2 0 1 6
A n n u a l R e p o r t
$10.1
$10.1
$13.6
$13.6
$19.6
$19.6
$24.8
$25.9
$25.9
$24.8
$951
$951
$512
$512
$760
$760
$867
$978
$867
$978
20.8%
20.8%
23.6%
23.6%
26.9%
26.9%
31.5%
31.5%
34.3%
34.3%
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
FREE CASH FLOW
(in millions)
2013
2013
2012
2014
2012
2016
RETURN on INVESTED CAPITAL
2015
2015
2014
2016
$10.1
$13.6
$19.6
$24.8
$25.9
$951
$512
$760
$867
$978
20.8%
23.6%
26.9%
31.5%
34.3%
2013
2014
2016
2012
MARKET CAPITALIZATION
(in billions)
2015
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
FINANCIAL HIGHLIGHTS
In thousands, except earnings per share and ratio data and store count
YEAR ENDED DECEMBER 31,
Store Count
Percentage Increase in Comparable Store Sales
2016
4,829
4.8%
2015
4,571
7.5%
2014
4,366
6.0%
2013
4,166
4.6%
2012
3,976
3.5%
$
Sales
Operating Income
Net Income
Accounts Payable to Inventory
Working Capital
Total Assets
Total Debt
Shareholders’ Equity
Earnings Per Share (assuming dilution) $
Weighted-Average Common Shares
Outstanding (assuming dilution)
8,593,096
$
7,966,674
$ 7,216,081
$
6,649,237
$
6,182,184
1,699,206
1,037,691
105.7%
(142,674)
7,204,189
1,887,019
1,627,136
1,514,021
1,270,374
1,103,485
931,216
99.1%
(36,372)
778,182
94.6%
252,082
670,292
86.6%
430,832
977,393
585,746
84.7%
478,093
6,676,684
6,532,083
6,057,895
5,741,241
1,390,018
1,388,422
1,386,895
1,088,011
1,961,314
2,018,418
1,966,321
2,108,307
10.73
$
9.17
$
7.34
$
6.03
$
4.75
96,720
101,514
106,041
111,101
123,314
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
This graph shows the cumulative total shareholder return assuming the investment of $100 on December 31, 2011, and the
reinvestment of dividends thereafter, in the common stock of O’Reilly Automotive, Inc., the Standard and Poor’s S&P 500 Retail
Index and the Standard and Poor’s S&P 500 Index.
$348
$1 00
2011
$112
2012
$16 1
$24 1
$31 7
2013
2014
2015
2016
O’Reilly Automotive, Inc.
S&P 500 Retail Index
S&P 500 Index
TO OUR FELLOW SHAREHOLDERS:
"Day in and day out, our more than 74,000 dedicated Team Members across 47
states roll up their sleeves prepared to out-work the competition and provide the
industry-leading levels of customer service that have come to define the name
O’Reilly Auto Parts.”
- greg henslee
Once again, we are very pleased to report to you that Team O’Reilly’s
unrelenting focus on providing consistently excellent customer service
has produced another year of record-breaking results. Day in and day
out, our more than 74,000 dedicated Team Members across 47 states roll up
their sleeves prepared to out-work the competition and provide the industry-
leading levels of customer service that have come to define the name O’Reilly
Auto Parts. Our long-term success is the direct result of the hard work and
dedication of our Team Members, and we would like to thank each one for
their commitment to our success.
Our Team’s commitment to being the dominant supplier in each of our mar-
kets produced an industry-leading 4.8% increase in comparable store sales
in 2016, which was on top of a 7.5% increase in 2015, and a 6.0% increase in
2014, and represents our 24th consecutive year of positive comparable stores
sales growth since becoming a publicly traded company in 1993. While we
are very proud of our consistent top line growth, we remain highly focused
on continued profitable growth. Our team’s persistent focus on expense
control ensured that our sales performance translated into profitable growth,
evidenced by our record 19.8% operating margin and 17% increase in diluted
earnings per share in 2016.
Our ability to continually generate record-breaking results is directly related to
our Team’s unwavering focus on providing consistently high levels of service
to our customers, providing the strong base required to capitalize on a stable,
favorable industry demand environment. A key driver to current and future
demand in our industry is total miles driven in the U.S., which continues to
exceed three trillion miles each year, supported by relatively low gas prices
and improvements in U.S. employment levels. Ongoing healthy levels of new
car sales and stable, low scrappage rates result in a growing vehicle fleet, and
sustained improvements in engineering and manufacturing have produced
higher quality vehicles, which can be reliably driven at higher mileages, and
result in an aging vehicle fleet that now averages 11.6 years old. We believe
the growing, aging vehicle fleet will continue to benefit our industry, as these
higher mileage vehicles are driven trillions of miles each year, resulting in
ongoing wear and tear and experiencing more routine maintenance cycles,
which, in turn, supports stable, long-term demand for our products.
While a favorable long-term industry demand environment is beneficial,
delivering the repeated, record-breaking success we proudly report to you
each year is primarily the result of our greatest competitive advantages – our
Team Members and our Culture. Since 1957, our Team Members’ unrelenting
focus on our Culture has been the key to our success and continues to be what
propels our sales growth beyond that of our peers. We understand that our
customers rely on our friendly, knowledgeable Parts Professionals to answer
their questions and get them the right parts to complete the job they are
working on, and for over 30 years, we have executed our dual market strategy
of providing this high level of service to both our do-it-yourself and profes-
sional service provider customers. We operate in very competitive markets,
and winning our customers’ repeat business requires our Team Members to
consistently execute our dual market strategy and live our Culture Values of
excellent customer service, hard work, enthusiasm, professionalism, teamwork,
respect and honesty each and every day, and we believe our results prove our
Culture is alive and well.
GR EG HENSLEE
Chief Executive Officer
GR EG JOHNSON
Co-President
JEFF SHAW
Co-President
THOMAS MCFALL
Executive Vice President
and Chief Financial Officer
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.
O’REIL LY AUTOMOTIV E 2016 A NNUA L REP ORT • 1
team members
our greatest asset
O’Reilly’s promote from within philosophy allows us to continually perpetuate our Culture and instill our values
in each new member of Team O’Reilly. Our experienced, well-trained, technically proficient store teams are
equipped to provide industry-leading customer service in every new store we open. In 2016, we successfully
opened 210 net, new stores and, in 2017, we plan to continue our profitable growth with the addition of 190
net, new stores in both new and existing markets. Our stores are supported by our robust, regional, tiered
distribution network comprised of 27 distribution centers augmented with more than 300 hub stores, which
provide our stores same-day access to a vast inventory of hard-to-find parts.
74,000+
team members
O'Reilly is made up of 74,715 team members as
follows: 63,380 Store, 7,807 Distribution Center, and
3,428 Regional and Corporate Team Members.
Our customers depend on us to provide them with expert advice, excel-
lent service, a competitive price, and the parts they need to complete their
jobs. The ability of our Professional Parts People to consistently satisfy
our customers’ needs is supported by our sustained competitive advan-
tage in parts availability. Our industry-leading robust, tiered, regional
distribution network provides our store teams with access to the right
parts faster than our competitors. Through our 27 distribution centers,
with inventories that average 148,000 SKUs, we replenish our stores five
nights a week. Each of our stores carry an average inventory of 23,000
SKUs that is individually tailored to each local market based on an analysis
of vehicle registration data, market demographic information and local
customer purchasing patterns. Additionally, almost all of our stores have
same-day access to hard-to-find parts from an extensive inventory selec-
tion either directly from a distribution center or from one of our 312 hub
stores, which stock an average 45,000 SKUs. Our distribution network
continues to expand in step with our store growth to ensure our industry-
leading parts availability is in place for each new store we open, and we
have the capacity to service more than 650 additional stores within our
existing distribution footprint. Our industry-leading parts availability and
our well-trained, experienced Team of Professional Parts People, who are
ready and eager to provide superior customer service each day an existing
or new store opens, are key factors in our mission to be the dominant sup-
plier of parts in all markets.
Our long-term strategy of profitable growth focuses on maintaining and
enhancing our existing store base and distribution network, organically
growing through new store openings, and consolidating the industry
through the prudent acquisitions of existing auto parts suppliers. During
2016, we successfully opened 210 net, new stores throughout the U.S. and
are excited to open our 5,000th store in 2017, as we plan to open 190 net,
new stores in the coming year. We continue to be very pleased with our
new store performance, resulting from well-trained, professional new store
teams supported by industry-leading parts availability, and our promote
from within philosophy ensures our new store managers instill the O’Reilly
Culture in every new Team Member. During 2016, we also grew through
the acquisition of Bond Auto Parts. With a remarkably similar company
culture and history, combined with a complementing geographic footprint
in New England, Bond Auto Parts fit perfectly into our criteria for acquisi-
tions. We will continue to look for strong automotive aftermarket chains,
such as Bond Auto Parts, that mirror our Company Culture, enhance our
national footprint and generate a strong return on our investment.
An unwavering commitment to excellent customer service and our relent-
less focus on profitable growth generated $978 million in free cash flow
during 2016, and our ongoing initiative to optimize our capital structure
allowed us to increase our leverage during the year through the issuance
of $500 million in senior notes. After reinvesting back into our business in
Store Manager Dreama Tillis
O'Reilly 1999-Jacksonville, FL
O'Reilly 5524, 14214 Cullen Boulevard, Houston, TX
4,829
stores
O'Reilly stores are divided into 10 divisions, 56
regions, and 474 districts, with approximately 10
stores in each district.
The team at O'Reilly 3385-Cicero, IL
27
distribution centers
O'Reilly Distribution Centers stock an average of
148,000 part numbers and provide five-night-a-week
service to all O’Reilly stores in the continental U.S. In
addition, approximately 90% of O'Reilly stores receive
multiple daily deliveries directly from a DC or hub store.
The team at O'Reilly 3841-Madison, WI
47
states
Founded in 1957, O’Reilly began with one store in
Springfield, MO, has grown to more than 4,800 stores
across 47 states, and plans to open 190 net, new stores
in 2017.
O’REIL LY AUTOMOTIV E 2016 A NNUA L REP ORT • 2
Inbound Materials Handler Charles LaFond
Distribution Center 36-Selma, TX
The team at O'Reilly 4756-Stafford, TX
O’REIL LY AUTOMOTIV E 2016 A NNUA L REP ORT • 3
service
coast to coast
stores in 47 states
Alabama ..................... 125
Alaska ................................15
Arizona ......................... 136
Arkansas ..................... 107
California....................534
Colorado ....................... 99
Connecticut ...................5
Florida ........................... 163
Georgia ........................ 187
Hawaii ...............................12
Idaho ................................. 40
Illinois ............................186
Indiana ......................... 120
Iowa ....................................73
Kansas ..............................82
Kentucky ........................77
Louisiana ....................109
Maine .................................35
Massachusetts ..........30
Michigan .................... 158
Minnesota ..................119
Mississippi ....................75
Missouri ....................... 195
Montana .........................27
Nebraska ........................41
Nevada .............................54
New Hampshire ......38
New Mexico ................52
New York ..........................2
North Carolina ...... 155
North Dakota .............15
Ohio ................................169
Oklahoma ................. 121
Oregon ............................ 66
Pennsylvania ..............12
Rhode Island .................3
South Carolina .........91
South Dakota .............16
Tennessee .................162
Texas ...............................667
Utah ....................................61
Vermont .........................24
Virginia ............................ 66
Washington ............. 155
West Virginia ..............12
Wisconsin ...................118
Wyoming .......................20
2016, we returned over $1.5 billion of our excess capital to you, our share-
holders, through our share repurchase program. Since the inception of our
share repurchase program in 2011, we have returned $6.9 billion through
the repurchase of 56.9 million shares, at an average price of $120.50 per
share, and in 2017, we plan to continue to prudently repurchase shares as a
tool to continue to deliver value, after we have exhausted all other means of
profitably reinvesting in our business.
As we plan for the future success of O’Reilly Auto Parts, we will never for-
get that our Team Members and our Culture are the keys to our continued
profitable growth. We are very proud of the depth and experience levels
we have developed over time in our management Team, and we under-
stand that long-term succession planning is a vital key to maintaining our
Culture. We continue to rely upon our promote from within philosophy
to accomplish this goal, and with that focus in mind, we announced the
promotions of Greg Johnson and Jeff Shaw to Co-Presidents of O’Reilly in
February of 2017. Greg began his O’Reilly career 34 years ago as a part-
time distribution center Team Member, and Jeff began his O’Reilly career
28 years ago as a parts specialist in our stores. Both of these experienced
leaders have dedicated their careers to the success of O’Reilly, progress-
ing their way up through the Company with hard work and a relentless
focus on providing excellent customer service. Greg and Jeff are the very
embodiment of the O’Reilly Culture, and they will continue to perpetu-
ate our Culture throughout the Company in their new positions for many
years to come.
Once again, we would like to thank all of our Team Members for their
dedication to our ongoing success. We would also like to thank you, our
shareholders, for your trust in our Company, and we look forward to
extending our long track record of profitable growth into 2017.
O’REIL LY AUTOMOTIV E 2016 A NNUA L REP ORT • 4
THE O'REILLY FOOTPRINT
Store Count 200-600+ 100-199 1-99
Distribution Center
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, 2016
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 20, 2017, an aggregate of 91,639,693 shares of common stock of the registrant was outstanding.
At June 30, 2016, the aggregate market value of the voting stock held by non-affiliates of the Company was $20,433,280,070 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 2017 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2016, are incorporated by reference into Part III.
FORM 10-K O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 16
Form 10-K Summary
PART IV
Page
2
14
18
19
20
20
21
23
25
40
41
70
70
70
71
71
71
72
72
73
73
1
FORM 10-K 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. 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, 2016, 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.
Item 1. Business
GENERAL INFORMATION
PART I
O’Reilly Automotive, Inc. and its subsidiaries, collectively “we,” “us,” “our,” the “Company,” or “O’Reilly,” 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 (“DIY”) and professional service provider customers, our “dual market strategy.” The business was founded
in 1957 by Charles F. O’Reilly and his son, Charles H. “Chub’’ O’Reilly, Sr., and initially operated from a single store in Springfield,
Missouri. Our common stock has traded on The NASDAQ Global Select Market under the symbol “ORLY” since April 22, 1993.
At December 31, 2016, we operated 4,829 stores in 47 states. Our stores carry an extensive product line, including
•
new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system
components, batteries, belts, hoses, temperature control, chassis parts, driveline parts and engine parts;
• 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.
Our stores offer many enhanced services and programs to our customers, such as
•
•
•
•
•
•
•
•
•
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.
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
sensitivity to regional economic and weather conditions, future growth assurance, our dependence upon key and other personnel, our
relationships with key suppliers and availability of key products, our acquisition strategies, complications in our distribution centers
(“DCs”), failure to achieve high levels of service and product quality, 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 and other regulations.
2
FORM 10-K OUR BUSINESS
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our
growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business
in new markets by focusing on our dual market strategy and the core O’Reilly values, including superior customer service and expense
control. Our intent is to be the dominant auto parts provider in all the markets we serve, by providing a higher level of customer
service and a better value position than our competitors to both DIY and professional service provider customers.
Competitive Advantages
We believe our effective dual market strategy, superior customer service, technically proficient store personnel, strategic distribution
network and experienced management team make up our key competitive advantages, which cannot be easily duplicated.
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
provider customers. We believe our proven ability to effectively execute a dual market strategy is a unique competitive advantage.
The execution of this strategy enables us to better compete by targeting a larger base of automotive aftermarket parts consumers,
capitalizing on our existing 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 provider customers.
In 2016, we derived approximately 58% of our sales from our DIY customers and approximately 42% of our sales from our professional
service provider customers. Historically, we have increased our sales to professional service provider customers at a faster pace than
the increase in our sales to DIY customers due to the more fragmented nature of the professional service provider business, which
offers a greater opportunity for consolidation. We believe we will continue to have a competitive advantage on the professional service
provider portion of our business, due to our systems, knowledge and experience serving the professional service provider side of the
automotive aftermarket, supported by our approximately 750 full-time sales staff dedicated solely to calling upon and servicing the
professional service provider customer. We will also continue to expand and enhance the level of offerings focused on growing our
DIY business and will continue to execute our proven dual market strategy in both existing and new markets.
Superior Customer Service:
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient
locations with a wide selection of automotive products. We believe 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 needed to
complete their repairs. Accordingly, each O’Reilly store carries, or has same or next day availability to, a broad selection of automotive
products designed to cover a wide range of vehicle applications. We continuously refine the inventory levels and assortments carried
in each of our stores and within our network, based in large part on the sales movement tracked by our inventory control system,
market vehicle registration data, failure rates and management’s assessment of the changes and trends in the marketplace. We have
no material backorders for the products we sell.
We seek to attract new DIY and professional service provider customers and 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”);
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
value preferences; and
a robust point-of-sale system integrated with our proprietary electronic catalog, which contains a wide variety of product
images, schematics and technical specifications, equips our Team Members with highly effective tools to source products
in our extensive supply network.
Technically Proficient Professional Parts People:
Our highly-motivated, technically-proficient Professional Parts People provide us with a significant competitive advantage,
particularly over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training
and to be knowledgeable, particularly with respect to hard part repairs, in order to better serve the technically-oriented professional
3
FORM 10-K 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.
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 27
regional DCs, which provide our stores with same-day or overnight access to an average of 148,000 stock keeping units (“SKUs”),
many of which are hard-to-find items not typically stocked by other auto parts retailers. To augment our robust distribution network,
we operate 312 Hub stores that also provide delivery service and same-day access to an average of 45,000 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 185 professionals who average 18 years of service; 242 corporate managers who average 16 years of service; and
474 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 24 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 2016, we opened 210 net, new stores and acquired
48 Bond Auto Parts stores and we plan to open approximately 190 net, new stores in 2017, 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,
vehicles in operation, number and type of existing automotive repair facilities and competing auto parts stores within a predetermined
radius.
We target both small and large markets for expansion of our store network. While we have faced, and expect to continue to face,
aggressive competition in the more densely populated markets, we believe we have competed effectively, and are well positioned to
continue to compete effectively, in such markets and to achieve our goal of continued profitable sales growth within these markets.
We also believe that with our dual market strategy, we are better able to operate stores in less densely populated areas, which would
not otherwise support a national chain store selling primarily to the retail automotive aftermarket. Therefore, we continue to pursue
opening new stores in less densely populated market areas as part of our growth strategy.
Grow Sales in Existing Stores:
Profitable comparable store sales growth is also an important part of our growth strategy. To achieve improved sales and profitability
at existing O’Reilly stores, we continually strive to improve the service provided to our customers. We believe that while competitive
pricing is an essential component of successful growth in the automotive aftermarket business, it is customer satisfaction, whether of
the DIY consumer or professional service provider, resulting from superior customer service that generates increased sales and
profitability.
4
FORM 10-K 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 effectively 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 optimized square footage, high ceilings, convenient interior store layouts, in-store signage,
bright lighting, convenient ingress and egress and parking, and dedicated counters to serve professional service provider customers,
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 2016, we relocated 20 stores and renovated 30 stores. We believe that our ability to consistently achieve growth in comparable
store sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best 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, 2017, we employed 74,715 Team Members (42,289 full-time Team Members and 32,426 part-time Team Members),
of whom 63,380 were employed at our stores, 7,907 were employed at our DCs and 3,428 were employed at our corporate and regional
offices. A union represents 49 stores (493 Team Members) in the Greater Bay Area in California and has for many years. In addition,
approximately 104 Team Members who drive over-the-road trucks in three of our DCs are represented by labor unions. Except for
these Team Members, our Team Members are not represented by labor unions. Our tradition for 60 years has been to treat all of our
Team Members with honesty and respect and to commit significant resources to instill in them our “Live Green” culture, which
emphasizes the importance of each Team Member’s contribution to the success of O’Reilly. This focus on professionalism and respect
has created an industry-leading team, 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
•
•
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;
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.
5
FORM 10-K 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 7,300 total square feet in size. At December 31,
2016, we had a total of approximately 35 million square feet in our 4,829 stores. Our stores are served primarily by the nearest DC,
which averages 148,000 SKUs, but also have same-day access to the broad selection of inventory available at one of our 312 Hub
stores, which, on average, carry approximately 45,000 SKUs and average approximately 10,600 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.
6
FORM 10-K The following table sets forth the geographic distribution and activity of our stores as of December 31, 2016 and 2015:
December 31, 2015
2016 Net, New and
Acquired Stores
December 31, 2016
State
Texas
California
Missouri
Georgia
Illinois
Ohio
Florida
Tennessee
Michigan
North Carolina
Washington
Arizona
Alabama
Oklahoma
Indiana
Minnesota
Wisconsin
Louisiana
Arkansas
Colorado
South Carolina
Kansas
Kentucky
Mississippi
Iowa
Oregon
Virginia
Utah
Nevada
New Mexico
Nebraska
Idaho
New Hampshire
Maine
Massachusetts
Montana
Vermont
Wyoming
South Dakota
Alaska
North Dakota
Hawaii
Pennsylvania
West Virginia
Connecticut
Rhode Island
New York
Total
Store
Count
639
523
193
181
178
161
143
154
149
149
154
133
120
119
118
118
109
103
105
96
89
80
73
75
70
61
61
60
53
47
37
38
20
35
13
27
—
19
12
15
15
12
3
9
2
—
—
4,571
% of Total
Store Count
14.0 %
11.4 %
4.2 %
4.0 %
3.9 %
3.5 %
3.1 %
3.4 %
3.3 %
3.3 %
3.4 %
2.9 %
2.6 %
2.6 %
2.6 %
2.6 %
2.4 %
2.3 %
2.3 %
2.1 %
1.9 %
1.8 %
1.6 %
1.6 %
1.5 %
1.3 %
1.3 %
1.3 %
1.2 %
1.0 %
0.8 %
0.8 %
0.4 %
0.8 %
0.3 %
0.6 %
— %
0.4 %
0.3 %
0.3 %
0.3 %
0.3 %
0.1 %
0.2 %
— %
— %
— %
100.0%
Store
Change
% of Total
Store
Change
Store
Count
10.9 %
4.3 %
0.8 %
2.3 %
3.1 %
3.1 %
7.8 %
3.1 %
3.5 %
2.3 %
0.4 %
1.1 %
1.9 %
0.8 %
0.8 %
0.4 %
3.5 %
2.3 %
0.8 %
1.1 %
0.8 %
0.8 %
1.6 %
0.0 %
1.1 %
1.9 %
1.9 %
0.4 %
0.4 %
1.9 %
1.6 %
0.8 %
7.0 %
0.0 %
6.6 %
0.0 %
9.3 %
0.4 %
1.6 %
0.0 %
0.0 %
0.0 %
3.5 %
1.1 %
1.1 %
1.1 %
0.8 %
100.0%
28
11
2
6
8
8
20
8
9
6
1
3
5
2
2
1
9
6
2
3
2
2
4
—
3
5
5
1
1
5
4
2
18
—
17
—
24
1
4
—
—
—
9
3
3
3
2
258
7
667
534
195
187
186
169
163
162
158
155
155
136
125
121
120
119
118
109
107
99
91
82
77
75
73
66
66
61
54
52
41
40
38
35
30
27
24
20
16
15
15
12
12
12
5
3
2
4,829
% of Total
Store Count
13.8 %
11.0 %
4.0 %
3.9 %
3.9 %
3.5 %
3.4 %
3.4 %
3.3 %
3.2 %
3.2 %
2.8 %
2.6 %
2.5 %
2.5 %
2.5 %
2.4 %
2.3 %
2.2 %
2.1 %
1.9 %
1.7 %
1.6 %
1.6 %
1.5 %
1.4 %
1.4 %
1.3 %
1.1 %
1.1 %
0.8 %
0.8 %
0.8 %
0.7 %
0.6 %
0.6 %
0.5 %
0.4 %
0.3 %
0.3 %
0.3 %
0.2 %
0.2 %
0.2 %
0.1 %
0.1 %
— %
100.0%
Cumulative
% of Total
Store Count
13.8%
24.8%
28.8%
32.7%
36.6%
40.1%
43.5%
46.9%
50.2%
53.4%
56.6%
59.4%
62.0%
64.5%
67.0%
69.5%
71.9%
74.2%
76.4%
78.5%
80.4%
82.1%
83.7%
85.3%
86.8%
88.2%
89.6%
90.9%
92.0%
93.1%
93.9%
94.7%
95.5%
96.2%
96.8%
97.4%
97.9%
98.3%
98.6%
98.9%
99.2%
99.4%
99.6%
99.8%
99.9%
100.0%
100.0%
FORM 10-K Store Layout:
We utilize a computer-assisted store layout system to provide a uniform and consistent front room 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 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 store’s geographic area. Aisle displays and end caps are used to feature high-demand, seasonal
merchandise, new items and advertised specials.
Store Automation:
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
access to our electronic catalog, part images and schematics and pricing information by make, model and year of vehicle. 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 assists in store management, strategic planning, inventory
control and distribution efficiency.
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 service specialists and other positions required to meet the specific needs of each store. Each of our 474 district managers
has general supervisory responsibility for an average of ten stores, which provides our stores with a strong operational support.
Store and district managers complete a comprehensive training program to ensure each has a thorough understanding of customer
service, leadership, inventory management and store profitability, as well as all other sales and operational aspects of our business
model. Store and district managers are also required to complete a structured training program that is specific to their position,
including attending a week-long manager development program at the corporate headquarters in Springfield, Missouri. Store and
district managers also receive continuous training through online 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 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 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.
Professional Parts People
We believe our highly trained team of Professional Parts People is essential in providing superior customer service to both DIY and
professional service provider customers. A significant portion of our business is from professional service provider customers;
therefore, our Professional Parts People are required to be highly technically proficient in automotive products. In addition, we have
found that the typical DIY customer often seeks assistance from Professional Parts People, particularly when purchasing hard parts.
The ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression and is a
significant factor in generating repeat DIY business.
We screen prospective Team Members to identify highly motivated individuals who either have experience with automotive parts or
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 through extensive automotive systems and product knowledge training to ensure they are able to provide high levels
of service to our customers. Once all of the required training has been satisfied, our parts specialists become eligible to take the
O’Reilly Certified Parts Professional test. Passing the O’Reilly test helps prepare them to become certified by the National Institute
for Automotive Service Excellence (“ASE”).
All of our stores have the ability to service professional service provider customers. For this reason, select Team Members in each
store complete extensive sales call training with a regional field sales manager. Afterward, these Team Members spend at least one
day per 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.
8
FORM 10-K 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 by controlling the depth of our inventory. Moreover, we believe our ongoing, significant capital
investments made in our DC 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.
Distribution Centers:
As of December 31, 2016, we operated 27 DCs comprised of approximately 10.6 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 stock an average of 148,000 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 provide weekend service to not only the stores they service via their city counters but
also to strategic Hub locations, which redistribute products to surrounding stores. Our national Hub store network provides additional
service throughout the week, and on weekends, to surrounding stores.
As part of our continuing efforts to enhance our distribution network in 2017, we plan to
•
•
•
•
enhance our distribution network by completing the expansion of one existing DC in Greensboro, North Carolina;
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;
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, lift equipment and computer hardware.
Hub stores:
We currently operate 312 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 10,600 square feet and carry an average of 45,000
SKUs.
Products and Purchasing
Our stores offer DIY and professional service provider customers a wide selection of products for domestic and imported automobiles,
vans and trucks. Our merchandise generally consists of nationally recognized, well-advertised, premium name brand products, such
as AC Delco, Armor All, Bosch, BWD, Cardone, Castrol, Gates Rubber, Monroe, Moog, Pennzoil, Prestone, Quaker State, STP, Turtle
Wax, Valvoline, Wagner, and Wix, and a wide selection of quality proprietary private label products, which span the entire good,
better and best value spectrum, under our BestTest®, 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, meet or exceed original equipment manufacturer specifications and
consist of house brands and nationally recognized proprietary bands, which we have acquired or developed over time. Our “good”
house brands provide a great combination of quality and value, a characteristic important to our DIY customers, while our proprietary
national brands offer “better” and “best” options for our more heavy-duty DIY customers, as well as our professional service provider
customers, who require high quality products that can be relied upon to support and grow their businesses.
We have no long-term contracts with material purchase commitments with any of our suppliers, nor have we experienced difficulty
in obtaining satisfactory alternative supply sources for automotive parts. We believe that alternative supply sources exist at competitive
costs for substantially all of the automotive products that we sell. It is our policy to take advantage of payment and seasonal purchasing
discounts offered by our suppliers and to utilize extended dating terms available from suppliers. We have entered into various programs
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 900 suppliers, the five largest of which accounted for
approximately 23% of our total purchases in 2016. Our largest supplier in 2016 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.
9
FORM 10-K 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 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 1,600 grassroots, local and regional motorsports events throughout 45
states during 2016. We were the title sponsor of two National Association for Stock Car Racing (NASCAR) National series events.
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.
To show appreciation for our DIY customers for their continued business, we maintain our O’Reilly O’Rewards customer loyalty
program. 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 with targeted promotions tailored to their specific needs and purchasing patterns.
Marketing to the Professional Service Provider Customer:
We have approximately 750 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 customers 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 thousands of SKUs through seven days a week store inventory replenishments;
separate service counter and phone line in our stores dedicated exclusively to service professional service provider customers;
trade credit for qualified accounts;
First Call Online, a dedicated proprietary Internet based catalog and ordering system designed specifically to connect
professional service provider customers directly to our inventory system;
• Mitchell shop management systems;
•
•
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; and
• Certified Auto Repair Center Program, a program that provides professional service provider customers with business tools
they can utilize to profitably grow and market their shops.
10
FORM 10-K Marketing to the Independently Owned Parts Store:
We also sell automotive products directly to independently owned parts stores (“jobber stores”) in certain market areas. These jobber
stores are generally located in areas not directly serviced by an O’Reilly store. We administer a proprietary, dedicated and distinct
marketing program specifically targeted to jobber stores called Parts City Auto Parts that currently provides automotive products to
approximately 190 jobber stores, with total annual sales of approximately $62 million. As a participant in this program, a jobber
store, which meets certain financial and operational standards, is permitted to indicate its Parts City Auto Parts membership through
the display of a trademarked logo owned by us. In return for a commitment to purchase automotive products from us, we provide
computer software for business management, competitive pricing, advertising, marketing and sales assistance to Parts City Auto Parts
affiliate stores.
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 products that we sell
are priced based upon a combination of internal gross margin targets and competitive reviews, with additional savings offered on
some items through special promotional pricing and volume discounts. 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 $268 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 $154 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
•
•
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; and
• mass merchandisers and online retailers 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, 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.
11
FORM 10-K 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.
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 56, Chief Executive Officer, has been an O’Reilly Team Member for 32 years. Mr. Henslee’s O’Reilly career
began as a Parts Specialist and progressed through the roles of Assistant Store Manager, District Manager, Computer Operations
Manager, Director of Computer Operations and Loss Prevention, Vice President of Store Operations, Senior Vice President, President
of Merchandise, Distribution, Information Systems and Loss Prevention, Chief Executive Officer and Co-President, and Chief
Executive Officer and President. Mr. Henslee has held the position of Chief Executive Officer since 2005.
Gregory D. Johnson, age 51, Co-President, has been an O’Reilly Team Member for 34 years. Mr. Johnson’s primary areas of
responsibility are Merchandise, Logistics, Purchasing, Inventory Management, Pricing, Advertising, Information Technology, Legal,
Risk Management, Loss Prevention, Human Resources and Finance. Mr. Johnson’s O’Reilly career began as a part-time Distribution
Center Team Member and progressed through the roles of Retail Systems Manager, Warehouse Management Systems (WMS)
Development Manager, Director of Distribution, Vice President of Distribution Operations, Senior Vice President of Distribution
Operations, and Executive Vice President of Supply Chain. Mr. Johnson has held the position of Co-President since February of
2017.
Jeff M. Shaw, age 54, Co-President, has been an O’Reilly Team Member for 28 years. Mr. Shaw’s primary areas of responsibility are
Store Operations, Sales, Distribution Operations, Real Estate, Jobber Sales and Acquisitions. Mr. Shaw’s O’Reilly career began as
a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Vice President of the
Southern Division, Vice President of Sales and Operations, Senior Vice President of Sales and Operations, and Executive Vice President
of Store Operations and Sales. Mr. Shaw has held the position of Co-President since February of 2017.
Tom McFall, age 46, Executive Vice President of Finance and Chief Financial Officer, has been an O’Reilly Team Member for 10
years. Mr. McFall’s primary areas of responsibility are Finance, Accounting, Information Technology, Legal, and Risk Management.
Mr. McFall’s career began with Ernst & Young LLP in Detroit, Michigan, where he achieved the position of Audit Manager, before
accepting a position with Murray’s Discount Auto Stores (“Murray’s”). Mr. McFall served Murray’s for eight years through the roles
12
FORM 10-K
of Controller, Vice President of Finance, and Chief Financial Officer, with direct responsibility for finance, accounting, and distribution
and logistics operations. After Murray’s was acquired by CSK Auto Corporation (“CSK”) in 2005, Mr. McFall held the position of
Chief Financial Officer of Midwest Operation for CSK. In May of 2006, Mr. McFall joined O’Reilly as Senior Vice President of
Finance and Chief Financial Officer. Mr. McFall has held the position of Executive Vice President of Finance and Chief Financial
Officer since 2007.
Tony Bartholomew, age 55, Senior Vice President of Professional Sales, has been an O’Reilly Team Member for 34 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.
Brad Beckham, age 38, Senior Vice President of Central Store Operations and Sales, has been an O’Reilly Team Member for 20 years.
Mr. Beckham’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Central Store 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, Vice President of Eastern Store Operations and Sales, and Senior Vice President of Eastern Store Operations
and Sales. Mr. Beckham has been a Senior Vice President since 2014 and has held the position of Senior Vice President of Central
Store Operations and Sales since July of 2016.
Keith Childers, age 57, Senior Vice President of Western Store Operations and Sales, has been an O’Reilly Team Member for 39
years. Mr. Childers’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Western Store 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 2014.
Robert Dumas, age 43, Senior Vice President of Eastern Store Operations and Sales, has been an O’Reilly Team Member for 25 years.
Mr. Dumas’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Eastern Store Operations. Mr. Dumas’s
O’Reilly career began as a Parts Specialist and progressed through the roles of Installer Service Specialist, Night Manager, Associate
Manager, Store Manager, District Manager, Regional Manager, and Divisional Vice President. Mr. Dumas has held the position of
Senior Vice President of Eastern Store Operations and Sales since July of 2016.
Larry Ellis, age 61, Senior Vice President of Distribution Operations, has been an O’Reilly Team Member for 41 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 2014.
Jeremy A. Fletcher, age 39, Senior Vice President of Finance and Controller, has been an O’Reilly Team Member for 11 years. Mr.
Fletcher’s primary area of responsibility is Finance. Mr. Fletcher’s O’Reilly career began as the Financial Reporting and Budgeting
Manager and progressed through the roles of Director of Finance, and Vice President of Finance and Controller. Prior to joining
O’Reilly, Mr. Fletcher worked as a Certified Public Accountant with a public accounting firm and in a financial reporting and planning
role for a Fortune 1000 corporation. Mr. Fletcher has held the position of Senior Vice President of Finance and Controller since
February of 2017.
Jeffrey L. Groves, age 51, Senior Vice President of Legal and General Counsel, has been an O’Reilly Team Member for 12 years. Mr.
Groves’s primary areas of responsibility are Corporate Governance, Regulatory Matters, and Internal Audit. Mr. Groves’s O’Reilly
career began as Director of Legal and Claim Services and progressed through the roles of Director of Legal and Claim Services and
General Counsel and Vice President of Legal and Claim Services and General Counsel. Prior to joining O’Reilly, Mr. Groves worked
in a private civil defense trial practice. Mr. Groves has held the position of Senior Vice President of Legal and General Counsel since
January of 2016.
Randy Johnson, age 61, Senior Vice President of Inventory Management, has been an O’Reilly Team Member for 43 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.
Scott Kraus, age 40, Senior Vice President of Real Estate and Expansion, has been an O’Reilly Team Member for 18 years. Mr.
Kraus’s primary areas of responsibility are Real Estate Expansion and Acquisitions. Mr. Kraus’s O’Reilly career began as a Parts
13
FORM 10-K Specialist and progressed through the roles of Store Manager, District Manager, Regional Field Sales Manager, Regional Manager,
Divisional Vice President, and Vice President of Real Estate. Mr. Kraus has held the position of Senior Vice President of Real Estate
and Expansion since January of 2016.
Jeffrey A. Lauro, age 50, Senior Vice President of Information Technology, has been an O’Reilly Team Member since 2015. Mr.
Lauro’s primary area of responsibility is Information Technology. Mr. Lauro has over 25 years of information technology experience
in the retail industry. Prior to joining O’Reilly, Mr. Lauro held the position of Chief Information Officer for Payless ShoeSource
(“Payless”), with direct responsibility for solution delivery, infrastructure and operations, and enterprise architecture. Prior to joining
Payless, Mr. Lauro was the Vice President, Global Information Technology Service Delivery Director for The TJX Companies, Inc.,
with direct responsibility for global information technology service management, operations, implementation and disaster recovery.
In 2015, Mr. Lauro joined O’Reilly as Senior Vice President of Information Technology and has held this position since that time.
C. David Wilbanks, age 45, Senior Vice President of Merchandise, has been an O’Reilly Team Member since 2012. Mr. Wilbanks’s
primary areas of responsibility are Merchandise and Pricing. Mr. Wilbanks has over 25 years of experience in the automotive
aftermarket industry. Mr. Wilbanks’s career began as a counter technician for an independent jobber and progressed to becoming an
ASE Certified Master Technician for an automotive dealership, before accepting a position with AutoZone, Inc. (“AutoZone”). Mr.
Wilbanks served AutoZone for twelve years as a financial analyst, Category Manager, and Director of Merchandise. In 2012, Mr.
Wilbanks joined O’Reilly as Vice President of Merchandise and has held the position of Senior Vice President of Merchandise since
March of 2016.
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®; CSK PROSHOP®; FIRST CALL®; FROM OUR STORE TO YOUR DOOR®; HI-LO®; IMPORT
DIRECT®; KRAGEN AUTO PARTS®; MASTER PRO®; MASTER PRO REFINISHING®; MICROGARD®; MURRAY®;
MURRAY’S AUTO PARTS®; 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®; PRIORITY PARTS®;
PROXONE®; QUIETECH®; REAL WORLD TRAINING®; SCHUCK’S®; SERIOUS ABOUT YOUR CAR…SO ARE WE!®;
SUPER START®; TOOLBOX®; and ULTIMA®. 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 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, Vice President of Investor
Relations, Financial Reporting and Planning, at 233 South Patterson Avenue, Springfield, Missouri, 65802.
Item 1A. Risk Factors
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company,” refer to O’Reilly Automotive,
Inc. and its subsidiaries.
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
14
FORM 10-K 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. In addition, restrictions on access to telematics, diagnostic tools and
repair information imposed by the original vehicle manufacturers or by governmental regulations may force vehicle owners to rely on
dealers to perform maintenance and repairs. If any of these events occur, or if unfavorable economic conditions challenge the consumer
environment, our business, results of operations, financial condition and cash flows could be adversely affected.
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. Furthermore, 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 do-it-yourself (“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 distribution centers (“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 2017 and beyond will be achieved. Failure
to achieve our growth objectives may negatively impact the trading price of our common stock. For a discussion of our growth strategies,
see the “Growth Strategy” section of Item 1 of this annual report on Form 10-K.
In order to be successful, we will need to 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
15
FORM 10-K 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, the unavailability of our key products at competitive prices or changes in
trade policies could affect our financial health.
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability or willingness
to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the
ability or willingness of these suppliers to sell us products on favorable terms. For example, financial or operational difficulties that our
suppliers may face could increase the cost of the products we purchase from them or our ability to source 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. Changes in U.S. trade policies, practices, tariffs or taxes could affect our
ability and our suppliers’ ability to source product at current volumes and/or prices.
Risks associated with future acquisitions may not lead to expected growth and could result in increased costs and inefficiencies.
We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause our
actual growth and profitability to differ from our expectations, examples of such risks include the following:
• We may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or
on other favorable terms.
• Our management’s attention may be distracted.
• We may fail to retain key personnel from acquired businesses.
• We may assume unanticipated legal liabilities and other problems.
• We may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we
acquire to realize economic, operational and other benefits.
• We may fail, or be unable to, discover liabilities of businesses that we acquire for which we or the subsequent owner or operator
may be liable.
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 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.
Risks related to us and unanticipated fluctuations in our quarterly operating results could affect our stock price.
We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating
results and should not be relied on as an indication of future performance. If our quarterly operating results fail to meet the expectations
of analysts, the trading price of our common stock could be negatively affected. We cannot be certain that our growth plans and business
strategies will be successful or that they will successfully meet the expectations of these analysts. If we fail to adequately address any
of these risks or difficulties, our stock price would likely suffer.
16
FORM 10-K 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 and failure to meet
such expectations, even slightly, could have an adverse effect on the market price of our common stock.
In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common stock to
decline. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has
often been 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 component of our cost of capital. These ratings are based upon, among other factors, our financial strength.
Our current credit ratings provide us with the ability to borrow funds at favorable rates. A downgrade in our current credit rating from
either rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed funds under our
unsecured revolving credit facility and a higher facility fee on commitments under our unsecured revolving credit facility. A downgrade
in our current credit rating could also adversely affect the market price and/or liquidity of our unsecured senior notes, preventing a holder
from selling the unsecured senior notes at a favorable price, as well as adversely affect our ability to issue new notes in the future. In
addition, a downgrade in our current credit rating could limit the financial institutions willing to commit funds to 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.
17
FORM 10-K Litigation, governmental proceedings, environmental legislation and regulations, employment legislation and regulations and
healthcare reform legislation 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 legislation and regulations, including requirements related to minimum wage. Our success depends,
in part, on our ability to manage operating costs and identify opportunities to reduce costs. Our ability to meet labor needs, while
controlling costs is subject to external factors, such as minimum wage legislation. A violation of, or change in, employment legislation
and/or regulations could hinder our ability to control costs, which could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
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 impacts.
If we cannot effectively mitigate the potential additional impacts of the healthcare reform legislation, our results of operations, financial
condition and cash flows may be adversely impacted.
Item 1B. Unresolved Staff Comments
None.
18
FORM 10-K Item 2. Properties
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company,” refer to O’Reilly Automotive,
Inc. and its subsidiaries.
Distribution centers, stores, and other properties
As of December 31, 2016, we operated 27 regional distribution centers (“DC”s), of which eight were leased (2.8 million operating square
footage) and 19 were owned (7.8 million operating square footage) for total DC operating square footage of 10.6 million square feet.
The following table provides information regarding our DCs, returns facility and corporate offices as of December 31, 2016:
Principal Use(s)
Operating Square
Footage (1)
Nature of
Occupancy
Lease Term
Expiration
Location
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
Houston, TX
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Kansas City, MO
Distribution Center
Knoxville, TN
Lakeland, FL
Lubbock, TX
Distribution Center
Distribution Center
Distribution Center
Moreno Valley, CA
Distribution Center
Naperville, IL
Nashville, TN
Distribution Center
Distribution Center
North Little Rock, AR Distribution Center
Oklahoma City, OK
Distribution Center
Phoenix, AZ
Puyallup, WA
Distribution Center
Distribution Center
Salt Lake City, UT
Distribution Center
Saraland, AL
Seagoville, TX
Selma, TX
Distribution Center
Distribution Center
Distribution Center
Springfield, MO
Distribution Center
Stockton, CA
Auburn, WA
Barre, VT
Springfield, MO
Springfield, MO
Phoenix, AZ
Springfield, MO
Springfield, MO
Springfield, MO
Distribution Center
Bulk Facility
Bulk Facility
Bulk Facility
Return/Deconsolidation Facility, Corporate Offices
Corporate Offices
Corporate Offices
Corporate Offices
Corporate Offices, Training and Technical Center
(1)
Includes floor and mezzanine operating square footage, excludes subleased square footage.
19
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
552,703
266,306
720,836
81,761
52,100
35,200
290,580
12,327
435,600
46,970
22,000
11,572,033
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
Owned
Leased
Leased
Leased
Owned
Owned
Leased
Owned
Leased
Owned
2/28/2025
1/31/2031
10/31/2024
12/31/2018
3/31/2022
6/30/2025
12/31/2022
6/30/2035
6/30/2018
11/30/2018
11/30/2022
8/31/2024
FORM 10-K The leased distribution 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.
Of the 4,829 stores that we operated at December 31, 2016, 1,912 stores were owned, 2,842 stores were leased from unaffiliated parties
and 75 stores were leased from entities, in which certain of our affiliated directors, or members of our affiliated director’s immediate
family, and an executive officer of the Company 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 six of the seven 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
March 31, 2018, 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 27 existing DCs is approximately 5,500 stores, providing a growth capacity of more
than 650 stores. We believe the growth capacity in our 27 existing DCs will provide us with the DC infrastructure needed for near-term
expansion. However, as we expand our geographic footprint, we will continue to evaluate our existing distribution system infrastructure
and will adjust our distribution system capacity as needed to support our future growth.
Item 3. Legal Proceedings
O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) is currently involved in litigation incidental to the ordinary
conduct of the Company’s business. The Company 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.
As previously reported, 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. On November 30, 2016, the Company through its affiliates, entered into a Stipulation for Entry of Final
Judgment and Permanent Injunction, including certain injunctive and monetary relief within the previously established accruals.
As previously reported, on June 18, 2015, a jury in Greene County, Missouri returned an unfavorable verdict in a litigated contract dispute
in the matter Meridian Creative Alliance vs. O’Reilly Automotive Stores, Inc. et. al. in the amount of $12.5 million. The Company has
vigorously challenged the verdict in the Court of Appeals. Following the matter being fully briefed by the parties, oral argument was
held in the Court of Appeals on January 12, 2017. The Court currently has the matter under consideration. As of December 31, 2016,
the Company had reserved $18.6 million with respect to this matter.
Item 4. Mine Safety Disclosures
Not applicable.
20
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 21, 2017, the Company had approximately 238,000 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
2016
2015
High
Low
High
Low
$
$
276.64
277.82
290.63
285.53
290.63
$
$
232.16
253.32
271.33
253.00
232.16
$
$
219.38
232.41
256.47
276.26
276.26
$
$
179.96
214.05
230.82
247.29
179.96
Sales of unregistered securities:
There were no sales of unregistered securities during the year ended December 31, 2016.
Issuer purchases of equity securities:
The following table identifies all repurchases during the fourth quarter ended December 31, 2016, of any of the Company’s securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended, by or on behalf of the Company or any affiliated purchaser
(in thousands, except per share data):
Period
October 1, 2016, to October 31, 2016
November 1, 2016, to November 30, 2016
December 1, 2016, to December 31, 2016
Total as of December 31, 2016
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
Maximum Dollar Value
of Shares that May Yet
Be Purchased Under the
Programs
(1)
288
$
1,265
472
2,025
$
276.77
264.44
278.40
269.45
$
$
288
1,265
472
2,025
603,610
1,019,107
887,826
(1) Under the Company’s share repurchase program, as approved by its 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’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase
program at any time, without prior notice. As announced on February 10, 2016, May 27, 2016, and November 16, 2016, the Company’s Board of
Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $750 million,
resulting in a cumulative authorization amount of $7.8 billion. Each additional authorization is effective for a three-year period, beginning on its
respective announcement date. The authorization under the share repurchase program that currently has capacity is scheduled to expire on
November 16, 2019. No other share repurchase programs existed during the twelve months ended December 31, 2016.
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, 2016, at an average price per share of $264.21, for a total investment of $1.5 billion. Subsequent
to the end of the year and through February 28, 2017, the Company repurchased an additional 1.4 million shares of its common stock,
at an average price per share of $267.32, for a total investment of $387.5 million. The Company has repurchased a total of 58.4 million
shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through
February 28, 2017, at an average price of $124.14, for a total aggregate investment of $7.2 billion.
21
FORM 10-K Stock performance graph:
The graph below shows the cumulative total shareholder return assuming the investment of $100, on December 31, 2011, 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
O’Reilly Automotive, Inc.
S&P 500 Retail Index
S&P 500
2011
2012
2013
2014
2015
2016
$
$
100
100
100
$
$
112
125
113
$
$
161
180
147
$
$
241
197
164
$
$
317
245
163
$
$
348
257
178
December 31,
22
FORM 10-K Item 6. Selected Financial Data
The table below compares O’Reilly Automotive, Inc.’s (the “Company”) selected financial data over a ten-year period.
Years ended December 31,
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
(In thousands, except per
share, Team Members, stores
and ratio data)
INCOME STATEMENT
DATA:
Sales ($)
8,593,096
7,966,674
7,216,081
6,649,237
6,182,184
5,788,816
5,397,525
4,847,062
3,576,553
2,522,319
Cost of goods sold, including
warehouse and distribution
expenses
4,084,085
3,804,031
3,507,180
3,280,236
3,084,766
2,951,467
2,776,533
2,520,534
1,948,627
1,401,859
Gross profit
4,509,011
4,162,643
3,708,901
3,369,001
3,097,418
2,837,349
2,620,992
2,326,528
1,627,926
1,120,460
Selling, general and
administrative expenses
Former CSK officer clawback
Legacy CSK Department of
Justice investigation charge
2,809,805
2,648,622
2,438,527
2,265,516
2,120,025
1,973,381
1,887,316
1,788,909
1,292,309
815,309
—
—
—
—
—
—
—
—
—
—
(2,798)
—
—
20,900
—
—
—
—
—
—
Operating income
1,699,206
1,514,021
1,270,374
1,103,485
977,393
866,766
712,776
537,619
335,617
305,151
Write-off of asset-based
revolving credit agreement
debt issuance costs
Termination of interest rate
swap agreements
Gain on settlement of note
receivable
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(21,626)
(4,237)
—
—
—
11,639
—
—
—
—
—
—
Other income (expense), net
Total other income (expense)
(62,015)
(62,015)
(53,655)
(48,192)
(44,543)
(35,872)
(25,130)
(35,042)
(40,721)
(33,085)
(53,655)
(48,192)
(44,543)
(35,872)
(50,993)
(23,403)
(40,721)
(33,085)
Income before income taxes
1,637,191
1,460,366
1,222,182
1,058,942
Provision for income taxes
Net income ($)
599,500
1,037,691
529,150
931,216
444,000
778,182
388,650
670,292
941,521
355,775
585,746
815,773
308,100
507,673
689,373
270,000
419,373
496,898
189,400
307,498
302,532
116,300
186,232
—
—
—
2,337
2,337
307,488
113,500
193,988
Basic earnings per common
share:
Earnings per share – basic ($)
10.87
9.32
7.46
6.14
4.83
3.77
3.02
2.26
1.50
1.69
Weighted-average common
shares outstanding – basic
Earnings per common share -
assuming dilution:
Earnings per share – assuming
dilution ($)
Weighted-average common
shares outstanding – assuming
dilution
SELECTED OPERATING
DATA:
Number of Team Members at
year end
Number of stores at year end
(a)
Total store square footage at
year end (b)
Sales per weighted-average
store (c)($)
Sales per weighted-average
square foot (b)(d)($)
Percentage increase in
comparable store sales (e)(f)
95,447
99,965
104,262
109,244
121,182
134,667
138,654
136,230
124,526
114,667
10.73
9.17
7.34
6.03
4.75
3.71
2.95
2.23
1.48
1.67
96,720
101,514
106,041
111,101
123,314
136,983
141,992
137,882
125,413
116,080
74,580
71,621
67,569
61,909
53,063
49,324
46,858
44,880
40,735
23,576
4,829
4,571
4,366
4,166
3,976
3,740
3,570
3,421
3,285
1,830
35,123
33,148
31,591
30,077
28,628
26,530
25,315
24,200
23,205
12,439
1,826
1,769
1,678
1,614
1,590
1,566
1,527
1,424
1,379
1,430
251
244
232
224
224
221
216
202
201
212
4.8%
7.5%
6.0%
4.6%
3.5%
4.6%
8.8%
4.8%
1.3%
3.7%
23
FORM 10-K Years ended December 31,
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
(In thousands, except per share,
Team Members, stores and ratio
data)
BALANCE SHEET DATA:
Working capital (g)($)
(142,674)
(36,372)
252,082
430,832
478,093
1,028,330
1,029,861
900,857
749,276
573,328
Total assets (g)($)
7,204,189
6,676,684
6,532,083
6,057,895
5,741,241
5,494,174
5,031,950
4,695,536
4,551,586
2,279,737
Inventory turnover (h)
1.5
1.5
1.4
1.4
1.4
1.5
1.4
1.4
1.6
1.6
Accounts payable to inventory
(i)
Current portion of long-term
debt and short-term debt ($)
Long-term debt, less current
portion (g)($)
105.7%
99.1%
94.6%
86.6%
84.7%
64.4%
44.3%
42.8%
46.9%
43.2%
—
—
25
67
222
662
1,431
106,708
8,131
25,320
1,887,019
1,390,018
1,388,397
1,386,828
1,087,789
790,585
357,273
684,040
724,564
75,149
Shareholders’ equity ($)
1,627,136
1,961,314
2,018,418
1,966,321
2,108,307
2,844,851
3,209,685
2,685,865
2,282,218
1,592,477
CASH FLOW DATA:
Cash provided by operating
activities ($)
Capital expenditures ($)
Free cash flow (j)($)
1,454,167
1,281,476
1,190,430
908,026
1,251,555
1,118,991
476,344
977,823
414,020
867,456
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
338,268
(129,579)
(43,137)
16,763
(a)
In 2008, 2012, and 2016, the Company acquired CSK Auto Corporation (“CSK”), VIP Parts, Tires & Service (“VIP”), and Bond Auto Parts (“Bond”), respectively.
The 2008 CSK acquisition added 1,342 stores, the 2012 VIP acquisition added 56 stores, and the 2016 Bond acquisition added 48 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.
(b) Total square footage includes normal selling, office, stockroom and receiving space.
(c) Sales per weighted-average store are weighted to consider the approximate dates of store openings, acquisitions or closures.
(d) Sales per weighted-average square foot are weighted to consider the approximate dates of store openings, acquisitions, expansions or closures.
(e) Comparable store sales are calculated based on the change in sales of stores open at least one year and excludes sales of specialty machinery, sales to independent
parts stores, sales to Team Members, sales from Leap Day during the years ended December 31, 2016, 2012 and 2008, and sales during the one to two week period
certain CSK branded stores were closed for conversion.
(f) Comparable 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 2.4% 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.
(g) Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of new accounting standards during
the fourth quarter ended December 31, 2015. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual
report on Form 10-K for the year ended December 31, 2015.
(h)
Inventory turnover is calculated as cost of goods sold for the last 12 months divided by average inventory. Average inventory is calculated as the average of inventory
for the trailing four quarters used in determining the denominator.
(i) Accounts payable to inventory is calculated as accounts payable divided by inventory.
(j) Free cash flow is calculated as net cash provided by operating activities less capital expenditures for the period.
24
FORM 10-K Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” or “O’Reilly,” refer to O’Reilly
Automotive, Inc. and its subsidiaries.
In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results
of operations, liquidity and certain other factors that may affect our future results, including
•
•
•
•
•
•
•
•
•
•
an overview of the key drivers of the automotive aftermarket industry;
key events and recent developments within our company;
our results of operations for the years ended December 31, 2016, 2015 and 2014;
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, 2016, and 2015; and
recent accounting pronouncements that may affect our Company.
The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements, related
notes and other financial information, forward-looking statements and other risk factors included elsewhere in this annual report.
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. 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, 2016, 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, 2016,
we operated 4,829 stores in 47 states.
Operating within the retail industry, we are influenced by a number of general macroeconomic factors including, but not limited to, fuel
costs, unemployment rates, consumer preferences and spending habits, and competition. We have ongoing initiatives aimed at tailoring
our product offering to adjust to customers’ changing preferences, and we also have initiatives focused on marketing and training to
educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.
25
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. In total, vehicles in the U.S. are driven approximately 3 trillion miles per year,
resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary
to keep these vehicles in operation. According to the Department of Transportation, the number of total miles driven in the U.S.
increased 2.8%, 3.5% and 1.7% in 2016, 2015 and 2014, respectively, and we expect to continue to see modest improvements
in total miles driven in the U.S., supported by an increasing number of registered vehicles on the road, resulting in continued
demand for automotive aftermarket products.
• Number of U.S. Registered Vehicles, New Light Vehicle Registrations and Average Vehicle Age – The total number of
vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the
automotive aftermarket industry. As reported by The Auto Care Association, the total number of registered vehicles increased
6% from 2005 to 2015, bringing the number of light vehicles on the road to 258 million by the end of 2015. For the year ended
December 31, 2016, the seasonally adjusted annual rate of light vehicles sales in the U.S. (“SAAR”) was approximately 18.3
million, contributing to the continued growth in the total number of registered vehicles on the road. In the past decade, vehicle
scrappage rates have remained relatively stable, ranging from 4.4% to 5.7% annually. As a result, over the past decade, the
average age of the U.S. vehicle population has increased, growing 22%, from 9.4 years in 2005 to 11.5 years in 2015. 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 that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate
strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent
mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest
in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet,
will support continued demand for automotive aftermarket products.
• Unemployment – Unemployment, underemployment, the threat of future joblessness and the uncertainty surrounding the overall
economic health of the U.S. have a negative impact on consumer confidence and the level of consumer discretionary spending.
Long-term trends of high unemployment have historically impeded the growth of annual miles driven, as well as decrease
consumer discretionary spending, both of which negatively impact demand for products sold in the automotive aftermarket
industry. As of December 31, 2015, the U.S. unemployment rate was 5.0%, and as of December 31, 2016, the U.S. unemployment
rate decreased to 4.7%. We believe, total employment should remain at healthy levels with marginal improvements, and we
would expect to see an increase in commuter traffic with a growing work force, further aiding the positive trend of growth of
total miles driven in the U.S. and demand for automotive aftermarket products.
We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on
our dual market strategy and the core O’Reilly values of hard work and excellent customer service.
KEY EVENTS AND RECENT DEVELOPMENTS
Several key events have had or may have a significant impact on our operations and are identified below:
• Under the Company’s share repurchase program, as approved by our Board of Directors in January of 2011, we may, from time
to time, repurchase shares of our common stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market
conditions. Our Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program
at any time, without prior notice. As announced on February 10, 2016, May 27, 2016, and November 16, 2016, our Board of
Directors each time approved a resolution to increase the authorization amount under our share repurchase program by an
additional $750 million, resulting in a cumulative authorization amount of $7.75 billion. Each additional authorization is effective
for a three-year period, beginning on its respective announcement date. As of February 28, 2017, we had repurchased
approximately 58.4 million shares of our common stock at an aggregate cost of $7.25 billion under this program.
• On March 8, 2016, we issued $500 million aggregate principal amount of unsecured 3.550% Senior Notes due 2026 (“3.550%
Senior Notes due 2026”) at a price to the public of 99.832% of their face value with United Missouri Bank, N.A. as trustee.
Interest on the 3.550% Senior Notes due 2026 is payable on March 15 and September 15 of each year, which began with the
first interest payment on September 15, 2016, and is computed on the basis of a 360-day year.
• At the close of business on December 1, 2016, we completed an asset purchase of Bond Auto Parts (“Bond”), a large, privately
held automotive parts supplier operating 48 stores throughout Vermont, New Hampshire, Massachusetts and New York.
26
FORM 10-K RESULTS OF OPERATIONS
The following table includes income statement data as a percentage of sales for the years ended December 31, 2016, 2015 and 2014:
Sales
Cost of goods sold, including warehouse and distribution expenses
Gross profit
Selling, general and administrative expenses
Operating income (1)
Interest expense
Interest income
Income before income taxes
Provision for income taxes
Net income
For the Year Ended
December 31,
2016
2015
2014
100.0%
100.0%
100.0%
47.5
52.5
32.7
19.8
(0.8)
0.1
19.1
7.0
47.7
52.3
33.2
19.0
(0.7)
—
18.3
6.6
48.6
51.4
33.8
17.6
(0.7)
—
16.9
6.1
12.1%
11.7%
10.8%
(1) Each percentage of sales amount is computed independently and may not compute to presented totals.
2016 Compared to 2015
Sales:
Sales for the year ended December 31, 2016, increased $626 million to $8.59 billion from $7.97 billion for the same period one year ago,
representing an increase of 8%. Comparable store sales for stores open at least one year increased 4.8% and 7.5% for the years ended
December 31, 2016 and 2015, 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 Leap Day
during the year ended December 31, 2016.
The following table presents the components of the increase in sales for the year ended December 31, 2016 (in millions):
Increase in Sales for the Year Ended
December 31, 2016,
Compared to the Same Period in 2015
Store sales:
Comparable store sales
Non-comparable store sales:
Sales for stores opened throughout 2015, excluding stores open at least one year that are
included in comparable store sales
Sales for stores opened throughout 2016 and sales from acquired Bond stores
Sales from Leap Day
Sales in 2015 for stores that have closed
Non-store sales:
Includes sales of machinery and sales to independent parts stores and Team Members
Total increase in sales
$
$
375
115
106
24
(4)
10
626
We believe the increased sales achieved by our stores were the result of store growth, sales from one additional day due to Leap Day for
the year ended December 31, 2016, sales from the acquired 48 Bond stores, the high levels of customer service provided by our well-
trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory
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.
27
FORM 10-K Our comparable store sales increase for the year ended December 31, 2016, was driven by increases in average ticket values and customer
transaction counts from both our DIY and professional service provider customers. The improvement in average ticket values was the
result of the increasing complexity and cost of replacement parts necessary to maintain the current population of better engineered and
more technically advanced vehicles. These better engineered, more technically advanced vehicles require less frequent repairs, as the
component parts are more durable and last for longer periods of time. This decrease in repair frequency creates pressure on customer
transaction counts; however, when repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit to average
ticket values. Customer transaction counts for both DIY and professional service provider customers increased for the year ended
December 31, 2016, despite the added pressure from the better engineered, more technically advance vehicles requiring less frequent
repairs. The increase in customer transaction counts was supported by an increase in miles driven, and the corresponding increase in
vehicle maintenance, lower year-over-year gas prices and decreasing unemployment levels, creating an overall positive macroeconomic
environment. The increase in our DIY customer transaction counts benefited from our continued focus on ensuring our stores are staffed
with knowledgeable parts professionals to assist our DIY customers during high DIY traffic periods, such as nights and weekends. The
increase in our professional service provider customer transaction counts benefited from the continued growth of our less mature markets
and our better parts and service availability.
We opened 210 net, new stores and acquired 48 Bond stores during the year ended December 31, 2016, compared to opening 205 net,
new stores for the year ended December 31, 2015. As of December 31, 2016, we operated 4,829 stores in 47 states compared to 4,571
stores in 44 states at December 31, 2015. We anticipate new store growth will be 190 net, new store openings in 2017, slightly below
the 2016 net, new store openings, due to the resources necessary to convert the acquired 48 Bond stores to our systems, inventory selection
and décor packages during 2017.
Gross profit:
Gross profit for the year ended December 31, 2016, increased to $4.51 billion (or 52.5% of sales) from $4.16 billion (or 52.3% of sales)
for the same period one year ago, representing an increase of 8%. The increase in gross profit dollars for the year ended December 31,
2016, was primarily a result of the increase in comparable store sales at existing stores, sales from new stores and one additional day due
to Leap Day. The increase in gross profit as a percentage of sales for the year ended December 31, 2016, was primarily due to product
acquisition cost improvements, partially offset by a larger non-cash last-in, first-out (“LIFO”) impact. Product acquisition cost
improvements are the result of our ongoing negotiations with our suppliers to improve our inventory purchase costs based on our increasing
scale. The non-cash LIFO impact is the result of these continued product acquisition cost reductions, and due to these reductions, we
fully depleted our LIFO reserve in 2013. 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 years ended December 31, 2016 and 2015, our LIFO costs were written
down by approximately $49 million and $28 million, respectively, to reflect replacement cost.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2016, increased to $2.81 billion (or 32.7% of
sales) from $2.65 billion (or 33.2% of sales) for the same period one year ago, representing an increase of 6%. The increase in total
SG&A dollars for the year ended December 31, 2016, was primarily the result of additional Team Members, facilities and vehicles to
support our increased sales and store count and one additional day due to Leap Day. The decrease in SG&A as a percentage of sales for
the year ended December 31, 2016, was primarily the result of increased leverage of store occupancy costs on comparable store sales
growth and a $19 million litigation loss charge in the prior year, resulting from an adverse verdict in a contract dispute with a former
service provider.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2016, increased to $1.70 billion (or 19.8%
of sales) from $1.51 billion (or 19.0% of sales) for the same period one year ago, representing an increase of 12%.
Other income and expense:
Total other expense for the year ended December 31, 2016, increased to $62 million (or 0.7% of sales), from $54 million (or 0.7% of
sales) for the same period one year ago, representing an increase of 16%. The increase in total other expense for the year ended December 31,
2016, was primarily the result of increased interest expense on higher average outstanding borrowings and increased amortization of debt
issuance costs, partially offset by an increase in the value of our trading securities. For additional information concerning our trading
securities, see Notes to Consolidated Financial Statements in this annual report on Form 10-K.
Income taxes:
Our provision for income taxes for the year ended December 31, 2016, increased to $600 million (36.6% effective tax rate) from $529
million (36.2% effective tax rate) for the same period one year ago, representing an increase of 13%. The increase in our provision for
income taxes for the year ended December 31, 2016, was the result of higher taxable income in 2016, primarily driven by our strong
operating results, and higher effective tax rates. The increase in our effective tax rate for the year ended December 31, 2016, was primarily
28
FORM 10-K due to a larger amount of favorable resolutions of historical tax matters in 2015, compared to 2016, and a smaller benefit in 2016 from
the realization of employment tax credits.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2016, increased to $1.04 billion (or 12.1% of
sales), from $931 million (or 11.7% of sales) for the same period one year ago, representing an increase of 11%.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2016, increased 17% to $10.73 on 97 million shares from $9.17
on 102 million shares for the same period one year ago.
2015 Compared to 2014
Sales:
Sales for the year ended December 31, 2015, increased $751 million to $7.97 billion from $7.22 billion for the same period one year
prior, representing an increase of 10%. Comparable store sales for stores open at least one year increased 7.5% and 6.0% for the years
ended December 31, 2015 and 2014, respectively. Comparable store sales were 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, 2015 (in millions):
Increase in Sales for the Year Ended
December 31, 2015,
Compared to the Same Period in 2014
Store sales:
Comparable store sales
Non-comparable store sales:
Sales for stores opened throughout 2014, excluding stores open at least one year that are
included in comparable store sales
Sales for stores opened throughout 2015
Sales in 2014 for stores that have closed
Non-store sales:
Includes sales of machinery and sales to independent parts stores and Team Members
Total increase in sales
$
$
531
117
102
(6)
7
751
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 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 focus on serving both DIY and
professional service provider customers.
Our comparable store sales increase for the year ended December 31, 2015, was driven by increases in average ticket values and customer
transaction counts for both our DIY and professional service provider customers. The improvement in average ticket values was the
result of the increasing complexity and cost of replacement parts necessary to maintain the current population of better engineered and
more technically advanced vehicles, and this improvement was without the benefit of an increase in the selling price of like kind items.
These better engineered vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of
time, which does create pressure on customer transaction counts; however, when repairs are required, the cost of replacement parts is,
on average, greater. Despite pressure from these better engineered vehicles requiring less frequent repairs, customer transaction counts
increased for both our DIY and professional service provider customers for the year ended December 31, 2015. These increases in
transaction counts were driven by an increase in miles driven and a corresponding increase in vehicle maintenance, which was led by
lower gas prices and decreasing unemployment levels. These factors created a positive macroeconomic environment, which was beneficial
to both DIY and professional service provider customer transaction counts. In addition, the increase in our DIY transaction counts
benefited from our continued focus on staffing our stores with knowledgeable parts professionals to assist our DIY customers during
high DIY traffic periods, including nights and weekends, and the increase in our professional service provider customer transaction counts
benefited from the continued growth of our less mature stores.
29
FORM 10-K We opened 205 net, new stores during the year ended December 31, 2015, compared to 200 net, new stores for the year ended December
31, 2014. As of December 31, 2015, we operated 4,571 stores in 44 states compared to 4,366 stores in 43 states at December 31, 2014.
Gross profit:
Gross profit for the year ended December 31, 2015, increased to $4.16 billion (or 52.3% of sales) from $3.71 billion (or 51.4% of sales)
for the same period one year prior, representing an increase of 12%. The increase in gross profit dollars for the year ended December
31, 2015, 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, 2015, was primarily due to product acquisition cost improvements,
a smaller non-cash negative LIFO impact and distribution system efficiencies. Acquisition cost improvements are the result of our ongoing
negotiations with our suppliers to improve our inventory purchase costs based on our increasing scale. The non-cash negative LIFO
impact is the result of our continued product acquisition cost reductions, and due to these acquisition cost reductions, we fully depleted
our LIFO reserve in 2013. Our policy is to not write up inventory in excess of replacement cost, and accordingly, we were effectively
valuing our inventory at replacement cost. During the years ended December 31, 2015 and 2014, our LIFO costs were written down by
approximately $28 million and $41 million, respectively, to reflect replacement cost. Distribution system efficiencies are the result of
leverage on our increased sales volumes and lower fuel costs.
Selling, general and administrative expenses:
SG&A for the year ended December 31, 2015, increased to $2.65 billion (or 33.2% of sales) from $2.44 billion (or 33.8% of sales) for
the same period one year prior, representing an increase of 9%. The increase in total SG&A dollars for the year ended December 31,
2015, was primarily the result of additional Team Members, facilities and vehicles to support our increased sales and store count and a
$19 million litigation loss charge from an adverse verdict in a contract dispute with a former service provider. The decrease in SG&A
as a percentage of sales for the year ended December 31, 2015, 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, 2015, increased to $1.51 billion (or 19.0%
of sales) from $1.27 billion (or 17.6% of sales) for the same period one year prior, representing an increase of 19%.
Other income and expense:
Total other expense for the year ended December 31, 2015, increased to $54 million (or 0.7% of sales), from $48 million (or 0.7% of
sales) for the same period one year prior, representing an increase of 11%. The increase in total other expense for the year ended December
31, 2015, was primarily the result of a decrease in the amount of capitalized interest in 2015, as compared to the same period in 2014.
Income taxes:
Our provision for income taxes for the year ended December 31, 2015, increased to $529 million (36.2% effective tax rate) from $444
million (36.3% effective tax rate) for the same period one year prior, representing an increase of 19%. The increase in our provision for
income taxes for the year ended December 31, 2015, was the result of higher taxable income in 2015, driven by our strong operating
results. The decrease in our effective tax rate for the year ended December 31, 2015, was primarily due to the non-typical favorable tax
reserve adjustment, which was related to historical tax positions due to a previous acquisition, partially offset by a decreased benefit in
2015 from the realization of employment tax credits.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2015, increased to $931 million (or 11.7% of
sales), from $778 million (or 10.8% of sales) for the same period one year prior, representing an increase of 20%.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2015, increased 25% to $9.17 on 102 million shares from $7.34
on 106 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 customer 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
30
FORM 10-K 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.
Liquidity and related ratios:
The following table highlights our liquidity and related ratios as of December 31, 2016 and 2015 (dollars in millions):
Liquidity and Related Ratios
Current assets
Current liabilities
Working capital (1)
Total debt
Total equity
Debt to equity (2)
December 31,
2016
2015
Percentage
Change
$
$
$
$
3,258
3,401
(143)
1,887
1,627
1.16:1
3,010
3,046
(36)
1,390
1,961
0.71:1
8.2 %
11.7 %
(297.2)%
35.8 %
(17.0)%
63.4 %
(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%, current liabilities increased 12%, total debt increased 36% and total equity decreased 17% from 2015 to
2016. The increase in current assets was primarily due to the increase in inventory, resulting from the opening of 210 net, new stores
and acquiring 48 Bond stores in 2016. 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 supplier
financing program during the year. Our accounts payable to inventory ratio was 105.7% as of December 31, 2016, as compared to 99.1%
in the prior year. The increase in total debt was attributable to the issuance of $500 million of 3.550% Senior Notes due 2026. The
decrease in total equity resulted from the impact of share repurchase activity, under our share repurchase program, on additional paid-
in-capital and retained earnings, partially offset by an increase in retained earnings from strong net income for the year.
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31,
2016, 2015 and 2014 (in thousands):
Liquidity
Total cash provided by/(used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Capital expenditures
Free cash flow (1)
For the Year Ended
December 31,
2016
2015
2014
$
$
$
1,454,167
(529,096)
(894,774)
30,297
476,344
977,823
$
$
$
1,281,476
(407,188)
(1,008,547)
(134,259)
414,020
867,456
$
$
$
1,190,430
(423,402)
(747,786)
19,242
429,987
760,443
(1) 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 2016 compared to 2015 was primarily due to an increase in net income and
a greater decrease in net inventory investment, partially offset by a decrease in income taxes payable. Net inventory investment reflects
our investment in inventory, net of the amount of accounts payable to suppliers. Our accounts payable to inventory ratio was 105.7%,
99.1% and 94.6% as of December 31, 2016, 2015 and 2014, respectively. The larger increase in our accounts payable to inventory ratio
in 2016 was primarily attributable to incrementally better terms from our suppliers and additional suppliers participating in our supplier
financing programs. The decrease from income taxes payable in 2016, compared to the increase in income taxes payable in 2015, was
primarily the result of a prepaid income taxes position at the end of 2016, versus an income taxes payable position at the end of 2015.
The increase in net cash provided by operating activities in 2015 compared to 2014 was primarily due to an increase in net income and
a greater increase in income taxes payable, partially offset by a smaller decrease in net inventory investment and a decrease in accrued
payroll-related liabilities. The larger increase in income taxes payable was primarily the result of higher accrued income taxes payable
at the end of 2015, as compared to the end of 2014. Our net inventory investment continues to decrease as a result of the impact of our
enhanced supplier financing programs. The smaller decrease in net inventory investment in 2015 was the result of fewer new suppliers
entering our supplier financing programs in 2015, as compared to 2014. Our accounts payable to inventory ratio was 99.1% and 94.6%
31
FORM 10-K as of December 31, 2015 and 2014, respectively. The decrease in accrued payroll-related liabilities during 2015, as compared to the
increase in 2014, was due to the timing of pay period end dates versus check dates.
Investing activities:
The increase in net cash used in investing activities in 2016 compared to 2015 was primarily the result of an increase in capital expenditures
and other investing activities in 2016. Total capital expenditures were $476 million and $414 million in 2016 and 2015, respectively,
and the increase was primarily related to the timing of property acquisitions, closings and construction costs for new stores and our
distribution expansion projects during 2016, as compared to 2015. The increase in other investing activities was primarily due to small
acquisitions during 2016.
The increase in net cash used in investing activities in 2015 compared to 2014 was primarily the result of a decrease in capital expenditures.
Total capital expenditures were $414 million and $430 million in 2015 and 2014, respectively, and the decrease was primarily related to
the construction of additional distribution facilities in 2014 to support our ongoing store growth, partially offset by an increase in the
number of new store openings in 2015.
We opened 210, 205, and 200 net, new stores in 2016, 2015 and 2014, respectively, and acquired 48 Bond stores in 2016. We plan to
open 190 net, new stores in 2017. The current 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
$1.5 million to $1.8 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.
Financing activities:
The decrease in net cash used in financing activities during 2016 compared to 2015 was primarily attributable to net proceeds from the
issuance of long-term debt during 2016, partially offset by a greater impact from the repurchases of our common stock under our share
repurchase program during 2016.
The increase in net cash used in financing activities during 2015 compared to 2014 was primarily attributable to a greater impact from
the repurchases of our common stock under our share repurchase program during 2015.
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, as further
amended by Amendment No. 2 dated as of July 2, 2013, and as further amended by Amendment No. 3 dated as of June 18, 2015 (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 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.
As of December 31, 2016 and 2015, we had outstanding letters of credit, primarily to support obligations related to workers’ compensation,
general liability and other insurance policies, in the amounts of $39 million and $38 million, respectively, reducing the aggregate availability
under the Revolving Credit Facility by those amounts. As of December 31, 2016 and 2015, we had no outstanding borrowings under the
Revolving Credit Facility.
Senior Notes:
On March 8, 2016, we issued $500 million aggregate principal amount of unsecured 3.550% Senior Notes due 2026 (“3.550% Senior
Notes due 2026”) at a price to the public of 99.832% of their face value with United Missouri Bank, N.A. (“UMB”) as trustee. Interest
on the 3.550% Senior Notes due 2026 is payable on March 15 and September 15 of each year, which began with the first interest payment
on September 15, 2016, and is computed on the basis of a 360-day year.
We have issued a cumulative $1.90 billion aggregate principal amount of unsecured senior notes, which are due between January 2021
and March 2026 with UMB as trustee. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is
computed on the basis of a 360-day year.
The senior notes are guaranteed on a senior unsecured basis by each of our 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
32
FORM 10-K 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.
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. As of December 31, 2016, we were in
compliance with the covenants applicable to our senior notes.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage
ratio of 2.50 times and a maximum consolidated leverage ratio of 3.00 times. The consolidated fixed charge coverage ratio includes a
calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense
(“EBITDAR”). Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes
a calculation of adjusted debt to 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 6.15
times and 5.99 times as of December 31, 2016 and 2015, respectively, and a consolidated leverage ratio of 1.63 times and 1.52 times as
of December 31, 2016 and 2015, 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, 2016 and 2015 (dollars in
thousands):
GAAP net income
Add: Interest expense
Rent expense
Provision for income taxes
Depreciation expense
Amortization expense
Non-cash share-based compensation
Non-GAAP EBITDAR
Interest expense
Capitalized interest
Rent expense
Total fixed charges
Consolidated fixed charge coverage ratio
GAAP debt
Add: Stand-by letters of credit
Discount on senior notes
Debt issuance costs
Six-times rent expense
Non-GAAP adjusted debt
Consolidated leverage ratio
$
$
$
$
$
$
For the Year Ended
December 31,
2016
2015
1,037,691
$
70,931
283,253
599,500
217,009
857
18,859
2,228,100
70,931
7,933
283,253
362,117
6.15
$
$
$
931,216
57,129
273,259
529,150
203,388
6,868
21,899
2,022,909
57,129
7,423
273,259
337,811
5.99
1,887,019
$
1,390,018
38,680
3,149
9,832
1,699,518
3,638,198
$
1.63
37,536
2,877
7,105
1,639,554
3,077,090
1.52
33
FORM 10-K 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:
In January of 2011, our Board of Directors approved a share repurchase program. Under the program, we may, from time to time,
repurchase shares of our common stock, solely through open market purchases effected through a broker dealer at prevailing market
prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. Our Board of
Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice.
As announced on February 10, 2016, May 27, 2016, and November 16, 2016, our Board of Directors each time approved a resolution to
increase the authorization amount under our share repurchase program by an additional $750 million, resulting in a cumulative authorization
amount of $7.75 billion. Each additional authorization is effective for a three-year period, beginning on its respective announcement
date.
The following table identifies shares of our common stock that have been repurchased as part of our publicly announced share repurchase
program (in thousands, except per share data):
Shares repurchased
Average price per share
Total investment
For the Year Ended
December 31,
2016
2015
$
$
5,698
264.21
1,505,371
$
$
4,901
231.81
1,136,139
As of December 31, 2016, we had $888 million remaining under our share repurchase program. Subsequent to the end of the year and
through February 28, 2017, we repurchased an additional 1.4 million shares of our common stock under our share repurchase program,
at an average price of $267.32, for a total investment of $388 million. We have repurchased a total of 58 million shares of our common
stock under our share repurchase program since the inception of the program in January of 2011 and through February 28, 2017, at an
average price of $124.14 for a total aggregate investment of $7.25 billion. As of February 28, 2017, we had approximately $500 million
remaining under our share repurchase program.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of December 31, 2016, 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 2017,
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 12 “Income Taxes” to the Consolidated Financial Statements. These estimates are not included in the table below
because the timing related to the ultimate resolution or settlement of these positions cannot be determined. As of December 31, 2016,
we recorded a net liability of $41 million related to these uncertain tax positions on our Consolidated Balance Sheets, all of which was
included as a component of “Other liabilities.”
We record a reserve for the projected obligation related to future payments under the Company’s nonqualified deferred compensation
plan, which is fully disclosed in Note 9 “Share-Based Compensation and Benefit Plans” to the Consolidated Financial Statements. This
34
FORM 10-K estimate is not included in the table below because the timing related to the ultimate payment cannot be determined. As of December 31,
2016, we recorded a liability of $20 million related to this uncertain liability on our Consolidated Balance Sheets, all of which was
included as a component of “Other liabilities.”
The following table identifies the estimated payments of the Company’s contractual obligations as of December 31, 2016 (in thousands):
Contractual Obligations
Long-term debt principal and interest payments (1)
Future minimum lease payments under operating leases (2)
Self-insurance reserves (3)
Construction commitments
Total contractual cash obligations
Payments Due By Period
Years
1 and 2
Years
3 and 4
Before
1 Year
Years 5
and Over
Total
$ 2,390,661
$ 78,950
$ 157,900
$ 945,713
$ 1,208,098
2,256,668
276,178
514,290
428,098
1,038,102
138,687
67,921
44,498
16,881
9,387
79,618
$ 4,865,634
79,618
$ 502,667
—
$ 716,688
—
$ 1,390,692
—
$ 2,255,587
(1) Our Revolving Credit Facility, which has a maximum aggregate commitment of $600 million and matures in July 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 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 current credit ratings, our margin for Base Rate loans was
0.000%, our margin for Eurodollar Rate loans was 0.875% and our facility fee was 0.125%. As of December 31, 2016, we had no outstanding
borrowings under our Revolving Credit Facility.
(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. See Note 6 “Leasing” to the Consolidated Financial Statements for further information on our operating
leases.
(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. See Note 10 “Commitments” to the Consolidated Financial Statements for
further information on our self-insurance reserves.
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 $39 million and $38 million were outstanding at December 31, 2016 and 2015,
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” section of Item 7 of this annual report on Form 10-K and Note 6 “Leasing” to the
Consolidated Financial Statements for further 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
35
FORM 10-K 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.
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, 2016, the financial
impact would have been approximately $1 million or 0.1% of pretax income for the year ended December 31, 2016.
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 that 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, 2016, nor do we believe goodwill is at risk of failing impairment testing. If the price of O’Reilly’s stock, which was a
primary input used to determine our market capitalization during step one of goodwill impairment testing, changed by 10% from the
value used during testing, the results and our conclusions would not have changed and no further steps would have been required.
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.
36
FORM 10-K Warranty Reserves:
We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited lifetime warranties. The risk
Warranty Reserves:
of loss arising from warranty claims is typically the obligation of our suppliers. Certain suppliers provide upfront allowances to us in
We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited lifetime warranties. The risk
lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we bear the risk of loss associated with the cost
of loss arising from warranty claims is typically the obligation of our suppliers. Certain suppliers provide upfront allowances to us in
of warranty claims. Differences between supplier allowances received in lieu of warranty obligations and estimated warranty expense
lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we bear the risk of loss associated with the cost
are recorded as an adjustment to the cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are
of warranty claims. Differences between supplier allowances received in lieu of warranty obligations and estimated warranty expense
based on the historical failure rate of each individual product line. Our historical experience has been that failure rates are relatively
are recorded as an adjustment to the cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are
consistent over time and that the ultimate cost of warranty claims has been driven by volume of units sold as opposed to fluctuations in
based on the historical failure rate of each individual product line. Our historical experience has been that failure rates are relatively
failure rates or the variation of the cost of individual claims. If warranty reserves were changed 10% from our estimated reserves at
consistent over time and that the ultimate cost of warranty claims has been driven by volume of units sold as opposed to fluctuations in
December 31, 2016, the financial impact would have been approximately $4 million or 0.2% of pretax income for the year ended
failure rates or the variation of the cost of individual claims. If warranty reserves were changed 10% from our estimated reserves at
December 31, 2016.
December 31, 2016, the financial impact would have been approximately $4 million or 0.2% of pretax income for the year ended
December 31, 2016.
Self-Insurance Reserves:
We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities from workers’ compensation, general
Self-Insurance Reserves:
liability, vehicle liability, property loss, and Team Member health care benefits. With the exception of certain Team Member health care
We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities from workers’ compensation, general
benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, we obtain third-
liability, vehicle liability, property loss, and Team Member health care benefits. With the exception of certain Team Member health care
party insurance coverage to limit our exposure for any individual workers’ compensation, general liability, vehicle liability or property
benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, we obtain third-
loss claim. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and
party insurance coverage to limit our exposure for any individual workers’ compensation, general liability, vehicle liability or property
trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. The assumptions made by management as
loss claim. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and
they relate to each of these factors represent our judgment as to the most probable cumulative impact of each factor to our future obligations.
trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. The assumptions made by management as
Our calculation of self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims
they relate to each of these factors represent our judgment as to the most probable cumulative impact of each factor to our future obligations.
and claims incurred but not yet reported as of the balance sheet date, and the application of alternative assumptions could result in a
Our calculation of self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims
different estimate of these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may
and claims incurred but not yet reported as of the balance sheet date, and the application of alternative assumptions could result in a
result in material losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize
different estimate of these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may
liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on
result in material losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize
this additional information. These liabilities are recorded at our estimate of their net present value, using a credit-adjusted discount rate.
liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on
These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We
this additional information. These liabilities are recorded at our estimate of their net present value, using a credit-adjusted discount rate.
could apply alternative assumptions regarding the timing of payments or the applicable discount rate that could result in materially
These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We
different estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves
could apply alternative assumptions regarding the timing of payments or the applicable discount rate that could result in materially
at December 31, 2016, the financial impact would have been approximately $13 million or 0.8% of pretax income for the year ended
different estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves
December 31, 2016.
at December 31, 2016, the financial impact would have been approximately $13 million or 0.8% of pretax income for the year ended
December 31, 2016.
Legal Reserves:
We maintain reserves for expenses associated with litigation, for which O’Reilly is currently involved. We are currently involved in
Legal Reserves:
litigation incidental to the ordinary conduct of our business. Management, with the assistance of outside legal counsel, must make
We maintain reserves for expenses associated with litigation, for which O’Reilly is currently involved. We are currently involved in
estimates of potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures.
litigation incidental to the ordinary conduct of our business. Management, with the assistance of outside legal counsel, must make
If legal reserves were changed 10% from our estimated reserves at December 31, 2016, the financial impact would have been approximately
estimates of potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures.
$4 million or 0.2% of pretax income for the year ended December 31, 2016.
If legal reserves were changed 10% from our estimated reserves at December 31, 2016, the financial impact would have been approximately
$4 million or 0.2% of pretax income for the year ended December 31, 2016.
Taxes:
We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues,
Taxes:
which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax years subject to audit.
We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues,
The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax
which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax years subject to audit.
authority, experience with previous tax audits and applicable tax law rulings. Changes in our tax liability may occur in the future as our
The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax
assessments change based on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s
authority, experience with previous tax audits and applicable tax law rulings. Changes in our tax liability may occur in the future as our
opinion, adequate provisions for income taxes have been made for all years presented. The estimates of our potential tax liabilities contain
assessments change based on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s
uncertainties because management must use judgment to estimate the exposures associated with our various tax positions and actual
opinion, adequate provisions for income taxes have been made for all years presented. The estimates of our potential tax liabilities contain
results could differ from our estimates. Alternatively, we could have applied assumptions regarding the eventual outcome of the resolution
uncertainties because management must use judgment to estimate the exposures associated with our various tax positions and actual
of open tax positions that could differ from our current estimates but would still be reasonable given the nature of a particular position.
results could differ from our estimates. Alternatively, we could have applied assumptions regarding the eventual outcome of the resolution
While our estimates are subject to the uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities
of open tax positions that could differ from our current estimates but would still be reasonable given the nature of a particular position.
have historically not been materially different from actual results, except in instances where we have reversed liabilities that were recorded
While our estimates are subject to the uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities
for periods that were subsequently closed with the applicable taxing authority.
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
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
For the last three fiscal years, we have generally been successful in reducing the effects of merchandise cost increases principally by
buying. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have typically been able
taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward
37
buying. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have typically been able
37
FORM 10-K 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 tables set forth certain quarterly unaudited operating data for fiscal years ended December 31, 2016 and 2015. The
unaudited quarterly information includes all adjustments, which management considers necessary for a fair presentation of the information
shown (in thousands, except per share and comparable store sales data):
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 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
6.1%
4.3%
4.2%
4.8%
$
2,096,150
$
2,176,689
$
2,220,955
$
2,099,302
1,097,579
1,127,179
1,170,026
1,114,227
418,626
255,374
425,061
257,794
447,809
278,493
$
$
2.63
2.59
$
$
2.69
2.65
$
$
2.93
2.90
$
$
407,710
246,030
2.62
2.59
Fiscal 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
7.2%
7.2%
7.9%
7.7%
$
1,901,903
$
2,035,518
$
2,080,201
$
1,949,052
1,058,791
1,089,254
1,027,639
986,959
350,373
212,864
385,768
233,508
415,260
266,268
$
$
2.09
2.06
$
$
2.32
2.29
$
$
2.68
2.64
$
$
362,620
218,576
2.22
2.19
(1) Earnings per share amounts are computed independently for each quarter and annual period. The quarterly earnings per share amounts may not
sum to equal the full-year earnings per share amount.
The unaudited operating data presented above should be read in conjunction with our consolidated financial statements and related notes
included elsewhere in this annual report, and the other financial information included therein.
RECENT ACCOUNTING PRONOUNCEMENTS
In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity is required to follow a
five-step process to determine the amount of revenue to recognize when promised goods or services are transferred to customers.
ASU 2014-09 offers specific accounting guidance for costs to obtain or fulfill a contract with a customer. In addition, an entity is
required to disclose sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. In August of 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), to defer the effective date of ASU 2014-09 by one year. For public
companies, ASU 2015-14 changes ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. These ASUs can be adopted retrospectively or as a cumulative-effective
adjustment at the date of adoption, with early adoption allowed, but not before December 15, 2016. We will adopt this guidance
beginning with our first quarter ending March 31, 2018. We have established a task force, composed of multiple functional groups
inside of the Company, that is currently in the process of evaluating critical components of this new guidance and the potential impact
of the guidance on our financial position, results of operations and cash flows. Based on the preliminary work completed, we are
considering the potential implications of the new standard on our recognition of customer related accounts receivable, warranty costs
38
FORM 10-K that are not the responsibility of our suppliers, the application of the Company’s retail O’Rewards loyalty program and all applicable
financial statement disclosures required by the new guidance. At this time, the task force has not completed its evaluation of the
impact or means of adoption.
In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity
will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing
arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees
and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial
statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is
effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and
requires a modified retrospective adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter
ending March 31, 2019. We have established a task force, composed of multiple functional groups inside of the Company, that is
currently in the process of evaluating critical components this new guidance and the potential impact of the guidance on our financial
position, results of operations and cash flows. Based on the preliminary work completed, we are considering the potential implications
of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable
and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may
be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the guidance,
all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force has not completed
its full evaluation; however, we believe the adoption of the new guidance will have a material impact on the total assets and total
liabilities reported on our consolidated balance sheets.
In March of 2016, the FASB issued ASU No. 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in
Debt Instruments” (“ASU 2016-06”). ASU 2016-06 clarifies the requirements for assessing whether contingent call or put options
that can accelerate the payment of principal on debt instruments are clearly and closely related to the economic characteristics and
risks of the debt hosts and requires entities to solely use the four-step decision sequence, which is already in existence, when assessing
the embedded call or put options. For public companies, ASU 2016-06 is effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period, and can be adopted on a modified retrospective basis,
with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2017. The application
of this new guidance is not expected to have a material impact on our consolidated financial condition, results of operations or cash
flows.
In March of 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, several aspects of the accounting for share-based payment
transactions, including tax consequences, classification of awards as either equity or liabilities, and classification on the statement of
cash flows, were simplified. For public companies, ASU 2016-09 is effective for annual reporting periods beginning after December
15, 2016, including interim periods within that reporting period, with early adoption permitted. ASU 2016-09 includes various
adoption methods, depending on the guidance being adopted; amendments related to the timing of when excess tax benefits are
recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition
method, while the amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied
retrospectively, the amendments requiring recognition of excess tax benefits and deficiencies in the income statement should be
applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows should be
applied either prospectively or retrospectively. We will adopt this guidance beginning with our first quarter ending March 31, 2017.
We are in the process of evaluating the future impact this new guidance will have on our consolidated financial position, results of
operations and cash flows, as well as which method of adoption is most appropriate. At this time, we anticipate the adoption of the
new guidance will prospectively impact our reported provision for income taxes, net income, weighted-average common shares
outstanding - assuming dilution and earnings per share - assuming dilution, as well as retrospectively and prospectively impact our
reported net cash provided by/used in operating activities and net cash provided by/used in financing activities.
In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present
financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a
valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss
will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the
reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019,
including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted.
We will adopt this guidance beginning with our first quarter ending March 31, 2020. The application of this new guidance is not
expected to have a material impact on our consolidated financial condition, results of operations or cash flows.
39
FORM 10-K In August of 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 reduces the existing
diversity in practice for eight specific parts on cash flow statement presentation and classification: debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business
combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI)
policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately
identifiable cash flows and application of the predominance principle. For public companies, ASU 2016-15 is effective for annual
reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires retrospective
adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2018. The
application of this new guidance is not expected to have a material impact on our consolidated financial condition, results of operations
or cash flows.
In January of 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a
Business” (“ASU 2017-01”). ASU 2017-01 revises the definition of a business in the Accounting Standards Codification and clarifies
the guidance for determining whether the purchase or disposal of an asset or group of assets qualifies as the purchase or disposal of
a business. For public companies, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period, and requires prospective adoption, with early adoption permitted with certain conditions.
We will adopt this guidance beginning with our first quarter ending March 31, 2018. The application of this new guidance is not
expected to have a material impact on our consolidated financial condition, results of operations or cash flows.
In January of 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step in the previous process for goodwill impairment
testing; instead the test is now a one-step process that calls for goodwill impairment loss to be measured as the excess of the reporting
unit’s carrying amount over its fair value. For public companies, ASU 2017-04 is effective for annual reporting periods beginning
after December 15, 2019, including interim periods within that reporting period, and requires prospective adoption, with early adoption
after January 1, 2017. We will adopt this guidance beginning with our first quarter ending March 31, 2019. The application of this
new guidance is not expected to have a material impact on our consolidated financial condition, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” or “O’Reilly,” refer to O’Reilly
Automotive, Inc. and its subsidiaries.
We are subject to interest rate risk to the extent we borrow against our unsecured revolving credit facility (the “Revolving Credit Facility”)
with variable interest rates based on either a Base Rate or Eurodollar Rate, as defined in the credit agreement governing the Revolving
Credit Facility. As of December 31, 2016, we had no outstanding borrowings under our Revolving Credit Facility.
We had outstanding fixed rate debt of $1.90 billion and $1.40 billion as of December 31, 2016 and 2015, respectively. The fair value of
our fixed rate debt was estimated at $1.98 billion and $1.47 billion as of December 31, 2016 and 2015, 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, 2016,
our cash and cash equivalents totaled $147 million.
40
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
42
43
44
45
46
47
48
49
41
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, 2016. 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, 2016, 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 L. Henslee
Greg L. Henslee
Chief Executive Officer
February 28, 2017
/s/ Thomas McFall
Thomas McFall
Executive Vice President of Finance &
Chief Financial Officer
February 28, 2017
42
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, 2016, 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, 2016, 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, 2016 and 2015, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016, of O’Reilly
Automotive, Inc. and Subsidiaries and our report dated February 28, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 28, 2017
43
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, 2016
and 2015, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2016. 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, 2016 and 2015, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 28, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 28, 2017
44
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 $12,040 in 2016 and $9,637 in 2015
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
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
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 –
92,851,815 as of December 31, 2016, and
97,737,171 as of December 31, 2015
Additional paid-in capital
Retained earnings
Total shareholders’ equity
December 31,
2016
2015
$
$
$
146,598
197,274
82,105
2,778,976
53,022
3,257,975
4,832,342
1,708,911
3,123,431
—
785,399
37,384
7,204,189
2,936,656
67,921
71,717
74,454
—
249,901
3,400,649
1,887,019
90,166
199,219
116,301
161,078
72,609
2,631,015
29,023
3,010,026
4,372,250
1,510,694
2,861,556
13,219
757,142
34,741
6,676,684
2,608,231
72,741
59,101
72,203
1,444
232,678
3,046,398
1,390,018
79,772
199,182
—
—
929
1,336,707
289,500
1,627,136
977
1,281,497
678,840
1,961,314
Total liabilities and shareholders’ equity
$
7,204,189
$
6,676,684
See accompanying Notes to consolidated financial statements.
45
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,
2015
7,966,674
3,804,031
4,162,643
$
$
2016
8,593,096
4,084,085
4,509,011
2014
7,216,081
3,507,180
3,708,901
2,809,805
1,699,206
2,648,622
1,514,021
2,438,527
1,270,374
(70,931)
4,224
4,692
(62,015)
(57,129)
2,340
1,134
(53,655)
(53,290)
2,301
2,797
(48,192)
1,637,191
1,460,366
1,222,182
599,500
1,037,691
10.87
95,447
10.73
96,720
$
$
$
529,150
931,216
9.32
99,965
9.17
101,514
$
$
$
444,000
778,182
7.46
104,262
7.34
106,041
See accompanying Notes to consolidated financial statements.
46
FORM 10-K Consolidated Statements of Shareholders’ Equity
(In thousands)
Common Stock
Shares
Par Value
Additional
Paid-In
Capital
$ 1,118,929
Retained
Earnings
Total
$
846,333
$ 1,966,321
—
778,182
778,182
Balance at December 31, 2013
105,940
$
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 from share-based compensation
Share based compensation
Share repurchases, including fees
Balance at December 31, 2014
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 from share-based compensation
Share based compensation
Share repurchases, including fees
Balance at December 31, 2015
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 from share-based compensation
Share based compensation
Share repurchases, including fees
Balance at December 31, 2016
—
86
1,320
—
—
(5,743)
101,603
$
—
59
976
—
—
(4,901)
97,737
$
—
56
757
—
—
(5,698)
92,852
$
1,059
—
1
13
—
—
—
10
—
—
(49)
977
—
1
8
—
—
(57)
929
—
—
—
—
(802,042)
822,473
931,216
11,181
59,594
49,150
20,474
(866,484)
$ 2,018,418
931,216
—
(57)
1,016
20,474
(64,385)
$ 1,194,929
$
11,180
59,581
49,150
—
11,630
52,901
63,078
—
—
—
11,630
52,911
63,078
20,274
(1,136,213)
$ 1,961,314
20,274
(61,315)
$ 1,281,497
—
(1,074,849)
678,840
$
—
1,037,691
1,037,691
12,613
47,386
55,994
—
—
—
17,566
(78,349)
$ 1,336,707
—
(1,427,031)
289,500
$
12,614
47,394
55,994
17,566
(1,505,437)
$ 1,627,136
See accompanying Notes to consolidated financial statements.
47
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 share-based compensation
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 share-based compensation
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,
2015
2014
2016
$
1,037,691
$
931,216
$
778,182
217,866
2,451
(55,994)
10,394
18,859
6,434
(38,548)
(119,270)
322,427
26,880
12,616
(808)
13,169
1,454,167
(476,344)
5,119
1,047
(58,918)
(529,096)
499,160
(4,125)
—
(1,505,437)
55,994
59,634
(894,774)
30,297
116,301
146,598
569,677
63,648
$
$
$
$
210,256
2,106
(63,078)
(22,650)
21,899
6,839
(23,858)
(76,226)
191,064
81,617
(19,341)
17,970
23,662
1,281,476
(414,020)
2,758
4,074
—
(407,188)
—
—
(25)
(1,136,213)
63,078
64,613
(1,008,547)
(134,259)
250,560
116,301
485,824
55,061
$
$
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
See accompanying Notes to consolidated financial statements.
48
FORM 10-K NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Notes to Consolidated Financial Statements
Nature of business:
O’Reilly Automotive, Inc. and its subsidiaries, collectively, “O’Reilly” or the “Company,” is a specialty retailer and supplier of automotive
aftermarket parts. The Company’s stores carry an extensive product line, including new and remanufactured automotive hard parts,
maintenance items and various automotive accessories. As of December 31, 2016, the Company owned and operated 4,829 stores in 47
states, servicing both do-it-yourself (“DIY”) and the professional service provider customers. The Company’s robust distribution system
provides stores with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of
other auto parts retailers.
Segment reporting:
The Company is managed and operated by a single management 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.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances
and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of the consolidated financial statements, in conformity with United States 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 $1.2 million and $1.1 million as of December 31, 2016 and 2015, respectively.
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
suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as
of December 31, 2016 or 2015.
49
FORM 10-K Inventory:
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market.
Inventory also includes capitalized costs related to procurement, warehousing and distribution centers (“DC”s). 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 $2.78 billion and $2.63 billion as of December 31,
2016 and 2015, respectively. LIFO costs exceeded replacement costs by $132.0 million and $85.9 million at December 31, 2016 and
2015, respectively.
Fair value of financial instruments:
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3 measurement). The Company uses the income and market approaches to determine
the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at
the measurement date.
• Level 2 – Inputs other than quoted prices in active markets included within Level 1 that are observable for the asset or liability,
either directly or indirectly.
• Level 3 – Unobservable inputs for the asset or liability.
See Note 2 for further information concerning the Company’s financial and non-financial assets and liabilities measured at fair value on
a recurring and non-recurring basis.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method, generally over the estimated useful
lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets.
The lease term includes renewal options determined by management at lease inception, for which failure to execute renewal options
would result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is recognized in the Company’s
Consolidated Statements of Income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Notes receivable:
The Company had notes receivable from suppliers and other third parties in the amount of $17.3 million at December 31, 2015. 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
did not believe there was a reasonable likelihood that the Company would 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, 2015. During the year
ended December 31, 2016, the notes receivable from suppliers and other third parties were dissolved, in connection with new supplier
contracts, and during the year ended December 31, 2016, no new notes receivable arrangements have been entered into.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at December 31, 2016 and 2015, 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 2016 and 2015, 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, 2016 and 2015; as such, no
goodwill impairment adjustment was required as of December 31, 2016 and 2015. Finite-lived intangibles are carried at cost and
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 charges to its long-
50
FORM 10-K lived assets and the Company did not record a material impairment charge to its long-lived assets during the year ended December 31,
2016 or 2015.
Valuation of investments:
The Company has an unsecured obligation to pay, in the future, the value of deferred compensation and a Company match relating to
employee participation in the Company’s nonqualified deferred compensation plan (the “Deferred Compensation Plan”). See Note 9 for
further information concerning the Company’s benefit plans. The future obligation is adjusted to reflect the performance, whether positive
or negative, of selected investment measurement options, chosen by each participant. The Company invests in various marketable
securities with the intention of selling these securities to fulfill its future obligations under the Deferred Compensation Plan. The
investments in this plan were stated at fair value based on quoted market prices, were accounted for as trading securities and were included
as a component of “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015. See Note
2 for further information concerning the fair value measurements of the Company’s marketable securities.
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, 2016 and 2015 (in thousands):
Self-insurance reserves (undiscounted)
Self-insurance reserves (discounted)
December 31,
2016
2015
$
138,687
$
129,437
141,173
131,990
The current portion of the Company’s discounted self-insurance reserves totaled $67.9 million and $72.7 million as of December 31,
2016 and 2015, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidate Balance Sheets as of
December 31, 2016 and 2015. The remainder was included was included as a component of “Other liabilities” on the accompanying
Consolidated Balance Sheets as of December 31, 2016 and 2015.
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 liabilities.
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 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. See Note 14 for further information concerning the
Company’s litigation reserves.
Share repurchases:
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may,
from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.
51
FORM 10-K 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.
The Company maintains a retail loyalty program named O’Reilly O’Rewards, designed to build brand recognition. The program allows
a retail customer to enroll at no charge, does not impose a membership fee and provides members with the ability to earn loyalty points
by making qualifying purchases at the Company’s stores. Upon reaching established thresholds, the members are automatically issued
coupons, which expire 90 days after issuance, have no cash value and may be redeemed for most items in the Company’s stores with a
total purchase price equal to or greater than the value of the coupon. Points accrued in a member’s account, which have not been awarded
to the member with a coupon, expire 12 months after the date that they were earned. The Company records a deferred revenue liability,
based on a breakage adjusted estimated redemption rate, and a corresponding reduction in revenue in periods when loyalty points are
earned by members. The Company recognizes revenue and a corresponding reduction to the deferred revenue liability in periods when
loyalty program issued coupons are redeemed by members.
As of December 31, 2016 and 2015, the Company had recorded a deferred revenue liability of $4.8 million and $7.2 million, respectively,
related to its loyalty program, which were included as a component of “Other liabilities” in the accompanying Consolidated Balance
Sheets. During the year ended December 31, 2016 and 2015, the Company recognized $12.7 million and $11.2 million, respectively, of
deferred revenue related to its loyalty program.
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
Selling, general and administrative expenses
Payroll and benefit costs for store and corporate Team Members
Occupancy costs of store and corporate facilities
Defective merchandise and warranty costs
Depreciation and amortization related to store and corporate assets
Supplier allowances and incentives, including:
Allowances that are not reimbursements for specific,
incremental and identifiable costs
Vehicle expenses for store delivery services
Self-insurance costs
Cash discounts on payments to suppliers
Costs associated with the Company’s supply chain, including:
Closed store expenses
Other administrative costs, including:
Payroll and benefit costs
Warehouse occupancy costs
Transportation costs
Depreciation
Inventory shrinkage
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. See Note 6 for further information concerning the Company’s
operating leases.
52
FORM 10-K 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, total $83.0 million, $79.3 million and $79.0 million for the years ended
December 31, 2016, 2015 and 2014, respectively, which were included as a component of “Selling, general and administrative expenses”
on the accompanying Consolidated Statements of Income.
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 and director stock plan, stock issued through the Company’s employee stock purchase plan and restricted stock awarded to employees
and directors through other compensation plans. See Note 9 for further information concerning the Company’s share-based compensation
and plans.
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to “Selling, general
and administrative expenses” on the accompanying Consolidated Statements of Income as incurred. Costs associated with the opening
of new distribution centers, which consist primarily of payroll and occupancy costs, are included 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, 2016, 2015 and 2014, were $7.9 million,
$7.4 million and $11.5 million, respectively, which were included in “Interest expense” on the accompanying Consolidated Statements
of Income.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs, including debt registration
fees, accounting and legal fees and underwriter and book runner fees. Debt issuance costs related to the Company’s long-term unsecured
senior notes are recorded as a reduction of the principal amount of the corresponding unsecured senior notes. Debt issuance costs related
to the Company’s unsecured revolving credit facility are recorded as an asset. These debt issuance costs have been deferred and are being
amortized over the term of the corresponding debt instrument and the amortization expense is included as a component of “Interest
expense” on the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $10.6 million and $8.3 million,
net of accumulated amortization, as of December 31, 2016 and 2015, respectively, of which $0.7 million and $1.2 million were included
as a component of “Other assets, net” as of December 31, 2016 and 2015, respectively, with the remainder included in “Long-term debt”
on the accompanying Consolidated Balance Sheets.
The Company issued its long-term unsecured senior notes at a discount. The original issuance 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” on the accompanying Consolidated Statements of Income.
Original issuance discounts, net of accretion, totaled $3.1 million and $2.9 million as of December 31, 2016 and 2015, respectively.
See Note 5 for further information concerning debt issuance costs and original issuance discounts associated with the Company’s issuances
of long-term debt instruments.
Income taxes:
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on differences between the 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, 2016 and 2015, 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
53
FORM 10-K 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. See Note 12 for further information concerning the Company’s income taxes.
Earnings per share:
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the
fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding plus the
common stock equivalents associated with the potential impact of dilutive stock options. Certain common stock equivalents that 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 13 for further information concerning the Company’s common stock equivalents.
New accounting pronouncements:
In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity is required to follow a five-
step process to determine the amount of revenue to recognize when promised goods or services are transferred to customers. ASU 2014-09
offers specific accounting guidance for costs to obtain or fulfill a contract with a customer. In addition, an entity is required to disclose
sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. In August of 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of
the Effective Date” (“ASU 2015-14”), to defer the effective date of ASU 2014-09 by one year. For public companies, ASU 2015-14
changes ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within
that reporting period. These ASUs can be adopted retrospectively or as a cumulative-effective adjustment at the date of adoption, with
early adoption allowed, but not before December 15, 2016. The Company will adopt this guidance beginning with its first quarter ending
March 31, 2018. The Company has established a task force, composed of multiple functional groups inside of the Company, that is
currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s
financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the
potential implications of the new standard on the Company’s recognition of customer related accounts receivable, warranty costs that are
not the responsibility of the Company’s suppliers, the application of the Company’s retail O’Rewards loyalty program and all applicable
financial statement disclosures required by the new guidance. At this time, the task force has not completed its evaluation of the impact
or means of adoption.
In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will
be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing
arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and
lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial
statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective
for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a
modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter
ending March 31, 2019. The Company has established a task force, composed of multiple functional groups inside of the Company, that
is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s
financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the
potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment
of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational
changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required
by the new guidance, all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force
has not completed its full evaluation; however, the Company believes the adoption of the new guidance will have a material impact on
the total assets and total liabilities reported on the Company’s consolidated balance sheets.
In March of 2016, the FASB issued ASU No. 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt
Instruments” (“ASU 2016-06”). ASU 2016-06 clarifies the requirements for assessing whether contingent call or put options that can
accelerate the payment of principal on debt instruments are clearly and closely related to the economic characteristics and risks of the
debt hosts and requires entities to solely use the four-step decision sequence, which is already in existence, when assessing the embedded
call or put options. For public companies, ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period, and can be adopted on a modified retrospective basis, with early adoption permitted.
The Company will adopt this guidance beginning with its first quarter ending March 31, 2017. The application of this new guidance is
not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
54
FORM 10-K In March of 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, several aspects of the accounting for share-based payment
transactions, including tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows, were simplified. For public companies, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period, with early adoption permitted. ASU 2016-09 includes various adoption methods,
depending on the guidance being adopted; amendments related to the timing of when excess tax benefits are recognized, minimum
statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method, while the
amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively, the
amendments requiring recognition of excess tax benefits and deficiencies in the income statement should be applied prospectively, and
amendments related to the presentation of excess tax benefits on the statement of cash flows should be applied either prospectively or
retrospectively. The Company will adopt this guidance beginning with its first quarter ending March 31, 2017. The Company is in the
process of evaluating the future impact this new guidance will have on its consolidated financial position, results of operations and cash
flows, as well as which method of adoption is most appropriate. At this time, the Company anticipates the adoption of the new guidance
will prospectively impact its reported provision for income taxes, net income, weighted-average common shares outstanding - assuming
dilution and earnings per share - assuming dilution, as well as retrospectively and prospectively impact the Company’s reported net cash
provided by/used in operating activities and net cash provided by/used in financing activities.
In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present financial
assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a valuation
account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss will be based
on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim
periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will
adopt this guidance beginning with its first quarter ending March 31, 2020. The application of this new guidance is not expected to have
a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In August of 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 reduces the existing
diversity in practice for eight specific parts on cash flow statement presentation and classification: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from
the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies; distributions received
from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application
of the predominance principle. For public companies, ASU 2016-15 is effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period, and requires retrospective adoption, with early adoption permitted. The
Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not
expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In January of 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a
Business” (“ASU 2017-01”). ASU 2017-01 revises the definition of a business in the Accounting Standards Codification and clarifies
the guidance for determining whether the purchase or disposal of an asset or group of assets qualifies as the purchase or disposal of a
business. For public companies, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period, and requires prospective adoption, with early adoption permitted with certain conditions.
The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is
not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In January of 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step in the previous process for goodwill impairment testing; instead
the test is now a one-step process that calls for goodwill impairment loss to be measured as the excess of the reporting unit’s carrying
amount over its fair value. For public companies, ASU 2017-04 is effective for annual reporting periods beginning after December 15,
2019, including interim periods within that reporting period, and requires prospective adoption, with early adoption after January 1, 2017.
The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The application of this new guidance is
not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
NOTE 2 – FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis:
The Company’s marketable securities were accounted for as trading securities and the carrying amount of the Company’s marketable
securities were included as a component of “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31,
2016 and 2015. The Company recorded an increase in fair value related to its marketable securities in the amount of $1.9 million for the
55
FORM 10-K year ended December 31, 2016, and a decrease in the amount of $0.2 million for the year ended December 31, 2015, which were included
in “Other income (expense)” on the accompanying Consolidated Statements of Income.
The tables below identify the estimated fair value of the Company’s marketable securities, determined by reference to quoted market
prices (Level 1), as of December 31, 2016 and 2015 (in thousands):
Quoted Prices in Active Markets
for Identical Instruments
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
December 31, 2016
Marketable securities $
20,462
$
— $
— $
20,462
Quoted Prices in Active Markets
for Identical Instruments
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
December 31, 2015
Marketable securities
$
16,895
$
— $
— $
16,895
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, 2016 and 2015, 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” on the accompanying Consolidated Balance Sheets
as of December 31, 2016 and 2015. See Note 5 for further information concerning the Company’s senior notes.
The table below identifies the estimated fair value of the Company’s senior notes, using the market approach. The fair values as of
December 31, 2016 and 2015, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in
thousands):
December 31, 2016
December 31, 2015
Carrying Amount
Estimated Fair
Value
Carrying Amount
Estimated Fair
Value
$500 million, 4.875% Senior Notes due 2021 $
$300 million, 4.625% Senior Notes due 2021
$300 million, 3.800% Senior Notes due 2022
$300 million, 3.850% Senior Notes due 2023
$500 million, 3.550% Senior Notes due 2026 $
496,758
298,679
297,868
298,355
495,359
$
$
538,678
321,633
310,802
307,860
498,537
$
$
495,951
298,396
297,535
298,136
$
$
542,078
319,620
303,595
302,468
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.
56
FORM 10-K NOTE 3 – PROPERTY AND EQUIPMENT
The following table identifies the types and balances of property and equipment included in “Property and equipment, at cost” on the
accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015, and includes the estimated useful lives for its types of
property and equipment (in thousands, except original 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
December 31, 2016
December 31, 2015
15 – 39 years
3 – 25 years
3 – 20 years
5 – 10 years
$
648,689
$
1,805,347
593,785
1,215,929
359,362
209,230
4,832,342
1,708,911
$
3,123,431
$
590,244
1,603,389
554,198
1,108,127
313,401
202,891
4,372,250
1,510,694
2,861,556
The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $217.0 million, $203.4
million and $193.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, which were primarily included as a
component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
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. The Company did not record any
goodwill impairment during the years ended December 31, 2016 or 2015.
The carrying amount of the Company’s goodwill was included in “Goodwill” on the accompanying Consolidate Balance Sheets as of
December 31, 2016 and 2015. During the year ended December 31, 2016 and 2015, the Company recorded an increase in goodwill of
$28.3 million and $0.8 million, respectively, resulting from small acquisitions.
The following table identifies the changes in goodwill for the years ended December 31, 2016 and 2015 (in thousands):
Goodwill, balance at January 1,
Change in goodwill
Goodwill, balance at December 31,
2016
2015
$
$
757,142
28,257
785,399
$
$
756,384
758
757,142
As of December 31, 2016 and 2015, other than goodwill, the Company did not have any other indefinite-lived intangible assets.
Intangibles other than goodwill:
The following table identifies the components of the Company’s amortizable intangibles as of December 31, 2016 and 2015 (in thousands):
Cost of Amortizable
Intangibles
Accumulated Amortization
(Expense) Benefit
Net Amortizable Intangibles
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
Amortizable intangible assets:
Favorable leases
Non-compete agreements
Total amortizable
intangible assets
Unfavorable leases
$
$
$
27,960
$
32,070
$
1,887
732
(18,104) $
(414)
(19,991) $
(409)
9,856
1,473
29,847
19,950
$
$
32,802
28,580
$
$
(18,518) $
(20,400) $
11,329
15,840
$
22,415
$
4,110
$
$
$
12,079
323
12,402
6,165
57
FORM 10-K During the years ended December 31, 2016 and 2015, the Company recorded non-compete agreement assets in conjunction with small
acquisitions in the amounts of $1.1 million and $0.2 million, respectively.
The Company recorded favorable lease assets in conjunction with the acquisition of CSK Auto Corporation (“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 9.0 years as of December 31, 2016. For the years ended December 31, 2016, 2015 and
2014, the Company recorded amortization expense of $2.1 million, $2.7 million and $3.9 million, respectively, related to its amortizable
intangible assets, which were included as a component of “Other assets, net” on the accompanying Consolidated Balance Sheets as of
December 31, 2016 and 2015.
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 3.7 years as of December 31, 2016. For the years ended December 31, 2016, 2015 and 2014, the Company
recognized an amortized benefit of $2.1 million, $2.8 million and $3.7 million, respectively, related to these unfavorable operating leases,
which were included as a component of “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2016
and 2015.
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, 2016 (in thousands):
Amortization Expense
December 31, 2016
Amortization Benefit
Total Amortization Expense
2017
2018
2019
2020
2021
Total
$
$
NOTE 5 – FINANCING
(2,072) $
(1,599)
(1,377)
(1,197)
(969)
(7,214) $
1,493
$
923
712
541
389
4,058
$
(579)
(676)
(665)
(656)
(580)
(3,156)
The following table identifies the amounts of the Company’s financing facilities, which were included in “Long-term debt” on the
accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015 (in thousands):
December 31,
2016
2015
Revolving Credit Facility
$500 million, 4.875% Senior Notes due 2021(1), effective interest rate of 4.959%
$300 million, 4.625% Senior Notes due 2021(2), effective interest rate of 4.646%
$300 million, 3.800% Senior Notes due 2022(3), effective interest rate of 3.845%
$300 million, 3.850% Senior Notes due 2023(4), effective interest rate of 3.851%
$500 million, 3.550% Senior Notes due 2026(5), effective interest rate of 3.570%
$
$
—
$
496,758
298,679
297,868
298,355
495,359
$
—
495,951
298,396
297,535
298,136
(1) Net of unamortized discount of $1.4 million and $1.8 million as of December 31, 2016 and 2015, respectively, and debt issuance costs of $1.8
million and $2.3 million as of December 31, 2016 and 2015, respectively.
(2) Net of unamortized discount of $0.2 million and $0.3 million as of December 31, 2016 and 2015, respectively, and debt issuance costs of $1.1
million and $1.3 million as of December 31, 2016 and 2015, respectively.
(3) Net of unamortized discount of $0.7 million and $0.8 million as of December 31, 2016 and 2015, respectively, and debt issuance costs of $1.5
million and $1.7 million as of December 31, 2016 and 2015, respectively.
(4) Net of unamortized discount of less than $0.1 million as of December 31, 2016 and 2015, and debt issuance costs of $1.6 million and $1.8 million
as of December 31, 2016 and 2015, respectively.
(5) Net of unamortized discount of $0.8 million as of December 31, 2016, and debt issuance costs of $3.9 million as of December 31, 2016.
58
FORM 10-K The following table identifies the principal maturities of the Company’s financing facilities as of December 31, 2016 (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Scheduled Maturities
—
—
—
—
800,000
1,100,000
1,900,000
$
$
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, as
further amended by Amendment No. 2 dated as of July 2, 2013, and as further amended by Amendment No. 3 dated as of June 18, 2015
(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 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, 2016 and 2015, the Company had outstanding letters of credit, primarily to support obligations related to workers’
compensation, general liability and other insurance policies, in the amounts of $38.7 million and $37.5 million, respectively, reducing
the aggregate availability under the Revolving Credit Facility by those amounts. As of December 31, 2016 and 2015, 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, subject to limited exceptions. As of December 31, 2016, based upon the Company’s credit ratings, its margin for Base
Rate loans was 0.000%, its margin for Eurodollar Rate loans was 0.875% and its facility fee was 0.125%.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage
ratio of 2.50 times and a maximum consolidated leverage ratio of 3.00 times. 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. The consolidated fixed charge coverage ratio includes
a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Fixed
charges include interest expense, capitalized interest and rent expense. 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, 2016, the Company remained in compliance with all covenants under the Credit Agreement.
Senior notes:
On March 8, 2016, the Company issued $500 million aggregate principal amount of unsecured 3.550% Senior Notes due 2026 (“3.550%
Senior Notes due 2026”) at a price to the public of 99.832% of their face value under its shelf registration statement with United Missouri
Bank, N.A. (“UMB”) as trustee. Interest on the 3.550% Senior Notes due 2026 is payable on March 15 and September 15 of each year,
which began with the first interest payment on September 15, 2016, and is computed on the basis of a 360-day year.
The Company has issued a cumulative $1.9 billion aggregate principal amount of unsecured senior notes, which are due between January
2021 and March 2026 with UMB as trustee. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and
is computed on the basis of a 360-day year.
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
59
FORM 10-K 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, 2016.
NOTE 6 – LEASING
The following table identifies the future minimum lease payments under all of the Company’s operating leases for each of the next five
years and in the aggregate as of December 31, 2016 (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Related Parties
December 31, 2016
Non-Related Parties
Total
$
$
4,634
4,571
3,099
2,313
1,846
5,546
22,009
$
$
271,544
$
262,056
244,564
223,528
200,411
1,032,556
2,234,659
$
276,178
266,627
247,663
225,841
202,257
1,038,102
2,256,668
See Note 11 for further information concerning the Company’s related party operating leases.
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 $20.5 million at December 31, 2016.
The following table summarizes the net rent expense amounts for the years ended December 31, 2016, 2015 and 2014, which were
included as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in
thousands):
Minimum operating lease expense
Contingent rents
Other lease related occupancy costs
Total rent expense
Less: sublease income
Net rent expense
$
$
2016
For the Year Ended
December 31,
2015
2014
273,559
$
263,479
$
892
13,241
287,692
4,439
947
12,852
277,278
4,019
283,253
$
273,259
$
254,565
759
11,688
267,012
3,984
263,028
60
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, 2016 and 2015. The following table identifies the changes in the Company’s aggregate product warranty liabilities
for the years ended December 31, 2016 and 2015 (in thousands):
Warranty liabilities, balance at January 1,
Warranty claims
Warranty accruals
Warranty liabilities, balance at December 31,
NOTE 8 – SHARE REPURCHASE PROGRAM
2016
2015
$
$
$
35,223
(73,925)
75,325
36,623
$
34,226
(61,819)
62,816
35,223
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may,
from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.
The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any
time, without prior notice. As announced on February 10, 2016, May 27, 2016, and November 16, 2016, the Company’s Board of Directors
each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $750 million,
resulting in a cumulative authorization amount of $7.8 billion. Each additional authorization is effective for a three-year period, beginning
on its respective announcement date.
The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly
announced share repurchase program (in thousands, except per share data):
Shares repurchased
Average price per share
Total investment
For the Year Ended
December 31,
2016
2015
$
$
5,698
264.21
1,505,371
$
$
4,901
231.81
1,136,139
As of December 31, 2016, the Company had $887.8 million remaining under its share repurchase program. Subsequent to the end of the
year and through February 28, 2017, the Company repurchased an additional 1.4 million shares of its common stock under its share
repurchase program, at an average price of $267.32, for a total investment of $387.5 million. The Company has repurchased a total of
58.4 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and
through February 28, 2017, at an average price of $124.14, for a total aggregate investment of $7.2 billion.
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.
61
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, 2016 (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
December 31, 2016
34,000
1,000
650
4,250
4,200
6,086
263
388
710
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, 2016:
Shares
(in thousands)
Weighted-
Average Exercise
Price
Average
Remaining
Contractual Terms
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2015
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Vested or expected to vest at December 31, 2016
Exercisable at December 31, 2016
3,291
$
308
(751)
(59)
2,789
2,744
2,027
$
$
$
81.04
267.00
62.81
144.91
105.11
103.29
65.45
5.1 Years
5.0 Years
3.9 Years
$
$
$
483,331
480,582
431,637
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, 2016:
Shares
(in thousands)
Weighted-
Average Exercise
Price
Average
Remaining
Contractual Terms
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Vested or expected to vest at December 31, 2016
Exercisable at December 31, 2016
17
—
(6)
—
11
11
11
$
$
$
$
45.13
—
39.99
—
48.31
48.31
48.31
0.3 Years
0.3 Years
0.3 Years
$
$
$
2,416
2,416
2,416
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.
62
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 is expected to fluctuate, based on a historical
trend.
• Expected dividend yield – The Company has not paid, nor does it have plans in the foreseeable future to pay, any dividends.
The table below identifies the weighted-average assumptions used for grants awarded during the years ended December 31, 2016, 2015
and 2014:
Risk free interest rate
Expected life
Expected volatility
Expected dividend yield
December 31,
2016
2015
2014
1.44%
5.5 Years
22.3%
—%
1.52%
5.7 Years
22.3%
—%
1.60%
5.3 Years
24.3%
—%
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, 2016, 2015
and 2014:
Compensation expense for stock options awarded (in thousands)
Income tax benefit from compensation expense related to stock options
(in thousands)
Total intrinsic value of stock options exercised (in thousands)
Cash received from exercise of stock options (in thousands)
Weighted-average grant-date fair value of options awarded
$
$
For the Year Ended
December 31,
2016
2015
2014
15,404
$
18,209
$
18,705
5,753
157,115
47,394
6,811
169,248
105,822
63.42
$
51.56
$
6,923
147,236
59,594
38.18
4.6 Years
Weighted-average remaining contractual life of exercisable options
3.9 Years
4.2 Years
At December 31, 2016, the remaining unrecognized compensation expense related to unvested stock option awards was $26.4 million,
and the weighted-average period of time, over which this cost will be recognized, is 2.6 years.
Restricted stock:
The Company’s performance incentive plans provide 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 these plans is based on the closing market price of the
Company’s common stock on the date of award and compensation expense is recorded over the minimum required service period.
The table below identifies the employee restricted stock activity under these plans during the year ended December 31, 2016 (in thousands,
except per share data):
Non-vested at December 31, 2015
Granted during the period
Vested during the period (1)
Forfeited during the period
Non-vested at December 31, 2016
(1)
Includes two thousand shares withheld to cover employees’ taxes upon vesting.
63
Shares
Weighted-Average Grant-Date
Fair Value
7
$
1
(5)
—
3
$
128.27
256.34
140.91
150.85
204.33
FORM 10-K The Company’s director stock plan provides for the award of shares of restricted stock to the directors of the Company 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 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, 2016 (in thousands,
except per share data):
Non-vested at December 31, 2015
Granted during the period
Vested during the period
Forfeited during the period
Non-vested at December 31, 2016
Shares
Weighted-Average Grant-Date
Fair Value
7
$
2
(3)
—
6
$
167.73
268.54
149.49
—
222.77
The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2016,
2015 and 2014 (in thousands, except per share data):
Compensation expense for restricted shares awarded
Income tax benefit from compensation expense related to restricted shares
Total fair value of restricted shares at vest date
Shares awarded under the plans
Weighted-average grant-date fair value of shares awarded under the plans
For the Year Ended
December 31,
2016
2015
2014
$
$
$
$
1,293
483
2,384
4
264.24
$
$
$
$
1,625
610
3,284
4
208.56
$
$
$
$
2,621
970
3,749
16
147.23
At December 31, 2016, the remaining unrecognized compensation expense related to unvested restricted share awards was $0.9 million,
and the weighted-average period of time, over which this cost will be recognized, is 0.1 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, 2016, 2015 and 2014 (in
thousands, except per share data):
Compensation expense for shares issued under the ESPP
Income tax benefit from compensation expense for shares issued under the ESPP
Shares issued under the ESPP
Weighted-average price of shares issued under the ESPP
For the Year Ended
December 31,
2016
2015
2014
$
$
$
2,162
807
54
227.12
$
$
$
2,065
773
60
195.04
$
$
$
1,769
655
77
130.12
Profit sharing and savings plan:
The Company sponsors a contributory profit sharing and savings plan (the “401(k) Plan”) that covers substantially all employees who
are at least 21 years of age and have completed one year of service. The Company makes matching contributions equal to 100% of the
first 2% of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed. An
employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching
contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned.
64
FORM 10-K 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,
2016, 2015 or 2014. The Company expensed matching contributions under the 401(k) Plan in the amounts of $20.6 million, $18.5 million
and $16.8 million for the years ended December 31, 2016, 2015 and 2014, respectively, which were included as a component of “Selling,
general and administrative expenses” on the accompanying Consolidated Statements of Income.
Nonqualified deferred compensation plan:
The Company sponsors a nonqualified deferred compensation plan (the “Deferred Compensation Plan”) for highly compensated
employees whose contributions to the 401(k) Plan are limited due to the application of the annual limitations under the Internal Revenue
Code. The Deferred Compensation Plan provides these employees with the opportunity to defer the full 6% of matched compensation,
including salary and incentive based compensation, that was precluded under the Company’s 401(k) Plan, which is then matched by the
Company using the same formula as the 401(k) Plan. An employee generally must be employed on December 31 to receive that year’s
Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the
year in which the matching contribution was earned. In the event of bankruptcy, the assets of this plan are available to satisfy the claims
of general creditors. The Company has an unsecured obligation to pay, in the future, the value of the deferred compensation and Company
match, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each
participant during the deferral period. The liability for compensation deferred under the Deferred Compensation Plan was $20.5 million
and $16.9 million as of December 31, 2016 and 2015, respectively, which were included as a component of “Other liabilities” on the
Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amounts
of $0.1 million, $0.1 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, which were included
as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
NOTE 10 – COMMITMENTS
Construction commitments:
As of December 31, 2016, the Company had construction commitments in the amount of $79.6 million.
Letters of credit commitments:
As of December 31, 2016, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability
and other insurance policies, in the amount of $38.7 million. See Note 5 for further information concerning the Company’s letters of
credit commitments.
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, but not including the repurchase date. See Note 5 for further information concerning the Company’s debt financing commitments.
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 – RELATED PARTIES
The Company leases certain land and buildings related to 75 of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating
lease agreements with entities, in which certain of the Company’s affiliated directors, or members of an affiliated director’s immediate
family, and an executive officer of the Company 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 $4.5 million, $4.5 million and $4.6 million
during the years ended December 31, 2016, 2015 and 2014, 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 concerning the
Company’s operating leases.
65
FORM 10-K NOTE 12 – 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.
The following table identifies significant components of the Company’s net deferred tax liabilities included in “Deferred income taxes”
on the accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015 (in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Tax credits
Other accruals
Net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Inventories
Property and equipment
Other
Total deferred tax liabilities
Net deferred tax liabilities
$
December 31,
2016
2015
$
2,686
9,363
153,955
304
19,870
186,178
76,694
157,228
42,422
276,344
2,492
11,747
151,635
337
19,051
185,262
82,313
141,930
40,791
265,034
$
(90,166)
$
(79,772)
Provision for income taxes:
The following tables reconcile the amounts included in “Provision for income taxes” on the accompanying Consolidated Statements of
Income for the years ended December 31, 2016, 2015 and 2014 (in thousands):
Federal income tax expense
State income tax expense
Net income tax expense
Federal income tax expense (benefit)
State income tax expense (benefit)
Net income tax expense (benefit)
Federal income tax expense
State income tax expense (benefit)
Net income tax expense
For the Year Ended
December 31, 2016
Current
Deferred
Total
$
$
$
$
$
$
540,090
49,016
589,106
$
$
7,558
2,836
10,394
For the Year Ended
December 31, 2015
Current
Deferred
504,558
47,242
551,800
$
$
(21,973)
(677)
(22,650)
For the Year Ended
December 31, 2014
Current
Deferred
399,271
43,242
442,513
$
$
5,987
(4,500)
1,487
$
$
$
$
$
$
547,648
51,852
599,500
Total
482,585
46,565
529,150
Total
405,258
38,742
444,000
66
FORM 10-K The following table outlines the reconciliation of the “Provision for income taxes” amounts included on the accompanying Consolidated
Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2016, 2015 and 2014 (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,
2015
2014
2016
$
$
573,020
$
511,128
$
427,764
35,285
(8,805)
599,500
$
32,137
(14,115)
529,150
25,320
(9,084)
$
444,000
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 Balance Sheets.
As of December 31, 2016, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount
of $9.4 million. As of December 31, 2016, the Company had net operating loss carryforwards available for state purposes in the amount
of $9.8 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.
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, 2016, 2015 and 2014 (in thousands):
Unrealized tax benefit, balance at 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
Unrealized tax benefit, balance at December 31,
2016
2015
2014
$
$
36,928
$
49,598
$
6,116
—
(195)
(8,051)
34,798
$
5,405
995
(4,012)
(15,058)
36,928
$
50,459
4,665
—
(300)
(5,226)
49,598
For the years ended December 31, 2016, 2015 and 2014, the Company recorded a reserve for unrecognized tax benefits, including interest
and penalties, in the amounts of $40.6 million, $43.6 million and $58.4 million, respectively. All of the unrecognized tax benefits recorded
as of December 31, 2016, 2015 and 2014, respectively, would affect the Company’s effective tax rate if recognized, generally net of the
federal tax effect of approximately $13.8 million. The Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. As of December 31, 2016, 2015 and 2014, the Company had accrued approximately $5.8 million, $6.7 million and
$8.8 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, 2016, 2015 and 2014, the Company recorded tax expense related to an
increase in its liability for interest and penalties in the amounts of $2.4 million, $2.8 million and $2.8 million, respectively. Although
unrecognized tax benefits for individual tax positions may increase or decrease during 2017, the Company expects a reduction of $7.4
million of unrecognized tax benefits during the one-year period subsequent to December 31, 2016, resulting from settlement or expiration
of the statute of limitations.
The Company’s United States federal income tax returns for tax years 2015 and beyond remain subject to examination by the Internal
Revenue Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2012 and 2013 federal income tax returns in
the second quarter of 2015. The statute of limitations for the Company’s federal income tax returns for tax years 2012 and prior expired
on September 15, 2016. The statute of limitations for the Company’s U.S. federal income tax return for 2013 will expire on September 15,
2017, unless otherwise extended. The IRS is currently conducting an examination of the Company’s consolidated returns for tax years
2014 and 2015. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging
from 2005 through 2015.
67
FORM 10-K NOTE 13 – EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2016, 2015 and
2014 (in thousands, except per share data):
Numerator (basic and diluted):
Net income
Denominator:
For the Year Ended
December 31,
2016
2015
2014
$ 1,037,691
$
931,216
$
778,182
Weighted-average common shares outstanding – basic
Effect of stock options (1)
Weighted-average common shares outstanding – assuming dilution
95,447
1,273
96,720
99,965
1,549
101,514
104,262
1,779
106,041
Earnings per share:
Earnings per share-basic
Earnings per share-assuming dilution
$
$
10.87
10.73
$
$
9.32
9.17
$
$
7.46
7.34
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)
332
245
363
$
265.77
$
216.29
$
151.65
(1) See Note 9 for further information concerning the terms of the Company’s share-based compensation plans.
Subsequent to the end of the year and through February 28, 2017, the Company repurchased 1.4 million shares of its common stock, at
an average price of $267.32, for a total investment of $387.5 million.
NOTE 14 – LEGAL MATTERS
As previously reported, 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. On November 30, 2016, the Company through its affiliates, entered into a Stipulation for Entry of Final
Judgment and Permanent Injunction, including certain injunctive and monetary relief within the previously established accruals.
As previously reported, on June 18, 2015, a jury in Greene County, Missouri returned an unfavorable verdict in a litigated contract dispute
in the matter Meridian Creative Alliance vs. O’Reilly Automotive Stores, Inc. et. al. in the amount of $12.5 million. The Company
strongly believes that the verdict was unjust and unsupported by the law and the underlying facts and, further, that there are several
potential bases for reversal on appeal. The Company has vigorously challenged the verdict in the Court of Appeals. Following the matter
being fully briefed by the parties, oral argument was held in the Court of Appeals on January 12, 2017. The Court currently has the matter
under consideration. As of December 31, 2016, the Company had reserved $18.6 million with respect to this matter.
68
FORM 10-K NOTE 15 – QUARTERLY RESULTS (Unaudited)
The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2016 and 2015. The
unaudited quarterly information includes all adjustments, which the Company considers necessary for a fair presentation of the information
shown (in thousands, except per share data):
Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Fiscal 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
2,096,150
$
2,176,689
$
2,220,955
$
2,099,302
1,097,579
1,127,179
1,170,026
1,114,227
418,626
255,374
425,061
257,794
447,809
278,493
$
$
2.63
2.59
$
$
2.69
2.65
$
$
2.93
2.90
$
$
407,710
246,030
2.62
2.59
Fiscal 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
1,901,903
$
2,035,518
$
2,080,201
$
1,949,052
1,058,791
1,089,254
1,027,639
986,959
350,373
212,864
385,768
233,508
415,260
266,268
$
$
2.09
2.06
$
$
2.32
2.29
$
$
2.68
2.64
$
$
362,620
218,576
2.22
2.19
(1) Earnings per share amounts are computed independently for each quarter and annual period. The quarterly earnings per share amounts may not
sum to equal the full-year earnings per share amount.
The unaudited operating data presented above should be read in conjunction with the Company’s consolidated financial statements and
related notes, and the other financial information included therein.
69
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, 2016,
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, 2016. 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, 2016, the Company’s
internal control over financial reporting was 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.
70
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 2017 Annual Meeting of Shareholders (“Proxy Statement”), which will be filed with the
Securities and Exchange Commission (the “SEC”) within 120 days of the end of the Company’s most recent fiscal year. Except for those
portions specifically incorporated in this Annual Report on Form 10-K by reference to the Company’s Proxy Statement, no other portions
of the Proxy Statement are deemed to be filed as part of this Annual Report on Form 10-K.
Directors and Officers:
The information regarding the directors of the Company will be included in the Company’s Proxy Statement under the caption “Proposal
1 - Election of Directors” and “Information Concerning the Board of Directors” and is incorporated herein by reference. The Proxy
Statement will be filed with the SEC within 120 days of the end of the Company’s most recent fiscal year. The information regarding
executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form
10-K, for the Company’s executive officers who are not also directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended:
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
required by Item 405 of Regulation S-K, will be included in the Company’s Proxy Statement under the caption “Section 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 R. 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 O’Reilly Automotive, Inc. and Subsidiaries’ (the “Company”)
Proxy Statement on Schedule 14A for the 2017 Annual Meeting of Shareholders (“Proxy Statement”) under the captions “Compensation
of Executive Officers” and “Compensation of Directors” 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 O’Reilly Automotive, Inc. and Subsidiaries’ (the
“Company”) Proxy Statement on Schedule 14A for the 2017 Annual Meeting of Shareholders (“Proxy Statement”) under the caption
“Equity Compensation Plans” and is incorporated herein by reference.
71
FORM 10-K The information required by Item 403 of Regulation S-K will be included in the Company’s Proxy Statement under the captions “Security
Ownership of Certain Beneficial Owners” and “Security Ownership of Directors and Management” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 404 of Regulation S-K will be included in the O’Reilly Automotive, Inc. and Subsidiaries’ (the
“Company”) Proxy Statement on Schedule 14A for the 2017 Annual Meeting of Shareholders (“Proxy Statement”) under the caption
“Certain Relationships and Related Transactions” and is incorporated herein by reference.
The information required by Item 407(a) of Regulation S-K will be included in the Company’s Proxy Statement under the caption “Director
Independence” and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A will be included in O’Reilly Automotive, Inc. and Subsidiaries’ Proxy Statement
on Schedule 14A for the 2017 Annual Meeting of Shareholders under the caption “Fees Paid to Independent Registered Public Accounting
Firm” and is incorporated herein by reference.
72
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, 2016, 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, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014
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.
Item 16. Form 10-K Summary
Not applicable.
73
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, 2016
For the year ended December 31, 2015
For the year ended December 31, 2014
Allowance for doubtful accounts:
For the year ended December 31, 2016
For the year ended December 31, 2015
For the year ended December 31, 2014
(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
$
$
$
$
7,978
6,855
6,500
9,637
8,713
6,661
$
$
$
$
1,617
1,123
355
9,587
7,119
8,919
$
$
$
$
— $
—
— $
—
—
—
— $
—
— $
7,184 (1)
6,195 (1)
6,867 (1)
$
$
$
$
9,595
7,978
6,855
12,040
9,637
8,713
74
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 28, 2017
By:
/s/ Greg L. Henslee
Greg L. Henslee
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
Date: February 28, 2017
/s/ David O’Reilly
David O’Reilly
Director and Chairman of the Board
/s/ Charles H. O’Reilly Jr.
Charles H. O’Reilly Jr.
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 L. Henslee
Greg L. Henslee
Chief Executive Officer
(Principal Executive Officer)
/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)
75
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
4.6
4.7
4.8
4.9
4.10
4.11
4.12
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, filed 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 3.1 to the Registrant’s Current Report on Form 8-K
dated November 29, 2016, 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, by and among O’Reilly Automotive, Inc., the subsidiaries party thereto 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.
Form of 4.875% Note due 2021, included in 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, by and among O’Reilly Automotive, Inc., the subsidiaries party thereto 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.
Form of 4.625% Note due 2021, included in Exhibit 4.1 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, by and among O’Reilly Automotive, Inc., the subsidiaries party thereto 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.
Form of 3.800% Note due 2022, included in 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, by and among O’Reilly Automotive, Inc., the subsidiaries party thereto 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.
Form of 3.850% Note due 2023, included in Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 20,
2013, is incorporated herein by this reference.
Indenture, dated as of March 8, 2016, by and among O’Reilly Automotive, Inc., the subsidiaries party thereto 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
March 8, 2016, is incorporated herein by this reference.
Supplemental Indenture, dated as of March 8, 2016, by and among O’Reilly Automotive, Inc., the subsidiaries party
thereto 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 March 8, 2016, is incorporated herein by this reference.
Form of 3.550% Note due 2026, included in Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March
8, 2016, 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)
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.
10.5 (a)
O’Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as Exhibit 4.1 to the Registration Statement of the
Registrant on Form S-8, File No. 33-73892, is incorporated herein by this reference.
Page E-1
FORM 10-K EXHIBIT INDEX (continued)
Exhibit No.
10.6 (a)
10.7 (a)
10.8 (a)
10.9 (a)
10.10 (a)
10.11 (a)
10.12 (a)
Description
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.
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.
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
reference.
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
reference.
10.13 (a)
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.
10.14
10.15 (a)
10.16 (a)
10.17 (a)
10.18 (a)
10.19 (a)
10.20 (a)
10.21 (a)
10.22 (a)
10.23
10.24
10.25
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
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
to the Registrant’s Annual Shareholders’ Report on Form 10-K for the year ended December 31, 2002, is incorporated
herein by this reference.
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.
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
incorporated herein by this reference.
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.
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.
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.
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.
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.
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.,
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.
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
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 9, 2011, is incorporated herein by this
reference.
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 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.
Page E-2
FORM 10-K EXHIBIT INDEX (continued)
Exhibit No.
10.26
10.27 (a)
10.28 (a)
10.29 (a)
10.30 (a)
10.31 (a)
10.32 (a)
10.33 (a)
21.1
23.1
31.1
31.2
32.1 *
32.2 *
Description
Amendment No. 3 to the Credit Agreement, dated as of June 18, 2015, by and among O’Reilly Automotive, Inc., as
borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer, Swing Line Lender and a Lender, and other
lenders party thereto, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 18, 2015, 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
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
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
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.
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.
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. and certain O’Reilly Automotive, Inc. 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
reference.
Subsidiaries of the Registrant, 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 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 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.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
(a)
*
Management contract or compensatory plan or arrangement.
Furnished (and not filed) herewith pursuant to Item 601 (b)(32)(ii) of Regulation S-K.
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
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;
(8) Registration Statement (Form S-8 No. 333-181364) pertaining to the O’Reilly Automotive, Inc. 2012 Incentive Award Plan; and
(9) Registration Statement (Form S-3ASR No. 333-209788) pertaining to the offer from time to time of debt securities;
of our reports dated February 28, 2017, 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, 2016.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 28, 2017
FORM 10-K O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Greg L. 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 28, 2017
/s/ Greg L. Henslee
Greg L. Henslee
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 28, 2017
/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,
2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg L. 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 L. Henslee
Greg L. Henslee
Chief Executive Officer
February 28, 2017
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,
2016, 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 28, 2017
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
CHARLES H. O’REILLY JR.
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
Director 1993-July 1997; director Since
February 2001 ; LEAD director Since 2002
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
Chief Executive Officer
GREG JOHNSON
Co-President
JEFF SHAW
Co-President
TOM MCFALL
Executive Vice President and Chief Financial Officer
TONY BARTHOLOMEW
Senior Vice President of Professional Sales
BRAD BECKHAM
Senior Vice President of Central Store Operations and Sales
KEITH CHILDERS
Senior Vice President of Western Store Operations and Sales
ROBERT DUMAS
Senior Vice President of Eastern Store Operations and Sales
LARRY ELLIS
Senior Vice President of Distribution Operations
JEREMY FLETCHER
Senior Vice President of Finance and Controller
JEFF GROVES
Senior Vice President of Legal and General Counsel
RANDY JOHNSON
Senior Vice President of Inventory Management
SCOTT KRAUS
Senior Vice President of Real Estate and Expansion
JEFF LAURO
Senior Vice President of Information technology
DAVID WILBANKS
Senior Vice President of Merchandise
TRICIA HEADLEY
Vice President and Corporate Secretary and
Secretary to the Board
DOUG ADAMS
Vice President of Southeast Division
JONATHAN ANDREWS
Vice President of Human Resources and Training
GREG BECK
Vice President of Purchasing
AARON BIGGS
Vice President of Southern Division
CORY BLACKBURN
Vice President of Merchandise
SCOTT BLACKBURN
Vice President of Store Operations
ROB BODENHAMER
Vice President of Information Technology
Infrastructure and Operations
DOUG BRAGG
Vice President of Central Division
JOE COCKELL
Vice President of Distribution Operations
JIM DICKENS
Vice President of Eastern Division
JOE EDWARDS
Vice President of Store Installations
CHRIS FARROW
Vice President of Northern Division
ALAN FEARS
Vice President of Jobber Sales and Acquisitions
JULIE GRAY
Vice President of Corporate Services and
assistant corporate secretary
JOE HANKINS
Vice President of Store Design
CHAD KEEL
Vice President of Western Division
SCOTT LEONHART
Vice President of Northeast Division
CHRIS MANCINI
Vice President of Mid-Atlantic Division
MARK MERZ
Vice President of Investor Relations,
Financial Reporting and Planning
RYAN MOORE
Vice President of Pricing
DAVID P. 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 and Advertising
BARRY SABOR
Vice President of Loss Prevention
DIEGO SANTILLANA
Vice President of Southwestern Division
TOM SEBOLDT
Vice President of Merchandise
JASON TARRANT
Vice President of Northwest Division
DARIN VENOSDEL
Vice President of Inventory Management
KARLA WILLIAMS
Vice President of Solution Delivery
MIKE YOUNG
Vice President of Real Estate Development and Facilities
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, rhode island 02940-3078
800-884-4225 • www.computershare.com
Inquiries regarding stock transfers, lost certificates
or address changes should be directed to
Computer share 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.:
ATLANTIC EQUITIES Sam Hudson
BAIRD EQUITY RESEARCH Craig R. Kennison
BARCLAYS CAPITAL Matthew McClintock
BTIG Alan Rifkin
BANK OF AMERICAN MERRILL LYNCH Denise Chai
CITI RESEARCH Kate McShane
CLEVELAND RESEARCH COMPANY Daryl Boehringer
CONSUMER EDGE RESEARCH David A. Schick
CREDIT SUISSE Seth Sigman
DEUTSCHE BANK MARKET RESEARCH Mike Baker
EVERCORE ISI Greg Melich
GOLDMAN SACHS Matthew J. Fassler
GUGGENHEIM SECURITIES Steven Forbes
JEFFERIES Bret Jordan
J.P. MORGAN EQUITY RESEARCH Christopher Horvers
MORGAN STANLEY RESEARCH Simeon Gutman
OPPENHEIMER & CO Brian Nagel
RAYMOND JAMES RESEARCH Dan Wewer
RBC CAPITAL MARKETS Scot Ciccarelli
STEPHENS Ben Bienvenu
SUSQUEHANNA FINANCIAL GROUP Ali Faghri
UBS SECURITIES Michael Lasser
WEDBUSH SECURITIES Seth Basham
WILLIAM BLAIR Daniel Hofkin
WOLFE RESEARCH Chris Bottiglieri
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