®
2 0 1 8
A n n u a l R e p o r t
$7,216
$7,216
$7,216
$7,967
$7,967
$7,967
$8,593
$8,593
$8,978
$8,593
$8,978
$9,536
$8,978
$9,536
$9,536
$7.34
$7.34
$7.34
$9.17
$9.17
$9.17
$10.73
$10.73
$12.67
$10.73
$12.67
$16.10
$12.67
$16.10
$16.10
26.9%
26.9%
26.9%
31.5%
31.5%
31.5%
34.3%
34.3%
35.1%
34.3%
35.1%
39.5%
35.1%
39.5%
39.5%
2014
2014
2015
2016
2015
2014
2015
SALES
(in millions)
2016
2016
2017
2017
2017
2018
2018
2018
2014
2015
2016
2017
2016
2017
2014
2015
2014
2016
2015
2018
2017
DILUTED EARNINGS
per SHARE
2018
2018
2016
2017
2016
2015
2016
2014
2014
2015
2015
2014
RETURN on
INVESTED CAPITAL
2017
2017
2018
2018
2018
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
2018
5,219
3.8%
2017
5,019
1.4%
2016
4,829
4.8%
2015
4,571
7.5%
2014
4,366
6.0%
Sales
Operating Income
Net Income
Accounts Payable to Inventory
Working Capital
Total Assets
Total Debt
Shareholders’ Equity
$
9,536,428 $
8,977,726 $
8,593,096 $
7,966,674 $
7,216,081
1,514,021
1,270,374
1,815,184
1,324,487
105.7%
(350,918)
7,980,789
3,417,122
353,667
1,725,400
1,133,804
106.0%
(249,694)
7,571,885
2,978,390
653,046
1,699,206
1,037,691
105.7%
(142,674)
7,204,189
1,887,019
1,627,136
931,216
99.1%
(36,372)
6,676,684
1,390,018
1,961,314
778,182
94.6%
252,082
6,532,083
1,388,422
2,018,418
7.34
106,041
Earnings Per Share (assuming dilution)
$
16.10 $
12.67 $
10.73 $
9.17 $
Weighted-Average Common Shares
Outstanding (assuming dilution)
82,280
89,502
96,720
101,514
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
This graph shows the cumulative total shareholder return assuming the investment of $100 on December 31, 2013, and the
reinvestment of dividends thereafter, if any, 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.
$1 00
2013
$19 7
$21 6
$18 7
$150
2014
2015
2016
2017
2018
O’Reilly Automotive, Inc.
S&P 500 Retail Index
S&P 500 Index
$268
Our commitment to our customers and our team members:
We are enthusiastic hardworking professionals who are dedicated to teamwork,
safety/wellness, 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.
TO OUR FELLOW SHAREHOLDERS:
"
Our over 78,000 dedicated Team Members in our stores, distribution centers and offices across
the country relentlessly focus on taking market share, as we strive to be the dominant auto parts
supplier in all of our market areas.
"
O'Reilly 5198-Little Rock, AR
We
are once again pleased to report to you another year of record-
breaking revenues, comparable store sales growth, which came in at
the top end of our guidance range, and record operating income. Our more than
78,000 dedicated Team Members in our stores, distribution centers and offices
across the country relentlessly focus on taking market share, as we strive to be
the dominant auto parts supplier in all of our market areas. Our knowledgeable
and hard working men and women remain our single greatest asset, and their
ongoing focus on perpetuating and growing our Company Culture continues
to drive O’Reilly to a record performance year after year. Thank you, Team
O’Reilly, for your ceaseless commitment to our success!
Our 3.8% comparable store sales growth in 2018 marks our 26th consecutive
year of positive comparable store sales growth since we became a public
company in April of 1993; however, we absolutely understand that strong
top-line performance must be coupled with a relentless focus on sustainable
profitable growth. During 2018, we capitalized on the significant tax savings
benefit we received from the Tax Cuts and Jobs Act of 2017 by allocating
approximately 30% of these savings back into the business, with a focus on
strengthening our team and improving our in-store and omnichannel customer
experience. Even with the increased operating costs from these initiatives, our
Team’s dedication to sustainable, profitable growth drove a 5.2% increase in
operating income. This improvement, combined with the tax savings benefits
and the continued prudent execution of our share repurchase program, drove a
27% increase in diluted earnings per share, representing our 10th consecutive
year of an annual diluted earnings per share increase in excess of 15%.
GREG JOHNSON
Chief Executive Officer
and Co-President
JEFF SH AW
Chief Operating Officer
and Co-President
BR AD BECKH AM
Executive Vice President of
Store Operations and Sales
THOM AS MCFALL
Executive Vice President
and Chief Financial Officer
O’REILLY AUTOMOTIVE 2018 ANNUAL REPORT • 1
Jean Alsaindor, Store Manager, at O'Reilly 5312-Lehigh Acres, FL.
From the first day we opened our doors in 1957 at
403 Sherman Avenue in Springfield, Missouri, our
Team Members and our Culture have been our greatest
competitive advantage, and our Team Members’ ongoing
commitment to providing consistently excellent service
will continue to be the critical factor to our future
success. In all conditions, rain or shine, fire or flood,
our customers have come to expect our doors to stand
open, with our Team ready and waiting to provide them
with the best technical knowledge and the greatest parts
selection available to complete their automotive repairs.
In 2019, we plan to open 200 to 210 new stores, and the
key ingredient to the success of these stores will be our
ability to open the stores with a team of Professional
Parts People who are friendly, knowledgeable and
dedicated to our Culture of teamwork, honesty, respect,
enthusiasm and hard work. For this reason, our top
priority continues to be to identify, hire, train, develop
and retain outstanding Team Members who will benefit
from our “promote from within” philosophy and
perpetuate our Culture throughout the Company.
O’REILLY AUTOMOTIVE 2018 ANNUAL REPORT • 2
Our commitment to profitably growing our market
share is enhanced by the continued strength in the long-
term drivers of demand in our industry. Annual miles
driven remains the most significant driver of demand in
our industry, and in 2018, U.S. consumers once again
drove their vehicles more than they did the prior year,
accumulating over three trillion miles. A growing and
aging vehicle fleet continues to be another long-term
demand driver for our industry. Approximately 17.5
million new vehicles were sold in 2018, and coupled
with steady scrappage rates, the size of the vehicle fleet
increased to approximately 270 million vehicles. As the
engineering and manufacturing of these new vehicles
continues to improve, so does their ability to remain
on the road longer and be reliably driven at higher
mileages, resulting in the growth of the average age of
the fleet, which is now up to 11.7 years old. We believe
this growing and aging vehicle fleet will result in
more routine maintenance cycles and ongoing repairs,
which are positive for industry demand. The better
engineered and manufactured parts in these vehicles
last longer, resulting in an increase in the interval between
repairs and pressuring industry traffic; however, the repair
cost of these more advanced components is on average
higher, offsetting the pressure on transaction counts and
benefitting our industry. Total employment levels in the
U.S. is another driver for industry demand. The decrease
in unemployment levels over the last several years has
benefited industry demand and continued to benefit in 2018,
with unemployment levels reaching a 49 year low of 3.9%.
This sustained level of total employment supports growth
in annual miles driven and the health of the consumer,
resulting in continued
stable long-term demand
in our industry.
With a growing, aging
and diverse vehicle
population comes the
challenge of providing
our customers with quick
access to an expanding
universe of parts. Our ability to meet this inherent
challenge by leading the industry in parts availability is
a key competitive advantage for our Company. We have
developed and continue to enhance our robust, tiered,
regional distribution network comprised of 27 strategically
located distribution centers with the capacity to deliver
hard-to-find parts into the hands of customers faster than
our competitors. Each store in the continental United
States is replenished five nights a week directly from
one of our distribution centers, which carry on average
156,000 SKUs, allowing our stores to stock a broader and
more diverse inventory assortment. Each of our stores
carry an average of 23,000 SKUs, which are tailored
"
We have developed and continue to enhance our
robust, tiered, regional distribution network comprised
of 27 strategically located distribution centers with
the capacity to deliver hard-to-find parts into the
hands of customers faster than our competitors.
to each local market based on vehicle registration data,
market demographic information and customer purchasing
patterns. This store inventory assortment is augmented
by same-day access to hard-to-find parts either directly
from one of our DCs or through our network of 342 Hub
stores. Our Hub store network is comprised of 84 Super
Hubs, which stock on average 66,000 SKUs, and 258 Hub
stores, which stock on average 42,000 SKUs. In order to
maintain our parts availability advantage, we continually
evaluate our distribution capacity, and we are excited
about the two new distribution projects we currently have
underway in Twinsburg, Ohio,
and Lebanon, Tennessee.
These expansion projects
will improve our capacity
in both of these markets
and bolster our position as
the industry leader in parts
availability. Our “Never
Say No” commitment is an
essential piece of the excellent
"
customer service our Team Members practice, and we
work hard every day to uphold O’Reilly’s reputation
for reliability when it comes to quickly providing our
customers all their auto parts needs.
Our long-term strategy for profitable growth is
underpinned by our consistent capital allocation strategy.
Our priorities for the use of capital continue to be the
enhancement of our existing store base and distribution
network to support our stores’ ability to take share in
existing markets, organic growth through greenfield new
store openings and the prudent acquisitions of existing
auto parts suppliers. During 2018, we successfully
Naperville, IL, Distribution Center.
O’REILLY AUTOMOTIVE 2018 ANNUAL REPORT • 3
Suriel Sosa, Parts Specialist,
at O'Reilly 2902-Escondido, CA.
opened 200 new stores throughout the
U.S. and remain very pleased with
the performance of our new stores.
We continue to see exciting growth
opportunities in newer regions in
the Northeast, Middle Atlantic and
Southern Florida, as well as strategic
backfill opportunities in our established
markets. We are also happy to report
that at the end of 2018, we closed on
the purchase of Bennett Auto Supply
in southern Florida and look forward to
converting those stores to the O’Reilly
brand in 2019.
Our Team’s dedication to excellent
customer service and profitable growth
generated free cash flow of $1.2
billion, after investing $504 million in
capital projects at our stores, DCs and
offices. In 2018, we were able to return
excess capital of $1.7 billion to you,
our shareholders, through our share
repurchase program. Since we began this
program in 2011, we have returned $11
billion by repurchasing 73 million shares,
at an average price of $150.73 per share.
We continue to view the disciplined
execution of our share repurchase
program as an effective means of
returning capital after we have exhausted
all opportunities to profitably grow the
business and drive a high rate of return
for our shareholders. As a Company,
we are deeply committed to maintaining
an appropriate capital structure, which
supports our investment-grade credit
ratings and provides the flexibility to take
advantage of future growth opportunities.
We would like to conclude our letter
by expressing our deep gratitude to our
Team Members, who strive every day
to make our Company successful and
cement the foundation for our continued
success for years to come. It is their
hard work and dedication to our Culture
that continues to build O’Reilly’s strong
brand reputation. We would also like to
thank you, our shareholders, for the trust
and confidence you place in our Team,
and we look forward to extending our
record of profitable growth in 2019.
O’REILLY AUTOMOTIVE 2018 ANNUAL REPORT • 4
THE O'REILLY FOOTPRINT
Store Count 200-700+ 100-199 1-99
Distribution Center
Future Distribution Center
CUSTOMER SERVICE Coast To Coast
Alabama ....................139
Alaska ............................15
Arizona .......................139
Arkansas .................... 112
California ...................553
Colorado ....................102
Connecticut ................. 20
Florida ........................200
Georgia.......................205
Hawaii ...........................12
Idaho ............................. 44
Illinois .........................203
Indiana .......................137
Iowa .............................. 77
Kansas .......................... 85
Kentucky ...................... 95
Louisiana ................... 121
Maine ............................ 35
Massachusetts ........... 39
Michigan ....................168
Minnesota ..................125
Mississippi ................... 78
Missouri ......................201
Montana ....................... 28
Nebraska...................... 45
Nevada ......................... 56
New Hampshire ......... 32
New Mexico ................ 56
New York ....................... 3
North Carolina .......... 173
North Dakota ...............15
Ohio .............................196
Oklahoma .................. 121
Oregon .......................... 70
Pennsylvania .............. 24
Rhode Island ................. 8
South Carolina .........108
South Dakota ...............18
Tennessee .................. 176
Texas ...........................706
Utah ............................... 64
Vermont ...................... 24
Virginia ......................... 78
Washington ...............156
West Virginia ...............15
Wisconsin .................. 121
Wyoming ......................21
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, 2018
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 every Interactive Data File required to be submitted 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 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.
FORM 10-K
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
At February 18, 2019, an aggregate of 78,375,610 shares of common stock of the registrant was outstanding.
At June 30, 2018, the aggregate market value of the voting stock held by non-affiliates of the Company was $16,890,003,772 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 2019 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2018, 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, 2018
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
15
18
19
20
20
21
23
25
40
41
70
70
70
71
71
71
72
72
73
76
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,
tariffs, product demand, the market for auto parts, competition, weather, risks associated with the performance of acquired businesses,
our ability to hire and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt,
governmental regulations, information security and cyber attacks, terrorist activities, war and the threat of war. Actual results may
materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors”
section of our annual report on Form 10-K for the year ended December 31, 2018, 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, 2018, we operated 5,219 stores in 47 states. Our stores carry an extensive product line, including
•
new and remanufactured automotive hard parts, such as alternators, batteries, brake system components, belts, chassis parts,
driveline parts, engine parts, fuel pumps, hoses, starters, temperature control and water pumps;
• maintenance items, such as antifreeze, appearance products, engine additives, filters, fluids, lighting, oil and wiper blades;
and
•
accessories, such as floor mats, seat covers and truck accessories.
Our stores offer many enhanced services and programs to our customers, such as
•
•
•
•
•
•
•
battery diagnostic testing;
battery, wiper and bulb replacement;
check engine light code extraction;
custom hydraulic hoses;
drum and rotor resurfacing;
electrical and module testing;
loaner tool program;
• machine shops;
•
•
professional paint shop mixing and related materials; and
used oil, oil filter and battery recycling.
See the “Risk Factors” section of Item 1A of this annual report on Form 10-K for a description of certain risks relevant to our business.
These risk factors include, among others, 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 2018, we derived approximately 57% of our sales from our DIY customers and approximately 43% 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 790 full-time sales staff dedicated solely to calling upon and servicing the
professional service provider customer. We will also continue to expand and enhance the level of offerings focused on growing our
DIY business and will continue to execute our proven dual market strategy in both existing and new markets.
Superior Customer Service:
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient
locations with a wide selection of automotive products. We believe the satisfaction of DIY and professional service provider customers
is substantially dependent upon our ability to provide, in a timely fashion, the 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 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;
• many enhanced service programs, including battery and electrical testing, battery, wiper and bulb replacement and check
•
•
•
engine light code extractions;
attractive stores in convenient locations;
competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers’ quality and
value preferences; 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 and equips our Team Members with highly effective tools to source products
in our extensive supply network.
3
FORM 10-K 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
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 156,000 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 a total of 342 Hub stores that also provide delivery service and same-day access to an average of 66,000 SKUs from a
Super Hub or 42,000 SKUs from a Hub 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 194 senior
managers who average 20 years of service; 254 corporate managers who average 16 years of service; and 518 district managers who
average 13 years of service. Our management team has demonstrated the consistent ability to successfully execute our business plan
and growth strategy by generating 26 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 2018, we opened 200 net, new stores, and in
2019, we plan to open approximately 200 to 210 net, new stores, 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. In addition, after the close of business on December 31, 2018, we acquired the 33 Bennett Auto Supply, Inc. stores
that were not included in our 2018 store count and were not operated by the Company in 2018. 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, and 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.
4
FORM 10-K 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.
Selectively Pursue Strategic Acquisitions:
The automotive aftermarket industry is still highly fragmented, and we believe the ability of national auto parts chains, like O’Reilly,
to operate more efficiently and effectively than smaller independent operators, will result in continued industry consolidation. Our
intention is to continue to selectively pursue strategic acquisitions that will strengthen our position as a leading automotive aftermarket
parts supplier in existing markets and provide a springboard for expansion into new 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, egress and parking, and dedicated counters to serve professional service provider customers, each
designed to increase sales and operating efficiencies to 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 2018, we relocated 18 stores and performed minor to major updates or renovations to approximately 1,000 additional stores.
We believe that our ability to consistently achieve growth in comparable store sales is due in part to our commitment to maintaining
an attractive store network, which is strategically located to best serve our customers.
Enhance and Improve Customer Omnichannel Experience:
Regardless of how our customers begin their interaction, whether in-store, over the telephone or digitally, and complete their transaction,
whether in-store or delivery to their home or business, our goal is to provide excellent customer service and a seamless experience.
Our user-friendly websites, www.OReillyAuto.com and www.FirstCallOnline.com, allow our customers to search product and repair
content, check the in-store availability of our products, and place orders for either delivery or in-store pickup. We continue to improve
the functionality of our websites to provide our customers with a user-friendly and convenient shopping experience, as well as a robust
product and repair content information resource, which will continue to enhance the O’Reilly Brand.
Team Members
As of January 31, 2019, we employed 79,174 Team Members (49,476 full-time Team Members and 29,698 part-time Team Members),
of whom 67,369 were employed at our stores, 8,372 were employed at our DCs and 3,433 were employed at our corporate and regional
offices. A union represents 48 stores (506 Team Members) in the Greater Bay Area in California and has for many years. In addition,
approximately 62 Team Members who drive over-the-road trucks in two of our DCs are represented by labor unions. Except for these
Team Members, our Team Members are not represented by labor unions. Our tradition for 62 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.
5
FORM 10-K When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in
order to maximize the effect of initial promotional programs and achieve economies of scale. After opening this initial cluster of new
stores, we begin penetrating the less densely populated surrounding areas. As these store clusters mature, we evaluate the need to
open additional locations in the more densely populated markets where we believe opportunities exist to expand our market share or
to improve the level of service provided in high volume areas. This strategy enables us to achieve additional distribution and advertising
efficiencies in each market.
Store Locations and Size:
As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and small, less
densely populated areas that would not otherwise support a national chain selling primarily to the retail automotive aftermarket. Our
stores, on average, carry approximately 23,000 SKUs and average approximately 7,400 total square feet in size. At December 31,
2018, we had a total of approximately 38 million square feet in our 5,219 stores. Our stores are served primarily by the nearest DC,
which averages 156,000 SKUs, but also have same-day access to the broad selection of inventory available at one of our 342 Hub
stores, which are comprised of 84 Super Hubs that average approximately 15,600 square feet and carry an average of 66,000 SKUs
and 258 Hubs that average approximately 10,000 square feet and carry an average of 42,000 SKUs.
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, 2018 and 2017:
State
Texas
California
Georgia
Illinois
Missouri
Florida
Ohio
Tennessee
North Carolina
Michigan
Washington
Alabama
Arizona
Indiana
Minnesota
Louisiana
Oklahoma
Wisconsin
Arkansas
South Carolina
Colorado
Kentucky
Kansas
Mississippi
Virginia
Iowa
Oregon
Utah
New Mexico
Nevada
Nebraska
Idaho
Massachusetts
Maine
New Hampshire
Montana
Pennsylvania
Vermont
Wyoming
Connecticut
South Dakota
Alaska
North Dakota
West Virginia
Hawaii
Rhode Island
New York
Total
December 31, 2017
2018 Net, New Stores
December 31, 2018
Store
Count
% of Total
Store Count
Store
Change
% of Total
Store
Change
Store
Count
% of Total
Store Count
Cumulative
% of Total
Store Count
690
541
196
193
200
180
180
167
162
162
156
132
137
126
122
116
121
120
110
104
101
88
84
75
74
74
69
61
53
55
43
42
32
35
35
27
17
24
21
12
17
15
15
15
12
5
3
5,019
13.7 %
10.8 %
3.9 %
3.8 %
4.0 %
3.6 %
3.6 %
3.3 %
3.2 %
3.2 %
3.1 %
2.6 %
2.7 %
2.5 %
2.4 %
2.3 %
2.4 %
2.4 %
2.2 %
2.1 %
2.0 %
1.8 %
1.7 %
1.5 %
1.5 %
1.5 %
1.4 %
1.2 %
1.1 %
1.1 %
1.0 %
0.9 %
0.6 %
0.7 %
0.7 %
0.5 %
0.3 %
0.5 %
0.4 %
0.2 %
0.3 %
0.3 %
0.3 %
0.3 %
0.2 %
0.1 %
0.1 %
100.0%
8.0 %
6.0 %
4.5 %
5.0 %
0.5 %
10.0 %
8.0 %
4.5 %
5.5 %
3.0 %
0.0 %
3.5 %
1.0 %
5.5 %
1.5 %
2.5 %
0.0 %
0.5 %
1.0 %
2.0 %
0.5 %
3.5 %
0.5 %
1.5 %
2.0 %
1.5 %
0.5 %
1.5 %
1.5 %
0.5 %
1.0 %
1.0 %
3.5 %
0.0 %
(1.5)%
0.5 %
3.5 %
0.0 %
0.0 %
4.0 %
0.5 %
0.0 %
0.0 %
0.0 %
0.0 %
1.5 %
0.0 %
100.0 %
16
12
9
10
1
20
16
9
11
6
—
7
2
11
3
5
—
1
2
4
1
7
1
3
4
3
1
3
3
1
2
2
7
—
(3)
1
7
—
—
8
1
—
—
—
—
3
—
200
7
706
553
205
203
201
200
196
176
173
168
156
139
139
137
125
121
121
121
112
108
102
95
85
78
78
77
70
64
56
56
45
44
39
35
32
28
24
24
21
20
18
15
15
15
12
8
3
5,219
13.5 %
10.6 %
3.9 %
3.9 %
3.9 %
3.8 %
3.8 %
3.4 %
3.3 %
3.2 %
3.0 %
2.7 %
2.7 %
2.6 %
2.4 %
2.3 %
2.3 %
2.3 %
2.1 %
2.1 %
2.0 %
1.7 %
1.6 %
1.5 %
1.5 %
1.5 %
1.3 %
1.2 %
1.1 %
1.1 %
0.9 %
0.8 %
0.7 %
0.7 %
0.6 %
0.5 %
0.5 %
0.5 %
0.4 %
0.4 %
0.3 %
0.3 %
0.3 %
0.3 %
0.2 %
0.2 %
0.1 %
100.0%
13.5%
24.1%
28.0%
31.9%
35.8%
39.6%
43.4%
46.8%
50.1%
53.3%
56.3%
59.0%
61.7%
64.3%
66.7%
69.0%
71.3%
73.6%
75.7%
77.8%
79.8%
81.5%
83.1%
84.6%
86.1%
87.6%
88.9%
90.1%
91.2%
92.3%
93.2%
94.0%
94.7%
95.4%
96.0%
96.5%
97.0%
97.5%
97.9%
98.3%
98.6%
98.9%
99.2%
99.5%
99.7%
99.9%
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 each 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 and provide consistently high levels of customer service, we operate exclusive store automation
systems that deliver quick point-of-sale transaction processing times, reduce our customers’ checkout time, ensure accuracy and
provide our Professional Parts People with immediate access to our proprietary electronic parts catalog, part images, technical
schematics and pricing information based on each individual customer’s specific vehicle make, model and year. These systems track
in-store inventory availability and, through connectivity with our DC and corporate systems, allow real-time access to inventory
available in nearby stores and DCs throughout our network. Our systems also capture detailed sales information, which assists
management in strategic planning, inventory control and distribution efficiency, and provide a mechanism to deliver ongoing Team
Member training through our integrated digital learning platform.
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 518 district managers
has general supervisory responsibility for an average of 10 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 training, field workshops, regional meetings and our annual leadership
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 position. Additionally, during their first year of employment, our parts
specialists go through extensive automotive systems and product knowledge training to ensure they are able to provide high levels
of service to our customers. Once all of the required training has been satisfied, our parts specialists become eligible to take the
O’Reilly Certified Parts Professional test. Passing the O’Reilly test helps prepare them to become certified by the National Institute
for Automotive Service Excellence (“ASE”).
All of our stores have the ability to service professional service provider customers. For this reason, select Team Members in each
store complete extensive sales call training with a regional field sales manager. These Team Members then spend at least one day
8
FORM 10-K 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.
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 allow us to efficiently service new stores that are planned to open in contiguous market areas
as well as servicing our existing store network. Our distribution expansion strategy complements our new store opening strategy by
supporting newly established clusters of stores, and additional penetration into existing markets, in the regions surrounding each DC.
As of December 31, 2018, we had a total growth capacity of more than 615 stores in our distribution center network, which will
increase by approximately 275 stores with the completion of our Twinsburg, Ohio, DC in 2019. Further enhancing our distribution
capabilities in 2020, we plan to relocate and merge our existing Nashville, Tennessee, and Knoxville, Tennessee, DCs into a larger
facility located in Lebanon, Tennessee, providing a larger, more efficient facility to serve both markets, while also allowing us to
convert the existing Knoxville, Tennessee, DC into a large Hub that will continue to provide same day parts availability in the attractive
Knoxville market.
Distribution Centers:
As of December 31, 2018, we operated 27 DCs comprised of approximately 10.8 million operating square feet (see the “Properties”
table in Item 2 of this annual report on Form 10-K for a detailed listing of DC operating square footages). Our DCs stock an average
of 156,000 SKUs and most DCs are linked to and have the ability to access multiple other regional DCs’ 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,” many of which
receive this service seven days per week. Our DCs provide weekend service to not only the stores they service via their city counters
but also to strategic Hub locations, which redistribute products to surrounding stores. Our national Hub store network provides
additional service throughout the week, and on weekends, to surrounding stores. With our planned DC expansion during 2019, we
expect to end the year in 2019 operating 28 DCs comprised of approximately 11.2 million operating square feet.
As part of our continuing efforts to enhance our distribution network in 2019, we plan to
•
•
•
•
continue to enhance our distribution network through the engineering, design, expansion or relocation of new or current
DCs;
continue to utilize routing software to continue to enhance logistics efficiencies;
continue to implement labor management software to improve DC productivity and overall operating efficiency;
continue to define and implement best practices in all DCs; 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 a total of 342 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 store network consists of 84 Super Hubs that average approximately
15,600 square feet and carry an average of 66,000 SKUs and 258 Hubs that average approximately 10,000 square feet and carry an
average of 42,000 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, Castrol, Dorman, Fel-Pro, Gates Rubber, Monroe, Moog, Pennzoil, Prestone, Quaker State, Standard,
STP, Turtle Wax, Valvoline, Wagner, and Wix, and a wide selection of quality proprietary private label products, which span the entire
good, better and best value spectrum, under our BestTest®, BrakeBest®, Import Direct®, MasterPro®, MicroGard®, 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”
proprietary brands provide a great combination of quality and value, a characteristic important to our DIY customers, while our
“better” and “best” proprietary brands offer options for our more heavy-duty DIY customers, as well as our professional service
provider customers, who often prefer higher quality products that can be relied upon to support and grow their businesses.
9
FORM 10-K 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 815 suppliers, the five largest of which accounted for
approximately 24% of our total purchases in 2018. Our largest supplier in 2018 accounted for approximately 8% of our total purchases
and the next four largest suppliers each accounted for approximately 3% to 5% of our total purchases.
Marketing
Marketing to the DIY Customer:
We use an integrated marketing program, which includes radio, in-store, digital and social media promotions, as well as sports and
event sponsorships and direct mail and newspaper promotional distributions, 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 700 grassroots, local and regional motorsports events throughout 45 states
during 2018. We were the title sponsor of two National Association for Stock Car Racing (NASCAR) National series events, in 2018.
During the fall and winter months, we strategically sponsor National Collegiate Athletic Association (“NCAA”) basketball. Our
relationships with over 25 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 local and regional festivals and events.
We invest in digital channels to expand the O’Reilly brand presence online and through mobile devices, as this continues to be an
important point of contact with our customers. Search engine optimization and paid search strategies are used to drive traffic to our
website, and popular social media platforms are used to provide excellent customer service through interaction and 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 for 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 790 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;
10
FORM 10-K •
•
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 1 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.
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 180 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, locally available product of the same or comparable quality offered by our competitors.
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 and current economic and industry trends. 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 $296 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 $93 billion, which
includes the auto parts share of professional service provider sales at wholesale and DIY sales at retail. We do not sell tires or perform
for-fee automotive repairs or installations.
Competition
The sale of automotive aftermarket items is highly competitive in many areas, including customer service, product availability, store
location, brand recognition and price. We compete in both the DIY and professional service provider portions of the automotive
aftermarket and are one of the largest specialty retailers within that market. We compete primarily with
•
•
national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, CARQUEST, 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
•
11
FORM 10-K • mass merchandisers and online retailers that carry automotive replacement parts, maintenance items and accessories (such
as Wal-Mart Stores, Inc. and Amazon.com, Inc.).
We compete on the basis of customer service, which includes merchandise selection and availability, technical proficiency and
helpfulness of store personnel, price, store layout, continually enhancing the omnichannel experience 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.
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 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, but not limited to,
those related to the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants, and the
ownership and operation of real property.
As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous
materials onto our property in connection with, for example, our 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 recycled 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:
Gregory D. Johnson, age 53, Chief Executive Officer and Co-President, has been an O’Reilly Team Member for 36 years, which
includes continuous years of service with a company acquired by O’Reilly. 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. Mr. Johnson was promoted to Chief Executive Officer and Co-President in May of 2018.
Jeff M. Shaw, age 56, Chief Operating Officer and Co-President, has been an O’Reilly Team Member for 30 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. Mr.
Shaw was promoted to Chief Operating Officer and Co-President in May of 2018.
Brad Beckham, age 40, Executive Vice President of Store Operations and Sales, has been an O’Reilly Team Member for 22 years.
Mr. Beckham’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Store Operations. Mr. Beckham’s
12
FORM 10-K
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, Senior Vice President of Eastern Store Operations
and Sales, and Senior Vice President of Central Store Operations. Mr. Beckham has held the position of Executive Vice President of
Store Operations and Sales since January of 2018.
Tom McFall, age 48, Executive Vice President and Chief Financial Officer, has been an O’Reilly Team Member for 12 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 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 and Chief Financial Officer since 2007.
Jonathan Andrews, age 51, Senior Vice President of Human Resources and Training, has been an O’Reilly Team Member for six
years. Mr. Andrews’s primary areas of responsibility are Human Resources and Training. Mr. Andrews has over 25 years of human
resources experience. Mr. Andrews’s career includes human resource positions with Cargill, Inc. and Tyson Foods, Inc. before
accepting a position with AutoNation. Mr. Andrews served AutoNation for 10 years as Director of Human Resources and Senior
Director of Human Resources. In 2012, Mr. Andrews joined O’Reilly as Vice President of Human Resources and progressed through
the role of Vice President of Human Resources and Training. Mr. Andrews has held the position of Senior Vice President of Human
Resources and Training since January of 2019.
Doug Bragg, age 49, Senior Vice President of Central Store Operations and Sales, has been an O’Reilly Team Member for 28 years.
Mr. Bragg’s primary areas of responsibility are Store Operations and Sales for O’Reilly Central Store Operations. Mr. Bragg’s O’Reilly
career began as a Distribution Center Team Member and progressed through the roles of Assistant Store Manager, Store Manager,
District Manager, Regional Manager, and Divisional Vice President. Mr. Bragg has held the position of Senior Vice President of
Central Store Operations since January of 2018.
Robert Dumas, age 45, Senior Vice President of Eastern Store Operations and Sales, has been an O’Reilly Team Member for 27 years,
which includes continuous years of service with a company acquired by O’Reilly. 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 2016.
Larry L. Ellis, age 63, Senior Vice President of Distribution Operations, has been an O’Reilly Team Member for 43 years, which
includes continuous years of service with a company acquired by O’Reilly. 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 Fletcher, age 41, Senior Vice President of Finance and Controller, has been an O’Reilly Team Member for 13 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 2017.
Jeffrey L. Groves, age 53, Senior Vice President of Legal and General Counsel, has been an O’Reilly Team Member for 14 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
2016.
Brent Kirby, age 50, Senior Vice President of Omnichannel, has been an O’Reilly Team Member since July 2018. Mr. Kirby’s primary
areas of responsibility are Marketing, Advertising and Digital business areas while working cross functionally to deliver our
Omnichannel strategy. Mr. Kirby has over 30 years of experience in the retail industry. Prior to joining O’Reilly, Mr. Kirby held the
position of Chief Supply Chain Officer for Lowe’s Companies, Inc. (“Lowe’s”), with direct responsibility for leading the global supply
13
FORM 10-K chain supporting Lowe’s U.S.-based home improvement business. In this role, Mr. Kirby was responsible for team members across
a diverse network of distribution centers, manufacturing facilities, direct-to-consumer parcel operations and last mile delivery
operations. Mr. Kirby began his retail career as a hardware associate with Lowe’s and progressed through various positions at the
store, district and regional levels before being promoted to Senior Vice President of Store Operations and later Chief Omnichannel
Officer. In July of 2018, Mr. Kirby joined O’Reilly as Senior Vice President of Omnichannel and has held this position since that
time.
Scott Kraus, age 42, Senior Vice President of Real Estate and Expansion, has been an O’Reilly Team Member for 20 years. Mr.
Kraus’s primary areas of responsibility are Real Estate Expansion and Acquisitions. Mr. Kraus’s O’Reilly career began as a Parts
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 2016.
Jeffrey A. Lauro, age 52, 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 30 years of information technology experience
primarily 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.
Jason Tarrant, age 38, Senior Vice President of Western Store Operations and Sales, has been an O’Reilly Team Member for 17 years,
which includes continuous years of service with a company acquired by O’Reilly. Mr. Tarrant’s primary areas of responsibility are
Store Operations and Sales for O’Reilly Western Store Operations. Mr. Tarrant’s O’Reilly career began as a Parts Specialist, and
progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Field Sales Manager, Regional
Manager, and Divisional Vice President. Mr. Tarrant has held the position of Senior Vice President of Western Store Operations and
Sales since January of 2018.
Darin Venosdel, age 48, Senior Vice President of Inventory Management, has been an O’Reilly Team Member for 21 years. Mr.
Venosdel’s primary areas of responsibility are Inventory Management, Purchasing, Logistics, and Store Design. Mr. Venosdel’s
O’Reilly career began as a Programmer/Analyst and progressed through the roles of Application Development Manager, Director of
Application Development, Director of Inventory Management, and Vice President of Inventory Management. Mr. Venosdel has held
the position of Senior Vice President of Inventory Management since January of 2018.
David Wilbanks, age 47, Senior Vice President of Merchandise, has been an O’Reilly Team Member for six years. 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
2016.
SERVICE MARKS AND TRADEMARKS
We have registered, acquired and/or been assigned the following service marks and trademarks in the United States: BESTEST®;
BETTER PARTS. BETTER PRICES.®; BETTER PARTS, BETTER PRICES....EVERYDAY!®; BOND AUTO PARTS®;
BRAKEBEST®; CERTIFIED AUTO REPAIR®; CUSTOMIZE YOUR RIDE®; CSK PROSHOP®; DO IT RIGHT DEALS®; DO
IT RIGHT REBATE®; FIRST CALL®; FROM OUR STORE TO YOUR DOOR®; IMPORT DIRECT®; MASTER PRO®; MASTER
PRO REFINISHING®; MICROGARD®; MURRAY®; MURRAY’S AUTO PARTS®; MURRAY’S MASCOT® (Design only);
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 FOR YOUR CAR
WHEREVER YOU ARE®; PARTS PAYOFF®; POWER TORQUE®; PRECISION®; PRECISION HUB ASSEMBLIES®;
PRIORITY PARTS®; QUIETECH®; REAL WORLD TRAINING®; SERIOUS ABOUT YOUR CAR…SO ARE WE!®; SUPER
START®; TOOLBOX®; ULTIMA®; and ULTIMA SELECT®. 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 above list includes only the trademarks and service marks that are currently and validly registered
14
FORM 10-K with the United States Patent and Trademark Office. It does not include trademarks or service marks which may also be in use, but
are not yet registered. 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
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 or political uncertainty. In addition, restrictions on access to telematics,
diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulations may force vehicle
owners to rely on dealers to perform maintenance and repairs. If any of these events occur, or if unfavorable economic conditions
challenge the consumer environment, our business, results of operations, financial condition and cash flows could be adversely affected.
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, all of which
could adversely impact our business, results of operations, financial condition and cash flows.
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. Online and
mobile platforms may allow customers to quickly compare prices and product assortments between us and a range of competitors, which
15
FORM 10-K could result in pricing pressure. Some online competitors may have a lower cost structure than we do, as a result of our strategy of
providing an exceptional in-store experience and superior parts availability supported by our extensive store network and robust, regional
distribution footprint, which could also create pricing pressure. We may have to expend more resources and risk additional capital to
remain competitive, and our results of operations, financial condition and cash flows could be adversely affected. For a list of our principal
competitors, see the “Competition” section of Item 1 of this annual report on Form 10-K.
We are sensitive to regional economic and weather conditions that could impact our costs and sales.
Our business is sensitive to national and regional economic and weather conditions, and natural disasters. Unusually inclement weather,
such as significant rain, snow, sleet, freezing rain, flooding, seismic activity and hurricanes, has historically discouraged our customers
from visiting our stores during the affected period and reduced our sales, particularly to DIY customers. Extreme weather conditions,
such as extreme heat and extreme cold temperatures, may enhance demand for our products due to increased failure rates of our customers’
automotive parts, while temperate weather conditions may have a lesser impact on failure rates of automotive parts. In addition, our
stores and distribution centers (“DCs”) 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 2019 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
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 products from them. In addition,
the trend toward consolidation among automotive parts suppliers, as well as the off-shoring of manufacturing capacity to foreign countries,
may disrupt or end our relationship with some suppliers and could lead to less competition and result in higher prices. We could also be
negatively impacted 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.
16
FORM 10-K 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.
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, including changes that may result from the implementation of new benchmark rates
that replace LIBOR.
In addition, the terms of our financing obligations include restrictions, such as affirmative, negative and financial covenants, conditions
on borrowing and subsidiary guarantees. A failure to comply with these restrictions could result in a default under our financing obligations
17
FORM 10-K 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, supplier, Team Member or Company information could damage our reputation or result in substantial additional
costs or possible litigation.
Our business involves the storage of information about our customers, suppliers, Team Members and the Company, some of which is
entrusted to third-party service providers and vendors. We and our third-party service providers and vendors have taken reasonable and
appropriate steps to protect this information; however, these security measures may be breached due to cyber-attacks, Team Member
error, system compromises, fraud, hacking or other intentional or unintentional acts, which could result in unauthorized parties gaining
access to such information. The methods used to obtain unauthorized access are constantly evolving, and may be difficult to anticipate
or detect for long periods of time. If we experience a significant data security breach, we could be exposed to damage to our reputation,
additional costs, lost sales or possible regulatory action. In addition, the regulatory environment related to information security and
privacy is constantly evolving and compliance with those requirements could result in additional costs. There is no guarantee that the
procedures that we and our third-party service providers and vendors 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.
Litigation, governmental proceedings, environmental legislation and regulations and employment legislation and regulations may
affect our business, financial condition, results of operations and cash flows.
We are, and in the future may become, involved in lawsuits, regulatory inquiries, and governmental and other legal proceedings, arising
out of the ordinary course of our business. The damages sought against us in some of these litigation proceedings may be material and
may adversely affect our business, results of operations, financial condition and cash flows.
Environmental legislation and regulations, like the initiatives to limit greenhouse gas emissions and bills related to climate change, could
adversely impact all industries. While it is uncertain whether these initiatives will become law, 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 enactment of legislation implementing changes in the taxation of business activities, the adoption of other corporate tax reform
policies, or changes in tax legislation or policies may affect our business, financial condition, results of operations and cash flows.
The Company is subject to taxation in the U.S. In December 2017, comprehensive tax legislation, commonly referred to as the U.S. Tax
Cuts and Jobs Act (the “Tax Act”), was enacted and the changes included in the Tax Act are broad and complex. As tax laws and related
regulations and interpretations change, our financial condition, results of operations and cash flows could be materially 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, 2018, we operated 27 regional distribution centers (“DC”s), of which eight were leased (2.8 million operating square
footage) and 19 were owned (8.1 million operating square footage) for total DC operating square footage of 10.8 million square feet.
The following table provides information regarding our DCs, returns facility and corporate offices as of December 31, 2018:
Location
Principal Use(s)
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center
Distribution Center (to be relocated in 2020)
Distribution Center
Distribution Center (to open in 2020)
Distribution Center
Distribution Center
Distribution Center
Distribution Center (to be relocated in 2020)
Aurora, CO
Belleville, MI
Billings, MT
Brooklyn Park, MN
Brownsburg, IN
Des Moines, IA
Devens, MA
Forest Park, GA
Greensboro, NC
Houston, TX
Kansas City, MO
Knoxville, TN
Lakeland, FL
Lebanon, TN
Lubbock, TX
Moreno Valley, CA
Naperville, IL
Nashville, TN
North Little Rock, AR Distribution Center
Distribution Center
Oklahoma City, OK
Distribution Center
Phoenix, AZ
Distribution Center
Puyallup, WA
Distribution Center
Salt Lake City, UT
Distribution Center
Saraland, AL
Distribution Center
Seagoville, TX
Distribution Center
Selma, TX
Distribution Center
Springfield, MO
Distribution Center
Stockton, CA
Distribution Center (to open in 2019)
Twinsburg, OH
Bulk Facility
Springfield, MO
Return/Deconsolidation Facility, Corporate Offices
Springfield, MO
Corporate Offices
Phoenix, AZ
Corporate Offices
Springfield, MO
Corporate Offices
Springfield, MO
Corporate Offices, Training and Technical Center
Springfield, MO
Operating Square
Footage (1)
321,242
333,262
129,142
324,668
657,603
253,886
511,261
492,350
685,230
532,615
299,018
150,766
569,419
410,000
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
405,000
35,200
290,580
12,327
224,818
46,970
22,000
12,286,020
Nature of
Occupancy
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Leased
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Lease Term
Expiration
2/28/2025
1/31/2031
10/31/2024
12/31/2023
3/31/2022
6/30/2025
12/31/2022
6/30/2035
11/30/2022
8/31/2024
(1)
Includes floor and mezzanine operating square footage, excludes subleased square footage.
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.
19
FORM 10-K Of the 5,219 stores that we operated at December 31, 2018, 2,119 stores were owned, 3,026 stores were leased from unaffiliated parties
and 74 stores were leased from entities that include one or more of our affiliated directors or members of their immediate family. Leases
with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses
and an original term of, at a minimum, 10 years, subject to one or more renewals at our option. We have entered into separate master
lease agreements with each of the affiliated entities for the occupancy of the stores covered thereby. Such master lease agreements with
one 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 April 30, 2019, 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 5,835 stores, providing a growth capacity of more
than 615 stores, which will increase by approximately 275 stores with the completion of our Twinsburg, Ohio, DC in 2019. We believe
the growth capacity in our 27 existing DCs, along with the additional capacity of our new Twinsburg, Ohio, DC will provide us with the
DC infrastructure needed for near-term expansion. However, as we expand our geographic footprint, we will continue to evaluate our
existing distribution system infrastructure and will adjust our distribution system capacity as needed to support our future growth.
Item 3. Legal Proceedings
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company accrues for
litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable
loss. The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters. Although the Company
cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate,
these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows in a particular quarter or annual period.
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 14, 2019, the Company had approximately 351,000 shareholders of common stock based on the number of holders of
record and an estimate of individual participants represented by security position listings.
Sales of unregistered securities:
There were no sales of unregistered securities during the year ended December 31, 2018.
Issuer purchases of equity securities:
The following table identifies all repurchases during the fourth quarter ended December 31, 2018, 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, 2018, to October 31, 2018
November 1, 2018, to November 30, 2018
December 1, 2018, to December 31, 2018
Total as of December 31, 2018
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)
277
472
617
1,366
$
$
338.34
339.35
338.84
338.92
$
$
277
472
617
1,366
370,701
1,210,365
1,001,436
(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 7, 2018, and November 13, 2018, the Company’s Board of Directors each
time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a
cumulative authorization amount of $11.8 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 13,
2021. No other share repurchase programs existed during the twelve months ended December 31, 2018.
The Company repurchased a total of 6.1 million shares of its common stock under its publicly announced share repurchase program
during the year ended December 31, 2018, at an average price per share of $282.80, for a total investment of $1.7 billion. Subsequent
to the end of the year and through February 27, 2019, the Company repurchased an additional 0.8 million shares of its common stock,
at an average price per share of $342.95, for a total investment of $268.9 million. The Company has repurchased a total of 73.1 million
shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through
February 27, 2019, at an average price of $150.73, for a total aggregate investment of $11.0 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, 2013, 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
2013
2014
2015
2016
2017
2018
$
$
100
100
100
$
$
150
110
111
$
$
197
137
111
$
$
216
143
121
$
$
187
184
145
$
$
268
208
136
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,
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
(In thousands, except per
share, Team Members, stores
and ratio data)
INCOME STATEMENT
DATA:
Sales ($)
9,536,428
8,977,726
8,593,096
7,966,674
7,216,081
6,649,237
6,182,184
5,788,816
5,397,525
4,847,062
Cost of goods sold, including
warehouse and distribution
expenses
4,496,462
4,257,043
4,084,085
3,804,031
3,507,180
3,280,236
3,084,766
2,951,467
2,776,533
2,520,534
Gross profit
5,039,966
4,720,683
4,509,011
4,162,643
3,708,901
3,369,001
3,097,418
2,837,349
2,620,992
2,326,528
Selling, general and
administrative expenses
Former CSK officer clawback
Legacy CSK Department of
Justice investigation charge
3,224,782
2,995,283
2,809,805
2,648,622
2,438,527
2,265,516
2,120,025
1,973,381
1,887,316
1,788,909
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,798)
—
—
20,900
—
—
Operating income
1,815,184
1,725,400
1,699,206
1,514,021
1,270,374
1,103,485
977,393
866,766
712,776
537,619
Write-off of asset-based
revolving credit agreement
debt issuance costs
Termination of interest rate
swap agreements
Gain on settlement of note
receivable
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(21,626)
(4,237)
—
—
—
11,639
Other income (expense), net
(121,097)
(87,596)
(62,015)
(53,655)
(48,192)
(44,543)
(35,872)
(25,130)
(35,042)
Total other income (expense)
(121,097)
(87,596)
(62,015)
(53,655)
(48,192)
(44,543)
(35,872)
(50,993)
(23,403)
—
—
—
(40,721)
(40,721)
Income before income taxes
1,694,087
1,637,804
1,637,191
1,460,366
1,222,182
1,058,942
941,521
815,773
689,373
496,898
Provision for income taxes (a)
(b)
369,600
504,000
599,500
Net income ($) (a)(b)
1,324,487
1,133,804
1,037,691
529,150
931,216
444,000
778,182
388,650
670,292
355,775
585,746
308,100
507,673
270,000
419,373
189,400
307,498
Basic earnings per common
share:
Earnings per share – basic ($)
16.27
12.82
10.87
9.32
7.46
6.14
4.83
3.77
3.02
2.26
Weighted-average common
shares outstanding – basic
Earnings per common share -
assuming dilution: (a)(b)
Earnings per share – assuming
dilution ($)
Weighted-average common
shares outstanding – assuming
dilution
SELECTED OPERATING
DATA:
Number of Team Members at
year end
Number of stores at year end
(c)
Total store square footage at
year end (d)
Sales per weighted-average
store (e)($)
Sales per weighted-average
square foot (d)(f)($)
Percentage increase in
comparable store sales (g)
81,406
88,426
95,447
99,965
104,262
109,244
121,182
134,667
138,654
136,230
16.10
12.67
10.73
9.17
7.34
6.03
4.75
3.71
2.95
2.23
82,280
89,502
96,720
101,514
106,041
111,101
123,314
136,983
141,992
137,882
78,882
75,552
74,580
71,621
67,569
61,909
53,063
49,324
46,858
44,880
5,219
5,019
4,829
4,571
4,366
4,166
3,976
3,740
3,570
3,421
38,455
36,685
35,123
33,148
31,591
30,077
28,628
26,530
25,315
24,200
1,842
1,807
1,826
1,769
1,678
1,614
1,590
1,566
1,527
1,424
251
248
251
244
232
224
224
221
216
202
3.8%
1.4%
4.8%
7.5%
6.0%
4.6%
3.5%
4.6%
8.8%
4.8%
23
FORM 10-K Years ended December 31,
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
(In thousands, except per share,
Team Members, stores and ratio
data)
SELECT BALANCE SHEET
AND CASH FLOW DATA:
Working capital (h)($)
(350,918)
(249,694)
(142,674)
(36,372)
252,082
430,832
478,093
1,028,330
1,029,861
900,857
Total assets (h)($)
7,980,789
7,571,885
7,404,189
6,676,684
6,532,083
6,057,895
5,741,241
5,494,174
5,031,950
4,695,536
Inventory turnover (i)
1.4
1.4
1.5
1.5
1.4
1.4
1.4
1.5
1.4
1.4
Accounts payable to inventory
(j)
Current portion of long-term
debt and short-term debt ($)
Long-term debt, less current
portion (h)($)
105.7%
106.0%
105.7%
99.1%
94.6%
86.6%
84.7%
64.4%
44.3%
42.8%
—
—
—
—
25
67
222
662
1,431
106,708
3,417,122
2,978,390
1,887,019
1,390,018
1,388,397
1,386,828
1,087,789
790,585
357,273
684,040
Shareholders’ equity ($) (a)
353,667
653,046
1,627,136
1,961,314
2,018,418
1,966,321
2,108,307
2,844,851
3,209,685
2,685,865
Cash provided by operating
activities (k) ($)
Capital expenditures ($)
Free cash flow (k)(l)($)
1,727,555
1,403,687
1,510,713
1,345,488
1,190,430
908,026
1,251,555
1,118,991
504,268
1,188,584
465,940
889,059
476,344
978,375
414,020
868,390
429,987
760,443
395,881
512,145
300,719
950,836
328,319
790,672
703,687
365,419
285,200
414,779
338,268
(129,579)
(a) During the year ended December 31, 2017, the Company adopted a new accounting standard that requires excess tax benefits related to share-based compensation
payments to be recorded through the income statement. In compliance with the standard, the Company did not restate prior period amounts to conform to current
period presentation. The Company recorded a cumulative effect adjustment to opening retained earnings, due to the adoption of the new accounting standard. See
Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31,
2017, for more information.
(b) Following the enactment of the U.S. Tax Cuts and Jobs Act in December of 2017, the Company revalued its deferred income tax liabilities, which resulted in a one-
time benefit to the Company’s Consolidated Statement of Income for the year ended December 31, 2018 and 2017. See Note 13 “Income Taxes” to the Consolidated
Financial Statements of this annual report on Form 10-K for more information.
(c)
In 2008, 2012 and 2016, the Company acquired CSK Auto Corporation (“CSK”), materially all assets of 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. After the close of business on December 31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett Auto
Supply, Inc., including 33 stores that were not included in the 2018 store count and were not operated by the Company in 2018. Financial results for these acquired
companies have been included in the Company’s consolidated financial statements from the dates of the acquisitions forward.
(d) Total square footage includes normal selling, office, stockroom and receiving space.
(e) Sales per weighted-average store are weighted to consider the approximate dates of store openings, acquisitions or closures.
(f) Sales per weighted-average square foot are weighted to consider the approximate dates of store openings, acquisitions, expansions or closures.
(g) 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 and 2012, and sales during the one to two week period certain
CSK branded stores were closed for conversion. Online sales, resulting from ship-to-home orders and pick-up-in-store orders, for stores open at least one year, are
included in the comparable store sales calculation.
(h) 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.
(i)
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.
(j) Accounts payable to inventory is calculated as accounts payable divided by inventory.
(k) Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard during
the first quarter ended March 31, 2017. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on
Form 10-K for the year ended December 31, 2017, for more information.
(l) Free cash flow is calculated as net cash provided by operating activities less capital expenditures and excess tax benefit from share-based compensation payments
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, 2018, 2017 and 2016;
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, 2018, and 2017; 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,
tariffs, product demand, the market for auto parts, competition, weather, risks associated with the performance of acquired businesses,
our ability to hire and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt,
governmental regulations, information security and cyber attacks, terrorist activities, war and the threat of war. Actual results may
materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors”
section of our annual report on Form 10-K for the year ended December 31, 2018, 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 profit 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, 2018,
we operated 5,219 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
25
FORM 10-K our product offering to adjust to customers’ changing preferences, and we also have initiatives focused on marketing and training to
educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.
We believe the key drivers of current and future demand for the products sold within the automotive aftermarket include the number of
U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations, average vehicle age and unemployment.
• Number of Miles Driven – The number of total miles driven in the U.S. influences the demand for repair and maintenance
products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per
year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary
to keep these vehicles in operation. According to the Department of Transportation, the number of total miles driven in the U.S.
increased 0.3%, 1.2% and 2.4% in 2018, 2017 and 2016, 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
8.5% from 2007 to 2017, bringing the number of light vehicles on the road to 270 million by the end of 2017. For the year
ended December 31, 2018, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately
17.5 million, contributing to the continued growth in the total number of registered vehicles on the road. In the past decade,
vehicle scrappage rates have remained relatively stable, ranging from 4.2% to 5.7% annually. As a result, over the past decade,
the average age of the U.S. vehicle population has increased, growing 21.9%, from 9.6 years in 2007 to 11.7 years in 2017. We
believe this increase in average age can be attributed to better engineered and manufactured vehicles, which can be reliably
driven at higher mileages due to better quality power trains and interiors and exteriors, and the consumer’s willingness to invest
in maintaining these higher-mileage, better built vehicles. As the average age of vehicles on the road increases, a larger percentage
of miles are being driven by vehicles that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate
strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent
mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest
in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet,
will support continued demand for automotive aftermarket products.
• Unemployment – Unemployment, underemployment, the threat of future joblessness and the uncertainty surrounding the overall
economic health of the U.S. have a negative impact on consumer confidence and the level of consumer discretionary spending.
Long-term trends of high unemployment have historically impeded the growth of annual miles driven, as well as decrease
consumer discretionary spending, both of which negatively impact demand for products sold in the automotive aftermarket
industry. As of December 31, 2017, the U.S. unemployment rate was 4.1%, and as of December 31, 2018, the U.S. unemployment
rate decreased to 3.9%. We believe total employment should remain at healthy levels supporting the trend of modest growth in
total miles driven in the U.S. and the continued demand for automotive aftermarket products.
We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on
our dual market strategy and the core O’Reilly values of hard work and excellent customer service.
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 7, 2018, and November 13, 2018, our Board of Directors each
time approved a resolution to increase the authorization amount under our share repurchase program by an additional $1.00
billion, resulting in a cumulative authorization amount of $11.75 billion. Each additional authorization is effective for a three-
year period, beginning on its respective announcement date. As of February 27, 2019, we had repurchased approximately 73.1
million shares of our common stock at an aggregate cost of $11.02 billion under this program.
• On May 17, 2018, we issued $500 million aggregate principal amount of unsecured 4.350% Senior Notes due 2028 (“4.350%
Senior Notes due 2028”) at a price to the public of 99.732% of their face value with UMB Bank, N.A. as trustee. Interest on
the 4.350% Senior Notes due 2028 is payable on June 1 and December 1 of each year, which began on December 1, 2018, and
is computed on the basis of a 360-day year.
26
FORM 10-K • After the close of business on December 31, 2018, we completed an asset purchase of Bennett Auto Supply, Inc. (“Bennett”),
a privately held automotive parts supplier. The asset purchase included 33 stores that were not included in the Company’s 2018
store count and were not operated by the Company in 2018, and a warehouse located in southern Florida.
RESULTS OF OPERATIONS
The following table includes income statement data as a percentage of sales for the years ended December 31, 2018, 2017 and 2016:
Sales
Cost of goods sold, including warehouse and distribution expenses
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Interest income
Income before income taxes (1)
Provision for income taxes
Net income
For the Year Ended
December 31,
2018
2017
2016
100.0%
100.0%
100.0%
47.2
52.8
33.8
19.0
(1.3)
—
17.8
3.9
47.4
52.6
33.4
19.2
(1.0)
—
18.2
5.6
47.5
52.5
32.7
19.8
(0.8)
0.1
19.1
7.0
13.9%
12.6%
12.1%
(1) Each percentage of sales amount is computed independently and may not compute to presented totals.
2018 Compared to 2017
Sales:
Sales for the year ended December 31, 2018, increased $559 million, or 6%, to $9.54 billion from $8.98 billion for the same period in
2017. Comparable store sales for stores open at least one year increased 3.8% and 1.4% for the years ended December 31, 2018 and
2017, respectively. Comparable store sales are calculated based on the change in sales for stores open at least one year and exclude sales
of specialty machinery, sales to independent parts stores and sales to Team Members. Online sales, resulting from ship-to-home orders
and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation.
The following table presents the components of the increase in sales for the year ended December 31, 2018 (in millions):
Increase in Sales for the Year Ended
December 31, 2018,
Compared to the Same Period in 2017
Store sales:
Comparable store sales
Non-comparable store sales:
Sales for stores opened throughout 2017, excluding stores open at least one year that are
included in comparable store sales
Sales for stores opened throughout 2018
Decline in sales 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
$
$
336
101
120
(7)
9
559
We believe the increased sales achieved by our stores were the result of store growth, 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 broad selection of product offerings
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, 2018, was driven by an increase in average ticket values for both
DIY and professional service provider customers and positive transaction counts for professional service provider customers, offset by
negative transaction counts for DIY 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 same SKU inflation. 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.
During the year ended December 31, 2018, DIY transaction counts also continued to be pressured by increased gas prices and other
inflationary impacts, resulting in an increased deferral of vehicle maintenance and repairs over the short term.
We opened 200 net, new stores during the year ended December 31, 2018, compared to opening 190 net, new stores during the year ended
December 31, 2017. As of December 31, 2018, we operated 5,219 stores in 47 states compared to 5,019 stores in 47 states at December 31,
2017. After the close of business on December 31, 2018, we acquired the 33 Bennett stores that were not included in our 2018 store
count and were not operated by the Company in 2018. We anticipate new store growth will be 200 to 210 net, new store openings in
2019 and will net an additional 20 stores, as we will merge 13 of the acquired 33 Bennett stores into existing O’Reilly stores during 2019.
Gross profit:
Gross profit for the year ended December 31, 2018, increased 7% to $5.04 billion (or 52.8% of sales) from $4.72 billion (or 52.6% of
sales) for the same period in 2017. The increase in gross profit dollars for the year ended December 31, 2018, was primarily the result
of sales from new stores and the increase in comparable store sales at existing stores. The increase in gross profit as a percentage of sales
for the year ended December 31, 2018, was primarily due to a non-cash last-in, first-out (“LIFO”) charge in 2017, partially offset by an
increase in distribution expenses. The increase in distribution expenses was primarily due to wage pressure and increased transportation
costs, as compared to 2017. During the year ended December 31, 2018, we did not realize net acquisition cost decreases, and as a result,
we did not record a LIFO charge. During the year ended December 31, 2017, our LIFO costs were written down by approximately $22
million to reflect replacement cost.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2018, increased 8% to $3.22 billion (or 33.8%
of sales) from $3.00 billion (or 33.4% of sales) for the same period in 2017. The increase in total SG&A dollars for the year ended
December 31, 2018, was primarily the result of additional Team Members, facilities and vehicles to support our increased sales and store
count, the planned allocation of a portion of the tax savings realized as a result of the U.S. Tax Cuts and Jobs Act, enacted in December
2017 (the “Tax Act”) and unfavorable comparison to a 2017 benefit of $9.1 million from the reduction in our legal accrual following the
expiration of the statute of limitations related to a legacy claim. The increase in SG&A as a percentage of sales for the year ended
December 31, 2018, was primarily due to our tax savings allocation initiatives and the 2017 legal accrual benefit.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2018, increased 5% to $1.82 billion (or
19.0% of sales) from $1.73 billion (or 19.2% of sales) for the same period in 2017.
Other income and expense:
Total other expense for the year ended December 31, 2018, increased 38% to $121 million (or 1.3% of sales), from $88 million (or 1.0%
of sales) for the same period in 2017. The increase in total other expense for the year ended December 31, 2018, was primarily the result
of increased interest expense on higher average outstanding borrowings.
Income taxes:
Our provision for income taxes for the year ended December 31, 2018, decreased 27% to $370 million (21.8% effective tax rate) from
$504 million (30.8% effective tax rate) for the same period in 2017. The decreases in our provision for income taxes and our effective
tax rate for the year ended December 31, 2018, were primarily the result of the lower federal corporate tax rate set forth by the Tax Act,
partially offset by a $53 million benefit in 2017 from the required revaluation of our deferred income tax liabilities based on the lower
federal corporate tax rate set forth by the Tax Act and lower excess tax benefits from share-based compensation in 2018, as compared
2017. During the year ended December 31, 2018 and 2017, excess tax benefits from share-based compensation were approximately $35
million and $49 million, respectively.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2018, increased 17% to $1.32 billion (or 13.9%
of sales), from $1.13 billion (or 12.6% of sales) for the same period in 2017.
28
FORM 10-K Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2018, increased 27% to $16.10 on 82 million shares from $12.67
on 90 million shares for the same period in 2017. Due to the revaluation of our deferred income tax liabilities in 2017, our diluted earnings
per common share for the year ended December 31, 2017, included a one-time benefit of $0.59.
2017 Compared to 2016
Sales:
Sales for the year ended December 31, 2017, increased $385 million, or 4%, to $8.98 billion from $8.59 billion for the same period in
2016. Comparable store sales for stores open at least one year increased 1.4% and 4.8% for the years ended December 31, 2017 and
2016, 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. Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in
the comparable store sales calculation.
The following table presents the components of the increase in sales for the year ended December 31, 2017 (in millions):
Increase in Sales for the Year Ended
December 31, 2017,
Compared to the Same Period in 2016
Store sales:
Comparable store sales, including sales from the 48 acquired Bond stores
Non-comparable store sales:
Sales for stores opened throughout 2016, excluding stores open at least one year that are
included in comparable store sales
Sales for stores opened throughout 2017
Sales from Leap Day in 2016
Decline in sales 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
$
$
182
126
108
(25)
(5)
(1)
385
We believe the increased sales achieved by our stores were the result of store growth, sales from the 48 acquired Bond Auto Parts (“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.
Our comparable store sales increase for the year ended December 31, 2017, was driven by increases in average ticket values for both
DIY and professional service provider customers, partially offset by negative 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. When repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit to average ticket
values; however, the decrease in repair frequency creates pressure on customer transaction counts. In addition, customer transaction
counts for the year ended December 31, 2017, were negatively impacted by softer industry demand, resulting, in part, from the unseasonably
mild winter weather at the onset of 2017 and a cool, wet summer in many of our markets. The mild winter weather did not stress vehicle
components to the degree more typical harsh winter weather would, which resulted in a lower level of automobile parts breakage and
associated demand for our products. The cool, wet summer in many of our markets resulted in a lower level of demand, as the absence
of typical seasonally high temperatures resulted in fewer heat related product repairs.
We opened 190 net, new stores during the year ended December 31, 2017, compared to opening 210 net, new stores and acquiring 48
Bond stores during the year ended December 31, 2016. As of December 31, 2017, we operated 5,019 stores in 47 states compared to
4,829 stores in 47 states at December 31, 2016.
29
FORM 10-K Gross profit:
Gross profit for the year ended December 31, 2017, increased 5% to $4.72 billion (or 52.6% of sales) from $4.51 billion (or 52.5% of
sales) for the same period in 2016. The increase in gross profit dollars for the year ended December 31, 2017, was primarily a result of
sales from new stores, the increase in comparable store sales at existing stores and sales from the 48 acquired Bond stores, partially offset
by gross profit dollars generated from one additional day due to Leap Day for the same period one year prior. The increase in gross profit
as a percentage of sales for the year ended December 31, 2017, was primarily due to a smaller non-cash LIFO impact, partially offset by
a lower merchandise margin and higher inventory shrinkage. The smaller LIFO impact is the result of fewer product acquisition cost
improvements during the year ended December 31, 2017, compared 2016. Our policy is to not write up inventory in excess of replacement
cost, and accordingly, we are effectively valuing our inventory at replacement cost. For the year ended December 31, 2017 and 2016,
our LIFO inventory costs were written down by approximately $22 million and $49 million, respectively, to reflect replacement cost.
The lower merchandise margin was primarily the result of merchandise mix, driven by the unfavorable weather conditions during 2017.
The higher inventory shrinkage was primarily cyclical in nature, following a period of lower than average shrinkage trends.
Selling, general and administrative expenses:
SG&A for the year ended December 31, 2017, increased 7% to $3.00 billion (or 33.4% of sales) from $2.81 billion (or 32.7% of sales)
for the same period in 2016. The increase in total SG&A dollars for the year ended December 31, 2017, was primarily the result of
additional Team Members, facilities and vehicles to support our increased sales and store count, partially offset by a $9.1 million benefit
from the reduction in our legal accrual following the expiration of the statute of limitations related to a legacy claim and incremental
SG&A expenses incurred from one additional day due to Leap Day for the same period one year prior. The increase in SG&A as a
percentage of sales for the year ended December 31, 2017, was primarily due to deleverage of store operating costs on soft comparable
store sales during the year ended December 31, 2017.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2017, increased 2% to $1.73 billion (or
19.2% of sales) from $1.70 billion (or 19.8% of sales) for the same period in 2016.
Other income and expense:
Total other expense for the year ended December 31, 2017, increased 41% to $88 million (or 1.0% of sales), from $62 million (or 0.7%
of sales) for the same period in 2016. The increase in total other expense for the year ended December 31, 2017, was primarily the result
of increased interest expense on higher average outstanding borrowings and increased amortization of debt issuance costs.
Income taxes:
Our provision for income taxes for the year ended December 31, 2017, decreased 16% to $504 million (30.8% effective tax rate) from
$600 million (36.6% effective tax rate) for the same period in 2016. The decrease in our provision for income taxes for the year ended
December 31, 2017, was the result of a one-time $53 million benefit to the provision for income taxes related to the required revaluation
of our deferred income tax liabilities based on the lower federal corporate income tax rate set forth by the Tax Act and excess tax benefits
from share-based compensation, which provided a benefit of $49 million to the provision for income taxes. The decrease in our effective
tax rate for the year ended December 31, 2017, was primarily due to the required revaluation of our deferred income tax liabilities, which
provided a one-time benefit of 325 basis points to the effective tax rate for the year ended December 31, 2017, and excess tax benefits
from share-based compensation, which provided a benefit of 297 basis points to the effective tax rate for the year ended December 31,
2017.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2017, increased 9% to $1.13 billion (or 12.6%
of sales), from $1.04 billion (or 12.1% of sales) for the same period in 2016.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2017, increased 18% to $12.67 on 90 million shares from $10.73
on 97 million shares for the same period in 2016. Due to the required revaluation of our deferred income tax liabilities, our diluted
earnings per common share for the year ended December 31, 2017, included a one-time benefit of $0.59. Due to the adoption of ASU
2016-09, our diluted earnings per common share for the year ended December 31, 2017, included a benefit of $0.50.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate
and maintain our existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved
share repurchase program. The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured
revolving credit facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability
to generate funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the
30
FORM 10-K debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.
We believe that cash expected to be provided by operating activities and availability under our unsecured revolving credit facility will
be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future. However, there can be no
assurance that we will continue to generate cash flows at or above recent levels.
Liquidity and related ratios:
The following table highlights our liquidity and related ratios as of December 31, 2018 and 2017 (dollars in millions):
Liquidity and Related Ratios
Current assets
Current liabilities
Working capital (1)
Total debt
Total equity
Debt to equity (2)
December 31,
2018
2017
Percentage
Change
$
$
$
3,543
3,894
(351)
3,417
354
$
9.66:1
3,398
3,647
(250)
2,978
653
4.56:1
4.3 %
6.8 %
(40.4)%
14.7 %
(45.8)%
111.8 %
(1) Working capital is calculated as current assets less current liabilities.
(2) Debt to equity is calculated as total debt divided by total equity.
Current assets increased 4%, current liabilities increased 7%, total debt increased 15% and total equity decreased 46% from 2017 to 2018.
The increase in current assets was primarily due to the increase in inventory, resulting from the opening of 200 net, new stores in 2018.
The increase in current liabilities was primarily due to the increase in accounts payable, resulting from inventory growth related to new
store openings. Our accounts payable to inventory ratio was 105.7% as of December 31, 2018, as compared to 106.0% in the prior year.
The increase in total debt was attributable to the issuance of $500 million of 4.350% Senior Notes due 2028 and borrowings of $287
million on our revolving credit facility at December 31, 2018. The decrease in total equity resulted from the impact of share repurchase
activity, under our share repurchase program, on retained deficit and additional paid-in-capital, partially offset by a decrease in retained
deficit from net income for the year ended December 31, 2018.
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31,
2018, 2017 and 2016 (in thousands):
Liquidity:
Total cash provided by/(used in):
Operating activities (1)
Investing activities
Financing activities (1)
Net (decrease) increase in cash and cash equivalents
Capital expenditures
Free cash flow (2)
For the Year Ended
December 31,
2018
2017
2016
$
$
$
1,727,555
(534,302)
(1,208,286)
(15,033)
504,268
1,188,584
$
$
$
1,403,687
(464,223)
(1,039,714)
(100,250)
465,940
889,059
$
$
$
1,510,713
(529,096)
(951,320)
30,297
476,344
978,375
(1) Prior period amount has been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard
during the first quarter ended March 31, 2017. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements
of the annual report on Form 10-K for the year ended December 31, 2017.
(2) Calculated as net cash provided by operating activities, less capital expenditures and excess tax benefit from share-based compensation payments
for the period.
Operating activities:
The increase in net cash provided by operating activities in 2018 compared to 2017 was primarily due to increased operating income,
reduced cash taxes paid, due to the Tax Act, and a reduction of accounts receivable, due to the business day timing of year-end 2018, as
compared to 2017.
The decrease in net cash provided by operating activities in 2017 compared to 2016 was primarily due to a smaller decrease in our net
inventory investment, partially offset by an increase in net income. Our accounts payable to inventory ratio was 106.0%, 105.7% and
99.1% as of December 31, 2017, 2016 and 2015, respectively. The smaller increase in our accounts payable to inventory ratio in 2017
31
FORM 10-K was primarily attributable to fewer new suppliers entering our supplier financing programs in 2017 and a smaller decrease in net inventory,
due to a softer sales environment, as compared to 2016.
Investing activities:
The increase in net cash used in investing activities in 2018 compared to 2017 was primarily the result of an increase in capital expenditures
in 2018 and an increase in other investing activities. Total capital expenditures were $504 million and $466 million in 2018 and 2017,
respectively, and the increase was primarily related to the timing of property acquisitions, closings, construction costs for new stores and
the mix of owned versus leased stores opened during 2018, as compared to 2017. The increase in other investing activities was primarily
due to more acquisition related expenditures in 2018, as compared to 2017.
The decrease in net cash used in investing activities in 2017 compared to 2016 was primarily the result of a decrease in other investing
activities and a decrease in capital expenditures in 2017. The decrease in other investing activities was primarily due to less acquisition
related expenditures in 2017, as compared to 2016. Total capital expenditures were $466 million and $476 million in 2017 and 2016,
respectively, and the decrease was primarily related to the timing of property acquisitions, closings, construction costs for new stores and
the mix of owned versus leased stores opened during 2017, as compared to 2016.
We opened 200, 190, and 210 net, new stores in 2018, 2017 and 2016, respectively, and acquired 48 Bond stores in 2016. After the close
of business on December 31, 2018, we acquired the 33 Bennett stores that were not included in our 2018 store count and were not operated
by the Company in 2018. We plan to open 200 to 210 net, new stores in 2019. 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 $1.6 million to $1.8 million; however, such costs may be significantly reduced where we lease,
rather than purchase, the store site.
Financing activities:
The increase in net cash used in financing activities in 2018 compared to 2017 was primarily attributable to a lower level of net borrowings
during 2018, as compared to 2017, partially offset by a lower level of repurchases of our common stock in 2018, as compared to 2017.
The increase in net cash used in financing activities in 2017 compared to 2016 was primarily attributable to a greater impact from the
repurchases of our common stock under our share repurchase program during 2017, as compared to 2016, partially offset by a higher
level of net borrowings during 2017, as compared to 2016.
Unsecured revolving credit facility:
On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a five-
year $1.20 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which
is scheduled to mature in April 2022. The Credit Agreement includes a $200 million sub-limit for the issuance of letters of credit and a
$75 million sub-limit for swing line borrowings. As described in the Credit Agreement governing the Revolving Credit Facility, the
Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility
by up to $600 million, provided that the aggregate amount of the commitments does not exceed $1.80 billion at any time.
As of December 31, 2018 and 2017, we had outstanding letters of credit, primarily to support obligations related to workers’ compensation,
general liability and other insurance policies, in the amounts of $35 million and $37 million, respectively, reducing the aggregate availability
under the Credit Agreement by those amounts. As of December 31, 2018 and 2017, we had outstanding borrowings under the Revolving
Credit Facility in the amounts of $287 million and $346 million, respectively.
Senior Notes:
On May 17, 2018, we issued $500 million aggregate principal amount of unsecured 4.350% Senior Notes due 2028 (“4.350% Senior
Notes due 2028”) at a price to the public of 99.732% of their face value with UMB Bank, N.A. (“UMB”) as trustee. Interest on the
4.350% Senior Notes due 2028 is payable on June 1 and December 1 of each year, which began on December 1, 2018, and is computed
on the basis of a 360-day year.
The Company have issued a cumulative $3.15 billion aggregate principal amount of unsecured senior notes, which are due between 2021
and 2028, 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. None of our subsidiaries is a guarantor under our senior notes.
Debt covenants:
The indentures governing our senior notes contain covenants that limit our ability and the ability of certain of our subsidiaries to, among
other things, create certain liens on assets to secure certain debt and enter into certain sale and leaseback transactions, and limit our ability
to merge or consolidate with another company or transfer all or substantially all of our property, in each case as set forth in the indentures.
These covenants are, however, subject to a number of important limitations and exceptions. As of December 31, 2018, we were in
compliance with the covenants applicable to our senior notes.
32
FORM 10-K The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage
ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The consolidated fixed charge coverage ratio includes a
calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed
charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes a
calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation
expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, five-times rent expense
and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that we should default
on any covenant contained within the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination
of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit
Agreement and litigation from our lenders.
We had a consolidated fixed charge coverage ratio of 5.38 times and 5.72 times as of December 31, 2018 and 2017, respectively, and a
consolidated leverage ratio of 2.10 times and 1.98 times as of December 31, 2018 and 2017, respectively, remaining in compliance with
all covenants related to the borrowing arrangements.
The table below outlines the calculations of the consolidated fixed charge coverage ratio and consolidated leverage ratio covenants, as
defined in the Credit Agreement governing the Revolving Credit Facility, for the years ended December 31, 2018 and 2017 (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
Five-times rent expense
Non-GAAP adjusted debt
Consolidated leverage ratio
$
$
$
$
$
$
For the Year Ended
December 31,
2018
2017
1,324,487
$
1,133,804
122,129
317,283
369,600
255,866
3,071
20,176
2,412,612
122,129
9,092
317,283
448,504
5.38
$
$
$
91,349
298,614
504,000
232,674
1,171
19,401
2,281,013
91,349
8,548
298,614
398,511
5.72
3,417,122
$
2,978,390
35,148
4,294
15,584
1,586,415
5,058,563
$
36,843
3,721
13,889
1,493,070
4,525,913
2.10
1.98
33
FORM 10-K The table below outlines the calculation of Free cash flow and reconciles Free cash flow to Net cash provided by operating activities, the
most directly comparable GAAP financial measure, for the years ended December 31, 2018, 2017 and 2016 (in thousands):
For the Year Ended
December 31,
Cash provided by operating activities (1)
Less: Capital expenditures
Excess tax benefit from share-based compensation
Free cash flow
2018
2017
2016
1,727,555
$
1,403,687
$
1,510,713
504,268
34,703
465,940
48,688
1,188,584
$
889,059
$
476,344
55,994
978,375
$
$
(1) Prior period amount has been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard
during the first quarter ended March 31, 2017. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements
of the annual report on Form 10-K for the year ended December 31, 2017.
Free cash flow, the consolidated fixed charge coverage ratio and the consolidated leverage ratio discussed and presented in the tables
above are not derived in accordance with United States generally accepted accounting principles (“GAAP”). We do not, nor do we
suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information.
We believe that the presentation of our free cash flow, consolidated fixed charge coverage ratio and consolidated leverage ratio provides
meaningful supplemental information to both management and investors and reflects the required covenants under the Credit Agreement.
We include these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material
limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations
by presenting, in the tables above, a reconciliation to the most directly comparable GAAP measures.
Share repurchase program:
In January of 2011, our Board of Directors approved a share repurchase program. Under the program, we may, from time to time,
repurchase shares of our common stock, solely through open market purchases effected through a broker dealer at prevailing market
prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. Our Board of
Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice.
As announced on February 7, 2018, and November 13, 2018, our Board of Directors each time approved a resolution to increase the
authorization amount under our share repurchase program by an additional $1.00 billion, resulting in a cumulative authorization amount
of $11.75 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,
2018
2017
$
$
6,061
282.80
1,713,953
$
$
9,301
233.57
2,172,437
As of December 31, 2018, we had $1.00 billion remaining under our share repurchase program. Subsequent to the end of the year and
through February 27, 2019, we repurchased an additional 0.8 million shares of our common stock under our share repurchase program,
at an average price of $342.95, for a total investment of $269 million. We have repurchased a total of 73 million shares of our common
stock under our share repurchase program since the inception of the program in January of 2011 and through February 27, 2019, at an
average price of $150.73 for a total aggregate investment of $11.02 billion. As of February 27, 2019, we had approximately $0.7 billion
remaining under our share repurchase program.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of December 31, 2018, 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 10 “Share-Based Compensation and Benefit Plans” and Note 11 “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.
34
FORM 10-K 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 2019,
which are included in “Current liabilities” on our Consolidated Balance Sheets.
We record a reserve for potential liabilities related to uncertain tax positions, including estimated interest and penalties, which are fully
disclosed in Note 13 “Income Taxes” to the Consolidated Financial Statements. These estimates are not included in the table below
because the timing related to the ultimate resolution or settlement of these positions cannot be determined. As of December 31, 2018,
we recorded a net liability of $39 million related to these uncertain tax positions on our Consolidated Balance Sheets, all of which was
included in “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 10 “Share-Based Compensation and Benefit Plans” to the Consolidated Financial Statements. This
estimate is not included in the table below because the timing related to the ultimate payment cannot be determined. As of December 31,
2018, we recorded a liability of $25 million related to this uncertain liability on our Consolidated Balance Sheets, all of which was
included in “Other liabilities.”
The following table identifies the estimated payments of the Company’s contractual obligations as of December 31, 2018 (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
$4,273,542
$ 141,414
$1,077,183
$ 1,056,936
$1,998,009
2,429,044
309,743
157,538
77,012
557,091
48,864
447,607
1,114,603
19,255
12,407
177,664
$7,037,788
177,664
$ 705,833
—
$1,683,138
—
$ 1,523,798
—
$3,125,019
(1) Our Revolving Credit Facility, which has a maximum aggregate commitment of $1.20 billion and matures in April 2022, bears interest (other than
swing line loans), at our option, at either the Alternate Base Rate or Adjusted LIBO Rate (both as defined in the Credit Agreement) plus a margin,
that will vary from 0.000% to 0.250% in the case of loans bearing interest at the Alternate Base Rate and 0.680% to 1.250% in the case of loans
bearing interest at the Adjusted LIBO Rate, in each case based upon the better of the ratings assigned to our debt by Moody’s Investor Service, Inc.
and Standard & Poor’s Rating Services, subject to limited exceptions. Swing line loans made under the Revolving Credit Facility bear interest at
the Alternate 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 0.070% 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 Alternate Base Rate loans was 0.000%, our margin for Eurodollar Revolving Loans was 0.900% and our facility fee was
0.100%. As of December 31, 2018, we had outstanding borrowings in the amount of $287 million 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 11 “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 10 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
35
FORM 10-K from the date of issuance. Letters of credit totaling $35 million and $37 million were outstanding at December 31, 2018 and 2017,
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
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 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
products 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, 2018, the financial
impact would have been approximately $1 million or less than 0.1% of pretax income for the year ended December 31, 2018.
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, 2018, nor do we believe goodwill is at risk of failing impairment testing. If the price of O’Reilly’s stock, which was a
36
FORM 10-K primary input used to determine our market capitalization during step one of goodwill impairment testing, changed by 10% from the
value used during testing, the results and our conclusions would not have changed and no further steps would have been required.
Supplier Concessions:
We receive concessions from our suppliers through a variety of programs and arrangements, including co-operative advertising, allowances
for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising allowances that are incremental to our
advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising
expense in the period in which the advertising occurred. All other material supplier concessions are recognized as a reduction to the cost
of sales. Amounts receivable from suppliers also include amounts due to us relating to supplier purchases and product returns. Management
regularly reviews amounts receivable from suppliers and assesses the need for a reserve for uncollectible amounts based on our evaluation
of our suppliers’ financial position and corresponding ability to meet their financial obligations. Based on our historical results and
current assessment, we have not recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not
believe there is a reasonable likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability
of our suppliers to pay us the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or
gains that could be material.
Warranty Reserves:
We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited lifetime warranties. The risk
of loss arising from warranty claims is typically the obligation of our suppliers. Certain suppliers provide upfront allowances to us in
lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we bear the risk of loss associated with the cost
of warranty claims. Differences between supplier allowances received in lieu of warranty obligations and estimated warranty expense
are recorded as an adjustment to the cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are
based on the historical failure rate of each individual product line. Our historical experience has been that failure rates are relatively
consistent over time and that the ultimate cost of warranty claims has been driven by volume of units sold as opposed to fluctuations in
failure rates or the variation of the cost of individual claims. If warranty reserves were changed 10% from our estimated reserves at
December 31, 2018, the financial impact would have been approximately $5 million or 0.3% of pretax income for the year ended
December 31, 2018.
Self-Insurance Reserves:
We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities from workers’ compensation, general
liability, vehicle liability, property loss, and Team Member health care benefits. With the exception of certain Team Member health care
benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, we obtain third-
party insurance coverage to limit our exposure for any individual workers’ compensation, general liability, vehicle liability or property
loss claim. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and
trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. The assumptions made by management as
they relate to each of these factors represent our judgment as to the most probable cumulative impact of each factor to our future obligations.
Our calculation of self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims
and claims incurred but not yet reported as of the balance sheet date, and the application of alternative assumptions could result in a
different estimate of these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may
result in material losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize
liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on
this additional information. These liabilities are recorded at our estimate of their net present value, using a credit-adjusted discount rate.
These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We
could apply alternative assumptions regarding the timing of payments or the applicable discount rate that could result in materially
different estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves
at December 31, 2018, the financial impact would have been approximately $15 million or 0.9% of pretax income for the year ended
December 31, 2018.
Legal Reserves:
We maintain reserves for expenses associated with litigation, for which O’Reilly is currently involved. We are currently involved in
litigation incidental to the ordinary conduct of our business. Management, with the assistance of outside legal counsel, must make
estimates of potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures.
If legal reserves were changed 10% from our estimated reserves at December 31, 2018, the financial impact would have been approximately
$1 million or 0.1% of pretax income for the year ended December 31, 2018.
Taxes:
We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues,
which may require an extended period of time to resolve. We regularly review our potential tax liabilities for tax years subject to audit.
The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax
37
FORM 10-K authority, experience with previous tax audits and applicable tax law rulings. Changes in our tax liability may occur in the future as our
assessments change based on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s
opinion, adequate provisions for income taxes have been made for all years presented. The estimates of our potential tax liabilities contain
uncertainties because management must use judgment to estimate the exposures associated with our various tax positions and actual
results could differ from our estimates. Alternatively, we could have applied assumptions regarding the eventual outcome of the resolution
of open tax positions that could differ from our current estimates but would still be reasonable given the nature of a particular position.
While our estimates are subject to the uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities
have historically not been materially different from actual results, except in instances where we have reversed liabilities that were recorded
for periods that were subsequently closed with the applicable taxing authority.
INFLATION AND SEASONALITY
For the last three fiscal years, we have generally been successful in reducing the effects of merchandise cost increases principally by
taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward
buying. To the extent our acquisition cost increased due to price increases industry-wide, we have typically been able to pass along these
increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse
effect on our operations.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While
we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the
second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
QUARTERLY RESULTS
The following tables set forth certain quarterly unaudited operating data for fiscal years ended December 31, 2018 and 2017. 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 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
3.4%
4.6%
3.9%
3.3%
$
2,282,681
$
2,456,073
$
2,482,717
$
2,314,957
1,201,258
1,288,638
1,315,755
1,234,315
422,846
304,906
479,150
353,073
485,148
366,151
$
$
3.65
3.61
$
$
4.32
4.28
$
$
4.54
4.50
$
$
428,040
300,357
3.76
3.72
Fiscal 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
0.8%
1.7%
1.8%
1.3%
$
2,156,259
$
2,290,829
$
2,339,830
$
2,190,808
1,131,147
1,200,062
1,230,294
1,159,180
403,157
264,934
2.88
2.83
$
$
457,445
282,821
3.14
3.10
$
$
461,963
283,734
3.26
3.22
$
$
402,835
302,315
3.56
3.52
$
$
(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.
38
FORM 10-K 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),” now codified in the Accounting Standards Codification (“Topic 606”). Under
Topic 606, 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. Topic 606 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. We adopted this guidance using the modified retrospective transition
method with our first quarter ended March 31, 2018. Results of the year ended December 31, 2018, were presented under Topic 606,
while amounts in prior periods were not adjusted and continue to be reported under the accounting standard in effect for the prior
periods. The adoption of Topic 606 did not have a material impact on our business process, internal controls, systems, consolidated
financial condition, results of operations or cash flows; as such, a cumulative effective adjustment was not recorded to opening retained
earnings.
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. In July of 2018, the FASB issued ASU
No. 2018-11, “Leases (Topic 842): Targeted Improvement” (“ASU 2018-11”), to provide an additional, optional transition method
for adopting ASU 2016-02, which allows for an entity to choose to apply the new lease standard at adoption date and recognize a
cumulative-effective adjustment to the opening balance of retained earnings in the period of adoption, while comparative periods
presented will continue to be in accordance with current U.S. GAAP Topic 840. For public companies, Topic 842 is effective for
annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We established
a task force, composed of multiple functional groups inside of the Company, which has substantially completed its objective of
reviewing the critical components of the standard and implementing changes to systems and controls necessary to support the adoption
of the new standard beginning with our first quarter ending March 31, 2019. We will adopt this guidance using the additional, optional
transition method, the package of transitional practical expedients relating to the identification, classification and initial direct costs
of leases commencing before the effective date of Topic 842, and the transitional practical expedient for the treatment of existing land
easements; however, we will not elect the hindsight transitional practical expedient. We will make an accounting policy election to
not apply recognition requirements of the guidance to short-term leases. The adoption of the new guidance will have a material impact
on the total assets and liabilities reported on our consolidated balance sheet, and we estimate net right-of-use assets and lease liability
to be approximately $1.9 billion and $2.0 billion, respectively, as of January 1, 2019. The difference between these amounts is
primarily due to the accrual for straight-line expense. These estimates are based on our current lease portfolio and changes to the
lease portfolio, including the total number of leases, lease commencement and end dates and lease termination expectations, as well
as changes in anticipated lease discount rates, could impact these estimates. We expect to make an adjustment to opening “Retained
Deficit” on the Consolidated Balance Sheet of approximately $1.4 million related to the adoption of this new guidance. The adoption
of this new guidance will not have a material impact on our results of operations, cash flows, liquidity or our covenant compliance
under our existing credit agreement.
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 consequence, classification of awards as equity or liabilities, and classification on the statement of cash
flows, were changed. We adopted this guidance with our first quarter ending March 31, 2017. Upon adoption of ASU 2016-09, the
we elected to change our accounting policy to account for forfeitures as they occur; this change was applied using the modified
retrospective transition method with a cumulative effect adjustment of $0.3 million to opening “Retained earnings” on the
accompanying Consolidated Balance Sheet as of December 31, 2017. We applied the amendments related to the presentation of tax
withholdings on the statement of cash flows using the retrospective transition method, which resulted in $0.6 million of tax withholdings
being reclassified from “Net cash provided by operating activities” to “Net cash used in financing activities” on the accompanying
Consolidated Statement of Cash Flows for the year ended December 31, 2016. We elected to apply the amendments related to the
presentation of excess tax benefits on the statement of cash flows using the retrospective transition method, which resulted in $56.0
million of excess tax benefits related to share-based compensation being reclassified from “Net cash used in financing activities” to
“Net cash provided by operating activities” in the accompanying Consolidated Statement of Cash Flows for the year ended
December 31, 2016. ASU 2016-09 amendments related to accounting for excess tax benefits in the income statement were adopted
prospectively, resulting in the reduction of $34.7 million and $48.7 million in “Provision for income taxes” in the accompanying
Consolidated Statements of Income for the years ended December 31, 2018, and 2017, respectively.
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
39
FORM 10-K
financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a
valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss
will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the
reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019,
including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted.
We will adopt this guidance beginning with our first quarter ending March 31, 2020. The application of this new guidance is not
expected to have a material impact on our consolidated financial condition, results of operations or cash flows.
In 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.
In August of 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU
2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU
2018-15 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period,
and allows for either retrospective or prospective adoption, with early adoption permitted. We early adopted this guidance with our
third quarter ended September 30, 2018, using the prospective adoption method. We did not capitalize any implementation costs
incurred in cloud computing arrangements that are service contracts subsequent to adoption, and therefore, the adoption of this new
guidance did not impact our consolidated financial condition, results of operations or cash flows during the period. We do not expect
that the application of this new guidance will 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 an Alternative Base Rate or Adjusted LIBO Rate, as defined in the credit agreement governing
the Revolving Credit Facility. As of December 31, 2018, we had outstanding borrowings under our Revolving Credit Facility in the
amount of $287 million, at the weighted-average variable interest rate of 4.560%. At this borrowing level, a 0.50% increase in interest
rates would have had an unfavorable annual impact on our pre-tax earnings and cash flows in the amount of $1.4 million.
We had outstanding fixed rate debt of $3.15 billion and $2.65 billion as of December 31, 2018 and 2017, respectively. The fair value of
our fixed rate debt was estimated at $3.12 billion and $2.73 billion as of December 31, 2018 and 2017, 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, 2018,
our cash and cash equivalents totaled $31 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, 2018. 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, 2018, 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/ Gregory D. Johnson
Gregory D. Johnson
Chief Executive Officer and
Co-President
February 27, 2019
/s/ Thomas McFall
Thomas McFall
Executive Vice President and
Chief Financial Officer
February 27, 2019
42
FORM 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of O’Reilly Automotive, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited O’Reilly Automotive, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, 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”). In our opinion, O’Reilly Automotive, Inc. and subsidiaries (the “Company”)
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income,
shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial
statement schedule listed in the Index at Item 15(a) and our report dated February 27, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 27, 2019
43
FORM 10-K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of O’Reilly Automotive, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”) as of
December 31, 2018 and 2017, the related consolidated statements of income, shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a)
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our
report dated February 27, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1992.
Kansas City, Missouri
February 27, 2019
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 $13,238 in 2018 and $12,717 in 2017
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
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 –
79,043,919 as of December 31, 2018, and
84,302,187 as of December 31, 2017
Additional paid-in capital
Retained deficit
Total shareholders’ equity
$
$
$
December 31,
2018
2017
$
$
$
31,315
192,026
78,155
3,193,344
48,262
3,543,102
5,645,552
2,058,550
3,587,002
807,260
43,425
7,980,789
3,376,403
77,012
86,520
89,082
11,013
253,990
3,894,020
3,417,122
105,566
210,414
46,348
216,251
76,236
3,009,800
49,037
3,397,672
5,191,135
1,847,329
3,343,806
789,058
41,349
7,571,885
3,190,029
71,695
77,147
69,308
—
239,187
3,647,366
2,978,390
85,406
207,677
—
—
790
1,262,063
(909,186)
353,667
843
1,265,043
(612,840)
653,046
Total liabilities and shareholders’ equity
$
7,980,789
$
7,571,885
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,
2017
8,977,726
4,257,043
4,720,683
$
$
2018
9,536,428
4,496,462
5,039,966
2016
8,593,096
4,084,085
4,509,011
3,224,782
1,815,184
2,995,283
1,725,400
2,809,805
1,699,206
(122,129)
2,521
(1,489)
(121,097)
(91,349)
2,347
1,406
(87,596)
(70,931)
4,224
4,692
(62,015)
1,694,087
1,637,804
1,637,191
369,600
1,324,487
16.27
81,406
16.10
82,280
$
$
$
504,000
1,133,804
12.82
88,426
12.67
89,502
$
$
$
599,500
1,037,691
10.87
95,447
10.73
96,720
See accompanying Notes to consolidated financial statements.
46
FORM 10-K Consolidated Statements of Shareholders’ Equity
(In thousands)
Common Stock
Shares
Par Value
Balance at December 31, 2015
97,737
$
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
Cumulative effective adjustment from adoption of
ASU 2016-09
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
Share based compensation
Share repurchases, including fees
Balance at December 31, 2017
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
Share based compensation
Share repurchases, including fees
Balance at December 31, 2018
—
56
757
—
—
(5,698)
92,852
$
—
—
66
685
—
(9,301)
84,302
—
58
745
—
(6,061)
79,044
$
$
977
—
1
8
—
—
(57)
929
—
—
—
7
—
(93)
843
—
—
8
Additional
Paid-In
Capital
$ 1,281,497
Retained
Earnings
(Deficit)
Total
$
678,840
$ 1,961,314
—
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
434
—
(266)
1,133,804
168
1,133,804
13,466
33,222
—
—
17,773
(136,559)
$ 1,265,043
—
—
(2,035,878)
$
(612,840) $
1,324,487
14,173
57,160
—
—
—
(61)
790
18,806
(93,119)
$ 1,262,063
—
(1,620,833)
$
(909,186) $
13,466
33,229
17,773
(2,172,530)
653,046
1,324,487
14,173
57,168
18,806
(1,714,013)
353,667
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
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 borrowings on revolving credit facility
Payments on revolving credit facility
Proceeds from the issuance of long-term debt
Payment of debt issuance costs
Repurchases of common stock
Net proceeds from issuance of common stock
Other
Net cash used in financing activities
Net (decrease) increase 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,
2017
2016
2018
$
1,324,487
$
1,133,804
$
1,037,691
258,937
3,470
20,160
20,176
9,895
18,138
(163,367)
177,676
22,903
9,373
28,022
(2,315)
1,727,555
(504,268)
4,784
—
(34,818)
(534,302)
2,414,000
(2,473,000)
498,660
(3,923)
(1,714,013)
72,146
(2,156)
(1,208,286)
(15,033)
46,348
31,315
311,376
117,938
$
$
$
$
233,845
2,871
(4,593)
19,401
11,790
(27,742)
(231,802)
253,265
14,220
5,430
3,042
(9,844)
1,403,687
(465,940)
4,464
—
(2,747)
(464,223)
217,866
2,451
10,394
18,859
6,434
(38,548)
(119,270)
322,427
26,880
12,616
(256)
13,169
1,510,713
(476,344)
5,119
1,047
(58,918)
(529,096)
3,101,000
(2,755,000)
748,800
(7,590)
(2,172,530)
45,762
(156)
(1,039,714)
(100,250)
146,598
46,348
496,728
77,766
$
$
—
—
499,160
(4,125)
(1,505,437)
59,634
(552)
(951,320)
30,297
116,301
146,598
569,677
63,648
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, 2018, the Company owned and operated 5,219 stores in 47
states, servicing both do-it-yourself (“DIY”) and the professional service provider customers. After the close of business on December
31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett Auto Supply, Inc. and its affiliates, including
33 stores that were not included in the 2018 store count and were not operated by the Company in 2018. 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 in “Accounts receivable” on the accompanying
Consolidated Balance Sheets. These amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts
receivable due from Team Members was approximately $1.1 million and $0.9 million as of December 31, 2018 and 2017, 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 include amounts due to the Company for changeover merchandise and product
returns. The Company regularly reviews supplier receivables for collectability and assesses the need for a reserve for uncollectable
amounts based on an evaluation of the Company’s suppliers’ financial positions and corresponding abilities to meet financial obligations.
Management does not believe there is a reasonable likelihood that the Company will be unable to collect the amounts receivable from
suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as
of December 31, 2018 or 2017.
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 $3.20 billion and $3.01 billion as of December 31,
2018 and 2017, respectively. LIFO costs exceeded replacement costs by $107.3 million and $157.3 million at December 31, 2018 and
2017, 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. See Note 3 for further information concerning the Company’s
property and equipment.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at December 31, 2018 and 2017, 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. During 2018 and 2017, 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, 2018 and 2017; as such, no goodwill impairment adjustment was required as of December 31,
2018 and 2017. 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. See Note 4 for further information concerning the Company’s goodwill and other 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-
lived assets. The Company recorded a charge of $11.4 million related to its long-lived assets during the year ended December 31, 2018,
primarily due to the disposal of a software project that was no longer expected to provide a long-term benefit.
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”). The future
obligation is adjusted to reflect the performance, whether positive or negative, of selected investment measurement options, chosen by
50
FORM 10-K each participant. The Company invests in various marketable securities with the intention of selling these securities to fulfill its future
obligations under the Deferred Compensation Plan. The investments in this plan were stated at fair value based on quoted market prices,
were accounted for as trading securities and were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as
of December 31, 2018 and 2017. See Note 2 for further information concerning the fair value measurements of the Company’s marketable
securities. See Note 10 for further information concerning the Company’s benefit plans.
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, 2018 and 2017 (in thousands):
Self-insurance reserves (undiscounted)
Self-insurance reserves (discounted)
December 31,
2018
2017
$
157,538
$
146,718
147,664
137,970
The current portion of the Company’s discounted self-insurance reserves totaled $77.0 million and $71.7 million as of December 31,
2018 and 2017, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidate Balance Sheets as of
December 31, 2018 and 2017. The remainder was included in “Other liabilities” on the accompanying Consolidated Balance Sheets as
of December 31, 2018 and 2017.
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 accruals:
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company accrues for
litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable
loss. The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters. Although the Company
cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate,
these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial
position, results of operations or cash flows in a particular quarter or annual period.
Share repurchases:
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may,
from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.
All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying
Consolidated Balance Sheets. See Note 8 for further information concerning the Company’s share repurchase program.
Revenue recognition:
The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts and merchandise to its customers.
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, in an amount representing
the consideration the Company expects to receive in exchange for transferring goods to the customer. Generally, the Company’s
performance obligations are satisfied when the customer takes possession of the merchandise, which normally occurs immediately at the
point of sale or through same day delivery of the merchandise. All sales are recorded net of estimated returns allowances, discounts and
51
FORM 10-K taxes. The company does not recognize revenue related to product warranties, as these are considered assurance warranty obligations.
See the new recent accounting pronouncements section for information regarding the adoption implementation of Accounting Standard
Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”
Over-the-counter retail sales to do-it-yourself (“DIY”) customers are recorded when the customer takes possession of the merchandise.
Internet retail sales, included in sales to DIY customers, are recorded when the merchandise is shipped or when the customer picks up
the merchandise at a store. Sales to professional service provider customers, also referred to as “commercial sales,” are recorded upon
same-day delivery of the merchandise to the customer, generally at the customer’s place of business. Other sales and sales adjustments
primarily includes sales to Team Members, wholesale sales to other retailers (“jobber sales”), equipment sales, discounts, rebates, deferred
revenue adjustments relating to the Company’s retail loyalty program and adjustments to estimated sales returns allowances. Sales to
Team Members are recorded when the Team Member takes possession of the merchandise. Jobber sales are recorded upon shipment of
the merchandise from a regional distribution center with same-day delivery to the jobber customer’s location.
The Company maintains a retail loyalty program named O’Reilly O’Rewards, which represents a performance obligation. The Company
records a deferred revenue liability, based on a breakage adjusted, estimated redemption rate, and a corresponding reduction in revenue
in periods when loyalty points are earned by members. The Company recognizes revenue and a corresponding reduction to the deferred
revenue liability in periods when loyalty program issued coupons are redeemed by members, generally within a period of three months
from issuance, or when unredeemed points expire, generally within 12 months after the date they were earned, which satisfies the
Company’s performance obligation. See Note 9 for further information concerning the Company’s revenue.
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.
Advertising expenses:
Advertising expense consists primarily of expenses related to the Company’s integrated marketing program, which includes radio, in-
store, digital and social media promotions, as well as sports and event sponsorships and direct mail and newspaper promotional distribution.
The Company expenses advertising costs as incurred. The Company also participates in cooperative advertising arrangements with
certain of its suppliers. Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the
advertising program, specific to the product or event and identifiable for accounting purposes, total $81.4 million, $83.7 million and
$83.0 million for the years ended December 31, 2018, 2017 and 2016, respectively, which were included in “Selling, general and
administrative expenses” on the accompanying Consolidated Statements of Income.
52
FORM 10-K 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 10 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 in “Cost of goods sold, including
warehouse and distribution expenses” on the accompanying Consolidated Statements of Income as incurred.
Interest expense:
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates incurred
on its long-term borrowings. Total interest costs capitalized for the years ended December 31, 2018, 2017 and 2016, were $9.1 million,
$8.5 million and $7.9 million, respectively, which were included in “Interest expense” on the accompanying Consolidated Statements of
Income.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs, including debt registration
fees, accounting and legal fees and underwriter and book runner fees. Debt issuance costs related to the Company’s long-term unsecured
senior notes are recorded as a reduction of the principal amount of the corresponding unsecured senior notes. Debt issuance costs related
to the Company’s unsecured revolving credit facility are recorded as an asset. These debt issuance costs have been deferred and are being
amortized over the term of the corresponding debt instrument and the amortization expense is included in “Interest expense” on the
accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $17.1 million and $15.9 million, net of
accumulated amortization, as of December 31, 2018 and 2017, respectively, of which $1.5 million and $2.0 million were included in
“Other assets, net” as of December 31, 2018 and 2017, 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 discounts on the senior notes are recorded
as a reduction of the principal amount of the corresponding senior notes and are accreted over the term of the applicable senior note, with
the accretion expense included in “Interest expense” on the accompanying Consolidated Statements of Income. Original issuance
discounts, net of accretion, totaled $4.3 million and $3.7 million as of December 31, 2018 and 2017, 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, 2018 and 2017, 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 invests in certain tax credit funds that promote renewable energy. These investments generate a return primarily through
the realization of federal tax credits and other tax benefits. The Company accounts for its renewable energy investments using the deferral
method. Under this method, realized investment tax credits are recognized as a reduction of the renewable energy investments.
The Company regularly reviews its potential tax liabilities for tax years subject to audit. The amount of such liabilities is based on various
factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with previous tax audits and
applicable tax law rulings. In management’s opinion, adequate provisions for income taxes have been made for all years presented. The
estimates of the Company’s potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures
53
FORM 10-K associated with the Company’s various tax positions and actual results could differ from estimates. See Note 13 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 14 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),” now codified in the Accounting Standards Codification (“Topic 606”). Under
Topic 606, 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. Topic 606 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. The Company adopted this guidance using the modified retrospective transition
method with its first quarter ended March 31, 2018. Results of the year ended December 31, 2018, were presented under Topic 606,
while amounts in prior periods were not adjusted and continue to be reported under the accounting standard in effect for the prior periods.
The adoption of Topic 606 did not have a material impact on the Company’s business process, internal controls, systems, consolidated
financial condition, results of operations or cash flows; as such, a cumulative effective adjustment was not recorded to opening retained
earnings.
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. In July of 2018, the FASB issued ASU No.
2018-11, “Leases (Topic 842): Targeted Improvement” (“ASU 2018-11”), to provide an additional, optional transition method for adopting
ASU 2016-02, which allows for an entity to choose to apply the new lease standard at adoption date and recognize a cumulative-effective
adjustment to the opening balance of retained earnings in the period of adoption, while comparative periods presented will continue to
be in accordance with current U.S. GAAP Topic 840. For public companies, Topic 842 is effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that reporting period. The Company established a task force, composed of
multiple functional groups inside of the Company, which has substantially completed its objective of reviewing the critical components
of the standard and implementing changes to systems and controls necessary to support the adoption of the new standard beginning with
its first quarter ending March 31, 2019. The Company will adopt this guidance using the additional, optional transition method, the
package of transitional practical expedients relating to the identification, classification and initial direct costs of leases commencing
before the effective date of Topic 842, and the transitional practical expedient for the treatment of existing land easements; however, the
Company will not elect the hindsight transitional practical expedient. The Company will make an accounting policy election to not apply
recognition requirements of the guidance to short-term leases. The adoption of the new guidance will have a material impact on the total
assets and liabilities reported on the Company’s consolidated balance sheet, and the Company estimates net right-of-use assets and lease
liabilities to be approximately $1.9 billion and $2.0 billion, respectively, as of January 1, 2019. The difference between these amounts
is primarily due to the accrual for straight-line rent expense. These estimates are based on the Company’s current lease portfolio and
changes to the lease portfolio, including the total number of leases, lease commencement and end dates and lease termination expectations,
as well as changes in anticipated lease discount rates, could impact these estimates. The Company expects to make an adjustment to
opening “Retained Deficit” on the Consolidated Balance Sheet of approximately $1.4 million related to the adoption of this new guidance.
The adoption of this new guidance will not have a material impact on the Company’s results of operations, cash flows, liquidity or the
Company’s covenant compliance under its existing credit agreement.
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 consequence, classification of awards as equity or liabilities, and classification on the statement of cash flows,
were changed. The Company adopted this guidance with its first quarter ending March 31, 2017. Upon adoption of ASU 2016-09, the
Company elected to change its accounting policy to account for forfeitures as they occur; this change was applied using the modified
retrospective transition method with a cumulative effect adjustment of $0.3 million to opening “Retained earnings” on the accompanying
Consolidated Balance Sheet as of December 31, 2017. The Company applied the amendments related to the presentation of tax
withholdings on the statement of cash flows using the retrospective transition method, which resulted in $0.6 million of tax withholdings
being reclassified from “Net cash provided by operating activities” to “Net cash used in financing activities” on the accompanying
Consolidated Statement of Cash Flows for the year ended December 31, 2016. The Company elected to apply the amendments related
54
FORM 10-K to the presentation of excess tax benefits on the statement of cash flows using the retrospective transition method, which resulted in $56.0
million of excess tax benefits related to share-based compensation being reclassified from “Net cash used in financing activities” to “Net
cash provided by operating activities” in the accompanying Consolidated Statement of Cash Flows for the year ended December 31,
2016. ASU 2016-09 amendments related to accounting for excess tax benefits in the income statement were adopted prospectively,
resulting in the reduction of $34.7 million and $48.7 million in “Provision for income taxes” in the accompanying Consolidated Statements
of Income for the years ended December 31, 2018, and 2017, respectively.
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 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.
In August of 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU
2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15
is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period, and allows
for either retrospective or prospective adoption, with early adoption permitted. The Company early adopted this guidance with its third
quarter ended September 30, 2018, using the prospective adoption method. The Company did not capitalize any implementation costs
incurred in cloud computing arrangements that are service contracts subsequent to adoption, and therefore, the adoption of this new
guidance did not impact the Company’s consolidated financial condition, results of operations or cash flows during the period. The
Company does not expect that the application of this new guidance will 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 its marketable securities were
included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2018 and 2017. The Company
recorded a decrease in fair value related to its marketable securities in the amount of $1.7 million for the year ended December 31, 2018,
and an increase in the amount of $3.6 million for the year ended December 31, 2017, which were included in “Other income (expense)”
on the accompanying Consolidated Statements of Income.
55
FORM 10-K 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, 2018 and 2017 (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, 2018
Marketable securities $
25,493
$
— $
— $
25,493
Quoted Prices in Active Markets
for Identical Instruments
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
December 31, 2017
Marketable securities
$
25,706
$
— $
— $
25,706
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, 2018 and 2017, the Company
did not have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.
Fair value of financial instruments:
The carrying amounts of the Company’s senior notes and unsecured revolving credit facility borrowings are included in “Long-term
debt” on the accompanying Consolidated Balance Sheets as of December 31, 2018 and 2017.
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, 2018 and 2017, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in
thousands):
December 31, 2018
December 31, 2017
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
Senior Notes
$
3,130,122
$
3,116,046
$
2,632,390
$
2,728,167
The carrying amount of the Company’s unsecured revolving credit facility approximates fair value, as borrowings under the facility bear
variable interest at current market rates. See Note 5 for further information concerning the Company’s senior notes and unsecured
revolving credit facility.
The accompanying Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts
receivable, amounts receivable from suppliers and accounts payable. Due to the short-term nature of these financial instruments, the
Company believes that the carrying values of these instruments approximate their fair values.
NOTE 3 – 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, 2018 and 2017, 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, 2018
December 31, 2017
15 – 39 years
3 – 25 years
3 – 20 years
5 – 10 years
$
745,050
$
2,147,969
686,058
1,350,808
424,421
291,246
5,645,552
2,058,550
$
3,587,002
$
56
695,669
1,968,079
626,714
1,250,690
392,130
257,853
5,191,135
1,847,329
3,343,806
FORM 10-K The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $246.0 million, $232.7
million and $217.0 million for the years ended December 31, 2018, 2017 and 2016, respectively, which were primarily included in
“Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
The Company recorded a charge of $11.4 million related to property and equipment for the year ended December 31, 2018, primarily
due to the disposal of a software project that was no longer expected to provide a long-term benefit, which was included in “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, 2018 or 2017.
The carrying amount of the Company’s goodwill was included in “Goodwill” on the accompanying Consolidate Balance Sheets as of
December 31, 2018 and 2017. During the year ended December 31, 2018 and 2017, the Company recorded an increase in goodwill of
$18.2 million and $3.7 million, respectively, resulting from small acquisitions.
The following table identifies the changes in goodwill for the years ended December 31, 2018 and 2017 (in thousands):
Goodwill, balance at January 1,
Change in goodwill
Goodwill, balance at December 31,
2018
2017
$
$
789,058
$
18,202
807,260
$
785,399
3,659
789,058
As of December 31, 2018 and 2017, other than goodwill, the Company did not have any indefinite-lived intangible assets.
Intangibles other than goodwill:
The following table identifies the components of the Company’s amortizable intangibles as of December 31, 2018 and 2017 (in thousands):
Cost of Amortizable
Intangibles
Accumulated Amortization
(Expense) Benefit
Net Amortizable Intangibles
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
Amortizable intangible assets:
Favorable leases
Non-compete agreements
Total amortizable
intangible assets
Unfavorable leases
$
$
$
18,930
$
22,500
$
2,757
1,851
(12,564) $
(679)
(14,495) $
(464)
6,366
$
2,078
21,687
10,180
$
$
24,351
14,470
$
$
(13,243) $
(14,959) $
8,444
8,486
$
11,853
$
1,694
$
$
8,005
1,387
9,392
2,617
During the years ended December 31, 2018 and 2017, the Company recorded non-compete agreement assets in conjunction with small
acquisitions in the amounts of $0.9 million and $0.2 million, respectively.
The Company recorded favorable lease assets in conjunction with a previous acquisition; 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 8.4 years as of December 31, 2018. For the years ended December 31, 2018, 2017 and 2016, the Company recorded
amortization expense of $1.4 million, $1.6 million and $2.1 million, respectively, related to its amortizable intangible assets, which were
included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2018 and 2017.
The Company recorded unfavorable lease liabilities in conjunction with a previous acquisition; 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 2.7 years as of December 31, 2018. For the years ended December 31, 2018, 2017 and 2016, the Company
recognized an amortized benefit of $0.9 million, $1.5 million and $2.1 million, respectively, related to these unfavorable operating leases,
which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2018 and 2017.
57
FORM 10-K 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, 2018 (in thousands):
Amortization Expense
December 31, 2018
Amortization Benefit
Total Amortization Expense
2019
2020
2021
2022
2023
Total
$
$
NOTE 5 – FINANCING
(1,483) $
(1,306)
(1,078)
(961)
(787)
(5,615) $
713
541
389
51
—
1,694
$
$
(770)
(765)
(689)
(910)
(787)
(3,921)
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, 2018 and 2017 (in thousands):
Revolving Credit Facility, weighted-average variable interest rate of 4.560%
$500 million, 4.875% Senior Notes due 2021(1), effective interest rate of 4.952%
$300 million, 4.625% Senior Notes due 2021(2), effective interest rate of 4.645%
$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%
$750 million, 3.600% Senior Notes due 2027(6), effective interest rate of 3.619%
$500 million, 4.350% Senior Notes due 2028(7), effective interest rate of 4.383%
December 31,
2018
2017
$
287,000
$
498,371
299,244
298,574
298,821
496,240
743,868
495,004
346,000
497,565
298,961
298,214
298,583
495,792
743,275
—
Long-term debt
$
3,417,122
$
2,978,390
(1) Net of unamortized discount of $0.7 million and $1.1 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $0.9
million and $1.4 million as of December 31, 2018 and 2017, respectively.
(2) Net of unamortized discount of $0.1 million and $0.2 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $0.6
million and $0.8 million as of December 31, 2018 and 2017, respectively.
(3) Net of unamortized discount of $0.5 million and $0.6 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $1.0
million and $1.2 million as of December 31, 2018 and 2017, respectively.
(4) Net of unamortized discount of less than $0.1 million as of December 31, 2018 and 2017, and debt issuance costs of $1.2 million and $1.4 million
as of December 31, 2018 and 2017, respectively.
(5) Net of unamortized discount of $0.6 million and $0.7 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $3.1
million and $3.5 million as of December 31, 2018 and 2017, respectively.
(6) Net of unamortized discount of $1.1 million and $1.2 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $5.1
million and $5.6 million as of December 31, 2018 and 2017, respectively.
(7) Net of unamortized discount of $1.3 million as of December 31, 2018, and debt issuance costs of $3.7 million as of December 31, 2018.
58
FORM 10-K The following table identifies the principal maturities of the Company’s financing facilities as of December 31, 2018 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Scheduled Maturities
—
—
800,000
587,000
300,000
1,750,000
3,437,000
$
$
Unsecured revolving credit facility:
On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $1.2
billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled
to mature in April 2022. The Credit Agreement includes a $200 million sub-limit for the issuance of letters of credit and a $75 million
sub-limit for swing line borrowings under the Revolving Credit Facility. As described in the Credit Agreement governing the Revolving
Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the
Revolving Credit Facility by up to $600 million, provided that the aggregate amount of the commitments does not exceed $1.8 billion
at any time.
As of December 31, 2018 and 2017, 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 $35.1 million and $36.8 million, respectively, reducing
the aggregate availability under the Revolving Credit Facility by those amounts.
Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company’s option, at either an Alternate
Base Rate or an Adjusted LIBO Rate (both as defined in the Credit Agreement) plus an applicable margin. Swing line loans made under
the Revolving Credit Facility bear interest at an Alternate Base Rate plus the applicable margin for Alternate Base Rate loans. In addition,
the Company pays a facility fee on the aggregate amount of the commitments under the Credit Agreement in an amount equal to a
percentage of such commitments. The interest rate margins and facility fee are based upon the better of the ratings assigned to the
Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions. As of
December 31, 2018, based upon the Company’s current credit ratings, its margin for Alternate Base Rate loans was 0.000%, its margin
for Eurodollar Revolving Loans was 0.900% and its facility fee was 0.100%.
The Credit Agreement contains certain covenants, including limitations on subsidiary indebtedness, a minimum consolidated fixed charge
coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The consolidated fixed charge coverage ratio
includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense
to fixed charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes
a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation
expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, five-times rent expense
and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that the Company should
default on any covenant (subject to customary grace periods, cure rights and materiality thresholds) contained in the Credit Agreement,
certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding
principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from lenders. As of December
31, 2018, the Company remained in compliance with all covenants under the Credit Agreement.
Senior notes:
On May 17, 2018, the Company issued $500 million aggregate principal amount of unsecured 4.350% Senior Notes due 2028 (“4.350%
Senior Notes due 2028”) at a price to the public of 99.732% of their face value with UMB Bank, N.A. (“UMB”) as trustee. Interest on
the 4.350% Senior Notes due 2028 is payable on June 1 and December 1 of each year, which began on December 1, 2018, and is computed
on the basis of a 360-day year.
The Company has issued a cumulative $3.2 billion aggregate principal amount of unsecured senior notes, which are due between 2021
and 2028, 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. None of the Company’s subsidiaries is a guarantor under the senior notes. Each of the senior notes is
subject to certain customary covenants, with which the Company complied as of December 31, 2018.
59
FORM 10-K 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, 2018 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Related Parties
December 31, 2018
Non-Related Parties
Total
$
$
4,682
3,896
3,429
2,671
2,448
3,515
20,641
$
$
305,061
$
288,972
260,794
236,485
206,003
1,111,088
2,408,403
$
309,743
292,868
264,223
239,156
208,451
1,114,603
2,429,044
See Note 12 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 $15.6 million at December 31, 2018.
The following table summarizes the net rent expense amounts for the years ended December 31, 2018, 2017 and 2016, which were
included in “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
NOTE 7 – WARRANTIES
$
$
2018
For the Year Ended
December 31,
2017
2016
305,613
$
289,245
$
806
14,449
320,868
3,585
1,049
12,478
302,772
4,158
317,283
$
298,614
$
273,559
892
13,241
287,692
4,439
283,253
The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Consolidated Balance Sheets
as of December 31, 2018 and 2017. The following table identifies the changes in the Company’s aggregate product warranty liabilities
for the years ended December 31, 2018 and 2017 (in thousands):
Warranty liabilities, balance at January 1,
Warranty claims
Warranty accruals
Warranty liabilities, balance at December 31,
NOTE 8 – SHARE REPURCHASE PROGRAM
2018
2017
$
$
$
44,398
(89,557)
97,379
52,220
$
36,623
(79,660)
87,435
44,398
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
60
FORM 10-K 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 7, 2018, and November 13, 2018, the Company’s Board of Directors each time
approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting
in a cumulative authorization amount of $11.8 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,
2018
2017
$
$
6,061
282.80
1,713,953
$
$
9,301
233.57
2,172,437
As of December 31, 2018, the Company had $1.0 billion remaining under its share repurchase program. Subsequent to the end of the
year and through February 27, 2019, the Company repurchased an additional 0.8 million shares of its common stock under its share
repurchase program, at an average price of $342.95, for a total investment of $268.9 million. The Company has repurchased a total of
73.1 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and
through February 27, 2019, at an average price of $150.73, for a total aggregate investment of $11.0 billion.
NOTE 9 – REVENUE
The table below identifies the Company’s revenues disaggregated by major customer type for the years ended December 31, 2018, 2017
and 2016 (in thousands):
Sales to do-it-yourself customers
Sales to professional service provider customers
Other sales and sales adjustments
Total sales
For the Year Ended
December 31,
2018
2017
5,351,035
$
5,113,288
$
4,035,898
149,495
3,724,220
140,218
2016
4,911,826
3,540,116
141,154
9,536,428
$
8,977,726
$
8,593,096
$
$
As of December 31, 2018 and 2017, the Company had recorded a deferred revenue liability of $4.3 million and $4.7 million, respectively,
related to its loyalty program, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets. During the
years ended December 31, 2018, 2017 and 2016, the Company recognized $15.9 million, $17.6 million and $12.7 million, respectively,
of deferred revenue related to its loyalty program, which were included in “Sales” on the accompanying Consolidated Statements of
Income.
NOTE 10 – SHARE-BASED COMPENSATION AND BENEFIT PLANS
The Company recognizes share-based compensation expense based on the fair value of the grants, awards or shares at the time of the
grant, award or issuance. Share-based compensation includes stock option awards issued under the Company’s employee incentive plans
and director stock plan, restricted stock awarded under the Company’s employee incentive plans and director stock plan and stock issued
through the Company’s employee stock purchase plan.
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, 2018 (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, 2018
34,000
1,000
650
4,250
4,200
5,573
263
368
594
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 evenly over the vesting period or minimum required service period.
The table below identifies the employee stock option activity under these plans during the year ended December 31, 2018:
Shares
(in thousands)
Weighted-
Average Exercise
Price
Average
Remaining
Contractual Terms
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2017
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2018
Vested or expected to vest at December 31, 2018
Exercisable at December 31, 2018
2,364
$
293
(763)
(34)
1,860
1,819
1,174
$
$
$
137.08
264.34
80.52
231.53
178.57
176.78
133.24
5.9 Years
5.8 Years
4.4 Years
$
$
$
308,297
304,818
247,816
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
or minimum required service period. As of December 31, 2018 and 2017, there were no director stock options outstanding under this
plan.
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.
• 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.
62
FORM 10-K The table below identifies the weighted-average assumptions used for stock options awarded by the Company during the years ended
December 31, 2018, 2017 and 2016:
Risk free interest rate
Expected life
Expected volatility
Expected dividend yield
December 31,
2018
2017
2016
2.63%
5.9 Years
24.0%
—%
1.98%
5.4 Years
22.4%
—%
1.44%
5.5 Years
22.3%
—%
Upon adoption of ASU 2016-09, during the three months ended March 31, 2017, the Company elected to change its accounting policy
to account for forfeitures as they occur; this change resulted in the calculation for forfeitures for the year ended December 31, 2016, not
being altered or restated. Prior to the year ended December 31, 2017, the Company’s forfeiture rate was the estimated percentage of
options awarded that were expected to be forfeited or canceled prior to becoming fully vested, and the estimate was evaluated periodically
and was based upon historical experience at the time of evaluation and reduced 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, 2018, 2017
and 2016:
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,
2018
2017
2016
16,521
$
15,561
$
15,404
4,093
156,327
61,403
5,934
135,533
33,229
76.57
$
62.79
$
5,753
157,115
47,394
63.42
3.9 Years
Weighted-average remaining contractual life of exercisable options
4.4 Years
3.8 Years
At December 31, 2018, the remaining unrecognized compensation expense related to unvested stock option awards was $31.3 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 vesting period or minimum required
service period.
The table below identifies employee restricted stock activity under these plans during the year ended December 31, 2018 (in thousands,
except per share data):
Non-vested at December 31, 2017
Granted during the period
Vested during the period (1)
Forfeited during the period
Non-vested at December 31, 2018
Shares
Weighted-Average Grant-Date
Fair Value
3
$
2
(1)
—
4
$
244.06
262.38
232.30
—
260.42
(1)
Includes less than one thousand shares withheld to cover employees’ taxes upon vesting.
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
63
FORM 10-K 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 minimum required service period.
The table below identifies director restricted stock activity under this plan during the year ended December 31, 2018 (in thousands, except
per share data):
Non-vested at December 31, 2017
Granted during the period
Vested during the period
Forfeited during the period
Non-vested at December 31, 2018
Shares
Weighted-Average Grant-Date
Fair Value
5
$
3
(3)
—
5
$
250.85
265.41
248.53
—
261.07
The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2018,
2017 and 2016 (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,
2018
2017
2016
$
$
$
$
1,370
340
1,230
5
263.89
$
$
$
$
1,628
621
1,202
4
253.78
$
$
$
$
1,293
483
2,384
4
264.24
At December 31, 2018, the remaining unrecognized compensation expense related to unvested restricted share awards was $0.3 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 table below summarizes activity related to the Company’s ESPP for the years ended December 31, 2018, 2017 and 2016 (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,
2018
2017
2016
$
$
$
2,285
566
53
245.26
$
$
$
2,212
844
64
196.72
$
$
$
2,162
807
54
227.12
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.
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,
2018, 2017 or 2016. The Company expensed matching contributions under the 401(k) Plan in the amounts of $24.8 million, $22.6 million
64
FORM 10-K and $20.6 million for the years ended December 31, 2018, 2017 and 2016, respectively, which were primarily included in “Selling, general
and administrative expenses” on the accompanying Consolidated Statements of Income.
Nonqualified deferred compensation plan:
The Company sponsors a nonqualified deferred compensation plan (the “Deferred Compensation Plan”) for highly compensated
employees whose contributions to the 401(k) Plan are limited due to the application of the annual limitations under the Internal Revenue
Code. The Deferred Compensation Plan provides these employees with the opportunity to defer the full 6% of matched compensation,
including salary and incentive based compensation, that was precluded under the Company’s 401(k) Plan, which is then matched by the
Company using the same formula as the 401(k) Plan. An employee generally must be employed on December 31 to receive that year’s
Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the
year in which the matching contribution was earned. In the event of bankruptcy, the assets of this plan are available to satisfy the claims
of general creditors. The Company has an unsecured obligation to pay, in the future, the value of the deferred compensation and Company
match, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each
participant during the deferral period. The liability for compensation deferred under the Deferred Compensation Plan was $25.5 million
and $25.7 million as of December 31, 2018 and 2017, respectively, which were included in “Other liabilities” on the Consolidated Balance
Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amount of $0.1 million for each
of the years ended December 31, 2018, 2017 and 2016, which were primarily included in “Selling, general and administrative expenses”
on the accompanying Consolidated Statements of Income.
NOTE 11 – COMMITMENTS
Construction commitments:
As of December 31, 2018, the Company had construction commitments in the amount of $177.7 million.
Letters of credit commitments:
As of December 31, 2018, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability
and other insurance policies, in the amount of $35.1 million. See Note 5 for further information concerning the Company’s letters of
credit commitments.
Debt financing commitments:
Each series of senior notes is 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 values 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 indenture governing such series of senior notes; provided, that on or after the date that is three months prior to the maturity
date of the series of senior notes, such series of senior notes is redeemable at a redemption price equal to par plus accrued and unpaid
interest to, but not including, the redemption date. In addition, if at any time the Company undergoes a Change of Control Triggering
Event, as defined in the indenture governing such series of senior notes, the holders may require the Company to repurchase all or a
portion of their senior notes at a price equal to 101% of the principal amount of the notes being repurchased, plus accrued and unpaid
interest, if any, but not including the repurchase date. See Note 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 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 12 – RELATED PARTIES
The Company leases certain land and buildings related to 74 of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating
lease agreements with entities that include one or more of the Company’s affiliated directors or members of an affiliated director’s
immediate family. Generally, these lease agreements provide for renewal options for an additional five years at the option of the Company
and the lease agreements are periodically modified to further extend the lease term for specific stores under the agreements. Lease
payments under these operating leases totaled $4.6 million, $4.6 million and $4.5 million during the years ended December 31, 2018,
2017 and 2016, 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 13 – INCOME TAXES
Deferred income tax assets and liabilities:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.
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, 2018 and 2017 (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,
2018
2017
$
1,944
5,606
105,894
—
14,770
128,214
62,846
140,019
30,915
233,780
1,885
7,179
97,247
346
14,784
121,441
55,965
122,354
28,528
206,847
$
(105,566)
$
(85,406)
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, 2018, 2017 and 2016 (in thousands):
Federal income tax expense
State income tax expense
Net income tax expense
Federal income tax expense (benefit)
State income tax expense
Net income tax expense (benefit)
Federal income tax expense
State income tax expense
Net income tax expense
For the Year Ended
December 31, 2018
Current
Deferred
Total
$
$
$
$
$
$
289,953
59,487
349,440
$
$
16,309
3,851
20,160
For the Year Ended
December 31, 2017
Current
Deferred
467,577
41,183
508,760
$
$
(13,053)
8,293
(4,760)
For the Year Ended
December 31, 2016
Current
Deferred
540,090
49,016
589,106
$
$
7,558
2,836
10,394
$
$
$
$
$
$
306,262
63,338
369,600
Total
454,524
49,476
504,000
Total
547,648
51,852
599,500
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, 2018, 2017 and 2016 (in
thousands):
Federal income taxes at statutory rate
State income taxes, net of federal tax benefit
Excess tax benefit from share-based compensation
Revaluation of deferred tax liability
Other items, net
Total provision for income taxes
For the Year Ended
December 31,
2017
2018
$
355,758
$
573,231
$
56,345
(34,703)
(1,262)
(6,538)
369,600
$
39,062
(48,688)
(53,240)
(6,365)
504,000
$
$
2016
573,020
35,285
—
—
(8,805)
599,500
As a result of the adoption of ASU 2016-09, during the three months ended March 31, 2017, the excess tax benefit associated with the
exercise of non-qualified stock options has been included in “Provision for income taxes” on the accompanying Consolidated Statements
of Income beginning with the year ended December 31, 2017. Prior to the year ended December 31, 2017, the excess tax benefit associated
with the exercise of non-qualified stock options was included in “Additional paid-in capital” on the accompanying Consolidated Balance
Sheets.
The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (the “Tax Act”), significantly reduced the federal corporate income tax rate
for tax years beginning in 2018 and required the Company to revalue its deferred income tax liabilities. The Company recorded a one-
time tax benefit of $53.2 million in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the year
ended December 31, 2017, to reflect the reduced federal corporate income tax rate in the tax years the deferred tax differences are expected
to reverse. This provisional tax benefit from the revaluation of the Company’s deferred income tax liabilities was recorded based on the
Company’s initial evaluation of the impact of the Tax Act. During the year ended December 31, 2018, the Company completed its
evaluation of the impact of the Tax Act and recorded an additional $1.3 million of tax benefit, finalizing the revaluation of its deferred
income tax liabilities due to the Tax Act, which was recorded in “Provision for income taxes” on the accompanying Consolidated Statements
of Income for the year ended December 31, 2018.
As of December 31, 2018, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount
of $5.6 million, which 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, 2018, 2017 and 2016 (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,
2018
2017
2016
$
$
35,388
$
34,798
$
3,550
4,255
(2,792)
(6,635)
33,766
$
6,299
—
—
(5,709)
35,388
$
36,928
6,116
—
(195)
(8,051)
34,798
For the years ended December 31, 2018, 2017 and 2016, the Company recorded a reserve for unrecognized tax benefits, including interest
and penalties, in the amounts of $38.9 million, $40.9 million and $40.6 million, respectively. All of the unrecognized tax benefits recorded
as of December 31, 2018, 2017 and 2016, respectively, would affect the Company’s effective tax rate if recognized, generally net of the
federal tax effect of approximately $8.2 million. The Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. As of December 31, 2018, 2017 and 2016, the Company had accrued approximately $5.1 million, $5.5 million and
$5.8 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, 2018, 2017 and 2016, the Company recorded tax expense related to an
increase in its liability for interest and penalties in the amounts of $2.3 million, $2.0 million and $2.4 million, respectively. Although
unrecognized tax benefits for individual tax positions may increase or decrease during 2019, the Company expects a reduction of $8.1
million of unrecognized tax benefits during the one-year period subsequent to December 31, 2018, resulting from settlement or expiration
of the statute of limitations.
67
FORM 10-K 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 2014, 2015 and 2016 federal income tax
returns in the third quarter of 2018. The Company’s state income tax returns remain subject to examination by various state authorities
for tax years ranging from 2007 through 2017.
NOTE 14 – EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2018, 2017 and
2016 (in thousands, except per share data):
Numerator (basic and diluted):
Net income
Denominator:
For the Year Ended
December 31,
2018
2017
2016
$ 1,324,487
$ 1,133,804
$ 1,037,691
Weighted-average common shares outstanding – basic
Effect of stock options (1)
Weighted-average common shares outstanding – assuming dilution
81,406
874
82,280
88,426
1,076
89,502
95,447
1,273
96,720
Earnings per share:
Earnings per share-basic
Earnings per share-assuming dilution
$
$
16.27
16.10
$
$
12.82
12.67
$
$
10.87
10.73
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)
567
715
332
$
268.55
$
252.16
$
265.77
(1) See Note 10 for further information concerning the terms of the Company’s share-based compensation plans.
Subsequent to the end of the year and through February 27, 2019, the Company repurchased 0.8 million shares of its common stock, at
an average price of $342.95, for a total investment of $268.9 million.
NOTE 15 – QUARTERLY RESULTS (Unaudited)
The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2018 and 2017. 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)
Fiscal 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
2,282,681
$
2,456,073
$
2,482,717
$
2,314,957
1,201,258
1,288,638
1,315,755
1,234,315
422,846
304,906
479,150
353,073
485,148
366,151
$
$
3.65
3.61
$
$
4.32
4.28
$
$
4.54
4.50
$
$
428,040
300,357
3.76
3.72
68
FORM 10-K Sales
Gross profit
Operating income
Net income
Earnings per share – basic (1)
Earnings per share – assuming dilution (1)
Fiscal 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
2,156,259
$
2,290,829
$
2,339,830
$
2,190,808
1,131,147
1,200,062
1,230,294
1,159,180
403,157
264,934
457,445
282,821
461,963
283,734
$
$
2.88
2.83
$
$
3.14
3.10
$
$
3.26
3.22
$
$
402,835
302,315
3.56
3.52
(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, 2018,
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, 2018. 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, 2018, 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 of this annual report on Form 10-K.
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 2019 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, John R. Murphy, Dana M. Perlman 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. Hendrickson, 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 2019 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 2019 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 2019 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 2019 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, 2018, 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, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements for the years ended December 31, 2018, 2017 and 2016
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
Exhibit No.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Description
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 4.1 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.
73
FORM 10-K Exhibits (continued)
Exhibit No.
Description
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
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.
Second Supplemental Indenture, dated as of August 17, 2017, by and between O’Reilly Automotive, Inc. and
UMB Bank N.A., as Trustee, filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated August
17, 2017, is incorporated herein by this reference.
Form of Note for 3.600% Senior Notes due 2027, included in Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K dated August 17, 2017, is incorporated herein by this reference.
Third Supplemental Indenture, dated as of May 17, 2018, by and between O’Reilly Automotive, Inc. and UMB
Bank N.A., as Trustee, filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated May 17, 2018,
is incorporated herein by this reference.
Form of Note for 4.350% Senior Notes due 2028, included in Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K dated May 17, 2018, is incorporated herein by this reference.
10.1 (a)
Form of Employment Agreement between the Registrant and David E. O’Reilly, filed as Exhibit 10.1 to the
Registration Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
10.2
10.3
10.4 (a)
10.5 (a)
10.6 (a)
10.7 (a)
10.8 (a)
10.9 (a)
Lease between the Registrant and O’Reilly Investment Company, filed as Exhibit 10.2 to the Registration
Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
Lease between the Registrant and O’Reilly Real Estate Company, filed as Exhibit 10.3 to the Registration
Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference.
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. 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.
O’Reilly Automotive, Inc. Performance Incentive Plan, filed as Exhibit 10.18 to the Registrant’s Annual
Shareholders’ Report on Form 10-K dated March 31, 1997, 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 dated August 14, 1997, is incorporated herein by this reference.
10.10 (a)
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 dated March 31, 1998, is incorporated herein by this
reference.
10.11 (a)
O’Reilly Automotive, Inc. Deferred Compensation Plan, filed as Exhibit 10.23 to the Registrant’s Quarterly
Report on Form 10-Q dated May 15, 1998, is incorporated herein by this reference.
10.12
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 dated May 15, 1998, is
incorporated herein by this reference.
74
FORM 10-K Exhibits (continued)
Exhibit No.
10.13 (a)
10.14 (a)
10.15 (a)
10.16 (a)
10.17 (a)
10.18 (a)
10.19 (a)
10.20 (a)
10.21 (a)
Description
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 dated September 14, 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 dated September 14, 1998, 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 dated March 29, 2002, 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 dated March 27, 2003, 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 dated March 27, 2003, 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 dated March 22, 2005, 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 dated March 22, 2005,
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 dated March 20, 2009, 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 dated March 20, 2009, is incorporated herein by this
reference.
10.22 (a)
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 dated February 26, 2010, is incorporated herein by this reference.
10.23
10.24
10.25 (a)
10.26 (a)
10.27 (a)
10.28
10.29 (a)
10.30 (a)
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.
O’Reilly Automotive, Inc. Director Compensation Program, as Exhibit 10.25 to the Registrant’s Annual Report
on Form 10-K dated February 28, 2012, 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 dated March 23, 2012, 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 dated August 8, 2012, 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.
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 19, 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 19, 2013, is incorporated herein by this reference.
75
FORM 10-K Exhibits (continued)
Exhibit No.
10.31 (a)
10.32 (a)
10.33
10.34 (a)
10.35
Description
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 February 4, 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 February 4, 2015, is incorporated
herein by this reference.
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
24, 2015, is incorporated herein by this reference.
O’Reilly Automotive, Inc. 2017 Incentive Award Plan, filed as Annex A to the Registrant’s Proxy Statement
for 2017 Annual Meeting of Shareholders on Schedule 14A dated March 24, 2017, is incorporated herein by
this reference.
Credit Agreement, dated as of April 5, 2017, among O’Reilly Automotive, Inc., as Borrower, JPMorgan Chase
Bank, N.A., as Administrative Agent, Swing Line Lender, Letter of Credit Issuer and a Lender, and other other
lenders party thereto, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 11, 2017,
is incorporated herein by this reference.
10.36 (a)
O’Reilly Automotive, Inc. 2017 Incentive Award Plan, Form of Stock Option Grant Notice and Agreement,
dated as of July 10, 2017, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated August
7, 2017, is incorporated herein by this reference.
21.1
23.1
31.1
31.2
32.1 *
32.2 *
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.
Item 16. Form 10-K Summary
Not applicable.
76
FORM 10-K O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Description
Allowance for doubtful accounts:
Balance at
Beginning of
Period
Additions -
Charged to
Costs and
Expenses
Additions -
Charged to
Other Accounts -
Describe
Deductions -
Describe
Balance at
End of
Period
For the year ended December 31, 2018
For the year ended December 31, 2017
For the year ended December 31, 2016
$
$
12,717
12,040
9,637
$
$
9,475
8,598
9,587
$
$
— $
—
— $
8,954 (1)
7,921 (1)
7,184 (1)
$
$
13,238
12,717
12,040
(1) Uncollectable accounts written off.
77
FORM 10-K Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
O’REILLY AUTOMOTIVE, INC.
(Registrant)
Date: February 27, 2019
By:
/s/ Gregory D. Johnson
Gregory D. Johnson
Chief Executive Officer and
Co-President
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 27, 2019
/s/ David O’Reilly
David O’Reilly
Director and Chairman of the Board
/s/ Rosalie O’Reilly Wooten
Rosalie O’Reilly Wooten
Director
/s/ Jay D. Burchfield
Jay D. Burchfield
Director
/s/ John R. Murphy
John R. Murphy
Director
/s/ Ronald Rashkow
Ronald Rashkow
Director
/s/ Gregory D. Johnson
Gregory D. Johnson
Chief Executive Officer and
Co-President
(Principal Executive Officer)
/s/ Larry O’Reilly
Larry O’Reilly
Director and Vice Chairman of the Board
/s/ Greg Henslee
Greg Henslee
Executive Vice Chairman of the Board
/s/ Thomas T. Hendrickson
Thomas T. Hendrickson
Director
/s/ Dana M. Perlman
Dana M. Perlman
Director
/s/ Thomas McFall
Thomas McFall
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
78
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, five 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
Post-Effective Amendment No. 1 (Form S-8 No. 333-181364) pertaining to the O’Reilly Automotive, Inc. 2012 Incentive Award
Plan and to the O’Reilly Automotive, Inc. 2017 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 27, 2019, with respect to the consolidated financial statements 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, 2018.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 27, 2019
FORM 10-K O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Gregory D. Johnson, certify that
1.
I have reviewed this report on Form 10-K of O’Reilly Automotive, Inc.;
Exhibit 31.1 - CEO Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2019
/s/ Gregory D. Johnson
Gregory D. Johnson
Chief Executive Officer and
Co-President
(Principal Executive Officer)
FORM 10-K O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Thomas McFall, certify that
1.
I have reviewed this report on Form 10-K of O’Reilly Automotive, Inc.;
Exhibit 31.2 - CFO Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2019
/s/ Thomas McFall
Thomas McFall
Executive Vice President 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,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory D. Johnson, 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/ Gregory D. Johnson
Gregory D. Johnson
Chief Executive Officer
February 27, 2019
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
Director and Chairman of the Board
LARRY O’REILLY
Director and
Vice Chairman of the Board
ROSALIE O’REILLY WOOTEN
Director
GREG HENSLEE
Director Since 2017 and
Executive Vice Chairman of the Board
JAY D. BURCHFIELD
Director Since 1997; Lead Director
Since 2018
Audit Committee
Compensation Committee
THOMAS T. HENDRICKSON
Director Since 2010
Audit Committee - Chairman
Compensation Committee
JOHN R. MURPHY
Director Since 2003
Audit Committee
Compensation Committee - Chairman
Corporate Governance/
Nominating Committee
DANA M. PERLMAN
Director Since 2017
Audit Committee
Corporate Governance/Nominating
Committee
RONALD RASHKOW
Director Since 2003
Audit Committee
Corporate Governance/Nominating
Committee - Chairman
Mr. Rashkow is expected to retire
from the Board at the end of the 2018
director term, Andrea M. Weiss has
been nominated by the Board as
independent director.
EXECUTIVE COMMITTEE and DIVISIONAL VICE PRESIDENTS
GREG JOHNSON
Chief Executive Officer and Co-President
JEFF SHAW
Chief Operating Officer and Co-President
BRAD BECKHAM
Executive Vice President
of Store Operations and Sales
TOM MCFALL
Executive Vice President
and Chief Financial Officer
JONATHAN ANDREWS
Senior Vice President
of Human Resources and Training
DOUG BRAGG
Senior Vice President
of Central 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
BRENT KIRBY
Senior Vice President of Omnichannel
SCOTT KRAUS
Senior Vice President
of Real Estate and Expansion
JEFF LAURO
Senior Vice President
of Information Technology
JASON TARRANT
Senior Vice President
of Western Store Operations and Sales
DARIN VENOSDEL
Senior Vice President
of Inventory Management
DAVID WILBANKS
Senior Vice President of Merchandise
TRICIA HEADLEY
Vice President and Corporate Secretary
and Secretary to the Board
STEVE ABARR
Vice President of Northwest Division
DOUG ADAMS
Vice President of Southeast Division
GREG BECK
Vice President of Purchasing
AARON BIGGS
Vice President of Southern Division
CORY BLACKBURN
Vice President of Merchandise - Out Front
SCOTT BLACKBURN
Vice President of Store Operations
ROB BODENHAMER
Vice President of Information Technology
Infrastructure and Operations
GUY BROYLES
Vice President of Merchandise - Backroom
TAMARA DE WILD
Deputy General Counsel and
Vice President of Legal Services
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
DAVID FINCH
Vice President of Solution Delivery
JULIE GRAY
Vice President of Corporate Services and
Assistant Corporate Secretary
LARRY GRAY
Vice President
of Distribution Operations Eastern Division
JOE HANKINS
Vice President of Store Design
TOM HARRINGTON
Vice President of New England Division
PHIL HOPPER
Vice President of Real Estate Expansion
and Property Management
CHAD KEEL
Vice President of Western Division
SCOTT LEONHART
Vice President of Central 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
RAMON ODEMS
Vice President of Northeast Division
DAVID P. ORTEGA
Vice President
of Electronic Catalog Systems
WAYNE PRICE
Vice President
of Treasury and Risk Management
TIM RATHBUN
Vice President of Inventory Management
CHUCK ROGERS
Vice President of Professional Sales
BARRY SABOR
Vice President of Loss Prevention
HUGO SANCHEZ
Vice President
of Marketing and Advertising
DIEGO SANTILLANA
Vice President of Southwestern Division
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 505000 • Louisville, Kentucky 40233
800-884-4225 • www.computershare.com
Inquiries regarding stock transfers, lost certificates or address changes should be directed to Computershare Investor Services at the
above address.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
One Kansas City Place • 1200 Main Street, Suite 2500
Kansas City, Missouri 64105-2167
ANALYST COVERAGE The following analysts provide research coverage of O’Reilly Automotive, Inc.:
ATLANTIC EQUITIES Sam Hudson
BANK OF AMERICAN MERRILL LYNCH Elizabeth Suzuki
BARCLAYS CAPITAL Matthew McClintock
CITI RESEARCH Kate McShane
CONSUMER EDGE RESEARCH David A. Schick
CREDIT SUISSE - NORTH AMERICA Seth Sigman
DEUTSCHE BANK EQUITY RESEARCH Mike Baker
EDGEWATER RESEARCH Daryl Boehringer
EVERCORE ISI Greg Melich
GOLDMAN SACHS Matthew J. Fassler
GUGGENHEIM SECURITIES LLC Ali Faghri
JEFFERIES EQUITY RESEARCH Bret Jordan
J.P. MORGAN Christopher Horvers
MORGAN STANLEY RESEARCH Simeon Gutman
MORNINGSTAR, INC. Zain Akbari
NORTHCOAST RESEARCH Seth Woolf
OPPENHEIMER & CO., INC. Brian Nagel
RAYMOND JAMES Dan Wewer
RBC CAPITAL MARKETS Scot Ciccarelli
STEPHENS INC. Daniel Imbro
UBS SECURITIES Michael Lasser
WEDBUSH SECURITIES INC. Seth Basham
WELLS FARGO SECURITIES, LLC Zachary Fadem
WILLIAM BLAIR & COMPANY Daniel Hofkin
WOLFE RESEARCH Chris Bottiglieri
®
2 3 3 S o u t h P a t t e r s o n • S p r i n g f i e l d , M i s s o u r i 6 5 8 0 2 • 4 1 7 - 8 6 2 - 3 3 3 3 • w w w . O R e i l l y A u t o . c o m