capital expenditures347,756
 356,234
Capital expenditures152,914
 114,843
Excess tax benefit from share-based compensation35,282
 46,034
Excess tax benefit from share-based compensation8,513
 6,318
Free cash flowFree cash flow$704,381
 $811,991
Free cash flow$279,195
 $311,116
(1)
Prior period amount has 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.


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 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:
In January of 2011, our Board of Directors approved a share repurchase program. Under the program, we may, from time to time, repurchase shares of our common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. Our Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 10, 2017, and September 1, 2017,November 13, 2018, our Board of Directors each time approved a resolution to increase the authorization amount under our share repurchase program by an additional $1.00 billion, resulting in a cumulative authorization amount of $9.75$11.75 billion. EachThe additional authorization is effective for a three-year period, beginning on its respective announcement date.


The following table identifies shares of our common stock that have been repurchased as part of our publicly announced share repurchase program for the three months ended March 31, 2019 and 2018 (in thousands, except per share data):
For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
For the Three Months Ended 
 March 31,
2017 2016 2017 20162019 2018
Shares repurchased2,743
 367
 8,047
 3,673
927
 2,188
Average price per share$200.70
 $281.04
 $235.26
 $261.32
$347.09
 $251.08
Total investment$550,530
 $102,941
 $1,893,068
 $959,743
$321,846
 $549,428


As of September 30, 2017,March 31, 2019, we had $995$680 million remaining under our share repurchase program. Subsequent to the end of the thirdfirst quarter and through November 7, 2017,May 6, 2019, we repurchased 0.40.1 million additional shares of our common stock under our share repurchase program, at an average price of $209.61,$377.59, for a total investment of $85$52 million. We have repurchased a total of 65.473.4 million shares of our common stock under our share repurchase program since the inception of the program in January of 2011 and through November 7, 2017,May 6, 2019, at an average price of $135.17,$151.58, for a total aggregate investment of $8.84$11.12 billion.



CONTRACTUAL OBLIGATIONS


There have been no material changes to the contractual obligations, to which we are committed, since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.


CRITICAL ACCOUNTING 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 condensed consolidated financial statements are prepared. There have been no material changes in the critical accounting estimates since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.


INFLATION AND SEASONALITY


We have 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 increased due to base commodity price increases industry-wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.


To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.


RECENT ACCOUNTING PRONOUNCEMENTS

In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity is required to follow 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 fulfill a contract with a customer. In addition, an entity is required to disclose sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August of 2015, the FASB issued 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, with early adoption allowed, but not before December 15, 2016. We will adopt this guidance beginning with our first quarter ending March 31, 2018. We have established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on our financial position, results of operations and cash flows. Based on the preliminary work completed, we are considering the potential implications of the new standard on our recognition of customer related accounts receivable, warranty costs that are not the responsibility of our suppliers, the application of the Company’s retail O’Rewards loyalty program and all applicable financial statement disclosures required by the new guidance. At this time, the task force has not completed its evaluation of the impact or means of adoption.


In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will beis required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In July of 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvement” (“ASU 2018-11”), to provide an additional, optional transition method for adopting ASU 2016-02, which allows for an entity to choose to apply the new lease standard at adoption date and recognize a cumulative-effective adjustment to the opening balance of retained earnings in the period of adoption, while comparative periods presented will continue to be in accordance with current U.S. GAAP Topic 840. For public companies, ASU 2016-02Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2019. We have established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on our financial position, results of operations and cash flows. Based on the preliminary work completed, we are considering the potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the guidance, all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force has not completed its full evaluation; however, we believe the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on our consolidated balance sheets.

In March of 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, several aspects of the accounting for share-based payment transactions, including tax consequence, classification of awards as equity or liabilities, and classification on the statement of cash flows, were changed.period. We adopted this new guidance with our first quarter ending March 31, 2017. Upon2019, using the additional, optional transition method, the package of transitional practical expedients relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842, the transitional practical expedient for the treatment of existing land easements and the practical expedient to make an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components; however, we did not elect the hindsight transitional practical expedient. We made an accounting policy election to not apply recognition requirements of the guidance to short-term leases. Due to the adoption of ASU 2016-09,this new guidance, we elected to change our accounting policy to account for forfeituresrecognized right-of-use assets and lease liabilities of $1.9 billion each on the accompanying Condensed Consolidated Balance Sheets as they occur; this change was applied usingof March 31, 2019. The difference between the modified retrospective transition method with a cumulative effect adjustment of $0.3 million to opening “Retained earnings”right-of-use assets and lease liabilities on the accompanying Condensed Consolidated Balance Sheet as of September 30, 2017. We applied the amendments relatedwas primarily due to the presentation of tax withholdings on the statements of cash flows using the retrospective transition method, which resulted in $0.2 million of tax withholdings being reclassified from “Net cash provided by operating activities”accrual for straight-line rent expense. We made an adjustment to “Net cash used in financing activities”opening “Retained Deficit” on the accompanying Condensed Consolidated StatementBalance Sheet in the amount of Cash Flows for$1.4 million, net of the nine months ended September 30, 2016. We elected to apply the amendmentsdeferred tax impact, related to the presentationadoption of excess tax benefitsthis new guidance. With the adoption of this new guidance, our favorable lease assets and unfavorable lease liabilities, from a previous acquisition, were eliminated through an adjustment to opening “Operating lease, right-of-use assets” on the statements of cash flows using the retrospective transition method, which resulted in $46 million of excess tax benefits related to share-based compensation being reclassified from “Net cash used in financing activities” to “Net cash provided by operating activities” in the accompanying Condensed Consolidated StatementBalance Sheet. The adoption of Cash Flows for the nine months ended September 30, 2016. ASU 2016-09 amendments related to accounting for excess tax benefits in the income statementthis new guidance did not have been adopted prospectively, resulting in the reductiona material impact on our results of $3 million and $35 million in “Provision for income taxes” in the accompanying Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2017, respectively, which loweredoperations, cash flows, liquidity or covenant compliance under our effective tax rate, increased dilutive shares outstanding and increased diluted earnings per share for the three and nine months ended September 30, 2017, by $0.02 and $0.35, respectively.existing credit agreement.


In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2020. The application of this new guidance is not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.

In August of 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice for eight specific parts on cash flow statement presentation and classification: debt prepayment or debt extinguishment

costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. For public companies, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires retrospective adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.

In January of 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 revises the definition of a business in the Accounting Standards Codification and clarifies the guidance for determining whether the purchase or disposal of an asset or group of assets qualifies as the purchase or disposal of a business. For public companies, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted with certain conditions. We will adopt this guidance beginning with our first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.

In January of 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step in the previous process for goodwill impairment testing; instead, the test is now a one-step process that calls for goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. For public companies, ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires prospective adoption, with early adoption after January 1, 2017. We will adoptearly adopted this guidance beginning with our first quarter ending March 31, 2019. The application of this new guidance isdid not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.

In May of 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarity and reduces both the diversity in practice and cost and complexity when applying stock compensation guidance to a change to the terms or conditions of a share-based payment award. For public companies, ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.


INTERNET ADDRESS AND ACCESS TO SEC FILINGS


Our Internet address is www.oreillyauto.comwww.OReillyAuto.com. Interested readers can access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov and searching with our ticker symbol “ORLY.” Such reports are generally available the day they are filed. Upon request, we will furnish interested readers a paper copy of such reports free of charge.


Item 3. Quantitative and Qualitative Disclosures about Market Risk


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


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 a Base Rate or Eurodollar Rate, as defined in the credit agreement governing the Revolving Credit Facility. As of September 30, 2017,March 31, 2019, we had outstanding borrowings under our Revolving Credit Facility in the amount of $269$330 million, at the weighted-average variable interest rate of 2.283%3.740%. 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 $0.7$0.8 million.


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 September 30, 2017,March 31, 2019, our cash and cash equivalents totaled $37$57 million.


Our market risks have not materially changed since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.



Item 4. Controls and Procedures


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES


As of the end of the period covered by this report, the 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 September 30, 2017,March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




PART II. OTHER INFORMATION
Item 1. Legal Proceedings


O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company accrues for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable loss. The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and 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.

As previously reported, on June 18, 2015, a jury in Greene County, Missouri, returned an unfavorable verdict in a litigated contract dispute in the matter Meridian Creative Alliance vs. O’Reilly Automotive Stores, Inc. et. al. in the amount of $12.5 million. As previously reported, the verdict was appealed, reversed in part and remanded to the trial court for a new trial. The matter has been set for trial to commence May 7, 2018, in the Circuit Court of Greene County, Missouri. The Company will continue to vigorously defend the matter. As of September 30, 2017, the Company had accrued $18.6 million with respect to this matter.


Item 1A. Risk Factors


As of September 30, 2017,March 31, 2019, there have been no material changes in O’Reilly Automotive, Inc. and its subsidiaries’ risk factors since those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.


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


O’Reilly Automotive, Inc. and its subsidiaries (the “Company”) had no sales of unregistered securities during the ninethree months ended September 30, 2017.March 31, 2019. The following table identifies all repurchases during the three months ended September 30, 2017,March 31, 2019, 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 data):
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)
July 1, 2017, through July 31, 2017 
 $
 
 $545,288
August 1, 2017, through August 31, 2017 1,999
 200.82
 1,999
 143,757
September 1, 2017, through September 30, 2017 744
 200.38
 744
 $994,758
Total as of September 30, 2017 2,743
 $200.70
 2,743
  
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)
January 1, 2019, through January 31, 2019 647
 $340.71
 647
 $781,126
February 1, 2019, through February 28, 2019 137
 353.46
 137
 732,489
March 1, 2019, through March 31, 2019 143
 369.81
 143
 $679,590
Total as of March 31, 2019 927
 $347.09
 927
  
(1) 
Under the Company’s share repurchase program, as approved by its Board of Directors, 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. The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 10, 2017, and September 1, 2017,November 13, 2018, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a cumulative authorization amount of $9.8$11.8 billion. EachThe additional authorization is effective for a three-year period, beginning on its respective announcement date. The authorization under the share repurchase program that currently has capacity is scheduled to expire on September 1, 2020.November 13, 2021. No other share repurchase programs existed during the ninethree months ended September 30, 2017.March 31, 2019.


Subsequent to the end of the thirdfirst quarter and through November 7, 2017,May 6, 2019, the Company repurchased an additional 0.40.1 million shares of its common stock under its share repurchase program, at an average price of $209.61,$377.59, for a total investment of $85.2$52.1 million. The Company has repurchased a total of 65.473.4 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through November 7, 2017,May 6, 2019, at an average price of $135.17,$151.58, for a total aggregate investment of $8.8$11.1 billion.




Item 6. Exhibits


Exhibit No.Description
101.INSXBRL 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.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase
*Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K.




SIGNATURES


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




  O’REILLY AUTOMOTIVE, INC.
    
November 7, 2017May 6, 2019 /s/Greg L. HensleeGregory D. Johnson
Date Greg L. HensleeGregory D. Johnson
  Chief Executive Officer and Co-President
  (Principal Executive Officer)
    
    
November 7, 2017May 6, 2019 /s/Thomas McFall
Date Thomas McFall
  Executive Vice President and Chief Financial Officer
  (Principal Financial and Accounting Officer)






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