2014 Annual Report $8.5
$8.5
$10.2
$10.2
$10.1
$10.1
$13.6
$13.6
$19.6
$19.6
$338
$338
$791
$791
$951
$951
$512
$512
$760
$760
13.1%
13.1%
16.7%
16.7%
20.8%
20.8%
23.6%
23.6%
26.9%
26.9%
$8.5
$10.2
$10.1
$13.6
$19.6
$338
$791
$951
$512
$760
13.1%
16.7%
20.8%
23.6%
26.9%
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
FREE CASH FLOW
(in millions)
RETURN on
INVESTED CAPITAL
MARKET
CAPITALIZATION
(in billions)
FINANCIAL HIGHLIGHTS
In thousands, except earnings per share data and store count
YEAR ENDED DECEMBER 31,
Store Count
Percentage Increase in Same-Store Sales
2014
4,366
6.0%
2013
4,166
4.3%
2012
3,976
3.8%
2011
3,740
4.6%
2010
3,570
8.8%
Sales
Operating Income
Net Income
Accounts Payable to Inventory
Working Capital
Total Assets
Total Debt
Shareholders’ Equity
Earnings Per Share (assuming dilution) $
$ 7,216,081
$
6,649,237
$
6,182,184
$ 5,788,816
$ 5,397,525
1,270,374
1,103,485
778,182
94.6%
236,422
6,540,301
1,396,640
2,018,418
670,292
86.6%
412,191
6,067,208
1,396,208
1,966,321
977,393
585,746
84.7%
460,083
5,749,187
1,095,956
2,108,307
866,766
507,673
64.4%
1,027,600
5,500,501
797,574
2,844,851
712,776
419,373
44.3%
1,072,294
5,047,827
358,704
3,209,685
7.34
$
6.03
$
4.75
$
3.71
$
2.95
Weighted-Average Common Shares
Outstanding (assuming dilution)
106,041
111,101
123,314
136,983
141,992
COMPARISON of FIVE-YEAR CUMULATIVE RETURN
This graph shows the cumulative total shareholder return assuming the investment of $100 on December, 31, 2009,
and the reinvestment of dividends thereafter, in the common stock of O’Reilly Automotive, Inc., the Standard and
Poor’s S&P 500 Index and the Standard and Poor’s S&P 500 Retail Index.
S&P 500 Index
O’Reilly Automotive, Inc.
S&P 500 Retail Index
$505
$1 00
$159
$210
$23 5
$33 8
2009
2010
2011
2012
2013
2014
T O O U R S H A R E H O L D E R S
W e are very excited to report to you, our shareholders, another extremely
successful year highlighted by robust, profitable sales growth of 9%,
a record operating margin of 17.6%, and a 22% increase in earnings
per share. These record-breaking 2014 results extend our impressive record to 22
consecutive years of positive comparable store sales growth and record revenue
and operating income since becoming a public company in April of 1993, and
mark the sixth consecutive year we have grown EPS in excess of 21%. Our ongo-
ing success is the direct result of our team’s unwavering commitment to providing
consistently high levels of service to our customers, and our team’s relentless focus
on executing our mission of being the dominant supplier of auto parts in every
market we serve. Our past accomplishments, and our future success, would not
be possible without the hard work of our more than 67,000 Team Members, and
we would like to take this opportunity to express our sincere gratitude to Team
O’Reilly for their dedication to ensuring every customer’s satisfaction is our num-
ber one priority.
Since 1957, the fundamental concept of providing consistent, excellent customer
service has been the foundation of our company’s culture and is the underlying
driver of our continued success. Our team has never forgotten the importance of
this basic principle and, as a result, we again led the industry in comparable store
sales growth in 2014, generating a 6.0% increase, which was on top of an industry-
leading increase of 4.3% in 2013. The battle to gain customers’ business and win
their loyalty is fierce, and we face strong competition every day in each market
we serve. We differentiate ourselves, and continue to generate consistently strong
and profitable top-line results, by simply rolling up our sleeves and out hustling
our competition. Our store operations teams understand second place is simply
not good enough, and our mission is to be our customers’ first call for all of their
auto parts needs. We work to achieve this goal by building great teams of Profes-
sional Parts People, and ensuring those teams have the tools necessary to win our
customers’ business each day. One of the primary factors in a customer’s decision
O ’ R E I L LY A U T O M O T I V E 2014 A N N U A L R E P O R T
1
OUR STORES are staffed with highly-
trained, technically-proficient Professional
Parts People who undergo extensive
and ongoing training to better serve our
technically-oriented professional service
provider customers and enhance the
customer service we provide to our do-it-
yourself customers who value the expert
assistance. We are committed to providing
consistently superior customer service and
significant value to each of our customers
every day.
“Our ongoing
success is the
direct result
of our team’s
unwavering
commitment
to providing
consistently high
levels of service.”
““ Photos provided by O’Reilly Store Installations team
FROM GROUND BREAKING TO GRAND OPENING Before breaking ground, we strategically select sites for new stores by considering,
among other factors, local population density and demographics, as well as local registered vehicles and automotive repair facilities. Our stores are
generally freestanding buildings or prominent end caps situated on or near major traffic thoroughfares, which offer ample parking, easy customer access
and average approximately 7,200 square feet. Our store design features high ceilings, convenient interior layouts, in-store signage, bright lighting, and
dedicated counters to serve our professional service provider customers. After construction is completed, our stores are stocked with an average of
23,000 SKUs, which includes a wide selection of nationally recognized, well-advertised, premium name brand products, as well as proprietary private label
products for domestic and imported automobiles.
to purchase a part is availability; if we do not have the part
a customer needs, or if we cannot get the part to a customer
faster than our competitors, we risk losing the business.
A key to our success has been our sustained competitive
advantage in parts availability, an advantage built through
our robust, tiered, regional supply chain network, which
provides our store teams with access to the right part faster
than our competitors. We stock each of our stores with
robust inventories consisting of high-quality parts tailored
to the needs of the market served by each individual store.
Each one of our store’s inventories is customized based on
numerous factors including vehicle registration data, market
demographic information, and local customer purchasing
patterns. In addition to individually-tailored store level
inventories, most of our store teams also have same-day
access to a larger assortment of hard-to-find parts through
our hub store network made up of 283 strategically-located
stores that stock larger inventories, which average 41,000
SKUs, and, for our stores located in markets surrounding
one of our 26 strategically-deployed distribution centers
(DC), directly from one of our DCs, which average 146,000
SKUs. Our stores also receive five-night-a-week inventory
replenishment from our DCs. This frequent and flexible
replenishment model allows us to stock a larger breadth of
store level inventory, increasing the chance we will either
have a part in stock at the store for immediate fulfillment
of our customer’s needs or have the part quickly available.
Our ability to customize and rapidly deploy inventory is a
powerful resource when a do-it-yourself customer walks
into one of our stores or a professional service provider
customer calls needing that hard-to-find part. We are not
satisfied, however, with resting on our laurels, and we
continually evaluate methods which will enhance our ability
to strategically and effectively deploy our inventory invest-
ment, allowing us to maintain our competitive advantage
and extend our tradition of providing unsurpassed levels of
service to our customers.
Our 22 consecutive years of profitable growth is a testament
to our ability to successfully execute our proven model
during both strong and difficult macroeconomic conditions,
and we remain very confident in the long-term drivers of
demand in the automotive aftermarket. The primary driver
of demand in our industry is the total number of miles
driven in the U.S. Supported by improving employment lev-
els, through November of 2014, the number of miles driven
in the U.S. in 2014 increased 1.4%. While temporary eco-
nomic conditions can incrementally pressure miles driven
over short periods of time, we believe the long-term outlook
for miles driven growth remains solid and will continue to
provide a strong foundation for demand in our industry. As
we have seen for several years now, the higher quality of
new cars manufactured and sold over the past two decades
has also benefitted the automotive aftermarket. With proper
maintenance, these high-quality vehicles can be reliably
driven at higher mileages, resulting in stable scrappage rates
and, coupled with solid new car sales, an increase in the
total U.S. vehicle population and the average age of vehicles.
4,366
O’Reilly stores
States with
O’Reilly stores
43
26O’Reilly
distribution
centers
O’Reilly
Team Members
more than
67 000
,
O ’ R E I L LY A U T O M O T I V E 2014 A N N U A L R E P O R T
2
As the average age a high quality vehicle can stay on the road
grows, so does the miles driven and required maintenance
on these vehicles, supporting continued strong demand in
our industry.
Sustainable, profitable top-line growth by itself is simply not
enough, and another important O’Reilly culture value is
the relentless practice of expense control. At Team O’Reilly,
expense control goes beyond scrutinizing our expenditures;
instead, it is a laser-focus on deploying our shareholders’ in-
vestments in activities which will ultimately improve service
levels to our customers and enhance their experience each
time they walk into or call one of our stores. We take a long-
term perspective when it comes to expense control, and our
commitment to consistently-superior customer service has
been rewarded with industry-leading comparable store sales.
Our expense control focus has translated our consistent top-
line growth into bottom line profits, and we once again set a
company record, high-operating profit margin of 17.6% of
sales in 2014.
Our priorities for the use of our capital remain unchanged:
our primary focus is reinvestment in our business by main-
taining and enhancing our existing store base and distribu-
tion network, expanding our footprint through greenfield
store openings and consolidating the market by acquiring
existing auto parts chains and converting them to our mod-
el. 2014 was another great year in execution of this playbook
with the successful opening of 200 net, new stores across
38 different states, including our first store in Pennsylvania,
and the opening of three new DCs. The single biggest factor
to the success of a new store is the quality of the store team,
and we aggressively identify and develop knowledgeable
and enthusiastic Professional Parts People who are eager to
provide unsurpassed customer service in each new store.
We are able to successfully instill the O’Reilly culture to new
store teams across the U.S. because of the vast aftermarket
experience we have amassed throughout our company and
our dedication to promoting new leaders from within our
ranks. We have been very pleased with the performance of
our new store openings over the past several years and are
very confident we will replicate this success in the additional
205 new stores we plan to open in 2015, supported by our 26
regional distribution centers, including the three we opened
in 2014. Our ability to bring additional DC capacity online
effectively, without missing a beat in providing exceptional
service to our stores, is a huge driver to our success. At the
end of 2014, our distribution system had the capacity to
support an additional 800 stores across our footprint, and
we are well positioned to continue our record of profitable
growth. While we did not make a significant strategic ac-
quisition in 2014, we continually monitor the landscape for
potential acquisition targets and will pursue opportunities
that can achieve the appropriate return on our investment
and drive our long-term profitable growth.
Supported by the strength and stability of the long-term
drivers for demand in the automotive aftermarket and
driven by our relentless focus on profitable long-term
OUR DISTRIBUTION NETWORK is a robust, regional,
tiered distribution model that provides our stores with industry-
leading parts availability. Our distribution centers are strategically
located close to our stores which allows us to service them five
nights a week.
DC 22, Phoenix, AZ, taken by O’Reilly Team Member Rick Rowen, Systems Analyst.
O ’ R E I L LY A U T O M O T I V E 2014 A N N U A L R E P O R T
3
151
58
36
27
18
52
512
59
90
133
45
14
15
12
35
76
116
615
12
35
18
7
115
70
104
134
109
148
167
67
153
73
114
178
190
104
100
1
54
6
141
84
118
GROWTH from COAST to COAST
Store Counts
Distribution Centers
200-600+
100-199
1-99
OUR FOOTPRINT grew to 43 states
in 2014 as we opened 200 net, new stores
staffed with well-trained teams eager to
aggressively execute our proven dual
market strategy and gain market share
from coast to coast. During 2014, we
opened two new distribution centers and
relocated one distribution center, enabling
us to better support our existing store base
and positioning us for future growth. We
will continue to expand the O’Reilly brand,
from coast to coast, in 2015, with the
investment in 205 net, new stores in both
existing and new markets.
“We are very
proud of our
success in 2014
and are absolutely
focused on
building upon
that success for
the future.”
growth, we continue to drive free cash flow to levels that exceed our opportu-
nity to prudently reinvest in our business. In 2014, after investing in our growth,
we generated more than $760 million in free cash. We utilized that free cash to
directly return value to our shareholders by continuing to prudently execute our
share repurchase program. Over the course of 2014, we repurchased 5.7 million of
our shares for an investment of $866 million and, since the inception of our share
repurchase program in 2011, we have repurchased 46.3 million of our shares for a
total investment of $4.22 billion, or $91.06 per share. We will continue to directly
return value to our shareholders through our repurchase program after we have
exhausted all other profitable-growth opportunities, including store growth and
accretive acquisitions.
Before we conclude our comments in this letter, we would once again like to thank
our more than 67,000 Team Members for their dedication and relentless focus on
providing the highest levels of customer service in the industry. Our record break-
ing results would not be possible without their hard work each day, in every store
and DC, across the country. We are very proud of our success in 2014 and are
absolutely focused on building upon that success for the future. We are grateful
of the trust you have placed in us, and we are committed to continuing our long
track record of producing outstanding returns on your investment in O’Reilly. Our
entire Team is dedicated to our mission of being the dominant supplier of parts
in every market we serve, and we are confident we will extend our rich history of
profitable growth into 2015 and beyond.
GR EG HENSLEE
President and Chief Executive Officer
THOMAS MCFALL
Executive Vice President of Finance
and Chief Financial Officer
O ’ R E I L LY A U T O M O T I V E 2014 A N N U A L R E P O R T
4
““ UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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
(State or other jurisdiction
of incorporation or organization)
000-21318
Commission file
number
27-4358837
(I.R.S. Employer
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange on which Registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained here, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Smaller Reporting Company
Non-Accelerated Filer
Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
FORM 10-K
At February 23, 2015, an aggregate of 101,648,745 shares of common stock of the registrant was outstanding. As of that date, the
aggregate market value of the voting stock held by non-affiliates of the Company was $16,064,770,732 based on the last sale price of
the common stock reported by The NASDAQ Global Select Market.
At June 30, 2014, an aggregate of 104,656,509 shares of the common stock of the registrant was outstanding. As of that date, the aggregate
market value of the voting stock held by non-affiliates of the Company was $12,733,033,768 based on the last price of the common stock
reported by The NASDAQ Global Select Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2015 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2014, are incorporated by reference into Part III.
FORM 10-K O'Reilly Automotive, Inc.
Form 10-K
For the Year Ended December 31, 2014
O'Reilly Automotive, Inc.
Form 10-K
Table of Contents
For the Year Ended December 31, 2014
Table of Contents
Part I
Part I
Item 1.
Business
Business
Item 1A. Risk Factors
Item 1.
Item 1B. Unresolved Staff Comments
Item 1A. Risk Factors
Item 2.
Item 1B. Unresolved Staff Comments
Item 3.
Item 2.
Item 4.
Item 3.
Legal Proceedings
Properties
Mine Safety Disclosures
Legal Proceedings
Properties
Item 4.
Item 5.
Item 6.
Item 5.
Mine Safety Disclosures
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Part II
Selected Financial Data
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Item 7.
Item 6.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8.
Financial Statements and Supplementary Data
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 9.
Item 8.
Item 9A. Controls and Procedures
Item 9.
Item 9B. Other Information
Item 9A. Controls and Procedures
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9B. Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Part III
Executive Compensation
Directors, Executive Officers and Corporate Governance
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Executive Compensation
Certain Relationships and Related Transactions, and Director Independence
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Principal Accounting Fees and Services
Certain Relationships and Related Transactions, and Director Independence
Item 11.
Item 10.
Item 12.
Item 11.
Item 13.
Item 12.
Item 14.
Item 13.
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 15.
Exhibits and Financial Statement Schedules
Part IV
Part IV
1
1
Page
Page
2
13
2
16
13
17
16
18
17
18
18
18
19
21
19
23
21
36
23
38
36
67
38
67
67
67
67
67
68
68
68
68
68
69
68
69
69
69
70
70
FORM 10-K Forward-Looking Statements
Forward-Looking Statements
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform
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,"
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
"would," "consider," "should," "anticipate," "project," "plan," "intend" or similar words. In addition, statements contained within this
annual report that are not historical facts are forward-looking statements, such as statements discussing among other things, expected
annual report that are not historical facts are forward-looking statements, such as statements discussing among other things, expected
growth, store development, integration and expansion strategy, business strategies, future revenues and future performance. These
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
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,
results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the economy in general, inflation,
product demand, the market for auto parts, competition, weather, risks associated with the performance of acquired businesses, our ability
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
to hire and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt, governmental
regulations, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied
regulations, 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 this annual report on Form 10-K for the year ended
in these forward-looking statements. Please refer to the "Risk Factors" section of this annual report on Form 10-K for the year ended
December 31, 2014, for additional factors that could materially affect our financial performance. Forward-looking statements speak only
December 31, 2014, 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
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.
new information, future events or otherwise, except as required by applicable law.
PART I
PART I
Item 1. Business
Item 1. Business
GENERAL INFORMATION
GENERAL INFORMATION
O'Reilly Automotive, Inc. and its subsidiaries, collectively "we," "O'Reilly," or the "Company," is one of the largest specialty retailers
O'Reilly Automotive, Inc. and its subsidiaries, collectively "we," "O'Reilly," or the "Company," is one of the largest specialty retailers
of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself
of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself
("DIY") and professional service provider customers, our "dual market strategy". The business was founded in 1957 by Charles F. O'Reilly
("DIY") and professional service provider customers, our "dual market strategy". The business was founded in 1957 by Charles F. O'Reilly
and his son, Charles H. ''Chub'' O'Reilly, Sr. and initially operated from a single store in Springfield, Missouri. Our common stock has
and his son, Charles H. ''Chub'' O'Reilly, Sr. and initially operated from a single store in Springfield, Missouri. Our common stock has
traded on The NASDAQ Global Select Market under the symbol "ORLY" since April 22, 1993.
traded on The NASDAQ Global Select Market under the symbol "ORLY" since April 22, 1993.
At December 31, 2014, we operated 4,366 stores in 43 states. Our stores carry an extensive product line, including the products identified
At December 31, 2014, we operated 4,366 stores in 43 states. Our stores carry an extensive product line, including the products identified
below:
below:
new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components,
•
new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components,
•
batteries, belts, hoses, temperature control, chassis parts and engine parts;
batteries, belts, hoses, temperature control, chassis parts and engine parts;
• maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products; and
• maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products; and
accessories, such as floor mats, seat covers and truck accessories.
•
accessories, such as floor mats, seat covers and truck accessories.
•
Our stores offer many enhanced services and programs to our customers, such as those identified below:
Our stores offer many enhanced services and programs to our customers, such as those identified below:
used oil, oil filter and battery recycling
used oil, oil filter and battery recycling
battery, wiper and bulb replacement
battery, wiper and bulb replacement
battery diagnostic testing
battery diagnostic testing
electrical and module testing
electrical and module testing
check engine light code extraction
check engine light code extraction
loaner tool program
loaner tool program
drum and rotor resurfacing
drum and rotor resurfacing
custom hydraulic hoses
custom hydraulic hoses
professional paint shop mixing and related materials
professional paint shop mixing and related materials
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• machine shops
• machine shops
See the "Risk Factors" section of Item 1A of this annual report on Form 10-K for a description of certain risks relevant to our business.
See the "Risk Factors" section of Item 1A of this annual report on Form 10-K for a description of certain risks relevant to our business.
These risk factors include, among others, deteriorating economic conditions, competition in the automotive aftermarket business, our
These risk factors include, among others, deteriorating economic conditions, competition in the automotive aftermarket business, our
sensitivity to regional economic and weather conditions, future growth assurance, our dependence upon key and other personnel, our
sensitivity to regional economic and weather conditions, future growth assurance, our dependence upon key and other personnel, our
relationships with key suppliers and availability of key products, our acquisition strategies, complications in our distribution centers
relationships with key suppliers and availability of key products, our acquisition strategies, complications in our distribution centers
("DCs"), failure to achieve high levels of services and products, unanticipated fluctuations in our quarterly results, the volatility of the
("DCs"), failure to achieve high levels of services and products, unanticipated fluctuations in our quarterly results, the volatility of the
market price of our common stock, our increased debt levels, a downgrade in our credit ratings, data security, and environmental legislation
market price of our common stock, our increased debt levels, a downgrade in our credit ratings, data security, and environmental legislation
and other regulations.
and other regulations.
2
2
FORM 10-K
OUR BUSINESS
OUR BUSINESS
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our
growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business in
new markets by focusing on our dual market strategy and the core O'Reilly values, including customer service and expense control. Our
growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business in
new markets by focusing on our dual market strategy and the core O'Reilly values, including customer service and expense control. Our
intent is to be the dominant auto parts provider in all the markets we serve, by providing superior customer service and significant value
to both DIY and professional service provider customers.
intent is to be the dominant auto parts provider in all the markets we serve, by providing superior customer service and significant value
to both DIY and professional service provider customers.
Competitive Advantages
Competitive Advantages
We believe our effective dual market strategy, superior customer service, technically proficient store personnel, strategic distribution
systems and experienced management team make up our key competitive advantages which cannot be easily duplicated.
We believe our effective dual market strategy, superior customer service, technically proficient store personnel, strategic distribution
systems and experienced management team make up our key competitive advantages which cannot be easily duplicated.
Proven Ability to Execute Our Dual Market Strategy:
Proven Ability to Execute Our Dual Market Strategy:
For more than 35 years, we have established a track record of effectively serving, at a high level, both DIY and professional service
For more than 35 years, we have established a track record of effectively serving, at a high level, both DIY and professional service
provider customers. We believe our proven ability to effectively execute a dual market strategy is a unique competitive advantage. The
provider customers. We believe our proven ability to effectively execute a dual market strategy is a unique competitive advantage. The
execution of this strategy enables us to better compete by targeting a larger base of consumers of automotive aftermarket parts, capitalizing
on our existing retail and distribution infrastructure, operating profitably in both large markets and less densely populated geographic
execution of this strategy enables us to better compete by targeting a larger base of consumers of automotive aftermarket parts, capitalizing
on our existing retail and distribution infrastructure, operating profitably in both large markets and less densely populated geographic
areas that typically attract fewer competitors, and enhancing service levels offered to DIY customers through the offering of a broad
inventory and the extensive product knowledge required by professional service providers.
areas that typically attract fewer competitors, and enhancing service levels offered to DIY customers through the offering of a broad
inventory and the extensive product knowledge required by professional service providers.
In 2014, we derived approximately 58% of our sales from our DIY customers and approximately 42% of our sales from our professional
In 2014, we derived approximately 58% of our sales from our DIY customers and approximately 42% of our sales from our professional
service provider customers. We believe we will continue to increase our sales to professional service provider customers at a faster pace
service provider customers. We believe we will continue to increase our sales to professional service provider customers at a faster pace
than the increase in our sales to DIY customers due to the more fragmented nature of the professional service provider business, which
than the increase in our sales to DIY customers due to the more fragmented nature of the professional service provider business, which
offers a greater opportunity for consolidation, the opportunities for growth in our less mature markets, and our systems, knowledge and
experience serving the professional service provider side of the automotive aftermarket, supported by our approximately 700 full-time
offers a greater opportunity for consolidation, the opportunities for growth in our less mature markets, and our systems, knowledge and
experience serving the professional service provider side of the automotive aftermarket, supported by our approximately 700 full-time
sales staff dedicated solely to calling upon and servicing the professional service provider customer. We believe we will continue to have
sales staff dedicated solely to calling upon and servicing the professional service provider customer. We believe we will continue to have
a competitive advantage on the professional service provider portion of our business over our competitors who do not have the same
a competitive advantage on the professional service provider portion of our business over our competitors who do not have the same
historical track record of serving the professional service provider. We will also continue to expand and enhance the level of offerings
historical track record of serving the professional service provider. We will also continue to expand and enhance the level of offerings
focused on the growth of our DIY business and will continue to execute our proven dual market strategy.
focused on the growth of our DIY business and will continue to execute our proven dual market strategy.
Superior Customer Service:
Superior Customer Service:
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations
with a wide selection of automotive products. We believe that the satisfaction of DIY and professional service provider customers is
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations
substantially dependent upon our ability to provide, in a timely fashion, the specific automotive products requested. Accordingly, each
with a wide selection of automotive products. We believe that the satisfaction of DIY and professional service provider customers is
substantially dependent upon our ability to provide, in a timely fashion, the specific automotive products requested. Accordingly, each
O'Reilly store carries a broad selection of automotive products designed to cover a wide range of vehicle applications. We continuously
O'Reilly store carries a broad selection of automotive products designed to cover a wide range of vehicle applications. We continuously
refine the inventory levels and assortments carried in each of our stores, based in large part on the sales movement tracked by our inventory
control system, market vehicle registration data, failure rates and management's assessment of the changes and trends in the marketplace.
refine the inventory levels and assortments carried in each of our stores, based in large part on the sales movement tracked by our inventory
We have no material backorders for the products we sell.
control system, market vehicle registration data, failure rates and management's assessment of the changes and trends in the marketplace.
We have no material backorders for the products we sell.
We seek to attract new DIY and professional service provider customers and to retain existing customers by offering superior customer
service, the key elements of which are identified below:
We seek to attract new DIY and professional service provider customers and to retain existing customers by offering superior customer
service, the key elements of which are identified below:
•
•
•
•
•
•
•
•
•
•
superior in-store service through highly-motivated, technically-proficient store personnel ("Professional Parts People")
superior in-store service through highly-motivated, technically-proficient store personnel ("Professional Parts People")
an extensive selection and availability of products
an extensive selection and availability of products
attractive stores in convenient locations
competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers' quality and
attractive stores in convenient locations
competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers' quality and
value preferences
value preferences
a robust point-of-sale system integrated with our proprietary electronic catalog, which contains a wide variety of product images,
a robust point-of-sale system integrated with our proprietary electronic catalog, which contains a wide variety of product images,
schematics and technical specifications, and equips our Team Members with highly effective tools to source products in our
extensive supply network
schematics and technical specifications, and equips our Team Members with highly effective tools to source products in our
extensive supply network
Technically Proficient Professional Parts People:
Technically Proficient Professional Parts People:
Our highly-motivated, technically-proficient Professional Parts People provide us with a significant competitive advantage, particularly
Our highly-motivated, technically-proficient Professional Parts People provide us with a significant competitive advantage, particularly
over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be
over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be
technically knowledgeable, particularly with respect to hard parts, in order to better serve the technically-oriented professional service
technically knowledgeable, particularly with respect to hard parts, in order to better serve the technically-oriented professional service
provider customers with whom they interact on a daily basis. Such technical proficiency also enhances the customer service we provide
to our DIY customers who value the expert assistance provided by our Professional Parts People.
provider customers with whom they interact on a daily basis. Such technical proficiency also enhances the customer service we provide
to our DIY customers who value the expert assistance provided by our Professional Parts People.
3
3
FORM 10-K Strategic Regional Tiered Distribution Network:
We believe our commitment to a robust, regional, tiered distribution network provides superior replenishment and access to hard-to-find
parts and enables us to optimize product availability and inventory levels throughout our store network. Our strategic regional tiered
distribution network includes DCs and Hub stores. Our inventory management and distribution systems electronically link each of our
stores to one or more DCs, which provides for efficient inventory control and management. We currently operate 26 regional DCs, which
provide our stores with same-day or overnight access to an average of 146,000 stock keeping units ("SKUs"), many of which are hard-
to-find items not typically stocked by other auto parts retailers. To augment our robust DC network, we operate 283 Hub stores that also
provide delivery service and same-day access to an average of 41,000 SKUs to other stores within the surrounding area. We believe this
timely access to a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business.
Experienced Management Team:
Our Company philosophy is to "promote from within" and the vast majority of our senior management, district managers and store
managers have been promoted from within the Company. We augment this promote from within philosophy by pursuing strategic hires
with a strong emphasis on automotive aftermarket experience. We have a strong management team comprised of senior management
with 166 professionals who average 18 years of service; 228 corporate managers who average 16 years of service; and 429 district
managers who average 12 years of service. Our management team has demonstrated the consistent ability to successfully execute our
business plan and growth strategy by generating 22 consecutive years of record revenues and earnings and positive comparable store
sales results since becoming a public company in April of 1993.
Growth Strategy
Aggressively Open New Stores:
We intend to continue to consolidate the fragmented automotive aftermarket. During 2014, we opened 200 net, new stores and we plan
to open approximately 205 net, new stores in 2015, which will increase our penetration in existing markets and allow for expansion into
new, contiguous markets. The sites for these new stores have been identified, and to date, we have not experienced significant difficulties
in locating suitable sites for construction of new stores or identifying suitable acquisition targets for conversion to O'Reilly stores. We
typically open new stores by (i) constructing a new facility or renovating an existing one on property we purchase or lease and stocking
the new store with fixtures and inventory, (ii) acquiring an independently owned auto parts store, typically by the purchase of substantially
all of the inventory and other assets (other than realty) of such store, or (iii) purchasing multi-store chains. New store sites are strategically
located in clusters within geographic areas that complement our distribution network in order to achieve economies of scale in management,
advertising and distribution. Other key factors we consider in the site selection process include population density and growth patterns,
demographic lifestyle segmentation, age and per capita income, vehicle traffic counts, number and type of existing automotive repair
facilities, competing auto parts stores within a predetermined radius, and the operational strength of such competitors.
We target both small and large markets for expansion of our store network. While we have faced, and expect to continue to face, aggressive
competition in the more densely populated markets, we believe we have competed effectively, and are well positioned to continue to
compete effectively, in such markets and to achieve our goal of continued profitable sales growth within these markets. We also believe
that with our dual market strategy, we are better able to operate stores in less densely populated areas, which would not otherwise support
a national chain store selling primarily to the retail automotive aftermarket. Therefore, we continue to pursue opening new stores in less
densely populated market areas as part of our growth strategy.
Grow Sales in Existing Stores:
Profitable same store sales growth is also an important part of our growth strategy. To achieve improved sales and profitability at existing
O'Reilly stores, we continually strive to improve the service provided to our customers. We believe that while competitive pricing is an
essential component of successful growth in the automotive aftermarket business, it is customer satisfaction, whether of the DIY consumer
or professional service provider, resulting from superior customer service that generates increased sales and profitability.
Selectively Pursue Strategic Acquisitions:
The automotive aftermarket industry is still highly fragmented and we believe the ability of national auto parts chains, such as ourselves,
to operate more efficiently and proficiently than smaller independent operators will result in continued industry consolidation. Our
intention is to continue to selectively pursue strategic acquisition targets that will strengthen our position as a leading automotive
aftermarket parts supplier in existing markets and provide a springboard for expansion into new markets.
Continually Enhance Store Design and Location:
Our current prototype store design features enhancements such as optimized square footage, higher ceilings, more convenient interior
store layouts, improved in-store signage, brighter lighting, increased parking availability and dedicated counters to serve professional
service providers, each designed to increase sales and operating efficiencies and enhance overall customer service. We continually update
the location and condition of our store network through systematic renovation and relocation of our existing stores to enhance store
performance. During 2014, we relocated 29 stores and renovated 58 stores. We believe that our ability to consistently achieve growth
4
FORM 10-K in same store sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best serve
our customers.
Continually Enhance the Growth and Functionality of Our E-Commerce Website:
Our user-friendly website, www.oreillyauto.com, allows our customers to search product and repair content, check the in-store availability
of our products, and place orders for either home delivery or in-store pickup. We continue to enhance the functionality of our website
to provide our customers with a friendly and convenient shopping experience, as well as a robust product and repair content information
resource, which will continue to build the O'Reilly Brand.
Team Members
As of January 31, 2015, we employed 67,926 Team Members (33,779 full-time Team Members and 34,147 part-time Team Members),
of whom 57,887 were employed at our stores, 7,085 were employed at our DCs and 2,954 were employed at our corporate and regional
offices. A union represents 50 stores (569 Team Members) in the Greater Bay Area in California and has for many years. In addition,
approximately 61 Team Members who drive over-the-road trucks in two of our DCs are represented by a labor union. Except for these
Team Members, our Team Members are not represented by labor unions. Our tradition for 58 years has been to treat all of our Team
Members with honesty and respect and to commit significant resources to instill in them our "Live Green" Culture, which emphasizes
the importance of each Team Member's contribution to the success of O'Reilly. This focus on professionalism and fairness has created
an industry-leading team, and we consider our relations with our Team Members to be excellent.
Store Network
New Store Site Selection:
In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies
of scale in management, advertising and distribution. Other key factors we consider in the site selection process are identified below:
population density;
demographics including age, ethnicity, life style and per capita income;
•
•
• market economic strength, retail draw and growth patterns;
•
•
•
number, age and percent of makes and models of registered vehicles;
the number, type and sales potential of existing automotive repair facilities;
the number of auto parts stores and other competitors within a predetermined radius and the operational strength of such
competitors;
physical location, traffic count, size, economics and presentation of the site;
financial review of adjacent existing locations; and
the type and size of store that should be developed.
•
•
•
When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in
order to maximize the effect of initial promotional programs and achieve economies of scale. After opening this initial cluster of new
stores, we seek to begin penetrating the less densely populated surrounding areas. As these store clusters mature, we evaluate the need
to open additional locations in the more densely populated markets where we believe opportunities exist to expand our market share or
to improve the level of service provided in high volume areas. This strategy enables us to achieve additional distribution and advertising
efficiencies in each market.
Store Locations and Size:
As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and small, less densely
populated areas that would not otherwise support a national chain selling primarily to the retail automotive aftermarket. Our stores, on
average, carry approximately 23,000 SKUs and average approximately 7,200 total square feet in size. At December 31, 2014, we had a
total of approximately 32 million square feet in our 4,366 stores. Our stores are served primarily by the nearest DC, which averages
146,000 SKUs, but also have same-day access to the broad selection of inventory available at one of our 283 Hub stores, which, on
average, carry approximately 41,000 SKUs and average approximately 10,000 square feet in size.
We believe that our stores are ''destination stores'' generating their own traffic rather than relying on traffic created by the presence of
other stores in the immediate vicinity. Consequently, most of our stores are freestanding buildings or prominent end caps situated on or
near major traffic thoroughfares, and offer ample parking, easy customer access and are generally located in close proximity to our
professional service provider customers.
5
FORM 10-K The following table sets forth the geographic distribution and activity of our stores as of December 31, 2014 and 2013:
The following table sets forth the geographic distribution and activity of our stores as of December 31, 2014 and 2013:
State
State
Texas
Texas
California
California
Missouri
Missouri
Georgia
Georgia
Illinois
Illinois
Tennessee
Tennessee
Washington
Washington
Ohio
Ohio
North Carolina
North Carolina
Michigan
Michigan
Arizona
Arizona
Florida
Florida
Oklahoma
Oklahoma
Minnesota
Minnesota
Alabama
Alabama
Indiana
Indiana
Arkansas
Arkansas
Wisconsin
Wisconsin
Louisiana
Louisiana
Colorado
Colorado
South Carolina
South Carolina
Kansas
Kansas
Mississippi
Mississippi
Iowa
Iowa
Kentucky
Kentucky
Utah
Utah
Oregon
Oregon
Virginia
Virginia
Nevada
Nevada
New Mexico
New Mexico
Idaho
Idaho
Maine
Maine
Nebraska
Nebraska
Montana
Montana
New Hampshire
New Hampshire
Wyoming
Wyoming
North Dakota
North Dakota
Alaska
Alaska
Hawaii
Hawaii
South Dakota
South Dakota
Massachusetts
Massachusetts
West Virginia
West Virginia
Pennsylvania
Pennsylvania
Total
Total
December 31, 2013
December 31, 2013
2014 Net, New and
2014 Net, New and
Acquired Stores
Acquired Stores
Store
Store
Count
Count
603
603
498
498
185
185
173
173
159
159
148
148
147
147
130
130
133
133
120
120
131
131
90
90
115
115
112
112
113
113
104
104
102
102
95
95
96
96
86
86
78
78
74
74
72
72
68
68
67
67
57
57
52
52
46
46
50
50
44
44
34
34
35
35
32
32
24
24
18
18
17
17
13
13
13
13
12
12
12
12
3
3
5
5
0
0
4,166
4,166
% of Total
% of Total
Store Count
Store Count
14.5 %
14.5 %
12.0 %
12.0 %
4.4 %
4.4 %
4.2 %
4.2 %
3.8 %
3.8 %
3.6 %
3.6 %
3.5 %
3.5 %
3.0 %
3.0 %
3.2 %
3.2 %
2.9 %
2.9 %
3.1 %
3.1 %
2.2 %
2.2 %
2.8 %
2.8 %
2.7 %
2.7 %
2.7 %
2.7 %
2.5 %
2.5 %
2.4 %
2.4 %
2.3 %
2.3 %
2.3 %
2.3 %
2.1 %
2.1 %
1.9 %
1.9 %
1.8 %
1.8 %
1.7 %
1.7 %
1.6 %
1.6 %
1.6 %
1.6 %
1.4 %
1.4 %
1.3 %
1.3 %
1.1 %
1.1 %
1.2 %
1.2 %
1.1 %
1.1 %
0.8 %
0.8 %
0.8 %
0.8 %
0.7 %
0.7 %
0.6 %
0.6 %
0.4 %
0.4 %
0.4 %
0.4 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.1 %
0.1 %
0.1 %
0.1 %
0.0 %
0.0 %
100.0%
100.0%
Store
Store
Change
Change
12
12
14
14
5
5
5
5
8
8
5
5
4
4
18
18
8
8
14
14
2
2
28
28
1
1
3
3
1
1
5
5
2
2
9
9
4
4
4
4
6
6
2
2
1
1
2
2
0
0
2
2
6
6
8
8
2
2
1
1
2
2
0
0
3
3
3
3
0
0
1
1
2
2
1
1
0
0
0
0
4
4
1
1
1
1
200
200
% of Total
% of Total
Store Change
Store Change
6.0 %
6.0 %
7.0 %
7.0 %
2.5 %
2.5 %
2.5 %
2.5 %
4.0 %
4.0 %
2.5 %
2.5 %
2.0 %
2.0 %
9.0 %
9.0 %
4.0 %
4.0 %
7.0 %
7.0 %
1.0 %
1.0 %
14.0 %
14.0 %
0.5 %
0.5 %
1.5 %
1.5 %
0.5 %
0.5 %
2.5 %
2.5 %
1.0 %
1.0 %
4.5 %
4.5 %
2.0 %
2.0 %
2.0 %
2.0 %
3.0 %
3.0 %
1.0 %
1.0 %
0.5 %
0.5 %
1.0 %
1.0 %
0.0 %
0.0 %
1.0 %
1.0 %
3.0 %
3.0 %
4.0 %
4.0 %
1.0 %
1.0 %
0.5 %
0.5 %
1.0 %
1.0 %
0.0 %
0.0 %
1.5 %
1.5 %
1.5 %
1.5 %
0.0 %
0.0 %
0.5 %
0.5 %
1.0 %
1.0 %
0.5 %
0.5 %
0.0 %
0.0 %
0.0 %
0.0 %
2.0 %
2.0 %
0.5 %
0.5 %
0.5 %
0.5 %
100.0%
100.0%
6
6
December 31, 2014
December 31, 2014
% of Total
% of Total
Store Count
Store Count
Cumulative
Cumulative
% of Total
% of Total
Store Count
Store Count
Store
Store
Count
Count
615
615
512
512
190
190
178
178
167
167
153
153
151
151
148
148
141
141
134
134
133
133
118
118
116
116
115
115
114
114
109
109
104
104
104
104
100
100
90
90
84
84
76
76
73
73
70
70
67
67
59
59
58
58
54
54
52
52
45
45
36
36
35
35
35
35
27
27
18
18
18
18
15
15
14
14
12
12
12
12
7
7
6
6
1
1
4,366
4,366
14.1 %
14.1 %
11.7 %
11.7 %
4.4 %
4.4 %
4.1 %
4.1 %
3.8 %
3.8 %
3.5 %
3.5 %
3.5 %
3.5 %
3.4 %
3.4 %
3.2 %
3.2 %
3.1 %
3.1 %
3.1 %
3.1 %
2.7 %
2.7 %
2.7 %
2.7 %
2.6 %
2.6 %
2.6 %
2.6 %
2.5 %
2.5 %
2.4 %
2.4 %
2.4 %
2.4 %
2.3 %
2.3 %
2.1 %
2.1 %
1.9 %
1.9 %
1.7 %
1.7 %
1.7 %
1.7 %
1.6 %
1.6 %
1.5 %
1.5 %
1.4 %
1.4 %
1.3 %
1.3 %
1.2 %
1.2 %
1.2 %
1.2 %
1.0 %
1.0 %
0.8 %
0.8 %
0.8 %
0.8 %
0.8 %
0.8 %
0.6 %
0.6 %
0.4 %
0.4 %
0.4 %
0.4 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.3 %
0.2 %
0.2 %
0.1 %
0.1 %
— %
— %
100.0%
100.0%
14.1%
25.8%
30.2%
34.3%
38.1%
41.6%
45.1%
48.5%
51.7%
54.8%
57.9%
60.6%
63.3%
65.9%
68.5%
71.0%
73.4%
75.8%
78.1%
80.2%
82.1%
83.8%
85.5%
87.1%
88.6%
90.0%
91.3%
92.5%
93.7%
94.7%
95.5%
96.3%
97.1%
97.7%
98.1%
98.5%
98.8%
99.1%
99.4%
99.7%
99.9%
100.0%
100.0%
14.1%
25.8%
30.2%
34.3%
38.1%
41.6%
45.1%
48.5%
51.7%
54.8%
57.9%
60.6%
63.3%
65.9%
68.5%
71.0%
73.4%
75.8%
78.1%
80.2%
82.1%
83.8%
85.5%
87.1%
88.6%
90.0%
91.3%
92.5%
93.7%
94.7%
95.5%
96.3%
97.1%
97.7%
98.1%
98.5%
98.8%
99.1%
99.4%
99.7%
99.9%
100.0%
100.0%
FORM 10-K Store Layout:
Store Layout:
We utilize a computer-assisted store layout system to provide a uniform and consistent retail merchandise presentation and customize
We utilize a computer-assisted store layout system to provide a uniform and consistent retail merchandise presentation and customize
our hard-parts inventory assortment to meet the specific needs of a particular market area. Front room merchandise is arranged to provide
our hard-parts inventory assortment to meet the specific needs of a particular market area. Front room merchandise is arranged to provide
easy customer access, maximum selling space and to prominently display high-turnover products and accessories to customers. To ensure
easy customer access, maximum selling space and to prominently display high-turnover products and accessories to customers. To ensure
the best customer experience possible, we have selectively implemented bilingual in-store signage based on the demographics in each
the best customer experience possible, we have selectively implemented bilingual in-store signage based on the demographics in each
store's geographic area. Aisle displays and end caps are used to feature high-demand, seasonal merchandise, new items and advertised
store's geographic area. Aisle displays and end caps are used to feature high-demand, seasonal merchandise, new items and advertised
specials.
specials.
Store Automation:
Store Automation:
To enhance store-level operations, customer service and reliability, we use Linux servers and IBM I-Series computer systems in our
To enhance store-level operations, customer service and reliability, we use Linux servers and IBM I-Series computer systems in our
stores. These systems are linked with the I-Series computers located in each of our DCs. Our point-of-sale system provides immediate
stores. These systems are linked with the I-Series computers located in each of our DCs. Our point-of-sale system provides immediate
access to our electronic catalog, part images, schematics and pricing information by make, model and year of vehicle and uses barcode
access to our electronic catalog, part images, schematics and pricing information by make, model and year of vehicle and uses barcode
scanning technology to price our merchandise. This system speeds transaction times, reduces the customer's checkout time, ensures
scanning technology to price our merchandise. This system speeds transaction times, reduces the customer's checkout time, ensures
accuracy and provides enhanced customer service. Moreover, our store automation systems capture detailed sales information which
accuracy and provides enhanced customer service. Moreover, our store automation systems capture detailed sales information which
assists in store management, strategic planning, inventory control and distribution efficiency.
assists in store management, strategic planning, inventory control and distribution efficiency.
Management Structure
Management Structure
Each of our stores is staffed with a store manager and one or more assistant managers, in addition to parts specialists, retail and/or installer
Each of our stores is staffed with a store manager and one or more assistant managers, in addition to parts specialists, retail and/or installer
service specialists and other positions required to meet the specific needs of each store. Each of our 429 district managers has general
service specialists and other positions required to meet the specific needs of each store. Each of our 429 district managers has general
supervisory responsibility for an average of ten stores, which provides our stores with a strong amount of operational support.
supervisory responsibility for an average of ten stores, which provides our stores with a strong amount of operational support.
Store and district managers complete a comprehensive training program to ensure each has a thorough understanding of customer service,
Store and district managers complete a comprehensive training program to ensure each has a thorough understanding of customer service,
leadership, inventory management and store profitability, as well as all other sales and operational aspects of our business model. Store
leadership, inventory management and store profitability, as well as all other sales and operational aspects of our business model. Store
and district managers are also required to complete a structured training program that is specific to their position, including attending a
and district managers are also required to complete a structured training program that is specific to their position, including attending a
week-long manager development program at the corporate headquarters in Springfield, Missouri. Store and district managers also receive
week-long manager development program at the corporate headquarters in Springfield, Missouri. Store and district managers also receive
continuous training through online assignments, field workshops, regional meetings and our annual managers' conference.
continuous training through online assignments, field workshops, regional meetings and our annual managers' conference.
We provide financial incentives to all store Team Members through incentive compensation programs. Under our incentive compensation
We provide financial incentives to all store Team Members through incentive compensation programs. Under our incentive compensation
programs, base salary is augmented by incentive compensation based on individual and store sales and profitability. In addition, each
programs, base salary is augmented by incentive compensation based on individual and store sales and profitability. In addition, each
of our district managers participates in our stock option and bonus programs, and store managers participate in bonus programs based
of our district managers participates in our stock option and bonus programs, and store managers participate in bonus programs based
on their store's performance. We believe our incentive compensation programs significantly increase the motivation and overall
on their store's performance. We believe our incentive compensation programs significantly increase the motivation and overall
performance of our store Team Members and enhance our ability to attract and retain qualified management and other personnel.
performance of our store Team Members and enhance our ability to attract and retain qualified management and other personnel.
Professional Parts People
Professional Parts People
We believe our highly trained team of Professional Parts People is essential in providing superior customer service to both DIY and
We believe our highly trained team of Professional Parts People is essential in providing superior customer service to both DIY and
professional service provider customers. A significant portion of our business is from professional service provider customers; therefore,
professional service provider customers. A significant portion of our business is from professional service provider customers; therefore,
our Professional Parts People are required to be highly technically proficient in automotive products. In addition, we have found that
our Professional Parts People are required to be highly technically proficient in automotive products. In addition, we have found that
the typical DIY customer often seeks assistance from Professional Parts People, particularly when purchasing hard parts. The ability of
the typical DIY customer often seeks assistance from Professional Parts People, particularly when purchasing hard parts. The ability of
our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression and is a significant factor
our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression and is a significant factor
in generating repeat DIY business.
in generating repeat DIY business.
We screen prospective Team Members to identify highly motivated individuals who either have experience with automotive parts or
We screen prospective Team Members to identify highly motivated individuals who either have experience with automotive parts or
repairs, or automotive aptitude. New store Team Members go through a comprehensive orientation focused on the culture of our Company,
repairs, or automotive aptitude. New store Team Members go through a comprehensive orientation focused on the culture of our Company,
as well as the requirements for their specific job position. Additionally, during their first year of employment, our parts specialists go
as well as the requirements for their specific job position. Additionally, during their first year of employment, our parts specialists go
through extensive automotive systems and product knowledge training to ensure they are able to provide the highest level of service to
through extensive automotive systems and product knowledge training to ensure they are able to provide the highest level of service to
our customers. Once all of the required training has been satisfied, our parts specialists become eligible to take the O'Reilly Certified
our customers. Once all of the required training has been satisfied, our parts specialists become eligible to take the O'Reilly Certified
Parts Professional test. Passing the O'Reilly test helps prepare them to become certified by the National Institute for Automotive Service
Parts Professional test. Passing the O'Reilly test helps prepare them to become certified by the National Institute for Automotive Service
Excellence (ASE).
Excellence (ASE).
All of our stores have the ability to service professional service provider customers. For this reason, select Team Members in each store
complete extensive sales call training with a regional field sales manager. Afterward, these Team Members spend at least one day per
All of our stores have the ability to service professional service provider customers. For this reason, select Team Members in each store
week calling on existing and potential professional service provider customers. Additionally, each Team Member engaged in such sales
complete extensive sales call training with a regional field sales manager. Afterward, these Team Members spend at least one day per
activities participates in quarterly advanced training programs for sales and business development.
week calling on existing and potential professional service provider customers. Additionally, each Team Member engaged in such sales
activities participates in quarterly advanced training programs for sales and business development.
Distribution Systems
Distribution Systems
We believe that our tiered distribution model provides industry-leading parts availability and store in-stock positions, while lowering our
inventory carrying costs and controlling inventory. Moreover, we believe the ongoing, significant capital investments made in our DC
We believe that our tiered distribution model provides industry-leading parts availability and store in-stock positions, while lowering our
inventory carrying costs and controlling inventory. Moreover, we believe the ongoing, significant capital investments made in our DC
7
7
FORM 10-K network allows us to efficiently service new stores that are planned to open in contiguous market areas as well as servicing our existing
store network. Our distribution expansion strategy complements our new store opening strategy by supporting newly established clusters
of stores and additional penetration into existing markets in the regions surrounding each DC. As of December 31, 2014, we had a total
growth capacity of over 800 stores in our distribution center network.
Distribution Centers:
As of December 31, 2014, we operated 26 DCs comprised of approximately 10.0 million operating square feet (see the "Properties" table
in Item 2 of this Form 10-K for a detailed listing of DC operating square footages). Our DCs electronically receive orders from computers
located in each of our stores. Our DCs stock an average of 146,000 SKUs and most DCs are linked to and have the ability to access
multiple other regional DCs' on-hand inventory. Our DCs provide five-night-a-week delivery, primarily via a Company-owned fleet, to
all of our stores in the continental United States. In addition, stores within an individual DC's metropolitan area receive multiple daily
deliveries from the DC's "city counter," most of which receive this service seven days per week. Our DCs also provide weekend service
not only to stores they service via their city counters, but also to strategic Hub locations, which redistribute to surrounding stores. Our
national Hub store network provides additional service throughout the week, and on weekends, to surrounding stores.
As part of our continuing efforts to enhance our distribution network in 2015, we plan to:
continue to implement voice picking technology in additional DCs;
complete migration to our warehouse management system in our final DC;
continue to implement enhanced routing software to further enhance logistics efficiencies;
continue to implement labor management software to improve DC productivity and overall operating efficiency;
develop further automated paperless picking processes;
improve proof of delivery systems to further increase the accuracy of product movement to our stores;
continue to define and implement best practices in all DCs; and
•
•
•
•
•
•
•
• make proven, return-on-investment based capital enhancements to material handling equipment in DCs including conveyor
systems, picking modules and lift equipment.
Hub stores:
We currently operate 283 strategically located Hub stores. In addition to serving DIY and professional service provider customers in
their markets, Hub stores also provide delivery service to our other stores within the surrounding area and access to an expanded selection
of SKUs on a same-day basis. Our Hub stores average approximately 10,000 square feet and carry an average of 41,000 SKUs.
Products and Purchasing
Our stores offer DIY and professional service provider customers a wide selection of brand name, house brands and private label products
for domestic and imported automobiles, vans and trucks. Our merchandise generally consists of nationally recognized, well-advertised,
premium name brand products such as AC Delco, Armor All, Bosch, BWD, Cardone, Castrol, Gates Rubber, Monroe, Moog, Pennzoil,
Prestone, Quaker State, STP, Turtle Wax, Valvoline, Wagner, and Wix. In addition to name brand products, our stores carry a wide variety
of high-quality proprietary private label products under our BestTest®, BrakeBest®, Import Direct®, Master Pro®, Micro-Gard®,
Murray®, Omnispark®, O'Reilly Auto Parts®, Precision®, Power Torque®, Super Start®, and Ultima® brands. Our proprietary private
label products are produced by nationally recognized manufacturers and meet or exceed original equipment manufacturer specifications
and provide a great combination of quality and value – a characteristic important to our DIY customers.
We have no long-term contractual purchase commitments with any of our suppliers, nor have we experienced difficulty in obtaining
satisfactory alternative supply sources for automotive parts. We believe that alternative supply sources exist at competitive costs, for
substantially all of the automotive products that we sell. It is our policy to take advantage of payment and seasonal purchasing discounts
offered by our suppliers and to utilize extended dating terms available from suppliers. We have entered into various programs and
arrangements with certain suppliers that provided for extended dating and payment terms for inventory purchases. As a whole, we
consider our relationships with our suppliers to be very good.
We purchase automotive products in substantial quantities from over 500 suppliers, the five largest of which accounted for approximately
23% of our total purchases in 2014. Our largest supplier in 2014 accounted for approximately 6% of our total purchases and the next
four largest suppliers each accounted for approximately 3% to 5% of our total purchases.
Marketing
Marketing to the DIY Customer:
We use an integrated marketing program, which includes radio, direct mail and newspaper distribution, in-store, online, and social media
promotions, and sports and event sponsorships, to aggressively attract DIY customers. The marketing strategy we employ is highly
effective and has led to a measurable increase in awareness of the O'Reilly Brand across our geographic footprint. We utilize a combination
8
FORM 10-K of brand, product and price messaging to drive retail traffic and purchases, which frequently coincide with key sales events. We also
utilize a problem-resolution communication strategy, which encourages vehicle owners to perform regular maintenance on their vehicles,
protecting their long-term automotive investment and establishing O'Reilly as their partner for auto parts needs.
To stimulate sales among racing enthusiasts, who we believe individually spend more on automotive products than the general public,
we sponsored multiple nationally-televised races and over 1,300 grassroots, local and regional motorsports events throughout 42 states
during 2014. We were the title sponsor of two National Association for Stock Car Racing ("NASCAR") National series events in Texas
and three National Hot Rod Association ("NHRA") races across the country.
During the fall and winter months, we strategically sponsor National Collegiate Athletic Association ("NCAA") basketball. Our
relationships with over 30 NCAA teams and tournaments have resulted in prominently displayed O'Reilly logos on TV-visible signs
throughout the season.
We target Spanish speaking auto parts customers through marketing efforts that include the use of Spanish language radio, print, and
outdoor advertising, as well as sponsorships of over 45 local and regional festivals and events.
As consumers increasingly turn to the Internet for information and offers, we continue to invest in digital channels to expand the O'Reilly
brand presence online and through mobile devices. Search engine optimization strategies are used to drive traffic to our website and
popular social media platforms are used to provide excellent customer service through interaction and dialogue with our customers.
In 2014, we continued our O'Reilly O'Rewards® DIY customer loyalty program, with a total of over 12 million customers enrolled. The
program provides members with the opportunity to earn points through purchases and other special events and allows members to redeem
those points toward coupons, which provide discounts on future merchandise purchases in our stores. The programs allow us to reward
our customers for their continued business, as well as enhance engagement with our customers to earn more of their business and target
promotions tailored to their specific needs and purchasing patterns.
Marketing to the Professional Service Provider Customer:
We have approximately 700 full-time O'Reilly sales representatives strategically located across our market areas as part of our First Call®
program. Each sales representative is dedicated solely to calling upon, selling to and servicing our professional service provider customers.
Targeted marketing materials such as flyers, quick reference guides and catalogs are produced and distributed on a regular basis to
professional service providers, paint and body shops and fleet customers. Our industry-leading First Call program enables our sales
representatives, district managers, and store managers to provide excellent customer service to each of our professional service provider
accounts by providing the products and services identified below:
broad selection of merchandise at competitive prices
dedicated Professional Service Specialists in our stores
•
•
• multiple, daily deliveries from our stores
•
•
•
•
same-day or overnight access to an average of 146,000 SKUs through seven day store inventory replenishments
separate service counter and phone line in our stores dedicated exclusively to service professional service providers
trade credit for qualified accounts
First Call Online, a dedicated proprietary Internet based catalog and ordering system designed specifically to connect professional
service providers directly to our inventory system
• Mitchell shop management systems
•
•
• Certified Auto Repair Center Program, a program that provides professional service providers with business tools they can utilize
training and seminars covering topics of interest, such as technical updates, safety and general business management
access to a comprehensive inventory of products and equipment needed to operate and maintain their shop
to profitably grow and market their shops
Marketing to the Independently Owned Parts Store:
Along with the daily operation and management of the DCs and the distribution of automotive products to our stores, Ozark Automotive
Distributors, Inc., our wholly owned subsidiary ("Ozark"), also sells automotive products directly to independently owned parts stores
("jobber stores") throughout our trade areas. These jobber stores are generally located in areas not directly serviced by an O'Reilly store.
Ozark administers a dedicated and distinct marketing program specifically targeted to jobber stores.
We currently provide automotive products to approximately 181 jobber stores, who participate in our proprietary jobber service program
called Parts City Auto Parts program, with total annual sales of approximately $60 million. As a participant in these programs, a jobber
store, which meets certain financial and operational standards, is permitted to indicate its Parts City Auto Parts membership through the
display of trademarked logo that is owned by Ozark. In return for a commitment to purchase automotive products from Ozark, we provide
computer software for business management, competitive pricing, advertising, marketing and sales assistance to Parts City Auto Parts
affiliate stores.
9
FORM 10-K Pricing
We believe that competitive pricing is essential to successfully operate in the automotive aftermarket business. Product pricing is generally
established to compete with the pricing of competitors in the market area served by each store. Most automotive products that we sell
are priced based upon a combination of internal gross margin targets with additional savings offered on some items through volume
discounts and special promotional pricing and competitor price comparisons. Consistent with our low price guarantee, each of our stores
will match any verifiable price on any in-stock product of the same or comparable quality offered by our competitors in the same market
area.
Customer Payments and Returns Policy
Our stores accept cash, checks, debit and credit cards. We also grant credit to many professional service provider customers who meet
our pre-established credit requirements. Some of the factors considered in our pre-established credit requirements include customer
creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment
terms. No customer accounted for greater than one percent of our consolidated net sales, nor do we have any dependence on any single
customer.
We accept product returns for new products, core products and warranty/defective products.
INDUSTRY ENVIRONMENT
The automotive aftermarket industry includes all products and services purchased for light and heavy-duty vehicles after the original
sale. The total size of the automotive aftermarket is estimated to be approximately $246 billion, according to The Auto Care Association.
This market is made up of four segments: labor share of professional service provider sales, auto parts share of professional service
provider sales, DIY sales and tire sales. O'Reilly's addressable market within this industry is approximately $140 billion, which includes
the auto parts share of professional service provider sales and DIY sales. We do not sell tires or perform for-fee automotive repairs or
installations.
Competition
The sale of automotive aftermarket items is highly competitive in many areas, including customer service, product availability, store
location, brand recognition and price. We compete in both the DIY and professional service provider portions of the automotive aftermarket
and are one of the largest specialty retailers within that market. We compete primarily with the stores identified below:
•
national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, CARQUEST, NAPA and
the Pep Boys - Manny, Moe and Jack, Inc.)
regional retail and wholesale automotive parts chains
•
• wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as
NAPA, CARQUEST, Bumper to Bumper and Auto Value)
automobile dealers
•
• mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc.)
We compete on the basis of customer service, which includes merchandise selection and availability, technical proficiency and helpfulness
of store personnel, price, store layout and convenient and accessible store locations. Our dual market strategy requires significant capital
to support, such as the capital expenditures required for our distribution and store networks and working capital needed to maintain
inventory levels necessary for providing products to both the DIY and professional service provider portions of the automotive aftermarket.
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 increase due to base commodity price increases industry wide, we have typically been able to pass along these increased
costs through higher retail prices for the affected products. As a result, we do not believe our operations have been materially, adversely
affected by inflation.
To some extent our business is seasonal, primarily as a result of the impact of weather conditions on customer buying patterns. Store
sales, profits and inventory levels have historically been higher in the second and third quarters (April through September) than in the
first and fourth quarters (October through March) of the year.
10
FORM 10-K Regulations
We are subject to federal, state and local laws and governmental regulations relating to our business, including those related to the handling,
storage and disposal of hazardous substances, the recycling of batteries and used lubricants, and the ownership and operation of real
property.
As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous
materials onto our property in connection with, for example, our oil and battery recycling programs. We currently provide a recycling
program for batteries and the collection of used lubricants at certain stores as a service to our customers pursuant to agreements with
third-party suppliers. The batteries and used lubricants are collected by our Team Members, deposited into supplier-provided containers
and pallets, and then disposed of by the third-party suppliers. In general, our agreements with such suppliers contain provisions that are
designed to limit our potential liability under applicable environmental regulations for any damage or contamination, which may be
caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused
by the supplier.
Compliance with any such laws and regulations has not had a material adverse effect on our operations to date. However, we cannot
give any assurance that we will not incur significant expenses in the future in order to comply with any such laws or regulations.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following paragraphs discuss information about our executive officers who are not also directors:
Greg L. Henslee, age 54, President and Chief Executive Officer, has been an O'Reilly Team Member for 30 years. Mr. Henslee's O'Reilly
career began as a Parts Specialist in a store and progressed through the roles of Assistant Store Manager, District Manager, Computer
Operations Manager, Director of Computer Operations and Loss Prevention, Vice President of Store Operations, Senior Vice President,
President of Merchandise, Distribution, Information Systems and Loss Prevention, and Chief Executive Officer and Co-President. Mr.
Henslee has held the position of Chief Executive Officer since 2005 and the position of President since 2013.
Thomas McFall, age 44, Executive Vice President of Finance and Chief Financial Officer, has been an O'Reilly Team Member for eight
years. Mr. McFall's primary areas of responsibility are Finance, Accounting, Information Systems, Risk Management and Human
Resources. Mr. McFall's career began with Ernst & Young LLP in Detroit, Michigan, where he achieved the position of Audit Manager,
before accepting a position with Murray's Discount Auto Stores ("Murray's"). Mr. McFall served Murray's for eight years as Controller,
Vice President of Finance, and Chief Financial Officer, with direct responsibility for finance and accounting, distribution and logistics
operations, and after Murray's was acquired by CSK Auto Corporation ("CSK"), he held the position of Chief Financial Officer - Midwest
Operation for CSK. In May of 2006, Mr. McFall joined O'Reilly as Senior Vice President of Finance and Chief Financial Officer, and
has held the position as Executive Vice President of Finance and Chief Financial Officer since December of 2006.
Gregory D. Johnson, age 49, Executive Vice President of Supply Chain, has been an O'Reilly Team Member for 32 years. Mr. Johnson's
primary areas of responsibility are Distribution Operations, Logistics, Purchasing, and Advertising. Mr. Johnson's O'Reilly career began
as a part-time distribution center team member and progressed through the roles of Retail Systems Manager, WMS Systems Development
Manager, Director of Distribution, Vice President of Distribution Operations, and Senior Vice President of Distribution Operations. Mr.
Johnson has held the position of Executive Vice President of Supply Chain since December of 2014.
Jeff M. Shaw, age 52, Executive Vice President of Store Operations and Sales, has been an O'Reilly Team Member for 26 years. Mr.
Shaw's primary areas of responsibility are Store Operations, Sales, Real Estate, Jobber Sales, and Acquisitions. Mr. Shaw's O'Reilly
career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager and Vice
President of the Southern Division, Vice President of Sales and Operations, and Senior Vice President of Sales and Operations. Mr. Shaw
has held the position of Executive Vice President of Store Operations and Sales since 2013.
Ted F. Wise, age 64, Executive Vice President of Expansion, has been an O'Reilly Team Member for 44 years. Mr. Wise's primary area
of responsibility is Real Estate. Mr. Wise's O'Reilly career began in a store, and he advanced to Store Manager before becoming O'Reilly's
first District Manager. Mr. Wise progressed through the roles of Operations Manager, Vice President, Senior Vice President of Operations
and Sales, Executive Vice President, and President of Sales, Operations and Real Estate, and Chief Operating Officer and Co-President.
Mr. Wise has held the position of Executive Vice President of Expansion since 2013.
Tony Bartholomew, age 53, Senior Vice President of Professional Sales, has been an O'Reilly Team Member for 32 years. Mr.
Bartholomew's primary area of responsibility is Professional Sales. Mr. Bartholomew's O'Reilly career began as a Delivery Specialist
and progressed through the roles of Parts Specialist, Assistant Manager, Night Manager, Merchandising set up crew Supervisor, Equipment
Sales Manager, Regional Field Sales Manager, Director of Southern Division Sales, and Vice President of Professional Sales. Mr.
Bartholomew has held the position of Senior Vice President of Professional Sales since 2013.
11
FORM 10-K
Brad W. Beckham, age 36, Senior Vice President of Eastern Store Operations and Sales, has been an O'Reilly Team Member for 18 years.
Mr. Beckham's primary areas of responsibility are Store Operations and Sales for O'Reilly's Eastern Operations. Mr. Beckham's O'Reilly
career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Divisional
Vice President, and Vice President of Eastern Store Operations and Sales. Mr. Beckham has held the position of Senior Vice President
of Eastern Store Operations and Sales since December of 2014.
Keith Childers, age 55, Senior Vice President of Western Store Operations and Sales, has been an O'Reilly Team Member for 37 years.
Mr. Childers's primary areas of responsibility are Store Operations and Sales for O'Reilly's Western Operations. Mr. Childers's career
began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Vice President of
CSK Store Operations Integration, and Vice President of Western Store Operations and Sales. Mr. Childers has held the position of Senior
Vice President of Western Store Operations and Sales since December of 2014.
Larry Ellis, age 59, Senior Vice President of Distribution Operations, has been an O'Reilly Team Member for 39 years. Mr. Ellis's primary
areas of responsibility are Distribution Operations and Logistics. Mr. Ellis's O'Reilly career began as a distribution center team member
and progressed through the roles of Distribution Center Supervisor, Distribution Center Manager, Director of Distribution Operations,
Vice President of Logistics, Vice President of Western Division Distribution Operations, and Vice President of Distribution Operations.
Mr. Ellis has held the position of Senior Vice President of Distribution Operations since December of 2014.
Stephen L. Jasinski, age 49, Senior Vice President of Information Systems, has been an O'Reilly Team Member for 22 years. Mr. Jasinski's
primary area of responsibility is Information Systems. Mr. Jasinski's O'Reilly career began as a Programmer and progressed through the
roles of Information Systems Manager, Director of Systems Development, and Vice President of Information Systems. Mr. Jasinski has
held the position of Senior Vice President of Information Systems since 2013.
Randy Johnson, age 59, Senior Vice President of Inventory Management, has been an O'Reilly Team Member for 41 years. Mr. Johnson's
primary areas of responsibility are Inventory Management, Purchasing, Logistics, and Store Design. Mr. Johnson's O'Reilly career began
as a distribution center team member and progressed through the roles of Customer Service Manager, Inventory Control Manager, Director
of Store Inventory Management, and Vice President of Store Inventory Management. Mr. Johnson has held the position of Senior Vice
President of Inventory Management since 2010.
Michael Swearengin, age 54, Senior Vice President of Merchandise, has been an O'Reilly Team Member for 21 years. Mr. Swearengin's
primary areas of responsibility are Merchandise, Pricing and Advertising. Mr. Swearengin's career began with an independent auto parts
store, which was later acquired by O'Reilly. With O'Reilly, Mr. Swearengin progressed through the roles of Product Manager, Senior
Product Manager, Director of Merchandise, and Vice President of Merchandise. Mr. Swearengin has held the position of Senior Vice
President of Merchandise since 2004.
SERVICE MARKS AND TRADEMARKS
We have registered, acquired and/or been assigned the following service marks and trademarks: BESTEST®, BETTER PARTS. BETTER
PRICES.®, BETTER PARTS, BETTER PRICES....EVERYDAY!®, BRAKEBEST®, CERTIFIED AUTO REPAIR®, CUSTOMIZE
YOUR RIDE®, FIRST CALL®, FROM OUR STORE TO YOUR DOOR®, HI-LO®, IMPORT DIRECT®, IPOLITE®, MASTER
PRO®, MASTER PRO REFINISHING®, MICRO-GARD®, MICROGARD®, MURRAY®, O®, OMNISPARK®, O'REILLY®,
O'REILLY AUTO COLOR PROFESSIONAL PAINT PEOPLE®, O'REILLY AUTO PARTS®, O'REILLY AUTO PARTS
PROFESSIONAL PARTS PEOPLE®, O'REILLY AUTOMOTIVE®, O'REILLY O'REWARDS®, O'REILLY RACING®,
O'REWARDS®, PARTNERSHIP NETWORK®, PARTS CITY®, PARTS CITY AUTO COLOR PROFESSIONAL PAINT PEOPLE®,
PARTS CITY AUTO PARTS®, PARTS CITY TOOL BOX®, PARTS PAYOFF®, POWER TORQUE®, PRECISION®, PRECISION
HUB ASSEMBLIES®, QUIETECH®, REAL WORLD TRAINING®, SERIOUS ABOUT YOUR CAR…SO ARE WE!®, SUPER
START®, TOOLBOX®, ULTIMA®, CSK PROSHOP®, KRAGEN AUTO PARTS®, MURRAY'S AUTO PARTS®, PRIORITY
PARTS®, PROXONE®, and SCHUCK'S®. Some of the service marks and trademarks listed above may also have a design associated
therewith. Each of the service marks and trademarks are in duration for as long as we continue to use and seek renewal of such marks
– the duration of each of these service marks and trademarks is typically between five and ten years per renewal. We believe that our
business is not otherwise dependent upon any patent, trademark, service mark or copyright.
Solely for convenience, our service marks and trademarks may appear in this report without the ® or ™ symbol, which is not intended
to indicate that we will not assert, to the fullest extent under applicable law, our rights or the right to these service marks and trademarks.
AVAILABLE INFORMATION
Our Internet address is www.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
12
FORM 10-K 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commission 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 by contacting Mark Merz, Director of External Reporting and Investor
Relations, at 233 South Patterson Avenue, Springfield, Missouri, 65802.
Item 1A. Risk Factors
Our future performance is subject to a variety of risks and uncertainties. Although the risks described below are the risks that we believe
are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the
information available to us that later may prove to be material. Interested parties should be aware that the occurrence of the events
described in these risk factors, elsewhere in this Form 10-K and in our other filings with the Securities and Exchange Commission could
have a material adverse effect on our business, operating results and financial condition. Actual results, therefore, may materially differ
from anticipated results described in our forward-looking statements.
Deteriorating economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers
and others with which we do business to suffer financial hardship, all of which could adversely impact our business, results of
operations, financial condition and cash flows.
Although demand for many of our products is primarily non-discretionary in nature and tend to be purchased by consumers out of necessity,
rather than on an impulse basis, our sales are impacted by constraints on the economic health of our customers. The economic health of
our customers is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt
levels, the availability of consumer credit, currency exchange rates, taxation, fuel prices, unemployment levels and other matters that
influence consumer confidence and spending. Many of these factors are outside of our control. Our customers' purchases, including
purchases of our products, could decline during periods when income is lower, when prices increase in response to rising costs, or in
periods of actual or perceived unfavorable economic conditions. If any of these events occur, or if unfavorable economic conditions
challenge the consumer environment, our business, results of operations, financial condition and cash flows could be adversely affected.
Overall demand for products sold in the automotive aftermarket is dependent upon many factors including the total number of vehicle
miles driven in the U.S., the total number of registered vehicles in the U.S., the age and quality of these registered vehicles and the level
of unemployment in the U.S. Adverse changes in these factors could lead to a decreased level of demand for our products, which could
negatively impact our business, results of operations, financial condition and cash flows.
In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings,
bankruptcies, liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial
institutions that are counterparties to our credit facilities. Also, the ability of these third parties to overcome these difficulties may increase.
If third parties, on whom we rely for merchandise, are unable to overcome difficulties resulting from the deterioration in economic
conditions and provide us with the merchandise we need, or if counterparties to our credit facilities do not perform their obligations, our
business, results of operations, financial condition and cash flows could be adversely affected.
The automotive aftermarket business is highly competitive, and we may have to risk our capital to remain competitive.
Both the DIY and professional service provider portions of our business are highly competitive, particularly in the more densely populated
areas that we serve. Some of our competitors are larger than we are and have greater financial resources. In addition, some of our
competitors are smaller than we are, but have a greater presence than we do in a particular market. We may have to expend more resources
and risk additional capital to remain competitive. For a list of our principal competitors, see the "Competition" section of Item 1 of this
annual report on Form 10-K.
We are sensitive to regional economic and weather conditions that could impact our costs and sales.
Our business is sensitive to national and regional economic and weather conditions and natural disasters. Unusually inclement weather,
such as significant rain, snow, sleet, freezing rain, flooding, seismic activity and hurricanes, has historically discouraged our customers
from visiting our stores during the affected period and reduced our sales, particularly to DIY customers. Extreme weather conditions,
such as extreme heat and extreme cold temperatures, may enhance demand for our products due to increased failure rates of our customers'
automotive parts, while temperate weather conditions may have a lesser impact on failure rates of automotive parts. In addition, our
stores and DCs located in coastal regions may be subject to increased insurance claims resulting from regional weather conditions and
our results of operations, financial condition and cash flows could be adversely affected.
We cannot assure future growth will be achieved.
We believe that our ability to open additional, profitable stores at a high growth rate will be a significant factor in achieving our growth
objectives for the future. Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as
weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel
and general business and economic conditions. We cannot be sure that our growth plans for 2015 and beyond will be achieved. Failure
13
FORM 10-K to achieve our growth objectives may negatively impact the trading price of our common stock. For a discussion of our growth strategies,
see the "Growth Strategy" section of Item 1 of this annual report on Form 10-K.
In order to be successful, we will need to retain and motivate key employees.
Our success has been largely dependent on the efforts of certain key personnel. In order to be successful, we will need to retain and
motivate executives and other key employees. Experienced management and technical personnel are in high demand and competition
for their talents is intense. We must also continue to motivate employees and keep them focused on our strategies and goals. Our business,
results of operations and cash flows could be materially adversely affected by the unexpected loss of the services of one or more of our
key employees. We cannot be sure that we will be able to continue to attract qualified personnel, which could cause us to be less efficient,
and as a result, may adversely impact our sales and profitability. For a discussion of our management, see the "Business" section of Item
1 of this annual report on Form 10-K.
A change in the relationship with any of our key suppliers or the unavailability of our key products at competitive prices could affect
our financial health.
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers' ability or willingness
to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the
ability or willingness of these suppliers to sell us products on favorable terms. For example, financial or operational difficulties that our
suppliers may face could increase the cost of the products we purchase from them or our ability to source product from them. In addition,
the trend toward consolidation among automotive parts suppliers, as well as the off-shoring of manufacturing capacity to foreign countries,
may disrupt or end our relationship with some suppliers and could lead to less competition and result in higher prices. We could also be
negatively impacted by suppliers who might experience work stoppages, labor strikes or other interruptions to, or difficulties in the,
manufacture or supply of the products we purchase from them.
Risks associated with future acquisitions may not lead to expected growth and could result in increased costs and inefficiencies.
We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause our
actual growth and profitability to differ from our expectations, examples of such risks include the following:
• we may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or
on other favorable terms;
our management's attention may be distracted;
•
• we may fail to retain key personnel from acquired businesses;
• we may assume unanticipated legal liabilities and other problems;
• we may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we
acquire to realize economic, operational and other benefits; and
• we may fail, or be unable to, discover liabilities of businesses that we acquire for which we, the subsequent owner or operator,
may be liable.
Business interruptions in our distribution centers or other facilities may affect our store hours, operability of our computer systems,
and/or availability and distribution of merchandise, which may affect our business.
Weather, terrorist activities, war or other disasters or the threat of them, may result in the closure of one or more of our distribution centers
("DCs") or other facilities, or may adversely affect our ability to deliver inventory to our stores on a nightly basis. This may affect our
ability to timely provide products to our customers, resulting in lost sales or a potential loss of customer loyalty. Some of our merchandise
is imported from other countries and these goods could become difficult or impossible to bring into the United States, and we may not
be able to obtain such merchandise from other sources at similar prices. Such a disruption in revenue could potentially have a negative
impact on our results of operations, financial condition and cash flows.
We rely extensively on our computer systems to manage inventory, process transactions and timely provide products to our customers.
Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, security breaches
or other catastrophic events. If our systems are damaged or fail to function properly, we may experience loss of critical data and interruptions
or delays in our ability to manage inventories or process customer transactions. Such a disruption of our systems could negatively impact
revenue and potentially have a negative impact on our results of operations, financial condition and cash flows.
Failure to achieve and maintain a high level of product and service quality may reduce our brand value and negatively impact our
business.
We believe our Company has built an excellent reputation as a leading retailer in the automotive aftermarket industry. We believe our
continued success depends, in part, on our ability to preserve, grow and leverage the value of our brand. Brand value is based, in large
part, on perceptions of subjective qualities and even isolated incidents can erode trust and confidence, particularly if they result in adverse
publicity, governmental investigations or litigation, which can negatively impact these perceptions and lead to adverse effects on our
business or Team Members.
14
FORM 10-K Risks related to us and unanticipated fluctuations in our quarterly operating results could affect our stock price.
We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating
results and should not be relied on as an indication of future performance. If our quarterly operating results fail to meet the expectations
of analysts, the trading price of our common stock could be negatively affected. We cannot be certain that our business strategy and our
plans to integrate the operations of acquired businesses will be successful or that they will successfully meet the expectations of these
analysts. If we fail to adequately address any of these risks or difficulties, our stock price would likely suffer.
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market
conditions. The market price of our common stock may also be affected by our ability to meet analysts' expectations. Failure to meet
such expectations, even slightly, could have an adverse effect on the market price of our common stock.
In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common stock to
decline. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has
often been instituted against such companies. If similar litigation were instituted against us, it could result in substantial costs and a
diversion of our management's attention and resources, which could have an adverse effect on our business.
Our increased debt levels could adversely affect our cash flow and prevent us from fulfilling our obligations.
We have an unsecured revolving credit facility and unsecured senior notes, which could have important consequences to our financial
health. For example, our level of indebtedness could, among other things:
• make it more difficult to satisfy our financial obligations, including those relating to the senior unsecured notes and our credit
facility;
increase our vulnerability to adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive
disadvantage;
require us to dedicate a substantial portion of our cash flows to service the principal and interest on the debt, reducing the funds
available for other business purposes, such as working capital, capital expenditures or other cash requirements;
limit our ability to incur additional debt with acceptable terms, if at all; and
expose us to fluctuations in interest rates.
•
•
•
•
•
In addition, the terms of our financing obligations include restrictions, such as affirmative, negative and financial covenants, conditions
on borrowing and subsidiary guarantees. A failure to comply with these restrictions could result in a default under our financing obligations
or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that
remains uncured or the inability to secure a necessary consent or waiver could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
A downgrade in our credit rating would impact our cost of capital and could impact the market value of our unsecured senior notes,
as well as limit our access to attractive supplier financing programs.
Credit ratings are an important part of our cost of capital. These ratings are based upon, among other factors, our financial strength. Our
current credit ratings provide us with the ability to borrow funds at favorable rates. A downgrade in our current credit rating from either
rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed funds under our credit
facility and a higher facility fee on commitments under our credit facility. A downgrade could also adversely affect the market price and/
or liquidity of our notes, preventing a holder from selling the notes at a favorable price, as well as adversely affect our ability to issue
new notes in the future. In addition, a downgrade could limit the financial institutions willing to commit funds to our supplier financing
programs at attractive rates. Decreased participation in our supplier financing programs would lead to an increase in working capital
needed to operate the business, adversely affecting our cash flows.
A breach of customer, Team Member or Company information could damage our reputation or result in substantial additional costs
or possible litigation.
Our business involves the storage of personal information about our customers and Team Members. We have taken reasonable and
appropriate steps to protect this information; however, if we experience a significant data security breach, we could be exposed to damage
to our reputation, additional costs, lost sales or possible regulatory action. The regulatory environment related to information security
and privacy is constantly evolving, and compliance with those requirements could result in additional costs. There is no guarantee that
the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data
security breaches, and such a breach could potentially have a negative impact on our results of operations, financial condition and cash
flows.
15
FORM 10-K Litigation, governmental proceedings, environmental legislation and regulations and employment laws and regulations may affect
our business, financial condition, results of operations and cash flows.
We are, and in the future may become, involved in lawsuits, regulatory inquiries, and governmental and other legal proceedings, arising
out of the ordinary course of our business. The damages sought against us in some of these litigation proceedings may be material and
may adversely affect our business, results of operations, financial condition and cash flows.
Environmental legislation and regulations, like the initiatives to limit greenhouse gas emissions and bills related to climate change, could
adversely impact all industries. While it is uncertain whether these initiatives will become law, additional climate change related mandates
could potentially be forthcoming and these matters, if enacted, could adversely impact our costs, by, among other things, increasing fuel
prices.
Our business is subject to employment laws and regulations, including requirements related to minimum wage. Our success depends,
in part, on our ability to manage operating costs and identify opportunities to reduce costs. Our ability to meet labor needs, while
controlling costs is subject to external factors, such as minimum wage legislation. A violation of or change in employment laws and/or
regulations could hinder our ability to control costs, which could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
Healthcare reform legislation could have a negative impact on our business, financial condition and results of operations.
The enacted Patient Protection and Affordable Care Act, as well as other healthcare reform legislation considered by Congress and state
legislatures, significantly impacts our healthcare cost structure and increases our healthcare-related expenses. We continue to evaluate
potential additional impacts the healthcare reform legislation will have on our business and the steps necessary to mitigate such impact,
including potential further modifications to our current benefit plans, operational changes to minimize the effect of the legislation on our
cost structure and increases to selling prices to mitigate the expected increase in healthcare-related expenses. If we cannot effectively
modify our programs and operations in response to the new legislation, our results of operations, financial condition and cash flows may
be adversely impacted.
Item 1B. Unresolved Staff Comments
None.
16
FORM 10-K Item 2. Properties
Distribution centers, stores, and other properties
As of December 31, 2014, we operated 26 regional distribution centers ("DC"s), of which eight were leased (2.8 million operating square
footage) and 18 were owned (7.2 million operating square footage) for total DC operating square footage of 10.0 million square feet.
The following table provides information regarding our DCs, returns facility and corporate offices as of December 31, 2014:
Location
Principal Use(s)
Operating Square
Footage (1)
Nature of
Occupancy
Lease Term
Expiration
Aurora, CO
Belleville, MI
Billings, MT
Distribution Center
Distribution Center
Distribution Center
Brooklyn Park, MN
Distribution Center
Brownsburg, IN
Des Moines, IA
Devens, MA
Forest Park, GA
Greensboro, NC
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Houston, TX
Distribution Center
Kansas City, MO
Distribution Center
Knoxville, TN
Distribution Center
Lakeland, FL
Distribution Center
Lubbock, TX
Distribution Center
Moreno Valley, CA
Distribution Center
Naperville, IL
Distribution Center
Nashville, TN
Distribution Center
North Little Rock, AR Distribution Center
Distribution Center
Oklahoma City, OK
Distribution Center
Phoenix, AZ
Distribution Center
Puyallup, WA
Distribution Center
Salt Lake City, UT
Distribution Center
Saraland, AL
Distribution Center
Seagoville, TX
Distribution Center
Springfield, MO
Distribution Center
Stockton, CA
Bulk Facility
Auburn, WA
McAllen, TX
Springfield, MO
Springfield, MO
Phoenix, AZ
Springfield, MO
Springfield, MO
Springfield, MO
Bulk Facility
Bulk Facility
Return/Deconsolidation Facility, Corporate
Offices
Corporate Offices
Corporate Offices
Corporate Offices
Corporate Offices, Training and Technical Center
Total operating square footage
321,242
333,262
129,142
324,668
657,603
253,886
511,261
492,350
441,600
532,615
299,018
150,766
569,419
276,896
547,478
499,471
315,977
122,969
320,667
383,570
533,790
294,932
301,068
442,000
266,306
720,836
81,761
24,560
35,200
290,580
12,327
435,600
46,970
22,000
10,991,790
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Leased
Owned
Owned
Leased
Leased
Leased (2)
Owned
Owned
Leased
Owned
Leased
Owned
2/28/2025
1/31/2031
10/31/2024
12/31/2018
3/31/2017
6/22/2025
12/31/2022
6/30/2025
6/30/2018
4/30/2017
11/30/2022
8/31/2024
(1)
(2)
Includes floor and mezzanine operating square footage, excludes subleased square footage.
Occupied under the terms of a lease with an affiliated party.
The leased facilities typically require a fixed base rent, payment of certain tax, insurance and maintenance expenses and have an original
term of, at a minimum, 20 years, subject to one five-year renewal at our option. One of our bulk facilities is leased from an entity owned
by an affiliated director's immediate family. This lease requires payment of a fixed base rent, payment of certain tax, insurance and
17
FORM 10-K maintenance expenses and an original term of 15 years, subject to three five-year renewals at our option. We believe that this lease
agreement with the affiliated entity is on terms comparable to those obtainable from third parties.
Of the 4,366 stores that we operated at December 31, 2014, 1,612 stores were owned, 2,677 stores were leased from unaffiliated parties
and 77 stores were leased from entities in which certain of our affiliated directors, members of our affiliated director's immediate family,
or our executive officers, are affiliated. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of
certain tax, insurance and maintenance expenses and an original term of, at a minimum, 10 years, subject to one or more renewals at our
option. We have entered into separate master lease agreements with each of the affiliated entities for the occupancy of the stores covered
thereby. Such master lease agreements with three of the eight affiliated entities have been modified to extend the term of the lease
agreement for specific stores. The master lease agreements or modifications thereto expire on dates ranging from November 30, 2016,
to September 30, 2031. We believe that the lease agreements with the affiliated entities are on terms comparable to those obtainable from
third parties.
We believe that our present facilities are in good condition, are adequately insured and are adequate for the conduct of our current
operations. The store servicing capability of our 26 existing DCs is approximately 5,200 stores, providing a growth capacity of more
than 800 stores. We believe the growth capacity in our 26 existing DCs will provide us with the DC infrastructure needed for near-term
expansion. However, as we expand our geographic footprint, we will continue to evaluate our existing distribution system infrastructure
and will adjust our distribution system capacity as needed to support our future growth.
Item 3. Legal Proceedings
O'Reilly is currently involved in litigation incidental to the ordinary conduct of the Company's business. The Company records reserves
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 reserves 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 reserves, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows in a particular quarter or annual period.
The Company received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial
offices in the state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste.
Management has an ongoing and open dialogue with these agencies regarding this matter and is cooperating fully with the request;
however, at this time a prediction of the ultimate outcome of these efforts cannot be determined.
In addition, O'Reilly was involved in resolving governmental investigations that were being conducted against CSK Auto Corporation
("CSK") and CSK's former officers and other litigation, prior to its acquisition by O'Reilly in 2008, as described below. As previously
reported all governmental investigations and litigation related to these CSK legacy issues, both civil and criminal, have concluded.
However, under Delaware law, the charter documents of the CSK entities, and certain indemnification agreements, CSK may have certain
indemnification obligations. As a result of the CSK acquisition, O'Reilly has incurred legal fees and costs related to these potential
indemnification obligations arising from the litigation commenced by the Department of Justice and the Securities and Exchange
Commission against CSK's former employees. Whether those legal fees and costs are covered by CSK's insurance is subject to uncertainty,
and, given its complexity and scope, the final outcome cannot be predicted at this time. O'Reilly has a remaining reserve, with respect
to the indemnification obligations of $12 million at December 31, 2014, which relates to the payment of those legal fees and costs already
incurred. It is possible that in a particular quarter or annual period the Company's results of operations and cash flows could be materially
affected by resolution of such matter, depending, in part, upon the results of operations and cash flows for such period. However, at this
time, management believes that the ultimate outcome of this matter, after consideration of applicable reserves, should not have a material
adverse effect on the Company's consolidated financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
18
FORM 10-K PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common stock:
Shares of O'Reilly Automotive, Inc. (the "Company") common stock are traded on The NASDAQ Global Select Market ("Nasdaq") under
the symbol "ORLY". The Company's common stock began trading on April 22, 1993; no cash dividends have been declared since that
time, and the Company does not anticipate paying any cash dividends in the foreseeable future.
As of February 18, 2015, the Company had approximately 136,000 shareholders of common stock based on the number of holders of
record and an estimate of individual participants represented by security position listings.
The prices in the following table represent the high and low sales price for the Company's common stock as reported by Nasdaq:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the Year
2014
2013
High
Low
High
Low
$
$
154.81
153.37
158.55
195.48
195.48
$
$
128.76
141.93
145.88
148.53
128.76
$
$
104.70
113.09
128.20
135.19
135.19
$
$
87.74
98.67
113.91
120.96
87.74
Sales of unregistered securities:
There were no sales of unregistered securities during the year ended December 31, 2014.
Issuer purchases of equity securities:
The following table identifies all repurchases during the fourth quarter ended December 31, 2014, of any of the Company's securities
registered under Section 12 of the Exchange Act, as amended, by or on behalf of the Company or any affiliated purchaser (in thousands,
except per share amounts):
Period
October 1, 2014, to October 31, 2014
November 1, 2014, to November 30, 2014
December 1, 2014, to December 31, 2014
Total as of December 31, 2014
Total
Number of
Shares
Purchased
1,140
1
38
1,179
Average
Price Paid
per Share
$
$
151.05
179.37
181.56
152.05
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)
$
$
1,140
1
38
1,179
286,355
286,247
279,336
(1) Under the Company's share repurchase program, as approved by our Board of Directors on January 11, 2011, 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 not to exceed a dollar limit authorized
by the Board of Directors. The Company may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time,
without prior notice. As announced on February 5, 2014, August 13, 2014, and February 4, 2015, the Company's Board of Directors each time
approved a resolution to increase the authorization amount under the share repurchase program by an additional $500 million, resulting in a
cumulative authorization amount of $5.0 billion. Each additional $500 million authorization is effective for a three-year period beginning on their
respective announcement date. The authorizations under the share repurchase program that currently have capacity are scheduled to expire on
August 13, 2017, and February 4, 2018. No other share repurchase programs existed during the three or twelve months ended December 31, 2014.
The Company repurchased a total of 5.7 million shares of its common stock under its publicly announced share repurchase program
during the year ended December 31, 2014, at an average price per share of $150.86. Subsequent to the end of the year and through
February 27, 2015, the Company repurchased an additional 0.1 million shares of its common stock, at an average price per share of
$197.48, for a total investment of $27.8 million. The Company has repurchased a total of 46.5 million shares of its common stock under
its share repurchase program since the inception of the program in January of 2011 and through February 27, 2015, at an average price
of $91.38, for a total aggregate investment of $4.2 billion.
19
FORM 10-K Stock performance graph:
The graph below shows the cumulative total shareholder return assuming the investment of $100, on December 31, 2009, and the
reinvestment of dividends thereafter, if any, in the Company's common stock versus the Standard and Poor's S&P 500 Retail Index ("S&P
500 Retail Index") and the Standard and Poor's S&P 500 Index ("S&P 500").
Company/Index
2009
2010
2011
2012
2013
2014
O'Reilly Automotive, Inc.
S&P 500 Retail Index
S&P 500
$
$
100
100
100
$
$
159
124
113
$
$
210
127
113
$
$
235
159
128
$
$
338
229
166
$
$
505
251
185
December 31,
20
FORM 10-K Item 6. Selected Financial Data
The table below compares O'Reilly Automotive, Inc.'s (the "Company's") selected financial data over a ten-year period.
Years ended December 31,
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
(In thousands, except per
share, Team Members, stores
and ratio data)
INCOME STATEMENT
DATA:
Sales ($)
7,216,081
6,649,237
6,182,184
5,788,816
5,397,525
4,847,062
3,576,553
2,522,319
2,283,222
2,045,318
Cost of goods sold, including
warehouse and distribution
expenses
3,507,180
3,280,236
3,084,766
2,951,467
2,776,533
2,520,534
1,948,627
1,401,859
1,276,511
1,152,815
Gross profit
3,708,901
3,369,001
3,097,418
2,837,349
2,620,992
2,326,528
1,627,926
1,120,460
1,006,711
892,503
Selling, general and
administrative expenses
Former CSK officer clawback
Legacy CSK Department of
Justice investigation charge
Operating income
Write-off of asset-based
revolving credit agreement
debt issuance costs
Termination of interest rate
swap agreements
Gain on settlement of note
receivable
2,438,527
2,265,516
2,120,025
1,973,381
1,887,316
1,788,909
1,292,309
815,309
724,396
639,979
—
—
—
—
—
—
(2,798)
—
—
20,900
—
—
—
—
—
—
—
—
—
—
1,270,374
1,103,485
977,393
866,766
712,776
537,619
335,617
305,151
282,315
252,524
—
—
—
—
—
—
—
—
—
(35,872)
(35,872)
941,521
355,775
585,746
(21,626)
(4,237)
—
(25,130)
(50,993)
815,773
308,100
507,673
—
—
11,639
(35,042)
(23,403)
689,373
270,000
419,373
—
—
—
—
—
—
—
—
—
(40,721)
(40,721)
496,898
189,400
307,498
(33,085)
(33,085)
302,532
116,300
186,232
2,337
2,337
307,488
113,500
193,988
—
—
—
(50)
(50)
282,265
104,180
178,085
—
—
—
(1,455)
(1,455)
251,069
86,803
164,266
Other income (expense), net
Total other income (expense)
(48,192)
(48,192)
(44,543)
(44,543)
Income before income taxes
1,222,182
1,058,942
Provision for income taxes
Net income ($)
Basic earnings per common
share: (a)
444,000
778,182
388,650
670,292
Earnings per share – basic ($)
7.46
6.14
4.83
3.77
3.02
2.26
1.50
1.69
1.57
1.47
Weighted-average common
shares outstanding – basic
Earnings per common share -
assuming dilution:
Earnings per share – assuming
dilution ($)
Weighted-average common
shares outstanding – assuming
dilution
SELECTED OPERATING
DATA:
Number of Team Members at
year end
Number of stores at year end
(b)
Total store square footage at
year end (c)
Sales per weighted-average
store (c)($)
Sales per weighted-average
square foot (c)($)
Percentage increase in same
store sales (d)(e)
104,262
109,244
121,182
134,667
138,654
136,230
124,526
114,667
113,253
111,613
7.34
6.03
4.75
3.71
2.95
2.23
1.48
1.67
1.55
1.45
106,041
111,101
123,314
136,983
141,992
137,882
125,413
116,080
115,119
113,385
67,569
61,909
53,063
49,324
46,858
44,880
40,735
23,576
21,920
19,614
4,366
4,166
3,976
3,740
3,570
3,421
3,285
1,830
1,640
1,470
31,591
30,077
28,628
26,530
25,315
24,200
23,205
12,439
11,004
9,801
1,678
1,614
1,590
1,566
1,527
1,424
1,379
1,430
1,439
1,478
232
224
224
221
216
202
201
212
215
220
6.0%
4.3%
3.8%
4.6%
8.8%
4.6%
1.5%
3.7%
3.3%
7.5%
21
FORM 10-K Years ended December 31,
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
(In thousands, except per share,
Team Members, stores and ratio
data)
BALANCE SHEET DATA:
Working capital ($)
Total assets ($)
Inventory turnover
Inventory turnover, net of
payables
Accounts payable to inventory
Current portion of long-term
debt and short-term debt ($)
Long-term debt, less current
portion ($)
236,422
412,191
460,083
1,027,600
1,072,294
1,007,576
821,932
573,328
566,892
424,974
6,540,301
6,067,208
5,749,187
5,500,501
5,047,827
4,781,471
4,193,317
2,279,737
1,977,496
1,718,896
1.4
1.4
21.8
94.6%
10.7
86.6%
1.4
7.4
1.5
3.4
1.4
2.5
1.4
2.6
1.6
3.1
1.6
3.0
1.6
2.8
1.7
2.8
84.7%
64.4%
44.3%
42.8%
46.9%
43.2%
39.2%
40.3%
25
67
222
662
1,431
106,708
8,131
25,320
309
75,313
1,396,615
1,396,141
1,095,734
796,912
357,273
684,040
724,564
75,149
110,170
25,461
Shareholders' equity ($)
2,018,418
1,966,321
2,108,307
2,844,851
3,209,685
2,685,865
2,282,218
1,592,477
1,364,096
1,145,769
CASH FLOW DATA:
Cash provided by operating
activities ($)
Capital expenditures
Free cash flow (f)
1,190,430
908,026
1,251,555
1,118,991
429,987
760,443
395,881
512,145
300,719
950,836
328,319
790,672
703,687
365,419
285,200
414,779
298,542
341,679
299,418
282,655
185,928
228,871
206,685
205,159
338,268
(129,579)
(43,137)
16,763
(42,943)
1,526
(a) Adjusted for a 2-for-1 stock split in 2005.
(b)
In 2005, 2008 and 2012, the Company acquired Midwest Auto Parts Distributors "Midwest"), CSK Auto Corporation ("CSK") and VIP Parts, Tires & Service ("VIP"),
respectively. The 2005 Midwest acquisition added 72 stores, the 2008 CSK acquisition added 1,342 stores and the 2012 VIP acquisition added 56 stores to the
O'Reilly store count. Financial results for these acquired companies have been included in the Company's consolidated financial statements from the dates of the
acquisitions forward.
(c) Total square footage includes normal selling, office, stockroom and receiving space. Sales per weighted-average store and square foot are weighted to consider the
approximate dates of store openings, expansions, closures or acquisitions.
(d) Same-store sales are calculated based on the change in sales of stores open at least one year. Percentage increase in same-store sales is calculated based on store
sales results, which exclude sales of specialty machinery, sales by outside salesmen, sales to Team Members and sales during the one to two week period certain CSK
branded stores were closed for conversion.
(e) Same-store sales for 2008 include sales for stores acquired in the CSK acquisition. Comparable store sales for stores operating on O'Reilly systems open at least one
year increased 2.6% for the year ended December 31, 2008. Comparable store sales for stores operating on the legacy CSK system open at least one year decreased
1.7% for the portion of CSK's sales in 2008 since the July 11, 2008, acquisition.
(f) Free cash flow is calculated as net cash provided by operating activities, less capital expenditures for the period.
22
FORM 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In Management's Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results
of operations, liquidity and certain other factors that may affect our future results, including:
•
•
•
•
•
•
•
•
•
•
an overview of the key drivers of the automotive aftermarket industry;
key events and recent developments within our company;
our results of operations for the years ended December 31, 2014, 2013 and 2012;
our liquidity and capital resources;
any contractual obligations to which we are committed;
any off-balance sheet arrangements we utilize;
our critical accounting estimates;
the inflation and seasonality of our business;
our quarterly results for the years ended December 31, 2014, and 2013; and
recent accounting pronouncements that may affect our Company.
The review of Management's Discussion and Analysis should be made in conjunction with our consolidated financial statements, related
notes and other financial information, forward-looking statements and risk factors included elsewhere in this annual 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
annual report that are not historical facts are forward-looking statements, such as statements discussing among other things, expected
growth, store development, integration and expansion strategy, business strategies, 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,
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, terrorist activities, war and the threat of war. Such statements are subject to risks, uncertainties and assumptions, including,
but not limited to, the economy in general, inflation, 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, 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 this
annual report on Form 10-K for the year ended December 31, 2014, 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. As of December 31, 2014,
we operated 4,366 stores in 43 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. During challenging macroeconomic conditions,
we believe that the average consumer's tendency has been to "trade down" to lower quality products. We have ongoing initiatives aimed
at tailoring our product offering to adjust to customers' changing preferences; however, we also continue to have initiatives focused on
marketing and training to educate customers on the advantages of "purchasing up" on the value spectrum.
23
FORM 10-K We believe the key drivers of current and future demand of 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. According to the Department of Transportation, prior to 2007, the annual
number of total miles driven in the U.S. had steadily increased; however, between 2008 and 2013, as the U.S. experienced
difficult macroeconomic conditions and historically high levels of unemployment, the number of total miles driven in the U.S.
remained relatively flat. As the U.S. economy began to recover in 2014, miles driven also improved and through November of
2014, year-to-date total miles driven in the U.S. increased 1.4%. We believe that as the U.S. economy continues to recover and
the level of unemployment continues to decline, total miles driven in the U.S. will continue to increase and return to the historical
trend of long-term annual growth. In addition, vehicles in the U.S. continue to be driven approximately three trillion miles per
year, resulting in ongoing wear and tear and continued demand for the repair and maintenance products sold within the automotive
aftermarket.
• 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
6% from 2003 to 2013, bringing the number of light vehicles on the road to 249 million by the end of 2013. As of December
31, 2014, the seasonally adjusted annual rate of light vehicle sales in the U.S. was approximately 17 million, contributing to the
continued growth in the total number of registered vehicles on the road. During the past decade, vehicle scrappage rates have
remained relatively stable, ranging from just 5.2% to 5.7% annually. The stable scrappage rates over the past decade have
contributed to an increase in the average age of the U.S. vehicle population over that period, growing 16%, from 9.7 years in
2003 to 11.3 years in 2013. 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 the vehicle
on the road increases, a larger percentage of miles are being driven by vehicles which 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 could impede 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.
However, as of December 31, 2014, the U.S. unemployment rate decreased to 5.6%, its lowest rate in over six years. We believe
that as the economy continues to recover, total employment should increase and we would expect to see a corresponding increase
in commuter traffic as unemployed individuals return to work. Aided by the anticipated increase in commuter miles, we believe
overall annual U.S. miles driven should return to a period of annual growth, resulting in continued demand for automotive
aftermarket products.
We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on
our dual market strategy and the core O'Reilly values of hard work and excellent customer service.
KEY EVENTS AND RECENT DEVELOPMENTS
Several key events have had or may have a significant impact on our operations and are identified below:
• On January 26, 2015, Standard and Poor's Ratings Services raised all of its ratings on the Company, which moved the Company's
unsecured revolving credit facility applicable rate to the tier one pricing level, thus reducing the facility fee and interest rate
margins on borrowings of Eurodollar Rate loans.
• Under the Company's share repurchase program, as approved by the Board of Directors in January of 2011, 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 and its 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 February 5, 2014, August 13, 2014, and February 4,
2015, our Board of Directors each time approved a resolution to increase the authorization amount under our share repurchase
program by an additional $500 million, resulting in a cumulative authorization amount of $5.0 billion. Each additional $500
million authorization is each effective for a three-year period beginning on their respective announcement date. The authorizations
under the share repurchase program that currently have capacity are scheduled to expire on August 13, 2017, and February 4,
24
FORM 10-K 2018. As of February 27, 2015, the Company had repurchased approximately 46.5 million shares of its common stock at an
aggregate cost of $4.2 billion under this program.
RESULTS OF OPERATIONS
The following table includes income statement data as a percentage of sales for the years ended December 31, 2014, 2013 and 2012:
Sales
Cost of goods sold, including warehouse and distribution expenses
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Interest income
Income before income taxes
Provision for income taxes
Net income
2014 Compared to 2013
For the Year Ended
December 31,
2014
2013
2012
100.0%
100.0%
100.0%
48.6
51.4
33.8
17.6
(0.7)
—
16.9
6.1
10.8%
49.3
50.7
34.1
16.6
(0.7)
—
15.9
5.8
10.1%
49.9
50.1
34.3
15.8
(0.7)
0.1
15.2
5.7
9.5%
Sales:
Sales for the year ended December 31, 2014, increased $567 million to $7.22 billion from $6.65 billion for the same period one year ago,
representing an increase of 9%. Comparable store sales for stores open at least one year increased 6.0% and 4.3% for the years ended
December 31, 2014 and 2013, respectively. Comparable store sales are calculated based on the change in sales of stores open at least
one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members.
The following table presents the components of the increase in sales for the year ended December 31, 2014 (in millions):
Increase in Sales for the Year
Ended December 31, 2014,
Compared to the Same Period
in 2013
Store sales:
Comparable store sales
Non-comparable store sales:
Sales for stores opened throughout 2013, excluding stores open at least one year that are included
in comparable store sales
Sales in 2013 for stores that have closed
Sales for stores opened throughout 2014
Non-store sales:
Includes sales of machinery and sales to independent parts stores and Team Members
Total increase in sales
$
$
389
90
(4)
85
7
567
We believe the increased sales achieved by our stores are the result of store growth and 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 increase for the year ended December 31, 2014, was driven by increases in average ticket values and customer
transaction counts for both DIY and professional service provider customers. The improvements in average ticket values were the result
25
FORM 10-K of the continued growth of the more costly, hard part categories as a percentage of our total sales. The overall growth in our hard part
categories continues to be driven by our faster growing professional service provider sales, which are primarily comprised of hard part
categories and by the increasing complexity and cost of replacement parts necessary to maintain the current population of better engineered
and more technically advanced vehicles. These vehicles require less frequent repairs and the component parts are more durable and last
for longer periods of time; however, when repairs are required, the cost of the replacement parts is, on average, greater. While the less
frequent repairs required by these better engineered and manufactured vehicles does create pressure on transaction counts, both DIY and
professional service provider customer transaction counts were positive for the year ended December 31, 2014. The increases in
professional service provider customer transaction counts were primarily driven by our acquired markets and the continued growth of
less mature stores. The increases in DIY transaction counts were driven by our ongoing focus on staffing our stores with knowledgeable
parts professionals to assist our DIY customers during high DIY traffic periods, including nights and weekends.
We opened 200 net, new stores during the year ended December 31, 2014, compared to 190 net, new stores for the year ended December 31,
2013. At December 31, 2014, we operated 4,366 stores in 43 states compared to 4,166 stores in 42 states at December 31, 2013. We
anticipate total new store growth to increase to 205 net, new store openings in 2015.
Gross profit:
Gross profit for the year ended December 31, 2014, increased to $3.71 billion (or 51.4% of sales) from $3.37 billion (or 50.7% of sales)
for the same period one year ago, representing an increase of 10%. The increase in gross profit dollars was primarily a result of the
increase in comparable store sales at existing stores and sales from new stores. The increase in gross profit as a percentage of sales for
the year ended December 31, 2014, was primarily due to product acquisition cost improvements, partially offset by the non-cash last-in,
first-out ("LIFO") negative impact resulting from continued product acquisition cost reductions. Acquisition cost improvements are the
result of our ongoing negotiations with our vendors to improve our inventory purchase costs. During the third quarter of 2013, we fully
depleted our LIFO reserve due to acquisition cost improvements we realized over time. 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 year ended December 31,
2014, our LIFO cost was written down by approximately $41 million to reflect replacement cost.
Selling, general and administrative expenses:
Selling, general and administrative expenses ("SG&A") for the year ended December 31, 2014, increased to $2.44 billion (or 33.8% of
sales) from $2.27 billion (or 34.1% of sales) for the same period one year ago, representing an increase of 8%. The increase in total
SG&A dollars was primarily the result of additional Team Members, facilities and vehicles to support our increased store count. The
decrease in SG&A as a percentage of sales was primarily the result of increased leverage of store occupancy costs on strong comparable
store sales results.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2014, increased to $1.27 billion (or 17.6%
of sales) from $1.10 billion (or 16.6% of sales) for the same period one year ago, representing an increase of 15%.
Other income and expense:
Total other expense for the year ended December 31, 2014, increased to $48 million (or 0.7% of sales), from $45 million (or 0.7% of
sales) for the same period one year ago, representing an increase of 8%. The increase in total other expense for the year ended December 31,
2014, was primarily the result of increased interest expense on higher average outstanding borrowings.
Income taxes:
Our provision for income taxes for the year ended December 31, 2014, increased to $444 million (36.3% effective tax rate) from $389
million (36.7% effective tax rate) for the same period one year ago, representing an increase of 14%. The increase in our provision for
income taxes was the result of higher taxable income in the current year, driven by our strong operating results. The decrease in our
effective tax rate was primarily due to increased benefits from employment tax credits in the current year.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2014, increased to $778 million (or 10.8% of
sales), from $670 million (or 10.1% of sales) for the same period one year ago, representing an increase of 16%.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2014, increased 22% to $7.34 on 106 million shares from $6.03
on 111 million shares for the same period one year ago.
26
FORM 10-K 2013 Compared to 2012
Sales:
Sales for the year ended December 31, 2013, increased $467 million to $6.65 billion from $6.18 billion for the same period one year
prior, representing an increase of 8%. Comparable store sales for stores open at least one year increased 4.3% and 3.8% for the years
ended December 31, 2013 and 2012, respectively. Comparable store sales are calculated based on the change in sales of stores open at
least one year and exclude sales of specialty machinery, sales to independent parts stores, sales to Team Members and sales from the VIP
Parts, Tires & Service ("VIP") stores acquired on December 31, 2012, due to the significant change in the business model and lack of
historical data.
The following table presents the components of the increase in sales for the year ended December 31, 2013 (in millions):
Increase in Sales for the Year
Ended December 31, 2013,
Compared to the Same Period
in 2012
Store sales:
Comparable store sales
Non-comparable store sales:
Sales for stores opened throughout 2012, excluding stores open at least one year that are included
in comparable store sales
Sales in 2012 for stores that have closed
Sales for stores opened throughout 2013 and acquired VIP stores
Non-store sales:
Includes sales of machinery and sales to independent parts stores and Team Members
Total increase in sales
$
$
259
74
(3)
134
3
467
We believe the increased sales achieved by our stores were the result of store growth and 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 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 provided incentives for performance and our continued focus on serving both DIY and
professional service provider customers.
Our comparable store sales increase for the year ended December 31, 2013, was driven by an increase in average ticket values for both
DIY and professional service provider business, and an increase in customer transaction counts for professional service provider business,
slightly offset by a small decrease in customer transaction counts for DIY business. The improvements in average ticket values were the
result of the continued growth of the more costly hard part categories as a percentage of our total sales. The overall growth in the hard
part categories continues to be driven by the increasing cost of replacement parts necessary to maintain the current population of better
engineered and more technically advanced vehicles. These vehicles require less frequent repairs and the component parts are more
durable and last for longer periods of time; however, when repairs are required, the cost of the replacement parts is, on average, greater.
Both DIY and professional service provider customer transaction counts are negatively impacted by these less frequent repairs. The
increases in our professional service provider customer transaction counts were driven by the chain wide growth of our professional
business, while macroeconomic pressures on disposable income continue to negatively impact DIY customer transaction counts.
We opened 190 net, new stores during the year ended December 31, 2013, compared to 180 net, new stores and 56 acquired stores for
the year ended December 31, 2012. At December 31, 2013, we operated 4,166 stores in 42 states compared to 3,976 stores in 42 states
at December 31, 2012.
Gross profit:
Gross profit for the year ended December 31, 2013, increased to $3.37 billion (or 50.7% of sales) from $3.10 billion (or 50.1% of sales)
for the same period one year prior, representing an increase of 9%. The increase in gross profit dollars was primarily a result of the
increase in comparable store sales at existing stores and sales from new stores. The increase in gross profit as a percentage of sales was
primarily due to acquisition cost improvements, improved inventory shrinkage and distribution system efficiencies, partially offset by a
smaller amount of capitalized distribution costs for the year ended December 31, 2013, the non-cash negative impact to gross margin
resulting from the depletion of LIFO reserve and the impact of increased professional service provider sales as a percentage of our total
sales mix. Acquisition cost improvements were the result of our ongoing negotiations with our suppliers to improve our inventory
purchase costs. The improved inventory shrinkage was driven by our continued focus on inventory control and accountability through
27
FORM 10-K our distribution and store networks. Distribution system efficiencies were the result of continued leverage on our increased sales volumes
and more tenured and experienced DC Team Members in our maturing DCs. The decrease in capitalized distribution costs for the year
ended December 31, 2013, was the result of the larger than typical benefit from capitalized distribution costs in 2012 associated with our
initiative to increase our store-level inventories. The costs to move this additional inventory into the stores in 2012 were more efficient
than routine restocking activity; as a result, we realized a larger than normal benefit from capitalized distribution costs. The complete
depletion of our LIFO reserve during the year resulted from the acquisition cost improvements we realized over time. Our policy is to
not write up inventory in excess of replacement cost and, accordingly, we began effectively valuing our inventory at replacement cost in
2013. During 2013, our LIFO cost was written down by approximately $21.6 million to reflect replacement cost in 2013. Professional
service provider sales grew at a faster rate than DIY sales and professional service provider sales typically carry a lower gross profit as
a percentage of sales than DIY sales, as volume discounts are granted on wholesale transactions to professional service provider customers;
therefore, outsized growth in professional service provider sales, as compared to DIY, creates pressure on our gross profit as a percentage
of sales.
Selling, general and administrative expenses:
Selling, general and administrative expenses ("SG&A") for the year ended December 31, 2013, increased to $2.27 billion (or 34.1% of
sales) from $2.12 billion (or 34.3% of sales) for the same period one year prior, representing an increase of 7%. The increase in total
SG&A dollars was primarily the result of additional Team Members, facilities and vehicles to support our increased store count. The
decrease in SG&A as a percentage of sales was primarily the result of improved leverage of store payroll and occupancy costs on strong
comparable store sales results.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2013, increased to $1.10 billion (or 16.6%
of sales) from $977 million (or 15.8% of sales) for the same period one year prior, representing an increase of 13%.
Other income and expense:
Total other expense for the year ended December 31, 2013, increased to $45 million (or 0.7% of sales), from $36 million (or 0.6% of
sales) for the same period one year prior, representing an increase of 24%. The increase in total other expense for the year ended December
31, 2013, was primarily due to increased interest expense on higher average outstanding borrowings.
Income taxes:
Our provision for income taxes for the year ended December 31, 2013, increased to $389 million (36.7% effective tax rate) from $356
million (37.8% effective tax rate) for the same period one year prior, representing an increase of 9%. The increase in our provision for
income taxes was due to the increase in our taxable income. The decrease in our effective tax rate was primarily due to the benefits of
employment tax credits realized in 2013, adjustments to tax reserves related to the favorable resolution of certain income tax audits during
2013 and unfavorable adjustments relating to certain income tax audits in 2012.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2013, increased to $670 million (or 10.1% of
sales), from $586 million (or 9.5% of sales) for the same period one year prior, representing an increase of 14%.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2013, increased 27% to $6.03 on 111 million shares from $4.75
on 123 million shares for the same period one year prior.
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.
28
FORM 10-K Liquidity and related ratios:
The following table highlights our liquidity and related ratios as of December 31, 2014 and 2013 (dollars in millions):
Liquidity and Related Ratios
Current assets
Current liabilities
Working capital (1)
Total debt
Total equity
Debt to equity (2)
December 31,
2014
2013
Percentage
Change
$
$
3,067
$
2,831
236
1,397
2,018
$
0.69:1
2,835
2,423
412
1,396
1,966
0.71:1
8.2 %
16.8 %
(42.7)%
0.1 %
2.6 %
(2.8)%
(1) Working capital is calculated as current assets less current liabilities.
(2) Debt to equity is calculated as total debt divided by total equity.
Current assets increased 8% and current liabilities increased 17% from 2013 to 2014. The increase in current assets was primarily due
to the increase in inventory, resulting from the opening of 200 net, new stores. The increase in current liabilities was primarily due to
the increase in accounts payable, resulting from inventory growth related to new store openings supported in part by our suppliers and
additional supplier participation in our enhanced supplier financing program during the year, which allowed us to obtain more favorable
payment terms. Our accounts payable to inventory ratio was 94.6% as of December 31, 2014, as compared to 86.6% in the prior year.
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31,
2014, 2013 and 2012 (in thousands):
Liquidity
Total cash provided by/(used in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
Capital expenditures
Free cash flow (a)
For the Year Ended
December 31,
2014
2013
2012
$
$
$
1,190,430
(423,402)
(747,786)
19,242
429,987
760,443
$
$
$
$
908,026
(388,754)
(536,082)
(16,810) $
1,251,555
(317,407)
(1,047,572)
(113,424)
$
395,881
512,145
300,719
950,836
(a) Calculated as net cash provided by operating activities, less capital expenditures for the period.
Operating activities:
The increase in net cash provided by operating activities in 2014 compared to 2013 was primarily due to a greater decrease in net inventory
investment and larger increases in net income and accrued payroll-related liabilities in 2014 as compared to 2013. Net inventory investment
reflects our investment in inventory, net of the amount of accounts payable to suppliers. Our net inventory investment continues to
decrease as a result of the impact of our enhanced supplier financing programs. Our supplier financing programs enable us to reduce
overall supply chain costs and negotiate extended payment terms with our suppliers. Our accounts payable to inventory ratio was 94.6%,
86.6% and 84.7% as of December 31, 2014, 2013 and 2012, respectively. The larger increase in our accounts payable to inventory ratio
in 2014 was driven by continued strong supplier support. The increase in accrued payroll-related liabilities during 2014, as compared to
2013, was due to the timing of pay period end dates versus check dates and timing of payments for employer obligations under certain
benefit plans.
The decrease in cash provided by operating activities in 2013 compared to 2012 was primarily due to a smaller decrease in net inventory
investment and a smaller increase in income taxes payable, offset in part by an increase in net income for the year. Our accounts payable
to inventory ratio was 86.6%, 84.7% and 64.4% at December 31, 2013, 2012 and 2011, respectively. The smaller increase in our accounts
payable to inventory ratio in 2013 is the result of a smaller increase in the number of new suppliers added to our financing programs
versus the prior year. We launched our enhanced supplier financing program in January of 2011, and were able to add a large number of
suppliers to the program during 2011 and 2012. The smaller increase in income taxes payable was primarily the result of a prepaid tax
position at the beginning of 2012 versus a payable position at the beginning of 2013.
29
FORM 10-K Investing activities:
The increase in net cash used in investing activities in 2014 compared to 2013 was primarily the result of an increase in capital expenditures
during 2014 related to the mix of owned versus leased new stores as compared to the prior year, as well as an increase in the number of
new store openings. Total capital expenditures were $430 million and $396 million in 2014 and 2013, respectively.
The increase in net cash used in investing activities in 2013 compared to 2012 was primarily the result of an increase in capital expenditures
during 2013 related to the purchase and construction of new distribution facilities during 2013 to support our ongoing store growth, as
well as an increase in the number of new store openings. Total capital expenditures were $396 million and $301 million in 2013 and
2012, respectively.
We opened 200, 190, and 180 net, new stores in 2014, 2013, and 2012, respectively, and acquired 56 stores in 2012. We plan to open
205 net, new stores in 2015. The costs associated with the opening of a new store (including the cost of land acquisition, building
improvements, fixtures, vehicles, net inventory investment and computer equipment) are estimated to average approximately $1.3 million
to $1.5 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.
Financing activities:
The increase in net cash used in financing activities during 2014 compared to 2013 was primarily attributable to the net proceeds from
the issuance of long-term senior notes during 2013, partially offset by the impact of fewer share repurchases of our common stock during
the current year under our share repurchase program.
The decrease in net cash used in financing activities during 2013 compared to 2012 was primarily attributable to the impact of fewer
share repurchases of our common stock during 2013 under our share repurchase program.
Unsecured revolving credit facility:
On January 14, 2011, we entered into a credit agreement, as amended by Amendment No. 1 dated as of September 9, 2011, and as further
amended by Amendment No. 2 dated as of July 2, 2013 (the "Credit Agreement"). The Credit Agreement provides for a $600 million
unsecured revolving credit facility ("Revolving Credit Facility") arranged by Bank of America, N.A., which is scheduled to mature in
July of 2018. 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, we may, from time to time subject
to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $200 million. We had outstanding
letters of credit, primarily to support obligations related to workers' compensation, general liability and other insurance policies, in the
amount of $48 million and $52 million as of December 31, 2014 and 2013, respectively, reducing the aggregate availability under the
Revolving Credit Facility by those amounts. As of December 31, 2014 and 2013, we had no outstanding borrowings under the Revolving
Credit Facility.
Senior Notes:
We have issued $1.4 billion aggregate principal amount of unsecured senior notes due between 2021 and 2023 with United Missouri
Bank, N.A. as trustee. Interest on the unsecured senior notes of 3.800% to 4.875% is payable semi-annually and is computed on the basis
of a 360-day year.
The senior notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries ("Subsidiary Guarantors") that incurs
or guarantees obligations under our Credit Agreement or under other credit facility or capital markets debt of ours or any of our Subsidiary
Guarantors. The guarantees are joint and several and full and unconditional, subject to certain customary automatic release provisions,
including release of the Subsidiary Guarantor's guarantee under our Credit Agreement and certain other debt, or, in certain circumstances,
the sale or other disposition of a majority of the voting power of the capital interest in, or of all or substantially all the property of, the
Subsidiary Guarantor. Each of the Subsidiary Guarantors is 100% owned, directly or indirectly, by us and we have no independent assets
or operations other than those of our subsidiaries. Our only direct or indirect subsidiaries that would not be Subsidiary Guarantors would
be minor subsidiaries. Neither we, nor any of our Subsidiary Guarantors, are subject to any material or significant restrictions on our
ability to obtain funds from our subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by
applicable law. Each of our senior notes is subject to certain customary covenants, with which we complied as of December 31, 2014.
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: (i) create certain liens on assets to secure certain debt; (ii) enter into certain sale and leaseback transactions; and (iii) merge
or consolidate with another company or transfer all or substantially all of our or its property, in each case as set forth in the indentures.
These covenants are, however, subject to a number of important limitations and exceptions.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage
ratio of 2.25 times from March 31, 2013, through December 31, 2014, and 2.50 times thereafter through maturity, and a maximum
consolidated leverage ratio of 3.00 times through maturity. The consolidated leverage ratio includes a calculation of adjusted debt to
30
FORM 10-K earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense ("EBITDAR"). Adjusted
debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, six-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 5.36 times and 4.98 times as of December 31, 2014
and 2013, respectively, and a consolidated leverage ratio of 1.72 times and 1.90 times as of December 31, 2014 and 2013, respectively,
remaining in compliance with all covenants related to the borrowing arrangements. Under our current financing plan, we have targeted
an adjusted debt to EBITDAR ratio range of 2.00 times to 2.25 times.
The table below outlines the calculations of the consolidated fixed charge coverage ratio and consolidated leverage ratio covenants, as
defined in the Credit Agreement governing the Revolving Credit Facility, for the years ended December 31, 2014 and 2013 (dollars in
thousands):
GAAP net income
Add: Interest expense
Rent expense
Provision for income taxes
Depreciation expense
Amortization expense (benefit)
Non-cash share-based compensation
Non-GAAP EBITDAR
Interest expense
Capitalized interest
Rent expense
Total fixed charges
Consolidated fixed charge coverage ratio
GAAP debt
Stand-by letters of credit
Discount on senior notes
Six-times rent expense
Non-GAAP adjusted debt
Consolidated leverage ratio
$
$
$
$
$
$
For the Year Ended
December 31,
2014
2013
778,182
$
53,290
263,028
444,000
193,418
787
23,095
1,755,800
53,290
11,480
263,028
327,798
5.36
1,396,640
47,861
3,385
1,578,168
3,026,054
1.72
$
$
$
$
$
670,292
49,074
254,892
388,650
183,220
(40)
21,722
1,567,810
49,074
10,644
254,892
314,610
4.98
1,396,208
51,715
3,890
1,529,352
2,981,165
1.90
Free cash flow, the consolidated fixed charge coverage ratio and 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 our 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:
Under our share repurchase program, as approved by our Board of Directors, 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. We may increase or otherwise modify, renew, suspend
or terminate the share repurchase program at any time, without prior notice. As announced on February 5, 2014, August 13, 2014, and
31
FORM 10-K February 4, 2015, our Board of Directors each time approved a resolution to increase the authorization amount under our share repurchase
program by an additional $500 million, resulting in a cumulative authorization amount of $5.0 billion. Each additional $500 million
authorization is effective for a three-year period beginning on their 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 (in thousands, except per share data):
Shares repurchased
Average price per share
Total investment
For the Year Ended
December 31,
2014
2013
$
$
5,743
150.86
866,398
$
$
8,529
109.38
932,900
As of December 31, 2014, we had $279 million remaining under our share repurchase program. Subsequent to the end of the year and
through February 27, 2015, we repurchased an additional 0.1 million shares of our common stock under our share repurchase program,
at an average price of $197.48, for a total investment of $28 million. We have repurchased a total of 46 million shares of our common
stock under our share repurchase program since the inception of the program in January of 2011 and through February 27, 2015, at an
average price of $91.38 for a total aggregate investment of $4.2 billion. As of February 27, 2015, we had approximately $752 million
remaining under our share repurchase program.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of December 31, 2014, included commitments for short and long-term debt arrangements, interest payments
related to long-term debt, future payments under non-cancelable lease arrangements, self-insurance reserves, purchase obligations for
construction contract commitments and other long-term liabilities, which are identified in the table below and are fully disclosed in Note
6 "Leasing," Note 9 "Share-Based Compensation and Benefit Plans" and Note 10 "Commitments" to the Consolidated Financial
Statements. We expect to fund these commitments primarily with operating cash flows expected to be generated in the normal course
of business or through borrowings under our Revolving Credit Facility.
Deferred income taxes, as well as commitments with various suppliers for the purchase of inventory, are not reflected in the table below
due to the absence of scheduled maturities, the nature of the account or the commitment's cancellation terms. Due to the absence of
scheduled maturities, the timing of certain of these payments cannot be determined, except for amounts estimated to be payable in 2015,
which are included in "Current liabilities" on our Consolidated Balance Sheets.
We record a reserve for potential liabilities related to uncertain tax positions, including estimated interest and penalties, which are fully
disclosed in Note 13 "Income Taxes" to the Consolidated Financial Statements. These estimates are not included in the table below
because the timing related to the realized deferred income taxes' ultimate resolution or settlement of these positions cannot be determined.
As of December 31, 2014, we recorded a net liability of $58 million related to these uncertain tax positions on our Consolidated Balance
Sheets, all of which was included as a component of "Other liabilities".
Contractual Obligations:
Long-term debt principal and interest payments (1)
Future minimum lease payments under capital leases (2)
Future minimum lease payments under operating leases (2)
Other obligations
Self-insurance reserves (3)
Construction commitments
Other long-term liabilities (4)
Total contractual cash obligations
Total
$1,844,781
25
2,021,511
1,200
132,879
65,871
15,378
$4,081,645
Before
1 Year
Payments Due By Period
Years
1 and 2
(In thousands)
Years
3 and 4
Years 5
and Over
$
61,200
25
$ 122,400
—
$ 122,400
—
$1,538,781
—
252,098
460,191
368,126
941,096
600
64,882
600
40,247
—
16,416
—
11,334
65,871
—
$ 444,676
—
—
$ 623,438
—
—
$ 506,942
—
15,378
$2,506,589
(1) Our Revolving Credit Facility, which has a maximum aggregate commitment of $600 million and matures in July of 2018, bears interest (other
than swing line loans), at our option, at either the Base Rate or Eurodollar Rate (both as defined in the agreement) plus a margin, that will vary
from 0.875% to 1.250% in the case of loans bearing interest at the Eurodollar Rate and 0.000% to 0.250% in the case of loans bearing interest at
32
FORM 10-K the Base Rate, in each case based upon the better of the ratings assigned to our debt by Moody's Investor Service, Inc. and Standard & Poor's Rating
Services, subject to limited exceptions. Swing line loans made under the Revolving Credit Facility bear interest at the Base Rate plus the applicable
margin described above. In addition, we pay a facility fee on the aggregate amount of the commitments in an amount equal to a percentage of such
commitments, varying from 0.125% to 0.250% per annum based upon the better of the ratings assigned to our debt by Moody's Investor Service,
Inc. and Standard & Poor's Rating Services, subject to limited exceptions. Based on our credit ratings at December 31, 2014, our margin for Base
Rate loans was 0.000%, our margin for Eurodollar Rate loans was 0.975% and our facility fee was 0.150%. As of December 31, 2014, we had no
outstanding borrowings under our Revolving Credit Facility. Based upon our current credit ratings, our current margin for Base Rate loans is
0.000%, our margin for Eurodollar Rate loans is 0.875% and our facility fee is 0.125%
(2) The minimum lease payments above do not include certain tax, insurance and maintenance costs, which are also required contractual obligations
under our operating leases but are generally not fixed and can fluctuate from year to year. These expenses historically average approximately 20%
of the corresponding lease payments.
(3) We use various self-insurance mechanisms to provide for potential liabilities from workers' compensation, vehicle and general liability, and employee
health care benefits. The self-insurance reserves above are at the undiscounted obligation amount. The self-insurance reserves liabilities are
recorded on our Consolidated Balance Sheets at our estimate of their net present value and do not have scheduled maturities; however, we can
estimate the timing of future payments based upon historical patterns.
(4) The projected obligation related to future payments under the Company's nonqualified deferred compensation plan, the timing of which cannot be
estimated. See Note 9 "Share-Based Compensation and Benefit Plans" to the Consolidated Financial Statements for further information on the
Company's compensation plans.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which
we have an obligation to the entity that is not recorded in our consolidated financial statements. We historically utilized various off-
balance sheet financial instruments, including sale-leaseback and synthetic lease transactions, but we have not entered into any such
transactions for over five years and do not plan to utilize off-balance sheet arrangements in the future to fund our working capital
requirements, operations or growth plans.
We issue stand-by letters of credit provided by a $200 million sub limit under the Revolving Credit Facility that reduce our available
borrowings under the Revolving Credit Facility. Those letters of credit are issued primarily to satisfy the requirements of workers
compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term
from the date of issuance. Letters of credit totaling $48 million and $52 million were outstanding at December 31, 2014 and 2013,
respectively.
Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely
to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or
capital resources. See "Contractual Obligations" and Note 10 "Commitments" to the Consolidated Financial Statements for information
on our operating leases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by
management. Management bases its assumptions, estimates, and adjustments on historical experience, current trends and other factors
believed to be relevant at the time the consolidated financial statements are prepared. Management believes that the following policies
are critical due to the inherent uncertainty of these matters and the complex and subjective judgments required in establishing these
estimates. Management continues to review these critical accounting policies and estimates to ensure that the consolidated financial
statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates and
such differences could be material.
•
Inventory Obsolescence and Shrink – Inventory, which consists of automotive hard parts, maintenance items, accessories and
tools, is stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of obsolescence
of our inventory is minimal. The products that we sell generally have applications in our markets for a relatively long period of time
in conjunction with the corresponding vehicle population. We have developed sophisticated systems for monitoring the life cycle
of a given product and, accordingly, have historically been very successful in adjusting the volume of our inventory in conjunction
with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory through a charge to cost of sales
in the isolated instances where we believe that the market value of a product line is lower than our recorded cost. This reserve is
based on our assumptions about the marketability of our existing inventory and is subject to uncertainty to the extent that we must
estimate, at a given point in time, the market value of inventory that will be sold in future periods. Ultimately, our projections could
differ from actual results and could result in a material impact to our stated inventory balances. We have historically not had to
materially adjust our obsolescence reserves due to the factors discussed above and do not anticipate that we will experience material
changes in our estimates in the future.
33
FORM 10-K We also record a reserve to reduce the carrying value of our perpetual inventory to account for quantities in our perpetual records
above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our
extensive and frequent cycle counting programs and periodic, full physical inventories. To the extent that our estimates do not
accurately reflect the actual unrecorded inventory shrinkage, we could potentially experience a material impact to our inventory
balances. We have historically been able to provide a timely and accurate measurement of shrink and have not experienced material
adjustments to our estimates. If the shrink reserve changed 10% from the estimate that we recorded based on our historical experience
at December 31, 2014, the financial impact would have been approximately $1 million or 0.1% of pretax income for the year ended
December 31, 2014.
• Valuation of Long-Lived Assets and Goodwill - We evaluate the carrying value of long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. As part of the
evaluation, we review performance at the store level to identify any stores with current period operating losses that should be
considered for impairment. A potential impairment has occurred if the projected future undiscounted cash flows realized from the
best possible use of the asset are less than the carrying value of the asset. The estimate of cash flows includes management's
assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the assets. Our impairment analyses contain estimates due to the inherently judgmental nature of
forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual results
could differ from these estimates, which could materially impact our impairment assessment.
We review goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the
carrying value of these assets might exceed their current fair values. We have never recorded an impairment to goodwill. The process
of evaluating goodwill for impairment involves the determination of the fair value of our Company using the market approach.
Inherent in such fair value determinations are certain judgments and estimates, including estimates which incorporate assumptions
marketplace participants would use in making their estimates of fair value. In the future, if events or market conditions affect the
estimated fair value to the extent that an asset is impaired, we will adjust the carrying value of these assets in the period in which
the impairment occurs; however, we do not believe there has been any change of events or circumstances that would indicate that a
reevaluation of goodwill is required as of December 31, 2014, nor do we believe goodwill is at risk of failing impairment testing.
If the price of O'Reilly stock, which was a primary input used to determine our market capitalization during step one of goodwill
impairment testing, changed by 10% from the value used during testing, the results and our conclusions would not have changed
and no further steps would have been required.
•
Supplier Concessions – We receive concessions from our suppliers through a variety of programs and arrangements, including co-
operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising
allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes,
are reported as a reduction of advertising expense in the period in which the advertising occurred. All other material supplier
concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also include amounts due to us
relating to supplier purchases and product returns. Management regularly reviews amounts receivable from suppliers and assesses
the need for a reserve for uncollectible amounts based on our evaluation of our suppliers' financial position and corresponding ability
to meet their financial obligations. Based on our historical results and current assessment, we have not recorded a reserve for
uncollectible amounts in our consolidated financial statements, and we do not believe there is a reasonable likelihood that our ability
to collect these amounts will differ from our expectations. The eventual ability of our suppliers to pay us the obliged amounts could
differ from our assumptions and estimates, and we may be exposed to losses or gains that could be material.
• Warranty Reserves – We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited
lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of our suppliers. Certain suppliers
provide upfront allowances to us in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we bear
the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received 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. Our historical
experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims has been driven
by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. If warranty reserves
were changed 10% from our estimated reserves at December 31, 2014, the financial impact would have been approximately $3
million or 0.3% of pretax income for the year ended December 31, 2014.
•
Self-Insurance Reserves – We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities
from workers' compensation, general liability, vehicle liability, property loss, and Team Member health care benefits. With the
exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial
litigation and certain regulatory matters, we obtain third-party insurance coverage to limit our exposure for any individual workers'
compensation, general liability, vehicle liability or property loss claim. When estimating our self-insurance liabilities, we consider
34
FORM 10-K a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, and growth patterns
and exposure forecasts. The assumptions made by management as they relate to each of these factors represent our judgment as to
the most probable cumulative impact of each factor to our future obligations. Our calculation of self-insurance liabilities requires
management to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not yet reported as of
the balance sheet date and the application of alternative assumptions could result in a different estimate of these liabilities. Actual
claim activity or development may vary from our assumptions and estimates, which may result in material losses or gains. As we
obtain additional information that affects the assumptions and estimates we used to recognize liabilities for claims incurred in prior
accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on this additional information. These
liabilities are recorded at our estimate of their net present value, using a credit-adjusted discount rate. These liabilities do not have
scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We could apply alternative
assumptions regarding the timing of payments or the applicable discount rate that could result in materially different estimates of
the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves at December 31,
2014, the financial impact would have been approximately $12 million or 1.0% of pretax income for the year ended December 31,
2014.
• Legal Reserves – We maintain reserves for expenses associated with litigation for which O'Reilly is currently involved. We are
currently involved in litigation incidental to the ordinary conduct of our business. We resolved the governmental investigations and
litigation that were being conducted against CSK Auto Corporation ("CSK") and certain of CSK's former employees for alleged
conduct relating to periods prior to the 2008 acquisition date. As a result of the acquisition, we incurred legal fees and costs related
to such investigations, litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed liability in
our allocation of the purchase price of CSK. Management, with the assistance of outside legal counsel, must make estimates of
potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures. If legal
reserves were changed 10% from our estimated reserves at December 31, 2014, the financial impact would have been approximately
$2 million or 0.2% of pretax income for the year ended December 31, 2014.
• Taxes – We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve
complex issues, which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax
years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations
by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. Changes in our tax liability may
occur in the future as our assessments change based on the progress of tax examinations in various jurisdictions and/or changes in
tax regulations. In management's opinion, adequate provisions for income taxes have been made for all years presented. The estimates
of our potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated
with our various tax positions and actual results could differ from our estimates. Alternatively, we could have applied assumptions
regarding the eventual outcome of the resolution of open tax positions that could differ from our current estimates but that would
still be reasonable given the nature of a particular position. While our estimates are subject to the uncertainty noted in the preceding
discussion, our initial estimates of our potential tax liabilities have historically not been materially different from actual results except
in instances where we have reversed liabilities that were recorded for periods that were subsequently closed with the applicable
taxing authority.
INFLATION AND SEASONALITY
For the last three fiscal years, we have generally been successful 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 cost increased due to base commodity price increases industry-wide, we have typically been able
to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe 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.
QUARTERLY RESULTS
The following table sets forth certain quarterly unaudited operating data for fiscal 2014 and 2013. The unaudited quarterly information
includes all adjustments which management considers necessary for a fair presentation of the information shown. The unaudited operating
data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in
this annual report, and the other financial information included therein.
35
FORM 10-K Comparable store sales
Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Comparable store sales
Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Fiscal 2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share and comparable store sales data)
6.3%
5.1%
6.2%
6.3%
$
1,727,943
$
1,847,088
$
1,876,872
$
1,764,178
877,716
287,120
173,860
950,877
336,474
205,647
968,201
343,768
216,997
$
$
1.64
1.61
$
$
1.94
1.91
$
$
2.10
2.06
$
$
912,107
303,012
181,678
1.79
1.76
Fiscal 2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share and comparable store sales data)
0.6%
6.5%
4.6%
5.4%
$
$
$
1,585,009
798,663
251,084
154,329
1.38
1.36
$
$
$
1,714,969
871,875
296,261
177,127
1.61
1.58
$
$
$
1,728,025
879,163
300,380
186,489
1.72
1.69
$
$
$
1,621,234
819,300
255,760
152,347
1.43
1.40
(1) Earnings per share amounts are computed independently for each quarter and annual period. The quarterly earnings per share amounts may not
sum to equal the full-year earnings per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In May of 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard 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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including periods within
that reporting period, and can be adopted either retrospectively or as a cumulative effect adjustment at the date of adoption, with early
adoption not permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2017; we are in the process
of evaluating the potential future impact, if any, of ASU 2014-09 on our consolidated financial position, results of operations and cash
flows.
In August of 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic
205-40)" ("ASU 2014-15"). ASU 2014-15 will require management to assess an entity's ability to continue as a going concern for
each annual and interim reporting period and to provide related footnote disclosure in circumstances in which substantial doubt exists.
ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter,
with early application permitted. We will apply this guidance beginning with our annual period ending December 31, 2016; the
application of this guidance affects disclosure only and, therefore, it is not expected to have a material impact on our consolidated
financial condition, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to interest rate risk to the extent we borrow against our unsecured revolving credit facility (the "Revolving Credit Facility")
with variable interest rates based on either a Base Rate or Eurodollar Rate, as defined in the credit agreement governing the Revolving
Credit Facility. As of December 31, 2014, we had no outstanding borrowings under our Revolving Credit Facility.
36
FORM 10-K We had outstanding fixed rate debt of $1.40 billion and $1.40 billion as of December 31, 2014 and 2013, respectively. The fair value of
our fixed rate debt was estimated at $1.53 billion and $1.41 billion as of December 31, 2014 and 2013, respectively, which was determined
by reference to quoted market prices.
We invest certain of our excess cash balances in short-term, highly-liquid instruments with maturities of 90 days or less. We do not expect
any material losses from our invested cash balances and we believe that our interest rate exposure is minimal. As of December 31, 2014,
our cash and cash equivalents totaled $251 million.
37
FORM 10-K Item 8. Financial Statements and Supplementary Data
Index
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm: Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm: Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
39
40
41
42
43
44
45
46
38
FORM 10-K MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of O'Reilly Automotive, Inc. and Subsidiaries (the "Company"), under the supervision and with the participation of the
Company's principal executive officer and principal financial officer and effected by the Company's Board of Directors, is responsible
for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f) under
the Securities Exchange Act of 1934, as amended. The Company's internal control system is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Internal control over financial reporting includes all policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Under the supervision and with the participation of the Company's principal executive officer and principal financial officer, management
assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2014. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control – Integrated Framework (2013 framework). Based on this assessment, management believes that as of December 31, 2014, the
Company's internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company's consolidated financial statements and
has issued an attestation report on the effectiveness of the Company's internal control over financial reporting, as stated in their report
which is included herein.
/s/ Greg Henslee
Greg Henslee
President & Chief Executive Officer
February 27, 2015
/s/ Thomas McFall
Thomas McFall
Executive Vice President of Finance &
Chief Financial Officer
February 27, 2015
39
FORM 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of O'Reilly Automotive, Inc. and Subsidiaries
We have audited O'Reilly Automotive, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). O'Reilly Automotive, Inc. and Subsidiaries' management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, O'Reilly Automotive, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of O'Reilly Automotive, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014, of O'Reilly
Automotive, Inc. and Subsidiaries and our report dated February 27, 2015, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 27, 2015
40
FORM 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of O'Reilly Automotive, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of O'Reilly Automotive, Inc. and Subsidiaries as of December 31, 2014
and 2013, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
O'Reilly Automotive, Inc. and Subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), O'Reilly
Automotive, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 27, 2015, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 27, 2015
41
FORM 10-K Consolidated Balance Sheets
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts $8,713 in 2014 and $6,661 in 2013
Amounts receivable from suppliers
Inventory
Other current assets
Total current assets
Property and equipment, at cost
Less: accumulated depreciation and amortization
Net property and equipment
Notes receivable, less current portion
Goodwill
Other assets, net
Total assets
Liabilities and shareholders' equity
Current liabilities:
Accounts payable
Self-insurance reserves
Accrued payroll
Accrued benefits and withholdings
Deferred income taxes
Other current liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred income taxes
Other liabilities
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none
Common stock, $0.01 par value:
Authorized shares – 245,000,000
Issued and outstanding shares –
101,602,935 as of December 31, 2014, and
105,939,766 as of December 31, 2013
Additional paid-in capital
Retained earnings
Total shareholders' equity
$
$
$
December 31,
2014
2013
$
$
$
250,560
143,900
69,311
2,554,789
48,418
3,066,978
3,993,509
1,334,949
2,658,560
13,349
756,384
45,030
6,540,301
2,417,167
64,882
78,442
62,946
17,258
189,836
25
2,830,556
1,396,615
85,164
209,548
231,318
131,504
66,619
2,375,047
30,713
2,835,201
3,606,837
1,181,734
2,425,103
13,066
756,225
37,613
6,067,208
2,056,521
57,700
65,520
41,262
20,222
181,718
67
2,423,010
1,396,141
80,713
201,023
—
—
1,016
1,194,929
822,473
2,018,418
1,059
1,118,929
846,333
1,966,321
Total liabilities and shareholders' equity
$
6,540,301
$
6,067,208
See accompanying Notes to consolidated financial statements.
42
FORM 10-K Consolidated Statements of Income
(In thousands, except per share data)
Sales
Cost of goods sold, including warehouse and distribution expenses
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expense):
Interest expense
Interest income
Other, net
Total other expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share-basic:
Earnings per share
Weighted-average common shares outstanding – basic
Earnings per share-assuming dilution:
Earnings per share
Weighted-average common shares outstanding – assuming dilution
$
$
$
$
For the Year Ended
December 31,
2013
6,649,237
3,280,236
3,369,001
$
$
2014
7,216,081
3,507,180
3,708,901
2012
6,182,184
3,084,766
3,097,418
2,438,527
1,270,374
2,265,516
1,103,485
2,120,025
977,393
(53,290)
2,301
2,797
(48,192)
(49,074)
1,992
2,539
(44,543)
(40,200)
2,441
1,887
(35,872)
1,222,182
1,058,942
941,521
444,000
778,182
7.46
104,262
7.34
106,041
$
$
$
388,650
670,292
6.14
109,244
6.03
111,101
$
$
$
355,775
585,746
4.83
121,182
4.75
123,314
See accompanying Notes to consolidated financial statements.
43
FORM 10-K Consolidated Statements of Shareholders' Equity
(In thousands)
Common Stock
Balance at December 31, 2011
127,180
$
1,272
$ 1,110,105
$ 1,733,474
$ 2,844,851
Shares
Par Value
Additional
Paid-In
Capital
Retained
Earnings
Total
—
585,746
585,746
Net income
Issuance of common stock under employee benefit
plans, net of forfeitures and shares withheld to cover
taxes
Net issuance of common stock upon exercise of
stock options
Excess tax benefit of stock options exercised
—
124
1,860
—
—
1
19
—
Share based compensation
Share repurchases, including fees
Balance at December 31, 2012
Net income
Issuance of common stock under employee benefit
plans, net of forfeitures and shares withheld to cover
taxes
Net issuance of common stock upon exercise of
stock options
Excess tax benefit of stock options exercised
Share based compensation
Share repurchases, including fees
Balance at December 31, 2013
Net income
Issuance of common stock under employee benefit
plans, net of forfeitures and shares withheld to cover
taxes
Net issuance of common stock upon exercise of
stock options
Excess tax benefit of stock options exercised
Share based compensation
Share repurchases, including fees
Balance at December 31, 2014
9,552
54,857
38,572
—
—
—
9,553
54,876
38,572
19,996
(1,445,287)
$ 2,108,307
—
(16,201)
112,963
$
—
(162)
1,130
19,996
(149,172)
$ 1,083,910
—
(1,295,953)
$ 1,023,267
—
113
1,393
—
—
(8,529)
105,940
—
86
1,320
—
—
(5,743)
101,603
$
$
—
—
—
670,292
670,292
10,663
—
10,663
14
—
—
(85)
1,059
—
59,731
30,811
19,531
(85,717)
$ 1,118,929
—
$
—
—
—
(847,226)
846,333
778,182
59,745
30,811
19,531
(933,028)
$ 1,966,321
778,182
1
11,180
—
11,181
13
—
—
(57)
1,016
59,581
49,150
20,474
(64,385)
$ 1,194,929
$
—
—
—
(802,042)
822,473
59,594
49,150
20,474
(866,484)
$ 2,018,418
See accompanying Notes to consolidated financial statements.
44
FORM 10-K Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and intangibles
Amortization of debt discount and issuance costs
Excess tax benefit from stock options exercised
Deferred income taxes
Share-based compensation programs
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Accounts payable
Income taxes payable
Accrued payroll
Accrued benefits and withholdings
Other
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Payments received on notes receivable
Other
Net cash used in investing activities
Financing activities:
Proceeds from the issuance of long-term debt
Payment of debt issuance costs
Principal payments on capital leases
Repurchases of common stock
Excess tax benefit from stock options exercised
Net proceeds from issuance of common stock
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Supplemental disclosures of cash flow information:
Income taxes paid
Interest paid, net of capitalized interest
For the Year Ended
December 31,
2013
2012
2014
$
778,182
$
670,292
$
585,746
194,205
2,086
(49,150)
1,487
23,095
5,592
(19,271)
(179,742)
360,646
32,158
12,923
28,899
(680)
1,190,430
(429,987)
2,880
3,705
—
(423,402)
—
—
(72)
(866,484)
49,150
69,620
(747,786)
19,242
231,318
250,560
416,458
51,203
$
$
183,180
2,054
(30,811)
1,919
21,722
7,405
(16,937)
(96,876)
127,178
24,777
5,400
2,355
6,368
908,026
(395,881)
1,731
5,396
—
(388,754)
299,976
(2,967)
(224)
(933,028)
30,811
69,350
(536,082)
(16,810)
248,128
231,318
362,596
46,760
$
$
177,106
1,788
(38,631)
8,162
22,026
7,464
4,404
(276,904)
645,706
71,346
7,655
5,464
30,223
1,251,555
(300,719)
3,044
4,157
(23,889)
(317,407)
298,881
(2,376)
(935)
(1,445,287)
38,631
63,514
(1,047,572)
(113,424)
361,552
248,128
274,637
34,655
$
$
See accompanying Notes to consolidated financial statements.
45
FORM 10-K NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
O'Reilly Automotive, Inc. ("O'Reilly" or the "Company") is a specialty retailer and supplier of automotive aftermarket parts. The
Company's stores carry an extensive product line, including new and remanufactured automotive hard parts, maintenance items and
various automotive accessories. As of December 31, 2014, the Company owned and operated 4,366 stores in 43 states, servicing both
the do-it-yourself ("DIY") customer and the professional service provider. The Company's robust distribution system provides stores
with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of other auto parts
retailers.
Segment reporting:
The Company is managed and operated by a single management team reporting to the chief operating decision maker. O'Reilly stores
have similar characteristics including the nature of the products and services, the type and class of customers and the methods used to
distribute products and provide service to its customers and, as a whole, make up a single operating segment. The Company does not
prepare discrete financial information with respect to product lines, types of customers or geographic locations and as such has one
reportable segment.
Reclassification:
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.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-
company balances and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of the consolidated financial statements, in conformity with United States generally accepted accounting principles
("GAAP"), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could materially differ from those estimates.
Cash equivalents:
Cash equivalents include investments with maturities of 90 days or less on the date of purchase.
Accounts receivable:
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company's customers
to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer
creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment
terms. Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of
accounts receivable. Amounts due to the Company from its Team Members are included as a component of accounts receivable. These
amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts receivable due from Team Members was
approximately $1.0 million as of December 31, 2014 and 2013.
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Concentrations of credit
risk with respect to these receivables are limited because the Company's customer base consists of a large number of small customers,
spreading the credit risk across a broad base. The Company also controls this credit risk through credit approvals, credit limits and
accounts receivable and credit monitoring procedures. Generally, the Company does not require security when credit is granted to
customers. Credit losses are provided for in the Company's consolidated financial statements and have consistently been within
management's expectations.
Amounts receivable from suppliers:
The Company receives concessions from its suppliers through a variety of programs and arrangements, including allowances for new
stores and warranties, volume purchase rebates and co-operative advertising. Co-operative advertising allowances that are incremental
to the Company's advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction
of advertising expense in the period in which the advertising occurred. All other supplier concessions are recognized as a reduction to
the cost of sales. Amounts receivable from suppliers also includes amounts due to the Company for changeover merchandise and product
returns. The Company regularly reviews supplier receivables for collectability and assesses the need for a reserve for uncollectable
amounts based on an evaluation of the Company's suppliers' financial positions and corresponding abilities to meet financial obligations.
Management does not believe there is a reasonable likelihood that the Company will be unable to collect the amounts receivable from
46
FORM 10-K
suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as
of December 31, 2014 or 2013.
Inventory:
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market.
Inventory also includes capitalized costs related to procurement, warehousing and distribution centers ("DCs"). Cost has been determined
using the last-in, first-out ("LIFO") method, which more accurately matches costs with related revenues. Over time, as the Company's
merchandise inventory purchases have increased, the Company negotiated improved acquisition costs from its suppliers and the
corresponding price deflation exhausted the Company's LIFO reserve balance. The Company's policy is to not write up the value of its
inventory in excess of its replacement cost, and accordingly, the Company's merchandise inventory has been effectively recorded at
replacement cost since December 31, 2013. The replacement cost of inventory was $2.56 billion and $2.38 billion as of December 31,
2014 and 2013, respectively. LIFO costs exceeded replacement costs by $61.4 million and $21.6 million at December 31, 2014 and
2013, respectively.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method generally over the estimated useful
lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets.
The lease term includes renewal options determined by management at lease inception for which failure to execute renewal options would
result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is recognized in the Company's Consolidated
Statements of Income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
Notes receivable:
The Company had notes receivable from suppliers and other third parties amounting to $17.5 million and $17.2 million at December 31,
2014 and 2013, respectively. The notes receivable, which do not bear interest, are due in varying amounts through March 22, 2022. The
Company regularly reviews its notes receivable for collectability and assesses the need for a reserve for uncollectable amounts based on
an evaluation of the Company's borrowers' financial positions and corresponding abilities to meet financial obligations. Management
does not believe there is a reasonable likelihood that the Company will be unable to collect the notes receivable and the Company did
not record a reserve for uncollectable notes receivable in the consolidated financial statements as of December 31, 2014 or 2013.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at December 31, 2014 and 2013, include goodwill and other intangible assets recorded
as the result of acquisitions. The Company reviews goodwill for impairment annually during the fourth quarter, or when events or changes
in circumstances indicate the carrying value of these assets might exceed their current fair values, rather than systematically amortizing
goodwill against earnings. During 2014 and 2013, the goodwill impairment test included a quantitative assessment, which compared the
fair value of the reporting unit to its carrying amount, including goodwill. The Company operates as a single reporting unit, and the
Company determined that its fair value exceeded its carrying value, including goodwill, as of December 31, 2014 and 2013; as such, no
goodwill impairment adjustment was required as of December 31, 2014 and 2013. Finite-lived intangibles are carried at cost. Amortization
is calculated using the straight-line method, generally over the estimated useful lives of the intangibles.
Impairment of long-lived assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future
cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than
the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of
the assets exceeds the fair value of the assets. The Company has not historically recorded any material impairment to its long-lived assets
and the Company did not record an impairment to its long-lived assets during the year ended December 31, 2014 or 2013.
Valuation of investments:
The Company has an unsecured obligation to pay, in the future, the value of deferred compensation and a Company match relating to
employee participation in the Company’s nonqualified deferred compensation plan (the "Deferred Compensation Plan") (see Note 9).
The future obligation is adjusted to reflect the performance, whether positive or negative, of selected investment measurement options,
chosen by each participant. The Company invests in various marketable securities with the intention of selling these securities to fulfill
its future obligations under the Deferred Compensation Plan. The investments in this plan were stated at fair value based on quoted
market prices (see Note 2), were accounted for as trading securities and were included as a component of "Other assets, net" on the
accompanying Consolidated Balance Sheets as of December 31, 2014.
47
FORM 10-K Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for Team Member health
care benefits, workers' compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member
health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the
Company obtains third-party insurance coverage to limit its exposure. The Company estimates its self-insurance liabilities by considering
a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and
exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value, using a credit-adjusted discount
rate.
The following table identifies the components of the Company's self-insurance reserves as of December 31, 2014 and 2013 (in thousands):
Self-insurance reserves (undiscounted)
Self-insurance reserves (discounted)
December 31,
2014
2013
$
132,879
$
123,276
126,715
116,062
The current portion of the Company's discounted self-insurance reserves totaled $64.9 million and $57.7 million as of December 31,
2014 and 2013, respectively. The remainder was included within "Other liabilities" on the accompanying Consolidated Balance Sheets
as of December 31, 2014 and 2013.
Warranties:
The Company offers warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties.
The risk of loss arising from warranty claims is typically the obligation of the Company's suppliers. Certain suppliers provide upfront
allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears
the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received by the Company in lieu
of warranty obligations and estimated warranty expense are recorded as an adjustment to cost of sales. Estimated warranty costs, which
are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company's
historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the
Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual
claims. See Note 7 for further information concerning the Company's aggregate product warranty liability.
Litigation reserves:
O'Reilly is currently involved in litigation incidental to the ordinary conduct of the Company's business. The Company records reserves
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 reserves for an estimate of material legal costs to be incurred on pending litigation matters. Although the Company
cannot ascertain the total amount of liability that it may incur from any of these matters, the Company does not currently believe that in
the aggregate, taking into account applicable insurance coverage, these matters will have a material adverse effect on its consolidated
financial position, results of operations or cash flows. In addition, O'Reilly was involved in resolving legacy governmental investigations
and litigation commenced by the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") against CSK
Automotive Corporation ("CSK") and certain former CSK employees arising out of alleged conduct relating to periods prior to the
Company's acquisition of CSK in 2008; as a result, O'Reilly incurred legal fees and costs related to potential indemnification obligations.
See Note 11 for further information concerning these legal matters.
Share repurchases:
In January of 2011, the Company's Board of Directors approved a share repurchase program. Under the program, the Company may,
from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.
All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying
Consolidated Balance Sheets. See Note 8 for further information concerning the Company's share repurchase program.
Revenue recognition:
Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional service provider
customers, also referred to as "commercial sales," are recorded upon same-day delivery of the merchandise to the customer, generally at
the customer's place of business. Wholesale sales to other retailers, also referred to as "jobber sales," are recorded upon shipment of the
merchandise from a regional DC with same-day delivery to the jobber customer's location. Internet retail sales are recorded when the
merchandise is shipped or when the merchandise is picked up in a store. All sales are recorded net of estimated returns allowances,
discounts and taxes.
48
FORM 10-K Cost of goods sold and selling, general and administrative expenses:
The following table illustrates the primary costs classified in each major expense category:
Cost of goods sold, including warehouse and distribution
expenses
Total cost of merchandise sold, including:
Freight expenses associated with acquiring merchandise
and with moving merchandise inventories from the
Company's distribution centers to the stores
Defective merchandise and warranty costs
Supplier allowances and incentives, including:
Allowances that are not reimbursements for specific,
incremental and identifiable costs
Cash discounts on payments to suppliers
Costs associated with the Company's supply chain, including:
Payroll and benefit costs
Warehouse occupancy costs
Transportation costs
Depreciation
Inventory shrinkage
Selling, general and administrative expenses
Payroll and benefit costs for store and corporate Team Members
Occupancy costs of store and corporate facilities
Depreciation and amortization related to store and corporate
assets
Vehicle expenses for store delivery services
Self-insurance costs
Closed store expenses
Other administrative costs, including:
Accounting, legal and other professional services
Bad debt, banking and credit card fees
Supplies
Travel
Advertising costs
Operating leases:
The Company recognizes rent expense on a straight-line basis over the lease terms of its stores, DCs and corporate offices. Generally,
the lease term for stores and corporate offices is the base lease term and the lease term for DCs includes the base lease term plus certain
renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in a significant
economic penalty. The Company's policy is to amortize leasehold improvements associated with the Company's operating leases over
the lesser of the lease term or the estimated economic life of those assets.
Advertising expenses:
Advertising expense consists primarily of expenses related to the Company's integrated marketing program, which includes television,
radio, direct mail and newspaper distribution, in-store and online promotions, and sports and event sponsorships. The Company expenses
advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its suppliers.
Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the advertising program, specific
to the product or event and identifiable for accounting purposes, included as a component of "Selling, general and administrative
expenses" ("SG&A") on the accompanying Consolidated Statements of Income amounted to $79.0 million, $78.3 million and $74.8
million for the years ended December 31, 2014, 2013 and 2012, respectively.
Share-based compensation and benefit plans:
The Company sponsors employee share-based benefit plans and employee and director share-based compensation plans. The Company
recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the
date of the grant, award or issuance. Share-based plans include stock option awards issued under the Company's employee incentive
plans, director stock plan, stock issued through the Company's employee stock purchase plan and stock awarded to employees and directors
through other compensation plans. See Note 9 for further information concerning these plans.
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to SG&A as incurred.
Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are included as a
component of "Cost of goods sold, including warehouse and distribution expenses" on the accompanying Consolidated Statements of
Income as incurred.
Interest expense:
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates incurred
on its long-term borrowings. Total interest costs capitalized for the years ended December 31, 2014, 2013 and 2012, were $11.5 million,
$10.6 million and $6.1 million, respectively.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs including debt registration
fees, accounting and legal fees and underwriter and book runner fees. These debt issuance costs have been deferred and are being
49
FORM 10-K amortized over the term of the corresponding debt issue and the amortization expense is included as a component of "Interest expense"
in the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $9.9 million and $11.5 million, net of
accumulated amortization, as of December 31, 2014 and 2013, respectively, of which $1.6 million and $1.6 million were included within
"Other current assets" on the accompanying Consolidated Balance Sheets as of December 31, 2014 and 2013, with the remainder included
within "Other assets, net" on the accompanying Consolidated Balance Sheets as of December 31, 2014 and 2013.
The Company issued its long-term senior notes at a discount. The original issuance discount on the senior notes is recorded as a reduction
of the principal amount due for the corresponding senior notes and is accreted over the term of the applicable senior note, with the accretion
expense included as a component of “Interest expense” in the accompanying Consolidated Statements of Income. Original issuance
discounts, net of accretion, totaled $3.4 million and $3.9 million as of December 31, 2014 and 2013, respectively.
See Note 5 for further information concerning debt issuance costs and original issuance discounts associated with the issuances of or
amendments to long-term debt instruments.
Income taxes:
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on differences between the GAAP basis and tax basis of assets and liabilities using enacted
tax rules and rates currently scheduled to be in effect for the year in which the differences are expected to reverse. Tax carry forwards
are also recognized in deferred tax assets and liabilities under this method. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period of the enactment date. The Company would record a valuation allowance against deferred
tax assets to the extent it is more likely than not the amount will not be realized, based upon evidence available at the time of the
determination and any change in the valuation allowance is recorded in the period of a change in such determination. The Company did
not establish a valuation allowance for deferred tax assets as of December 31, 2014 and 2013, as it was considered more likely than not
that deferred tax assets were realizable through a combination of future taxable income, the realization of deferred tax liabilities and tax
planning strategies. The Company regularly reviews its potential tax liabilities for tax years subject to audit. The amount of such liabilities
is based on various factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with previous
tax audits and applicable tax law rulings. Changes in the Company's tax liability may occur in the future as its assessments change based
on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management's opinion, adequate
provisions for income taxes have been made for all years presented. The estimates of the Company's potential tax liabilities contain
uncertainties because management must use judgment to estimate the exposures associated with the Company's various tax positions and
actual results could differ from estimates.
Earnings per share:
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the
fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding plus, the
common stock equivalents associated with the potential impact of dilutive stock options. Certain common stock equivalents that could
potentially dilute basic earnings per share in the future were not included in the fully diluted computation because they would have been
antidilutive. Generally, stock options are antidilutive and excluded from the earnings per share calculation when the exercise price exceeds
the market price of the common shares. See Note 14 for further information concerning these common stock equivalents.
New accounting pronouncements:
In May of 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update 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.
ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including periods within that reporting period,
and can be adopted either retrospectively or as a cumulative effect adjustment at the date of adoption, with early adoption not permitted.
The Company will adopt this guidance beginning with its first quarter ending March 31, 2017; the Company is in the process of evaluating
the potential future impact, if any, of ASU 2014-09 on its consolidated financial position, results of operations and cash flows.
In August of 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)" ("ASU
2014-15"). ASU 2014-15 will require management to assess an entity's ability to continue as a going concern for each annual and interim
reporting period and to provide related footnote disclosure in circumstances in which substantial doubt exists. ASU 2014-15 is effective
for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter, with early application permitted.
The Company will apply this guidance beginning with its annual period ending December 31, 2016; the application of this guidance
affects disclosure only and, therefore, it is not expected to have a material impact on the Company's consolidated financial condition,
results of operations or cash flows.
50
FORM 10-K 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 carrying amount of the Company's marketable securities is included in "Other assets, net" on the accompanying Consolidated Balance
Sheets as of December 31, 2014 (see Note 9). The table below identifies the estimated fair value of the Company's marketable securities,
determined by reference to quoted market prices (Level 1), as of December 31, 2014 (in thousands):
Quoted Prices in Active
Markets for
Identical Instruments
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
Marketable securities
$
15,378
$
— $
— $
15,378
Non-financial assets and liabilities measured at fair value on a nonrecurring basis:
Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain
circumstances, including when there is evidence of impairment. These non-financial assets and liabilities may include assets acquired
in a business combination or property and equipment that are determined to be impaired. As of December 31, 2014 and 2013, 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 are included in "Long-term debt, less current portion" on the accompanying
Consolidated Balance Sheets as of December 31, 2014 and 2013 (see Note 5).
The table below identifies the estimated fair value of the Company's senior notes, using the market approach. The fair values of the
Company's senior notes as of December 31, 2014 and 2013, were determined by reference to quoted market prices of the same or similar
instruments (Level 2):
December 31, 2014
December 31, 2013
(in thousands)
4.875% Senior Notes due 2021 $
4.625% Senior Notes due 2021
Carrying Amount
497,876
299,650
Estimated Fair Value
566,700
$
337,222
$
3.800% Senior Notes due 2022
3.850% Senior Notes due 2023
299,109
299,980
310,749
311,656
$
Carrying Amount
497,525
299,598
299,011
299,976
$
Estimated Fair Value
524,434
$
310,141
290,453
289,362
The accompanying Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts
receivable, amounts receivable from suppliers and accounts payable. Due to the short-term nature of these financial instruments, the
Company believes that the carrying values of these instruments approximate their fair values.
51
FORM 10-K NOTE 3 – PROPERTY AND EQUIPMENT
The following table identifies the types of property and equipment included in the accompanying consolidated financial statements as of
December 31, 2014 and 2013 (in thousands, except useful lives):
Land
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Vehicles
Construction in progress
Total property and equipment
Less: accumulated depreciation and amortization
Net property and equipment
Original Useful Lives
15 – 39 years
3 – 25 years
3 – 20 years
5 – 10 years
December 31, 2014 December 31, 2013
$
457,858
527,471
$
1,418,479
523,550
1,052,846
279,874
191,289
3,993,509
1,334,949
$
2,658,560
$
1,197,369
483,578
960,928
251,505
255,599
3,606,837
1,181,734
2,425,103
The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $193.4 million, $183.2
million and $176.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The contractual terms of all original and amended vehicle capital lease agreements expired in the fourth quarter of 2013. The vehicles
under these expired capital lease agreements were either disposed, purchased by the Company or remain under short-term monthly
agreements with the original lessor. The gross value of capital lease assets included in the "Vehicles" amount of the above table was $7.0
million at December 31, 2013. As of December 31, 2013, the Company recorded accumulated amortization on these capital lease assets
in the amounts of $7.0 million, all of which was included in "accumulated depreciation and amortization" in the above table.
NOTE 4 – GOODWILL AND OTHER INTANGIBLES
Goodwill:
Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in business conditions
indicate that impairment may exist. Goodwill is not amortizable for financial statement purposes. During the year ended December 31,
2014, the Company recorded an increase in goodwill of $0.2 million, resulting from adjustments to purchase price allocations related to
small acquisitions. During the year ended December 31, 2013, the Company recorded a decrease in goodwill of $2.2 million, resulting
from adjustments to purchase price allocations related to small acquisitions. The Company did not record any goodwill impairment
during the years ended December 31, 2014 or 2013.
The following table identifies the changes in goodwill for the years ended December 31, 2014 and 2013 (in thousands):
Balance at December 31, 2012
Activity
Balance at December 31, 2013
Activity
Balance at December 31, 2014
$
$
758,410
(2,185)
756,225
159
756,384
As of December 31, 2014 and 2013, other than goodwill, the Company did not have any other indefinite lived intangible assets.
52
FORM 10-K Intangibles other than goodwill:
The following table identifies the components of the Company's amortizable intangibles as of December 31, 2014 and 2013 (in thousands):
Cost of Amortizable
Intangibles
Accumulated Amortization
(Expense) Benefit
Net Amortizable Intangibles
December 31,
2014
December 31,
2013
December 31,
2014
December 31,
2013
December 31,
2014
December 31,
2013
Amortizable intangible assets:
Favorable leases
Non-compete agreements
Total amortizable intangible
assets
Unfavorable leases
$
$
$
49,780
617
50,397
49,200
$
$
$
50,910
647
51,557
49,380
$
$
$
(35,145) $
(344)
(32,463) $
(428)
14,635
273
(35,489) $
(32,891) $
14,908
40,263
$
36,758
$
8,937
$
$
$
18,447
219
18,666
12,622
The Company recorded favorable lease assets in conjunction with the acquisition of CSK; these favorable lease assets represent the values
of operating leases acquired with favorable terms. These favorable leases had an estimated weighted-average remaining useful life of
approximately 9.4 years as of December 31, 2014. For the years ended December 31, 2014, 2013 and 2012, the Company recorded
amortization expense of $3.9 million, $4.0 million and $4.7 million, respectively, related to its amortizable intangible assets, which are
included in "Other assets, net" on the accompanying Consolidated Balance Sheets.
The Company recorded unfavorable lease liabilities in conjunction with the acquisition of CSK; these unfavorable lease liabilities represent
the values of operating leases acquired with unfavorable terms. These unfavorable leases had an estimated weighted-average remaining
useful life of approximately 4.5 years as of December 31, 2014. For the years ended December 31, 2014, 2013 and 2012, the Company
recognized an amortized benefit of $3.7 million, $4.5 million and $5.7 million, respectively, related to these unfavorable operating leases,
which are included in "Other liabilities" on the accompanying Consolidated Balance Sheets.
The following table identifies the estimated amortization expense and benefit of the Company's intangibles for each of the next five years
as of December 31, 2014 (in thousands):
Amortization Expense
Amortization Benefit
Total Amortization (Expense) Benefit
2015
2016
2017
2018
2019
Total
$
$
NOTE 5 – FINANCING
(2,656) $
(2,301)
(1,885)
(1,422)
(1,200)
(9,464) $
2,772
$
2,055
1,493
923
712
7,955
$
116
(246)
(392)
(499)
(488)
(1,509)
The following table identifies the balances of the Company's financing facilities as of December 31, 2014 and 2013 (in thousands):
Revolving Credit Facility
4.875% Senior Notes due 2021 (1), effective interest rate of 4.966%
4.625% Senior Notes due 2021 (2), effective interest rate of 4.648%
3.800% Senior Notes due 2022 (3), effective interest rate of 3.845%
3.850% Senior Notes due 2023 (4), effective interest rate of 3.851%
December 31,
2014
2013
$
$
—
$
497,876
299,650
299,109
299,980
$
—
497,525
299,598
299,011
299,976
(1) Net of unamortized discount of $2.1 million and $2.5 million as of December 31, 2014 and 2013, respectively.
(2) Net of unamortized discount of $0.4 million as of December 31, 2014 and 2013.
(3) Net of unamortized discount of $0.9 million and $1.0 million as of December 31, 2014 and 2013, respectively.
(4) Net of unamortized discount of less than $0.1 million as of December 31, 2014 and 2013.
53
FORM 10-K As of December 31, 2014, the Company had no principal maturities of its financing facilities scheduled within the next five years and
$1.4 billion scheduled thereafter.
Unsecured revolving credit facility:
On January 14, 2011, the Company entered into a credit agreement, as amended by Amendment No. 1 dated as of September 9, 2011,
and as further amended by Amendment No. 2 dated as of July 2, 2013 (the "Credit Agreement"). The Credit Agreement provides for a
$600 million unsecured revolving credit facility (the "Revolving Credit Facility") arranged by Bank of America, N.A., which is scheduled
to mature in July of 2018. 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 $200 million. As of December 31, 2014 and 2013, the Company had outstanding letters of credit,
primarily to support obligations related to workers' compensation, general liability and other insurance policies, in the amount of $47.9
million and $51.7 million, respectively, reducing the aggregate availability under the Revolving Credit Facility by those amounts. As of
December 31, 2014 and 2013, the Company had no outstanding borrowings under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company's option, at the Base Rate or
Eurodollar Rate (both as defined in the Credit Agreement) plus an applicable margin. Swing line loans made under the Revolving Credit
Facility bear interest at the Base Rate plus the applicable margin for Base Rate loans. In addition, the Company pays a facility fee on
the aggregate amount of the commitments 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 ("S&P"), subject to limited exceptions. Based upon the Company's credit ratings at December 31, 2014, its margin for
Base Rate loans was 0.000%, its margin for Eurodollar Rate loans was 0.975% and its facility fee was 0.150%. On January 26, 2015,
S&P raised the Company's rating, which moved the Company's Revolving Credit Facility applicable rate to the tier one pricing level,
thus reducing the facility fee and interest rate margins on borrowings on Eurodollar Rate loans. Based upon the Company's improved
credit rating, its current margin for Base Rate loans is 0.000%, its margin for Eurodollar Rate loans is 0.875% and its facility fee is
0.125%.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage
ratio of 2.25 times from March 31, 2013, through December 31, 2014, and 2.50 times thereafter through maturity, and a maximum
consolidated leverage ratio of 3.00 times through maturity. 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, six-times rent expense and excludes any premium or
discount recorded in conjunction with the issuance of long-term debt. In the event that the Company 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 lenders. As of December 31, 2014, the Company remained in compliance with all covenants under the Credit Agreement.
Senior notes:
The Company has issued $1.4 billion aggregate principal amount of unsecured senior notes due between 2021 and 2023 with United
Missouri Bank, N.A. as trustee. Interest on the unsecured notes of 3.800% to 4.875% is payable biannually and is computed on the basis
of a 360-day year.
The senior notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries ("Subsidiary Guarantors") that incurs
or guarantees obligations under the Company's Credit Agreement or under other credit facility or capital markets debt of the Company's
or any of the Company's Subsidiary Guarantors. The guarantees are joint and several and full and unconditional, subject to certain
customary automatic release provisions, including release of the Subsidiary Guarantor's guarantee under the Company's Credit Agreement
and certain other debt, or, in certain circumstances, the sale or other disposition of a majority of the voting power of the capital interest
in, or of all or substantially all of the property of, the Subsidiary Guarantor. Each of the Subsidiary Guarantors is 100% owned, directly
or indirectly, by the Company and the Company has no independent assets or operations other than those of its subsidiaries. The only
direct or indirect subsidiaries of the Company that would not be Subsidiary Guarantors would be minor subsidiaries. Neither the Company,
nor any of its Subsidiary Guarantors, is subject to any material or significant restrictions on the Company's ability to obtain funds from
its subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by applicable law. Each of the senior
notes is subject to certain customary covenants, with which the Company complied as of December 31, 2014.
54
FORM 10-K NOTE 6 – LEASING
The following table identifies the future minimum lease payments under all of the Company's operating and capital leases for each of
the next five years and in the aggregate as of December 31, 2014 (in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
Operating Leases
Related Parties
Non-Related
Parties
Capital Leases
Non-Related
Parties
$
$
4,621
$
247,477
$
4,659
4,526
4,318
2,756
234,267
216,739
191,781
169,271
8,917
29,797
$
932,179
1,991,714
$
25
—
—
—
—
—
25
$
$
Total
252,123
238,926
221,265
196,099
172,027
941,096
2,021,536
Capital lease agreements:
The Company assumed certain building capital leases in the acquisition of CSK. The only remaining building capital lease agreement
will expire on April 30, 2015. The present value of future minimum lease payments under this building capital lease at December 31,
2014 and 2013, was less than $0.1 million and was classified as long-term debt in the accompanying Consolidated Balance Sheets. The
Company did not acquire any additional buildings under capital leases during the years ended December 31, 2014 or 2013.
Operating lease commitments:
The Company leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most
of these leases include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or
incremental step increase provisions.
The future minimum lease payments under the Company's operating leases, in the table above, do not include potential amounts for
percentage rent or other operating lease related costs and have not been reduced by expected future minimum sublease income. Expected
future minimum sublease income under non-cancelable subleases is approximately $15.3 million at December 31, 2014.
The following table summarizes the net rent expense amounts for the years ended December 31, 2014, 2013 and 2012:
Minimum operating lease expense
Contingent rents
Other lease related occupancy costs
Total rent expense
Less: sublease income
Net rent expense
$
$
2014
For the Year Ended
December 31,
2013
2012
254,565
$
247,039
$
759
11,688
267,012
3,984
701
11,257
258,997
4,105
263,028
$
254,892
$
234,113
744
10,043
244,900
4,031
240,869
See Note 12 for further information on the Company's related party operating leases.
55
FORM 10-K NOTE 7 – WARRANTIES
The Company's product warranty liabilities are included in "Other current liabilities" on the accompanying Consolidated Balance Sheets
as of December 31, 2014 and 2013. The following table identifies the changes in the Company's aggregate product warranty liabilities
for the years ended December 31, 2014 and 2013 (in thousands):
Balance at January 1,
Warranty claims
Warranty accruals
Balance at December 31,
NOTE 8 – SHARE REPURCHASE PROGRAM
2014
2013
$
$
$
33,386
(52,297)
53,137
34,226
$
28,001
(50,859)
56,244
33,386
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,
for a three-year period. The Company and its 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 February 5, 2014, August 13, 2014, and February 4, 2015,
the Company's Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase
program by an additional $500 million, resulting in a cumulative authorization amount of $5.0 billion. Each additional $500 million
authorization is effective for a three-year period beginning on their 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 (in thousands, except per share data):
Shares repurchased
Average price per share
Total investment
For the Year Ended
December 31,
2014
2013
$
$
5,743
150.86
866,398
$
$
8,529
109.38
932,900
As of December 31, 2014, the Company had $279.3 million remaining under its share repurchase program. Subsequent to the end of the
year and through February 27, 2015, the Company repurchased an additional 0.1 million shares of our common stock under our share
repurchase program, at an average price of $197.48, for a total investment of $27.8 million. The Company has repurchased a total of
46.5 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and
through February 27, 2015, at an average price of $91.38 for a total aggregate investment of $4.2 billion. As of February 27, 2015, the
Company had approximately $751.5 million remaining under its share repurchase program.
NOTE 9 – 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, performance incentive plan and director
stock plan, stock issued through the Company's employee stock purchase plan and stock awarded to employees through other benefit
programs.
56
FORM 10-K The table below identifies the shares that have been authorized for issuance and the shares available for future issuance under the Company
plans, as of December 31, 2014 (in thousands):
Plans
Employee Incentive Plans
Director Stock Plan
Performance Incentive Plan
Employee Stock Purchase Plans
Profit Sharing and Savings Plan
Total Shares Authorized for Issuance
under the Plans
Shares Available for Future
Issuance under the Plans
34,000
1,000
650
4,250
4,200
6,552
263
373
824
349
Stock options:
The Company's employee incentive plans provide for the granting of stock options for the purchase of common stock of the Company
to certain key employees of the Company. Employee stock options are granted at an exercise price that is equal to the closing market
price of the Company's common stock on the date of the grant. Employee stock options granted under the plans expire after 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, adjusted for estimated forfeitures, evenly over the minimum required service period.
The table below identifies the employee stock option activity under these plans during the year ended December 31, 2014:
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2014
Vested or expected to vest at December 31, 2014
Exercisable at December 31, 2014
Shares
(in thousands)
5,177
392
(1,310)
(234)
4,025
3,879
2,617
Weighted-
Average Exercise
Price
Average
Remaining
Contractual Terms
(in years)
Aggregate
Intrinsic Value
(in thousands)
$
$
$
$
54.28
150.82
45.26
85.25
64.82
63.61
43.60
5.8
5.7
4.6
$
$
$
514,443
500,413
389,953
The Company's director stock plan provides for the granting of stock options for the purchase of common stock of the Company to
directors of the Company. Director stock options are granted at an exercise price that is equal to the closing market price of the Company's
common stock on the date of the grant. Director stock options granted under the plans expire after seven years and vest fully after six
months. The Company records compensation expense for the grant date fair value of the option awards evenly over the vesting period.
The table below identifies the director stock option activity under this plan during the year ended December 31, 2014:
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2014
Vested or expected to vest at December 31, 2014
Exercisable at December 31, 2014
Shares
(in thousands)
50
—
(10)
—
40
40
40
Weighted-
Average Exercise
Price
Average
Remaining
Contractual Terms
(in years)
Aggregate
Intrinsic Value
(in thousands)
$
$
$
$
37.37
—
30.08
—
39.19
39.19
39.19
1.6
1.6
1.6
$
$
$
6,137
6,137
6,137
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.
57
FORM 10-K • 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 has historically fluctuated.
• Expected dividend yield – The Company has not paid, nor does it have plans in the foreseeable future to pay, any dividends.
The table below identifies the weighted-average assumptions used for grants awarded during the years ended December 31, 2014, 2013
and 2012:
Risk free interest rate
Expected life
Expected volatility
Expected dividend yield
2014
1.60%
December 31,
2013
0.96%
2012
0.59%
5.3 Years
5.0 Years
3.9 Years
24.3%
—%
31.0%
—%
33.5%
—%
The Company's forfeiture rate is the estimated percentage of options awarded that are expected to be forfeited or canceled prior to
becoming fully vested. The Company's estimate is evaluated periodically, and is based upon historical experience at the time of evaluation
and reduces expense ratably over the vesting period or the minimum required service period.
The following table summarizes activity related to stock options awarded by the Company for the years ended December 31, 2014, 2013
and 2012:
Compensation expense for stock options awarded (in millions)
Income tax benefit from compensation expense related to stock options (in
millions)
Total intrinsic value of stock options exercised (in millions)
Cash received from exercise of stock options (in millions)
Weighted-average grant-date fair value of options awarded
Weighted-average remaining contractual life of exercisable options (in years)
For the Year Ended
December 31,
2014
2013
2012
$
$
18.7
$
17.8
$
6.9
147.2
59.6
38.18
4.56
$
6.8
95.8
59.7
29.98
4.77
$
18.5
7.1
113.6
54.9
23.57
5.13
The remaining unrecognized compensation expense related to unvested stock option awards at December 31, 2014, was $28.3 million
and the weighted-average period of time over which this cost will be recognized is 2.4 years.
Restricted stock:
The Company's performance incentive plan provides for the award of shares of restricted stock to its corporate and senior management
that vest evenly over a three-year period and are held in escrow until such vesting has occurred. Generally, unvested shares are forfeited
when an employee ceases employment. The fair value of shares awarded under this plan is based on the closing market price of the
Company's common stock on the date of award and compensation expense is recorded over the minimum required service period.
The table below identifies the employee restricted stock activity under this plan during the year ended December 31, 2014:
Non-vested at December 31, 2013
Granted during the period
Vested during the period (1)
Forfeited during the period
Non-vested at December 31, 2014
Shares
(in thousands)
Weighted-Average Grant-Date
Fair Value
20
$
13
(16)
(1)
16
$
92.02
147.58
103.09
121.85
123.68
(1)
Includes 7 thousand shares withheld to cover employees' taxes upon vesting.
The Company's director stock plan provides for the award of shares of restricted stock that vest evenly over a three-year period and are
held in escrow until such vesting has occurred. Unvested shares are forfeited when a director ceases their service on the Company's
58
FORM 10-K Board of Directors for reasons other than death or retirement. The fair value of shares awarded under this plan is based on the closing
market price of the Company's common stock on the date of award and compensation expense is recorded evenly over the vesting period.
The table below identifies the director restricted stock activity under this plan during the year ended December 31, 2014:
Non-vested at December 31, 2013
Granted during the period
Vested during the period
Forfeited during the period
Non-vested at December 31, 2014
Shares
(in thousands)
Weighted-Average Grant-Date
Fair Value
$
11
3
(6)
—
8
$
94.18
146.05
84.12
—
124.44
The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2014,
2013 and 2012:
Compensation expense for restricted shares awarded (in millions)
Income tax benefit from compensation expense related to restricted shares (in
millions)
Total fair value of restricted shares at vest date (in millions)
Shares awarded under the plans (in thousands)
Average grant-date fair value of shares awarded under the plans
For the Year Ended
December 31,
2014
2013
2012
$
$
$
$
2.6
1.0
3.7
16.4
147.23
$
$
$
$
2.2
0.8
3.3
21.2
102.63
$
$
$
$
2.0
0.8
2.7
23.7
90.10
The remaining unrecognized compensation expense related to unvested restricted share awards at December 31, 2014, was $2.0 million
and the weighted-average period of time over which this cost will be recognized is 2.1 years.
Employee stock purchase plan:
The Company's employee stock purchase plan (the "ESPP") permits eligible employees to purchase shares of the Company's common
stock at 85% of the fair market value. Employees may authorize the Company to withhold up to 5% of their annual salary to participate
in the plan. The fair value of shares issued under the ESPP is based on the average of the high and low market prices of the Company's
common stock during the offering periods. Compensation expense is recognized based on the discount between the grant-date fair value
and the employee purchase price for the shares sold to employees.
The following table summarizes activity related to the Company's ESPP for the years ended December 31, 2014, 2013 and 2012:
Compensation expense for shares issued under the ESPP (in millions)
Income tax benefit from compensation expense for shares issued under the ESPP
(in millions)
Shares issued under the ESPP (in thousands)
Weighted-average price of shares issued under the ESPP
For the Year Ended
December 31,
2014
2013
2012
$
$
$
1.8
0.7
77.0
130.12
$
$
$
1.7
0.6
100.6
95.51
$
$
$
1.5
0.6
114.6
75.42
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 at least six months 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. Beginning
in 2014, an employee must be employed on December 31 to receive that year's Company matching contribution, with the matching
contribution funded annually in the January following the year in which the matching contribution was earned. The Company may also
make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The
Company did not make any discretionary contributions to the 401(k) Plan during the years ended December 31, 2014, 2013 or 2012. The
Company expensed matching contributions under the 401(k) Plan in the amounts of $16.8 million, $16.5 million and $15.6 million for
the years ended December 31, 2014, 2013 and 2012, respectively.
59
FORM 10-K 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 compensation, including salary and
incentive based compensation that would have been covered under the 401(k) Plan, which are then matched by the Company using the
same formula as the 401(k) Plan. Beginning in 2014, an employee must be employed on December 31 to receive that year's Company
matching contribution, with the matching contribution funded annually in the January 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 $15.4 million as of December 31, 2014, and
was included within "Other liabilities" on the Consolidated Balance Sheet. The Company expensed matching contributions under the
Deferred Compensation Plan in the amounts of $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2014, 2013
and 2012, respectively.
NOTE 10 – COMMITMENTS
Construction commitments:
As of December 31, 2014, the Company had construction commitments in the amount of $65.9 million.
Letter of credit commitments:
As of December 31, 2014, the Company had outstanding letters of credit, primarily to satisfy workers' compensation, general liability
and other insurance policies, in the amount of $47.9 million (see Note 5).
Debt financing commitments:
The Company's senior notes are redeemable in whole, at any time, or in part, from time to time, at the Company's option upon not less
than 30 nor more than 60 days' notice at a redemption price, plus any accrued and unpaid interest to, but not including the redemption
date, equal to the greater of (i) 100% of the principal amount thereof or (ii) the sum of the present value of the remaining scheduled
payments of principal and interest thereon discounted to the redemption date on a semiannual basis at the applicable Treasury Yield plus
basis points identified in the indentures governing the notes. In addition, if at any time the Company undergoes a Change of Control
Triggering Event (as defined in the indentures governing the notes), the holders may require the Company to repurchase all or a portion
of their senior notes at a price equal to 101% of the principal amount of the notes being repurchased, plus accrued and unpaid interest,
if any, to but not including the repurchase date (see Note 5).
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for Team Member
health care benefits, workers' compensation, vehicle liability, general liability and property loss. With the exception of certain Team
Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory
matters, the Company obtains third-party insurance coverage to limit its exposure to this obligation.
NOTE 11 – LEGAL MATTERS
O'Reilly is currently involved in litigation incidental to the ordinary conduct of the Company's business. The Company records reserves
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 reserves 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 reserves, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows in a particular quarter or annual period.
The Company received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial
offices in the state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste.
Management has an ongoing and open dialogue with these agencies regarding this matter and is cooperating fully with the request;
however, at this time a prediction of the ultimate outcome of these efforts cannot be determined.
In addition, O'Reilly was involved in resolving governmental investigations that were being conducted against CSK and CSK's former
officers and other litigation, prior to its acquisition by O'Reilly, as described below. As previously reported all governmental investigations
and litigation related to these CSK legacy issues, both civil and criminal, have concluded. However, under Delaware law, the charter
documents of the CSK entities, and certain indemnification agreements, CSK may have certain indemnification obligations. As a result
of the CSK acquisition, O'Reilly has incurred legal fees and costs related to these potential indemnification obligations arising from the
60
FORM 10-K litigation commenced by the Department of Justice and SEC against CSK's former employees. Whether those legal fees and costs are
covered by CSK's insurance is subject to uncertainty, and, given its complexity and scope, the final outcome cannot be predicted at this
time. O'Reilly has a remaining reserve, with respect to the indemnification obligations of $11.6 million at December 31, 2014, which
relates to the payment of those legal fees and costs already incurred. It is possible that in a particular quarter or annual period the
Company's results of operations and cash flows could be materially affected by resolution of such matter, depending, in part, upon the
results of operations or cash flows for such period. However, at this time, management believes that the ultimate outcome of this matter,
after consideration of applicable reserves, should not have a material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
NOTE 12 – RELATED PARTIES
The Company leases certain land and buildings related to 77 of its O'Reilly Auto Parts stores and one of its bulk facilities under fifteen-
or twenty-year operating lease agreements with entities in which certain of the Company's affiliated directors, members of an affiliated
director's immediate family or certain of the Company's executive officers, are affiliated. Generally, these lease agreements provide for
renewal options for an additional five years at the option of the Company and the lease agreements are periodically modified to further
extend the lease term for specific stores under the agreements. Lease payments under these operating leases totaled $4.6 million, $4.4
million and $4.4 million during the years ended December 31, 2014, 2013 and 2012, respectively. The Company believes that the lease
agreements with the affiliated entities are on terms comparable to those obtainable from third parties. See Note 6 for further information
on the Company's operating leases.
NOTE 13 – INCOME TAXES
Deferred income tax assets and liabilities:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.
61
FORM 10-K The following table identifies significant components of the Company's deferred tax assets and liabilities as of December 31, 2014 and
2013 (in thousands):
Deferred tax assets:
Current:
Allowance for doubtful accounts
Tax credits
Other accruals
Total current deferred tax assets
Noncurrent:
Tax credits
Net operating losses
Other accruals
Other
Total noncurrent deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Current:
Inventories
Total current deferred tax liabilities
Noncurrent:
Property and equipment
Other
Total noncurrent deferred tax liabilities
Total deferred tax liabilities
Net deferred tax liabilities
December 31,
2014
2013
$
$
2,357
3,250
67,468
73,075
11,475
746
63,968
16,468
92,657
1,997
1,636
61,100
64,733
5,333
1,180
59,176
16,181
81,870
165,732
146,603
90,333
90,333
84,955
84,955
139,604
38,217
177,821
268,154
(102,422) $
131,851
30,732
162,583
247,538
(100,935)
$
The following table reconciles the above net deferred tax assets (liabilities) as presented on the accompanying Consolidated Balance
Sheets as of December 31, 2014 and 2013 (in thousands):
Deferred tax assets - current
Deferred tax liabilities - current
Deferred tax liabilities - current
Deferred tax assets - noncurrent
Deferred tax liabilities - noncurrent
Deferred tax liabilities - noncurrent
December 31,
2014
2013
$
$
73,075
(90,333)
(17,258)
64,733
(84,955)
(20,222)
92,657
(177,821)
(85,164)
81,870
(162,583)
(80,713)
Net deferred tax liabilities
$
(102,422) $
(100,935)
62
FORM 10-K Provision for income taxes:
The following table reconciles the “Provision for income taxes" included in the accompanying Consolidated Statements of Income for
the years ended December 31, 2014, 2013 and 2012 (in thousands):
2014
Federal
State
2013
Federal
State
2012
Federal
State
Current
Deferred
Total
$
$
$
$
$
$
399,271
43,242
442,513
348,303
38,428
386,731
311,631
35,982
347,613
$
$
$
$
$
$
5,987
(4,500)
1,487
847
1,072
1,919
10,030
(1,868)
8,162
$
$
$
$
$
$
405,258
38,742
444,000
349,150
39,500
388,650
321,661
34,114
355,775
The following table outlines the reconciliation of the “Provision for income taxes" amounts included in the accompanying Consolidated
Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2014, 2013 and 2012 (in
thousands):
Federal income taxes at statutory rate
State income taxes, net of federal tax benefit
Other items, net
Total provision for income taxes
For the Year Ended
December 31,
2013
2014
$
$
427,764
25,320
(9,084)
444,000
$
$
370,632
26,802
(8,784)
388,650
$
$
2012
329,532
22,426
3,817
355,775
The excess tax benefit associated with the exercise of non-qualified stock options has been included within “Additional paid-in capital"
on the accompanying consolidated financial statements.
As of December 31, 2014, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, of $14.7
million. As of December 31, 2014, the Company had net operating loss carryforwards available for state purposes of $19.7 million. The
Company's state net operating loss carryforwards generally expire in years ranging from 2022 to 2028, and the Company's tax credits
generally expire in 2024.
CSK had net operating losses in various years dating back to the tax year 1993. For CSK, the statute of limitation for a particular tax
year for examination by the IRS is three years subsequent to the last year in which the loss carryover is finally used. The IRS completed
an examination of the CSK consolidated federal tax return for the fiscal years ended January 30, 2005, January 29, 2006, February 4,
2007 and February 2, 2008. The statute of limitation for a particular tax year for examination by various states is generally three to four
years subsequent to the last year in which the loss carryover is finally used.
63
FORM 10-K Unrecognized tax benefits:
The following table summarizes the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the
years ended December 31, 2014, 2013 and 2012 (in thousands):
Balance as of January 1,
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Payments related to items settled with taxing authorities
Reductions due to the lapse of statute of limitations and settlements
Balance as of December 31,
For the Year Ended
December 31,
2014
2013
2012
$
50,459
$
51,004
$
4,665
—
(300)
(5,226)
49,598
$
7,046
—
(1,056)
(6,535)
50,459
$
$
45,800
8,100
1,301
(451)
(3,746)
51,004
For the years ended December 31, 2014, 2013 and 2012, the Company recorded a reserve for unrecognized tax benefits (including interest
and penalties) of $58.4 million, $58.6 million and $59.3 million, respectively. All of the unrecognized tax benefits recorded as of
December 31, 2014, would affect the Company's effective tax rate if recognized, generally net of the federal tax effect of approximately
$16.8 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of the years
ended December 31, 2014, 2013 and 2012, the Company had accrued approximately $8.8 million, $8.1 million and $8.3 million,
respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for interest on state and federal
returns. During the years ended December 31, 2014, 2013 and 2012, the Company recorded tax expense related to an increase in its
liability for interest and penalties of $2.8 million, $2.1 million and $2.6 million, respectively. Although unrecognized tax benefits for
individual tax positions may increase or decrease during 2015, the Company expects a reduction of $17.0 million of unrecognized tax
benefits during the one-year period subsequent to December 31, 2014, resulting from settlement or expiration of the statute of limitations.
The Company's United States federal income tax returns for tax years 2012 and beyond remain subject to examination by the Internal
Revenue Service (“IRS"). The IRS concluded an examination of the O'Reilly consolidated 2011 federal income tax return in the second
quarter of 2014. The statute of limitations for the Company's federal income tax returns for tax years 2010 and prior expired on
September 15, 2014. The statute of limitations for the Company's U.S. federal income tax return for 2011 will expire on September 15,
2015, unless otherwise extended. The IRS is currently conducting an examination of the Company's consolidated returns for the tax year
2012 and 2013. The Company's state income tax returns remain subject to examination by various state authorities for tax years ranging
from 2003 through 2013.
64
FORM 10-K NOTE 14 – EARNINGS PER SHARE
The following table reconciles the numerator and denominator used in the basic and diluted earnings per share calculations for the years
ended December 31, 2014, 2013 and 2012 (in thousands, except per share data):
Numerator (basic and diluted):
Net income
Denominator:
For the Year Ended
December 31,
2014
2013
2012
$
778,182
$
670,292
$
585,746
Denominator for basic earnings per share - weighted-average shares
Effect of stock options (1)
Denominator for diluted earnings per share - weighted-average shares
104,262
1,779
106,041
109,244
1,857
111,101
121,182
2,132
123,314
Earnings per share:
Earnings per share-basic
Earnings per share-assuming dilution
$
$
7.46
7.34
$
$
6.14
6.03
$
$
4.83
4.75
Antidilutive potential common shares not included in the calculation of
diluted earnings per share:
Stock options (1)
Weighted-average exercise price per share of antidilutive stock options (1)
363
498
$
151.65
$
103.80
$
1,816
87.88
(1) See Note 9 for further discussion on the terms of the Company's share-based compensation plans.
Subsequent to the end of the year and through February 27, 2015, the Company repurchased 0.1 million shares of its common stock, at
an average price of $197.48, for a total investment of $27.8 million.
NOTE 15 – QUARTERLY RESULTS (Unaudited)
The following table sets forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2014 and 2013. The
unaudited quarterly information includes all adjustments, which the Company considers necessary for a fair presentation of the information
shown:
Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Fiscal 2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
$ 1,727,943
$ 1,847,088
$
1,876,872
$
1,764,178
877,716
287,120
173,860
950,877
336,474
205,647
968,201
343,768
216,997
$
$
1.64
1.61
$
$
1.94
1.91
$
$
2.10
2.06
$
$
912,107
303,012
181,678
1.79
1.76
65
FORM 10-K Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Fiscal 2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
$ 1,585,009
$ 1,714,969
$ 1,728,025
$ 1,621,234
798,663
251,084
154,329
871,875
296,261
177,127
879,163
300,380
186,489
$
$
1.38
1.36
$
$
1.61
1.58
$
$
1.72
1.69
$
$
819,300
255,760
152,347
1.43
1.40
(1) Earnings per share amounts are computed independently for each quarter and annual period. The quarterly earnings per share amounts may not
sum to equal the full-year earnings per share.
The unaudited operating data presented above should be read in conjunction with the Company's consolidated financial statements and
related notes, and the other financial information included therein.
66
FORM 10-K Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the management of O'Reilly Automotive, Inc. and Subsidiaries (the "Company"), under
the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(b) and as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and procedures as of the end of the period covered by this
report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company (including
its consolidated subsidiaries) in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms and is accumulated and communicated to management,
including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended December 31, 2014,
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company, under the supervision and with the participation of the Company's principal executive officer and
principal financial officer and effected by the Company's Board of Directors, is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f) under the Exchange Act. The Company's internal
control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting includes all policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Under the supervision and with the participation of the Company's principal executive officer and principal financial officer, management
assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2014. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control
– Integrated Framework (2013 framework). Based on this assessment, management believes that as of December 31, 2014, the Company's
internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company's consolidated financial statements and
has issued an attestation report on the effectiveness of the Company's internal control over financial reporting, which is included in Item
8.
Item 9B. Other Information
Not Applicable.
67
FORM 10-K Item 10. Directors, Executive Officers and Corporate Governance
PART III
Certain information required by Part III is incorporated by reference from O'Reilly Automotive, Inc. and Subsidiaries' (the "Company")
Proxy Statement on Schedule 14A for the 2015 Annual Meeting of Shareholders ("Proxy Statement"), which will be filed with the
Securities and Exchange Commission (the "SEC") within 120 days of the end of the Company's most recent fiscal year. Except for those
portions specifically incorporated in this Annual Report on Form 10-K by reference to the Company's Proxy Statement, no other portions
of the Proxy Statement are deemed to be filed as part of this Annual Report on Form 10-K.
Directors and Officers:
The information regarding the directors of the Company will be included in the Company's Proxy Statement under the caption "Proposal
1- Election of Directors" and "Information Concerning the Board of Directors" and is incorporated herein by reference. The Proxy
Statement will be filed with the SEC within 120 days of the end of the Company's most recent fiscal year. The information regarding
executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form
10-K, for the Company's executive officers who are not also directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"):
The information regarding compliance with Section 16(a) of the Exchange Act required by Item 405 of Regulation S-K, will be included
in the Company's Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference.
Code of Ethics:
The Company's Board of Directors has adopted a code of ethics that applies to all of its directors, officers (including its chief executive
officer, chief operating officer, chief financial officer, chief accounting officer, controller and any person performing similar functions)
and Team Members. The Company's Code of Ethics is available on its website at www.oreillyauto.com, under the "Corporate Home"
caption. The information on the Company's website is not a part of this Annual Report on Form 10-K and is not incorporated by reference
in this report or any of the Company's other filings with the SEC.
Corporate Governance:
The Corporate Governance/Nominating Committee of the Board of Directors does not have a written policy on the consideration of
Director candidates recommended by shareholders. It is the view of the Board of Directors that all candidates, whether recommended
by a shareholder or the Corporate Governance/Nominating Committee, shall be evaluated based on the same established criteria for
persons to be nominated for election to the Board of Directors and its committees.
The Board of Directors has established an Audit Committee pursuant to Section 3(a)(58)(A) of the Exchange Act. The Audit Committee
currently consists of Jay D. Burchfield, Thomas T. Hendrickson, Paul R. Lederer, John Murphy and Ronald Rashkow, each an independent
director in accordance with The Nasdaq Stock Market Marketplace Rule 5605(a)(2), the standards of Rule 10A-3 of the Exchange Act
and the requirements of The Nasdaq Stock Market Marketplace Rule 5605(c)(2). In addition, our Board of Directors has determined that
Mr. Murphy, Chairman of the Audit Committee, qualifies as an audit committee financial expert under Item 407(d)(5) of Regulation S-
K.
Item 11. Executive Compensation
Director and Officer compensation:
The information required by Item 402 of Regulation S-K will be included in the Company's Proxy Statement under the captions
"Compensation of Executive Officers" and "Director Compensation" and is incorporated herein by reference.
Compensation Committee:
The information required by Item 407(e)(4) and (e)(5) of Regulation S-K will be included in the Company's Proxy Statement under the
captions "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 201(d) of Regulation S-K will be included in the Company's Proxy Statement under the caption "Equity
Compensation Plans" and is incorporated herein by reference.
The information required by Item 403 of Regulation S-K will be included in the Company's Proxy Statement under the captions "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Management" and is incorporated herein by reference.
68
FORM 10-K Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 404 of Regulation S-K will be included in the Company's Proxy Statement under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
The information required by Item 407(a) of Regulation S-K will be included in the Company's Proxy Statement under the caption "Director
Independence" and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A will be included in the Company's Proxy Statement under the caption "Fees Paid
to Independent Registered Public Accounting Firm" and is incorporated herein by reference.
69
FORM 10-K PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements - O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive, Inc. and Subsidiaries included in the Annual
Shareholders' Report of the registrant for the year ended December 31, 2014, are filed with this Annual Report in Part II, Item
8:
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Financial Statements
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012
2. Financial Statement Schedules - O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statement schedule of O'Reilly Automotive, Inc. and Subsidiaries is included in Item 15
(a):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. Exhibits
See Exhibit Index beginning on page E-1.
70
FORM 10-K O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Description
Sales and returns allowances:
For the year ended December 31, 2014
For the year ended December 31, 2013
For the year ended December 31, 2012
Allowance for doubtful accounts:
For the year ended December 31, 2014
For the year ended December 31, 2013
For the year ended December 31, 2012
(1) Uncollectable accounts written off.
Balance at
Beginning of
Period
Additions -
Charged to
Costs and
Expenses
Additions -
Charged to
Other Accounts -
Describe
Deductions -
Describe
Balance at
End of Period
$
$
$
$
6,500
7,326
6,406
6,661
6,447
6,403
$
$
355
(826)
920
8,919
8,499
8,043
— $
—
—
—
—
—
— $
—
—
6,867 (1)
8,285 (1)
7,999 (1)
$
$
6,855
6,500
7,326
8,713
6,661
6,447
71
FORM 10-K Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
O'REILLY AUTOMOTIVE, INC.
(Registrant)
Date: February 27, 2015
By:
/s/ Greg Henslee
Greg Henslee
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
/s/ Charlie O'Reilly
Charlie O'Reilly
Director and Vice-Chairman of the Board
/s/ Rosalie O'Reilly Wooten
Rosalie O'Reilly Wooten
Director
/s/ Thomas T. Hendrickson
Thomas T. Hendrickson
Director
/s/ John R. Murphy
John R. Murphy
Director
/s/ Greg Henslee
Greg Henslee
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 27, 2015
/s/ David O'Reilly
David O'Reilly
Director and Chairman of the Board
/s/ Larry O'Reilly
Larry O'Reilly
Director and Vice-Chairman of the Board
/s/ Jay D. Burchfield
Jay D. Burchfield
Director
/s/ Paul R. Lederer
Paul R. Lederer
Director
/s/ Ronald Rashkow
Ronald Rashkow
Director
/s/ Thomas McFall
Thomas McFall
Executive Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
72
FORM 10-K EXHIBIT INDEX
Exhibit No.
Description
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Agreement and Plan of Merger, dated April 1, 2008, between O'Reilly Automotive, Inc., OC Acquisition Company and
CSK Auto Corporation, filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated April 7, 2008, is
incorporated herein by this reference.
Agreement and Plan of Merger, dated December 29, 2010, between O'Reilly Automotive, Inc., O'Reilly Holdings, Inc.
and O'Reilly MergerCo, Inc., filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated December 29,
2010, is incorporated herein by this reference.
Amended and Restated Articles of Incorporation of the Registrant, as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K dated May 9, 2013, is incorporated herein by this reference.
Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated August 13, 2014, is incorporated herein by this reference.
Form of Stock Certificate for Common Stock, filed as Exhibit 4.1 to the Registration Statement of the Registrant on
Form S-1, File No. 33-58948, is incorporated herein by this reference.
Indenture, dated as of January 14, 2011, among O'Reilly Automotive, Inc. as guarantors, and UMB Bank, N.A., as
Trustee, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 14, 2011, is incorporated
herein by this reference.
Indenture, dated as of September 19, 2011, among O'Reilly Automotive, Inc. as guarantors, and UMB Bank, N.A., as
Trustee, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated September 19, 2011, is incorporated
herein by this reference.
Indenture, dated as of August 21, 2012, among O'Reilly Automotive, Inc. as guarantors, and UMB Bank, N.A., as
Trustee, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated August 21, 2012, is incorporated
herein by this reference.
Indenture, dated as of June 20, 2013, among O'Reilly Automotive, Inc. as guarantors, and UMB Bank, N.A., as Trustee,
filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated June 20, 2013, is incorporated herein by this
reference.
10.1 (a)
Form of Employment Agreement between the Registrant and David E. O'Reilly, filed as Exhibit 10.1 to the Registration
Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
10.2
10.3
10.4 (a)
10.5 (a)
10.6 (a)
10.7 (a)
10.8 (a)
10.9 (a)
Lease between the Registrant and O'Reilly Investment Company, filed as Exhibit 10.2 to the Registration Statement of
the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
Lease between the Registrant and O'Reilly Real Estate Company, filed as Exhibit 10.3 to the Registration Statement
of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
Form of Retirement Agreement between the Registrant and David E. O'Reilly, filed as Exhibit 10.4 to the Registrant's
Annual Shareholders' Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by this
reference.
O'Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as Exhibit 4.1 to the Registrant's Registration Statement
on Form S-8, File No. 33-73892, is incorporated herein by this reference.
O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.8 to the Registration Statement of the Registrant
on Form S-1, File No. 33-58948, is incorporated herein by this reference.
O'Reilly Automotive, Inc. Stock Purchase Plan, filed as Exhibit 10.9 to the Registration Statement of the Registrant on
Form S-1, File No. 33-58948, is incorporated herein by this reference.
O'Reilly Automotive, Inc. Director Stock Option Plan, filed as Exhibit 10.10 to the Registration Statement of the
Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
O'Reilly Automotive, Inc. Performance Incentive Plan, filed as Exhibit 10.18 (a) to the Registrant's Annual Shareholders'
Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by this reference.
10.10 (a)
Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.20 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by this reference.
Page E-1
FORM 10-K EXHIBIT INDEX (continued)
EXHIBIT INDEX (continued)
Exhibit No.
Exhibit No.
10.11 (a)
10.11 (a)
Description
Description
Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.21 to the Registrant's
Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.21 to the Registrant's
Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated herein by this
Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated herein by this
reference.
reference.
10.12 (a)
10.12 (a)
10.13 (a)
10.13 (a)
10.14
10.14
10.15 (a)
10.15 (a)
10.16 (a)
10.16 (a)
10.17 (a)
10.17 (a)
10.18 (a)
10.18 (a)
10.19 (a)
10.19 (a)
10.20 (a)
10.20 (a)
10.21 (a)
10.21 (a)
10.22 (a)
10.22 (a)
10.23
10.23
10.24
10.24
10.25
10.25
10.26 (a)
10.26 (a)
10.27 (a)
10.27 (a)
10.28 (a)
10.28 (a)
10.29 (a)
10.29 (a)
First Amendment to the O'Reilly Automotive, Inc. Directors' Stock Option Plan, filed as Exhibit 10.22 to the Registrant's
First Amendment to the O'Reilly Automotive, Inc. Directors' Stock Option Plan, filed as Exhibit 10.22 to the Registrant's
Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated herein by this
Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, is incorporated herein by this
reference.
reference.
O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as Exhibit 10.23 to the Registrant's Quarterly Report on
O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as Exhibit 10.23 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by this reference.
Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by this reference.
Trust Agreement between the Registrant's Deferred Compensation Plan and Bankers Trust, dated February 2, 1998,
Trust Agreement between the Registrant's Deferred Compensation Plan and Bankers Trust, dated February 2, 1998,
filed as Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is
filed as Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is
incorporated herein by this reference.
incorporated herein by this reference.
2001 Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, dated May 8, 2001, filed as Exhibit 10.24
2001 Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, dated May 8, 2001, filed as Exhibit 10.24
to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 2002, is incorporated
to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 2002, is incorporated
herein by this reference.
herein by this reference.
First Amendment to Retirement Agreement, dated February 7, 2001, filed as Exhibit 10.26 to the Registrant's Annual
First Amendment to Retirement Agreement, dated February 7, 2001, filed as Exhibit 10.26 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference.
Shareholders' Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference.
Fourth Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, dated February 7, 2001, filed as Exhibit
Fourth Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, dated February 7, 2001, filed as Exhibit
10.27 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 2001, is
10.27 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 2001, is
incorporated herein by this reference.
incorporated herein by this reference.
Amended and Restated O'Reilly Automotive, Inc. 2003 Incentive Plan, filed as Appendix B to the Registrant's Proxy
Amended and Restated O'Reilly Automotive, Inc. 2003 Incentive Plan, filed as Appendix B to the Registrant's Proxy
Statement for 2005 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Statement for 2005 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Amended and Restated O'Reilly Automotive, Inc. 2003 Directors' Stock Plan, filed as Appendix C to the Registrant's
Amended and Restated O'Reilly Automotive, Inc. 2003 Directors' Stock Plan, filed as Appendix C to the Registrant's
Proxy Statement for 2005 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Proxy Statement for 2005 Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
O'Reilly Automotive, Inc. 2009 Stock Purchase Plan, filed as Appendix A to the Registrant's Proxy Statement for 2009
O'Reilly Automotive, Inc. 2009 Stock Purchase Plan, filed as Appendix A to the Registrant's Proxy Statement for 2009
Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
O'Reilly Automotive, Inc. 2009 Incentive Plan, filed as Appendix B to the Registrant's Proxy Statement for 2009 Annual
O'Reilly Automotive, Inc. 2009 Incentive Plan, filed as Appendix B to the Registrant's Proxy Statement for 2009 Annual
Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Form of Stock Option Agreement, dated as of December 31, 2009, filed as Exhibit 10.47 to the Registrant's Annual
Form of Stock Option Agreement, dated as of December 31, 2009, filed as Exhibit 10.47 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31, 2009, is incorporated herein by this reference.
Shareholders' Report on Form 10-K for the year ended December 31, 2009, is incorporated herein by this reference.
Credit Agreement, dated as of January 14, 2011, among O'Reilly Automotive, Inc., as the lead Borrower itself and the
Credit Agreement, dated as of January 14, 2011, among O'Reilly Automotive, Inc., as the lead Borrower itself and the
other Borrowers from time to time party thereto, the Guarantors from time to time party thereto, Bank of America N.A.,
other Borrowers from time to time party thereto, the Guarantors from time to time party thereto, Bank of America N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer, filed as Exhibit 10.1 to the Registrant's Current Report
as Administrative Agent, Swing Line Lender and L/C Issuer, filed as Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated January 14, 2011, is incorporated herein by this reference.
on Form 8-K dated January 14, 2011, is incorporated herein by this reference.
Amendment No. 1 to the Credit Agreement, dated as of September 9, 2011, by and among O'Reilly Automotive, Inc.,
Amendment No. 1 to the Credit Agreement, dated as of September 9, 2011, by and among O'Reilly Automotive, Inc.,
as the lead Borrower, Bank of America N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, filed as
as the lead Borrower, Bank of America N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September 9, 2011, is incorporated herein by this
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September 9, 2011, is incorporated herein by this
reference.
reference.
Amendment No. 2 to the Credit Agreement and Amendment No. 1 to Guaranty, dated as of July 2, 2013, by and among
Amendment No. 2 to the Credit Agreement and Amendment No. 1 to Guaranty, dated as of July 2, 2013, by and among
O'Reilly Automotive, Inc., as borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer, Swing Line Lender
O'Reilly Automotive, Inc., as borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer, Swing Line Lender
and a Lender, and the other lenders party thereto, filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K
and a Lender, and the other lenders party thereto, filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated July 3, 2013, is incorporated herein by this reference.
dated July 3, 2013, is incorporated herein by this reference.
O'Reilly Automotive, Inc. Director Compensation Program, as Exhibit 10.25 to the Registrant's Annual Report on Form
O'Reilly Automotive, Inc. Director Compensation Program, as Exhibit 10.25 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2011, is incorporated herein by this reference.
10-K for the year ended December 31, 2011, is incorporated herein by this reference.
O'Reilly Automotive, Inc. 2012 Incentive Award Plan, filed as Annex A to the Registrant's Proxy Statement for 2012
O'Reilly Automotive, Inc. 2012 Incentive Award Plan, filed as Annex A to the Registrant's Proxy Statement for 2012
Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
Annual Meeting of Shareholders on Schedule 14A, is incorporated herein by this reference.
O'Reilly Automotive, Inc. 2012 Incentive Award Plan, Form of Stock Option Grant Notice and Agreement, filed as
O'Reilly Automotive, Inc. 2012 Incentive Award Plan, Form of Stock Option Grant Notice and Agreement, filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, is incorporated
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, is incorporated
herein by this reference.
herein by this reference.
Form of O'Reilly Automotive, Inc. Director Indemnification Agreement, filed as Exhibit 10.1 to the Registrant's Current
Form of O'Reilly Automotive, Inc. Director Indemnification Agreement, filed as Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated August 14, 2013, is incorporated herein by this reference.
Report on Form 8-K dated August 14, 2013, is incorporated herein by this reference.
Page E-2
Page E-2
FORM 10-K EXHIBIT INDEX (continued)
EXHIBIT INDEX (continued)
Exhibit No.
Exhibit No.
10.30 (a)
10.30 (a)
Description
Description
Form of O'Reilly Automotive, Inc. Executive Officer Indemnification Agreement, filed as Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated August 14, 2013, is incorporated herein by this reference.
Form of O'Reilly Automotive, Inc. Executive Officer Indemnification Agreement, filed as Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated August 14, 2013, is incorporated herein by this reference.
Form of O'Reilly Automotive, Inc. Executive Incentive Compensation Clawback Policy Acknowledgment, between
O'Reilly Automotive, Inc. ("O'Reilly") and certain O'Reilly Executive Officers, filed as Exhibit 10.1 to the Registrant's
Form of O'Reilly Automotive, Inc. Executive Incentive Compensation Clawback Policy Acknowledgment, between
Current Report on Form 8-K dated January 29, 2015, is incorporated herein by this reference.
O'Reilly Automotive, Inc. ("O'Reilly") and certain O'Reilly Executive Officers, filed as Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated January 29, 2015, is incorporated herein by this reference.
Form of Change in Control Severance Agreement between O'Reilly and certain O'Reilly Executive Officers, filed as
Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated January 29, 2015, is incorporated herein by this
Form of Change in Control Severance Agreement between O'Reilly and certain O'Reilly Executive Officers, filed as
reference.
Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated January 29, 2015, is incorporated herein by this
reference.
Subsidiaries of the Registrant, filed herewith.
Subsidiaries of the Registrant, filed herewith.
Consent of Ernst & Young LLP, independent registered public accounting firm, filed herewith.
Consent of Ernst & Young LLP, independent registered public accounting firm, filed herewith.
Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, furnished herewith.
Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, furnished herewith.
Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, furnished herewith.
Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, furnished herewith.
XBRL Instance Document
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
XBRL Taxonomy Extension Presentation Linkbase
Management contract or compensatory plan or arrangement.
Management contract or compensatory plan or arrangement.
Furnished (and not filed) herewith pursuant to Item 601 (b)(32)(ii) of Regulation S-K.
Furnished (and not filed) herewith pursuant to Item 601 (b)(32)(ii) of Regulation S-K.
10.31 (a)
10.31 (a)
10.32 (a)
10.32 (a)
21.1
21.1
23.1
23.1
31.1
31.1
31.2
31.2
32.1 *
32.1 *
32.2 *
32.2 *
101.INS
101.INS
101.SCH
101.SCH
101.CAL
101.CAL
101.DEF
101.DEF
101.LAB
101.LAB
101.PRE
101.PRE
(a)
(a)
*
*
Page E-3
Page E-3
FORM 10-K Exhibit 21.1 – Subsidiaries of the Registrant
O'Reilly Automotive, Inc. and Subsidiaries
Subsidiary
State of Incorporation
O'Reilly Automotive Stores, Inc.
Ozark Automotive Distributors, Inc.
Ozark Services, Inc.
Ozark Purchasing, LLC
O'Reilly Auto Enterprises, LLC (formerly known as CSK Auto, Inc.)
Missouri
Missouri
Missouri
Missouri
Delaware
In addition, three subsidiaries operating in the United States have been omitted from the above list, as they would not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary as defined by Rule 1-02(w) of Regulation S-X.
One hundred percent of the capital stock of each of the above subsidiaries is directly or indirectly owned by O'Reilly Automotive, Inc.
FORM 10-K
Exhibit 23.1 – Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 033-91022), Post-Effective Amendment No. 1 to Registration Statement on Form S-8
(Form S-8 No. 033-91022) and Post-Effective Amendment No. 2 to Registration Statement on Form S-8 (Form S-8 No.
033-91022) pertaining to the O'Reilly Automotive, Inc. Performance Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-63467) and Post-Effective Amendment No. 1 (Form S-8 No. 333-63467) pertaining
to the O'Reilly Automotive, Inc. Director Stock Option Plan and the O'Reilly Automotive, Inc. 1993 Stock Option Plan,
(3) Registration Statements (Form S-8 No. 333-59568 and 333-136958) and Post-Effective Amendment No. 1 (Form S-8 No.
333-59568 and 333-136958) pertaining to the O'Reilly Automotive, Inc. Profit Sharing and Savings Plan,
(4) Registration Statement (Form S-8 No. 333-111976) and Post-Effective Amendment No. 1 (Form S-8 No. 333-111976) pertaining
to the O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan, O'Reilly Automotive, Inc. 2003 Director Stock Option Plan,
O'Reilly Automotive, Inc. 1993 Employee Stock Option Plan, and the O'Reilly Automotive, Inc. Stock Purchase Plan,
(5) Post-Effective Amendment No. 1 to Registration Statement on Form S-8 to Form S-4 (Form S-8 No. 333-151578) and Post-
Effective Amendment No. 2 (Form S-8 No. 333-151578) pertaining to the CSK Auto Corporation 2004 Stock and Incentive
Plan, CSK Auto Corporation 1999 Employee Stock Option Plan, CSK Auto Corporation 1996 Executive Stock Option Plan,
CSK Auto Corporation 1996 Associate Stock Option Plan and CSK Auto Corporation Nonqualified Stock Option Agreement
with Lawrence N. Mondry,
(6) Registration Statement (Form S-8 No. 333-157862) and Post-Effective Amendment No. 1 (Form S-8 No. 333-157862) pertaining
to the O'Reilly Automotive, Inc. Stock Purchase Plan,
(7) Registration Statement (Form S-8 No. 333-159351) and Post-Effective Amendment No. 1 (Form S-8 No. 333-159351) pertaining
to the O'Reilly Automotive, Inc. 2009 Stock Purchase Plan and to the O'Reilly Automotive, Inc. 2009 Incentive Plan, and
(8) Registration Statement (Form S-8 No. 333-181364) pertaining to the O'Reilly Automotive, Inc. 2012 Incentive Award Plan;
of our reports dated February 27, 2015, with respect to the consolidated financial statements and schedule of O'Reilly Automotive, Inc.
and Subsidiaries and the effectiveness of internal control over financial reporting of O'Reilly Automotive, Inc. and Subsidiaries, included
in this Annual Report (Form 10-K) of O'Reilly Automotive, Inc. and Subsidiaries for the year ended December 31, 2014.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 27, 2015
FORM 10-K O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Greg Henslee, certify that:
1.
I have reviewed this report on Form 10-K of O’Reilly Automotive, Inc.;
Exhibit 31.1 - CEO Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2015 /s/ Greg Henslee
Greg Henslee, President and
Chief Executive Officer (Principal Executive Officer)
FORM 10-K
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Thomas McFall, certify that:
1.
I have reviewed this report on Form 10-K of O’Reilly Automotive, Inc.;
Exhibit 31.2 - CFO Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2015
/s/ Thomas McFall
Thomas McFall
Executive Vice President of
Finance and Chief Financial Officer (Principal
Financial and Accounting Officer)
FORM 10-K
Exhibit 32.1 - CEO Certification
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
O’REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-K for the period ended December 31,
2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg Henslee, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
/s/ Greg Henslee
Greg Henslee
Chief Executive Officer
February 27, 2015
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose. This certification
accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
FORM 10-K
Exhibit 32.2 - CFO Certification
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
O’REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of O’Reilly Automotive, Inc. (the “Company”) on Form 10-K for the period ended December 31,
2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas McFall, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
/s/ Thomas McFall
Thomas McFall
Chief Financial Officer
February 27, 2015
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose. This certification
accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
FORM 10-K
BOARD of DIRECTORS
DAVID O’REILLY
Chairman of the Board
CHARLIE O’REILLY
Vice Chairman of the Board
LARRY O’REILLY
Vice Chairman of the Board
ROSALIE O’REILLY WOOTEN
Director
JAY D. BURCHFIELD
Director Since 1997
Compensation
Committee - Chairman
Audit & Corporate Governance/
Nominating Committees
THOMAS T. HENDRICKSON
Director Since 2010
Audit Committee
PAUL R. LEDERER
Lead Director 1993-July 1997;
Since February 2001
Corporate Governance/Nominating
Committee - Chairman
Audit & Compensation Committees
JOHN R. MURPHY
Director Since 2003
Audit Committee - Chairman
Corporate Governance/
Nominating Committee
RONALD RASHKOW
Director Since 2003
Audit & Compensation
Committees
EXECUTIVE COMMITTEE and DIVISIONAL VICE PRESIDENTS
GREG HENSLEE
JONATHAN ANDREWS
Vice President of
President and Chief
Human Resources
Executive Officer
GREG BECK
TOM MCFALL
Vice President of Purchasing
Executive Vice President of
AARON BIGGS
Finance and Chief Financial Officer
GREG JOHNSON
Vice President of
Southern Division
Executive Vice President
SCOTT BLACKBURN
of Supply Chain
JEFF SHAW
Vice President of Store Operations
ROB BODENHAMER
Executive Vice President of
Store Operations and Sales
Vice President of Information
TED WISE
Technology and Services
DOUG BRAGG
Executive Vice President
of Expansion
Vice President of
TONY BARTHOLOMEW
Central Division
JOE COCKELL
Senior Vice President
of Professional Sales
Vice President of
BRAD BECKHAM
Distribution Operations
ROBERT DUMAS
Senior Vice President of Eastern
Store Operations and Sales
Vice President of
KEITH CHILDERS
Southeast Division
ALAN FEARS
Senior Vice President of Western
Store Operations and Sales
Vice President of Jobber
LARRY ELLIS
Sales and Acquisitions
JEREMY FLETCHER
Senior Vice President of
Distribution Operations
Vice President of
STEVE JASINSKI
Finance and Controller
JEFF GROVES
Senior Vice President
of Information Systems
Vice President of Legal
RANDY JOHNSON
and General Counsel
JOE HANKINS
Senior Vice President of
Inventory Management
Vice President of Store Design
MIKE SWEARENGIN
BILLY HARRIS
Senior Vice President
Vice President of
of Merchandise
Eastern Division
TRICIA HEADLEY
CHAD KEEL
Vice President and Corporate
Vice President of
Southwest Division
Secretary/Secretary to Board
SCOTT KRAUS
Vice President of
Real Estate Expansion
SCOTT LEONHART
Vice President of
Northeast Division
KENNY MARTIN
Vice President of
Northern Division
RYAN MOORE
Vice President of Pricing
DAVID ORTEGA
Vice President of
Electronic Catalog Systems
WAYNE PRICE
Vice President of Treasury
and Risk Management
CHUCK ROGERS
Vice President of
Professional Sales
DOUG RUBLE
Vice President of
Marketing/Advertising
BARRY SABOR
Vice President of
Loss Prevention
RO SALAZAR
Vice President of
Northwest Division
TOM SEBOLDT
Vice President of Merchandise
DARIN VENOSDEL
Vice President of
Inventory Management
DAVID WILBANKS
Vice President of Merchandise
KARLA WILLIAMS
Vice President of
Application Development
SHAREHOLDER INFORMATION
CORPORATE ADDRESS
233 South Patterson Avenue
Springfield, Missouri 65802
417-862-3333
www.oreillyauto.com
REGISTRAR AND TRANSFER AGENT
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
800-884-4225
www.computershare.com
Inquiries regarding stock transfers, lost
certificates or address changes should be
directed to Computershare Investor Services
at the above address.
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
One Kansas City Place
1200 Main Street, Suite 2500
Kansas City, Missouri
64105-2167
ANALYST COVERAGE
The following analysts provide research coverage
of O’Reilly Automotive, Inc.:
BAIRD EQUITY RESEARCH Craig R. Kennison
BARCLAYS CAPITAL Alan M. Rifkin
BB&T CAPITAL MARKETS Bret D. Jordan
CLEVELAND RESEARCH COMPANY Daryl Boehringer
CREDIT SUISSE Gary Balter
DEUTSCHE BANK MARKET RESEARCH Michael Baker
EVERCORE ISI Greg Melich
GABELLI & COMPANY INC Brian Sponheimer
GOLDMAN SACHS Matthew J. Fassler
JP MORGAN EQUITY RESEARCH Christopher Horvers
MORGAN STANLEY RESEARCH Simeon Gutman
MORNINGSTAR EQUITY RESEARCH Liang Feng
NOMURA EQUITY RESEARCH Edgar Roesch
NORTHCOAST RESEARCH Nick Mitchell
OPPENHEIMER & CO INC Brian Nagel
RAYMOND JAMES RESEARCH Dan Wewer
RBC CAPITAL MARKETS LLC Scot Ciccarelli
STIFEL NICOLAUS David A. Schick
SUNTRUST Robert Higginbotham
UBS INVESTMENT RESEARCH Michael Lasser
WEDBUSH SECURITIES Seth Basham
WILLIAM BLAIR EQUITY RESEARCH Daniel Hofkin
WOLFE RESEARCH Aram Rubinson
OUR CULTURE: Our COMMITMENT to our customers and our Team Members. We are
ENTHUSIASTIC, HARDWORKING PROFESSIONALS who are DEDICATED to TEAMWORK,
SAFETY, and EXCELLENT CUSTOMER SERVICE. We will practice EXPENSE CONTROL while
setting an example of RESPECT, HONESTY, and a WIN-WIN ATTITUDE in everything we do.
233 South Patterson • Springfield, Missouri 65802 • 417-862-3333 • www.OReillyAuto.com