10-Q 1 orly-20210930x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Graphic

O’REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

Missouri

    

000-21318

    

27-4358837

(State or other jurisdiction of

Commission file number

(I.R.S. Employer Identification No.)

incorporation or organization)

233 South Patterson Avenue

Springfield, Missouri 65802

(Address of principal executive offices, Zip code)

(417) 862-6708

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol(s)

    

Name of Each Exchange on which Registered

Common Stock

$0.01 par value

ORLY

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Emerging growth company

Non-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  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:  Common stock, $0.01 par value - 67,378,396 shares outstanding as of November 1, 2021.  

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021

TABLE OF CONTENTS

    

Page

PART I - FINANCIAL INFORMATION

2

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Income

3

Condensed Consolidated Statements of Comprehensive Income

4

Condensed Consolidated Statements of Shareholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

ITEM 4 - CONTROLS AND PROCEDURES

26

PART II - OTHER INFORMATION

28

ITEM 1 - LEGAL PROCEEDINGS

28

ITEM 1A - RISK FACTORS

28

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

28

ITEM 6 - EXHIBITS

29

SIGNATURE PAGES

30

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

    

September 30, 2021

    

December 31, 2020

(Unaudited)

(Note)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

449,302

$

465,640

Accounts receivable, net

 

282,883

 

229,679

Amounts receivable from suppliers

 

110,882

 

100,615

Inventory

 

3,646,988

 

3,653,195

Other current assets

 

72,154

 

50,658

Total current assets

 

4,562,209

 

4,499,787

Property and equipment, at cost

 

6,874,639

 

6,559,911

Less: accumulated depreciation and amortization

 

2,672,954

 

2,464,993

Net property and equipment

 

4,201,685

 

4,094,918

Operating lease, right-of-use assets

2,011,115

1,995,127

Goodwill

 

878,872

 

881,030

Other assets, net

 

135,504

 

125,780

Total assets

$

11,789,385

$

11,596,642

Liabilities and shareholders’ equity (deficit)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

4,608,549

$

4,184,662

Self-insurance reserves

 

122,551

 

109,199

Accrued payroll

 

89,095

 

88,875

Accrued benefits and withholdings

 

288,134

 

242,724

Income taxes payable

 

158,481

 

16,786

Current portion of operating lease liabilities

336,962

322,778

Other current liabilities

 

385,982

 

297,393

Total current liabilities

 

5,989,754

 

5,262,417

Long-term debt

 

3,826,073

 

4,123,217

Operating lease liabilities, less current portion

1,729,013

1,718,691

Deferred income taxes

 

172,807

 

155,899

Other liabilities

 

212,591

 

196,160

Shareholders’ equity (deficit):

 

  

 

  

Common stock, $0.01 par value:

 

Authorized shares – 245,000,000

Issued and outstanding shares –

67,684,615 as of September 30, 2021, and

71,123,109 as of December 31, 2020

677

 

711

Additional paid-in capital

 

1,296,358

 

1,280,841

Retained deficit

 

(1,430,060)

 

(1,139,139)

Accumulated other comprehensive loss

(7,828)

(2,155)

Total shareholders’ (deficit) equity

 

(140,853)

 

140,258

Total liabilities and shareholders’ equity (deficit)

$

11,789,385

$

11,596,642

Note:  The balance sheet at December 31, 2020, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

See accompanying Notes to condensed consolidated financial statements.

2

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Sales

$

3,479,570

$

3,207,638

$

10,036,070

$

8,775,720

Cost of goods sold, including warehouse and distribution expenses

 

1,661,330

 

1,527,170

 

4,750,657

 

4,162,166

Gross profit

 

1,818,240

 

1,680,468

 

5,285,413

 

4,613,554

Selling, general and administrative expenses

 

1,063,641

 

955,455

 

3,044,126

 

2,728,490

Operating income

 

754,599

 

725,013

 

2,241,287

 

1,885,064

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(34,873)

 

(41,668)

 

(110,036)

 

(122,777)

Interest income

 

485

 

582

 

1,478

 

1,892

Other, net

 

318

 

2,479

 

4,961

 

2,297

Total other expense

 

(34,070)

 

(38,607)

 

(103,597)

 

(118,588)

Income before income taxes

 

720,529

 

686,406

 

2,137,690

 

1,766,476

Provision for income taxes

 

161,877

 

159,154

 

491,978

 

407,119

Net income

$

558,652

$

527,252

$

1,645,712

$

1,359,357

Earnings per share-basic:

 

  

 

  

 

  

 

  

Earnings per share

$

8.14

$

7.13

$

23.67

$

18.28

Weighted-average common shares outstanding – basic

 

68,608

 

73,916

 

69,529

 

74,377

Earnings per share-assuming dilution:

 

  

 

  

 

  

 

  

Earnings per share

$

8.07

$

7.07

$

23.45

$

18.12

Weighted-average common shares outstanding – assuming dilution

 

69,240

 

74,586

 

70,174

 

75,026

See accompanying Notes to condensed consolidated financial statements.

3

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Net income

$

558,652

$

527,252

$

1,645,712

$

1,359,357

Other comprehensive income (loss):

Foreign currency translation adjustments

 

(5,237)

 

5,076

 

(5,673)

 

(21,925)

Total other comprehensive (loss) income

(5,237)

5,076

(5,673)

(21,925)

 

Comprehensive income

$

553,415

$

532,328

$

1,640,039

$

1,337,432

See accompanying Notes to condensed consolidated financial statements.

4

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands)

For the Three Months Ended September 30, 2021

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Loss

    

Total

Balance at June 30, 2021

 

69,133

$

691

$

1,295,363

$

(1,075,769)

$

(2,591)

$

217,694

Net income

 

 

 

 

558,652

 

558,652

Total other comprehensive loss

 

 

(5,237)

(5,237)

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

10

 

1

 

4,722

 

 

4,723

Net issuance of common stock upon exercise of stock options

 

125

 

1

 

20,718

 

 

20,719

Share based compensation

 

 

 

5,568

 

 

5,568

Share repurchases, including fees

 

(1,583)

 

(16)

 

(30,013)

 

(912,943)

 

(942,972)

Balance at September 30, 2021

 

67,685

$

677

$

1,296,358

$

(1,430,060)

$

(7,828)

$

(140,853)

For the Nine Months Ended September 30, 2021

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Loss

    

Total

Balance at December 31, 2020

 

71,123

$

711

$

1,280,841

$

(1,139,139)

$

(2,155)

$

140,258

Net income

 

 

 

 

1,645,712

 

1,645,712

Total other comprehensive loss

(5,673)

(5,673)

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

32

 

1

 

14,152

 

 

14,153

Net issuance of common stock upon exercise of stock options

 

331

 

3

 

54,488

 

 

54,491

Share-based compensation

 

 

 

17,367

 

 

17,367

Share repurchases, including fees

 

(3,801)

 

(38)

 

(70,490)

 

(1,936,633)

 

(2,007,161)

Balance at September 30, 2021

 

67,685

$

677

$

1,296,358

$

(1,430,060)

$

(7,828)

$

(140,853)

For the Three Months Ended September 30, 2020

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Loss

    

Total

Balance at June 30, 2020

 

74,098

$

741

$

1,289,976

$

(679,506)

$

(22,111)

$

589,100

Net income

 

 

 

 

527,252

 

527,252

Total other comprehensive income

5,076

5,076

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

9

 

 

4,057

 

 

4,057

Net issuance of common stock upon exercise of stock options

 

130

 

1

 

21,522

 

 

21,523

Share based compensation

 

 

 

5,190

 

 

5,190

Share repurchases, including fees

 

(965)

 

(9)

 

(17,046)

 

(425,918)

 

(442,973)

Balance at September 30, 2020

 

73,272

$

733

$

1,303,699

$

(578,172)

$

(17,035)

$

709,225

For the Nine Months Ended September 30, 2020

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income (Loss)

    

Total

Balance at December 31, 2019

 

75,619

$

756

$

1,280,760

$

(889,066)

$

4,890

$

397,340

Net income

 

 

 

 

1,359,357

 

1,359,357

Total other comprehensive loss

(21,925)

(21,925)

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

36

 

 

12,979

 

 

12,979

Net issuance of common stock upon exercise of stock options

 

251

 

3

 

39,503

 

 

39,506

Share-based compensation

 

 

 

15,968

 

 

15,968

Share repurchases, including fees

 

(2,634)

 

(26)

 

(45,511)

 

(1,048,463)

 

(1,094,000)

Balance at September 30, 2020

 

73,272

$

733

$

1,303,699

$

(578,172)

$

(17,035)

$

709,225

See accompanying Notes to condensed consolidated financial statements.

5

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

For the Nine Months Ended

September 30, 

    

2021

    

2020

Operating activities:

 

  

 

  

Net income

$

1,645,712

$

1,359,357

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization of property, equipment and intangibles

 

237,654

 

231,510

Amortization of debt discount and issuance costs

 

3,294

 

3,300

Deferred income taxes

 

18,053

 

32,249

Share-based compensation programs

 

18,544

 

17,062

Other

 

1,803

 

2,576

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(56,743)

 

(34,970)

Inventory

 

6,420

 

(76,239)

Accounts payable

 

424,710

 

481,431

Income taxes payable

 

141,273

 

123,581

Other

 

124,607

 

209,272

Net cash provided by operating activities

 

2,565,327

 

2,349,129

Investing activities:

 

  

 

  

Purchases of property and equipment

 

(340,687)

 

(363,425)

Proceeds from sale of property and equipment

 

6,643

 

11,690

Investment in tax credit equity investments

(1,795)

(95,292)

Other

 

(1,897)

 

(312)

Net cash used in investing activities

 

(337,736)

 

(447,339)

Financing activities:

 

  

 

  

Proceeds from borrowings on revolving credit facility

 

 

1,162,000

Payments on revolving credit facility

 

 

(1,423,000)

Proceeds from the issuance of long-term debt

 

 

997,515

Principal payments on long-term debt

(300,000)

Payment of debt issuance costs

 

(3,404)

 

(7,779)

Repurchases of common stock

 

(2,007,161)

 

(1,094,000)

Net proceeds from issuance of common stock

 

67,361

 

51,174

Other

 

(313)

 

(253)

Net cash used in financing activities

 

(2,243,517)

 

(314,343)

Effect of exchange rate changes on cash

(412)

(755)

Net (decrease) increase in cash and cash equivalents

 

(16,338)

 

1,586,692

Cash and cash equivalents at beginning of the period

 

465,640

 

40,406

Cash and cash equivalents at end of the period

$

449,302

$

1,627,098

Supplemental disclosures of cash flow information:

 

  

 

  

Income taxes paid

$

333,360

$

250,484

Interest paid, net of capitalized interest

 

107,971

 

118,397

See accompanying Notes to condensed consolidated financial statements.

6

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2021

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ended December 31, 2021.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Principles of consolidation:

The condensed 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.    

NOTE 2 – VARIABLE INTEREST ENTITIES

The Company invests in certain tax credit funds that promote renewable energy.  These investments generate a return primarily through the realization of federal tax credits and other tax benefits.  The Company accounts for the tax attributes of its renewable energy investments using the deferral method.  Under this method, realized investment tax credits and other tax benefits are recognized as a reduction of the renewable energy investments.

The Company has determined its investment in these tax credit funds were investments in variable interest entities (“VIEs”).  The Company analyzes any investments in VIEs at inception and again if certain triggering events are identified to determine if it is the primary beneficiary.  The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIEs’ economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities.  As of September 30, 2021, the Company had invested in four unconsolidated tax credit fund entities that were considered to be VIEs and concluded it was not the primary beneficiary of any of the entities, as it did not have the power to control the activities that most significantly impact the entities, and has therefore accounted for these investments using the equity method.  The Company’s maximum exposure to losses associated with these VIEs is generally limited to its net investment, which was $20.0 million as of September 30, 2021, and was included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets.  During the nine months ended September 30, 2020, the Company recognized investment tax credits in the amount of $108.4 million, all of which were realized through reductions in cash income taxes paid and were reflected as a component of the change in Income taxes payable on the accompanying Condensed Consolidated Statements of Cash Flows for the respective period.

During the nine months ended September 30, 2021, the Company entered into an agreement to make certain additional capital contributions to one of its tax credit funds, which promotes renewable energy through the development of solar energy farms, for the primary purpose of receiving renewable energy tax credits.  Per the terms of the agreement, the Company is required to make capital contributions totaling approximately $170.0 million upon achievement of project milestones by the solar energy farms, the timing of which is variable and outside of the Company’s control.  

7

NOTE 3 – FAIR VALUE MEASUREMENTS

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

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 – Inputs other than quoted prices in active markets included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability.

Financial assets and liabilities measured at fair value on a recurring basis:

The Company invests in various marketable securities with the intention of selling these securities to fulfill its future unsecured obligations under the Company’s nonqualified deferred compensation plan.  See Note 11 for further information concerning the Company’s benefit plans.

The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020.  The Company recorded a decrease in fair value related to its marketable securities in the amount of $0.2 million and an increase in fair value related to its marketable securities in the amount of $1.9 million for the three months ended September 30, 2021 and 2020, respectively, which were included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income.  The Company recorded an increase in fair value related to its marketable securities in the amount of $3.8 million and $1.2 million for the nine months ended September 30, 2021 and 2020, respectively, which were included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income.  

The tables below identify the estimated fair value of the Company’s marketable securities, determined by reference to quoted market prices (Level 1), as of September 30, 2021, and December 31, 2020 (in thousands):

September 30, 2021

Quoted Priced in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

50,012

$

$

$

50,012

December 31, 2020

Quoted Prices in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

40,411

$

$

$

40,411

Non-financial assets and liabilities measured at fair value on a nonrecurring basis:

Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain circumstances, including when there is evidence of impairment.  These non-financial assets and liabilities may include assets acquired in a business combination or property and equipment that are determined to be impaired.  As of September 30, 2021, and December 31, 2020, the Company did not have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.

Fair value of financial instruments:

The carrying amounts of the Company’s senior notes and unsecured revolving credit facility borrowings are included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020.  See Note 6 for further information concerning the Company’s senior notes and unsecured revolving credit facility.

8

The table below identifies the estimated fair value of the Company’s senior notes, using the market approach.  The fair value as of September 30, 2021, and December 31, 2020, was determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

September 30, 2021

December 31, 2020

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Senior Notes

$

3,826,073

$

4,191,551

$

4,123,217

$

4,647,595

The carrying amount of the Company’s unsecured revolving credit facility approximates fair value (Level 2), as borrowings under the facility bear variable interest at current market rates.

The accompanying Condensed Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts receivable, amounts receivable from suppliers and accounts payable.  Due to the short-term nature of these financial instruments, the Company believes that the carrying values of these instruments approximate their fair values.

NOTE 4 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments.  The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current expectations of future economic and industry trends, changes in customer payment terms and management’s expectations.  Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable.  The Company grants credit to certain professional service provider and jobber customers who meet the Company’s pre-established credit requirements.  Concentrations of credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of relatively small customers, spreading the credit risk across a broad base regarded as a single class of financing receivable by the Company.  The Company also controls this credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures.  Generally, the Company does not require security when credit is granted to customers.  Credit is granted to customers on a short-term basis, consisting primarily of daily, weekly or monthly accounts.  Credit losses are provided for in the Company’s condensed consolidated financial statements and have consistently been within management’s expectations.

The Company’s allowance for doubtful accounts are included in “Accounts receivable, net” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020.  The following table identifies the changes in the Company’s allowance for doubtful accounts for the nine months ended September 30, 2021 (in thousands):

Allowance for doubtful accounts, balance at December 31, 2020

$

12,670

Reserve accruals

 

2,940

Uncollectable accounts written-off

(3,669)

Foreign currency translation

 

(25)

Allowance for doubtful accounts, balance at September 30, 2021

$

11,916

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 aggregate amounts receivable from suppliers, and the Company did not record a reserve for uncollectable amounts from suppliers in the condensed consolidated financial statements as of September 30, 2021, and December 31, 2020.    

9

NOTE 5 – LEASES

The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases.  The following table summarizes Total lease cost for the three and nine months ended September 30, 2021 and 2020, which were primarily included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income (in thousands):

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2021

2020

    

2021

2020

Operating lease cost

$

87,601

$

84,065

$

262,183

$

250,721

Short-term operating lease cost

 

1,803

 

1,617

 

5,397

 

4,342

Variable operating lease cost

 

22,436

 

20,630

 

67,025

 

61,739

Sublease income

 

(1,177)

 

(1,235)

 

(3,560)

 

(3,597)

Total lease cost

$

110,663

$

105,077

$

331,045

$

313,205

The following table summarizes other lease-related information for the nine months ended September 30, 2021 and 2020:

    

For the Nine Months Ended

September 30, 

2021

2020

Cash paid for amounts included in the measurement of operating lease liabilities:

 

  

Operating cash flows from operating leases

$

256,282

$

249,584

Right-of-use assets obtained in exchange for new operating lease liabilities

216,825

176,714

NOTE 6 – FINANCING

The following table identifies the amounts included in “Current portion of long-term debt” and “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020 (in thousands):

    

September 30, 2021

    

December 31, 2020

4.625% Senior Notes due 2021, effective interest rate of 4.643%

$

$

300,000

3.800% Senior Notes due 2022, effective interest rate of 3.845%

 

300,000

 

300,000

3.850% Senior Notes due 2023, effective interest rate of 3.851%

 

300,000

 

300,000

3.550% Senior Notes due 2026, effective interest rate of 3.570%

 

500,000

 

500,000

3.600% Senior Notes due 2027, effective interest rate of 3.619%

 

750,000

 

750,000

4.350% Senior Notes due 2028, effective interest rate of 4.383%

 

500,000

 

500,000

3.900% Senior Notes due 2029, effective interest rate of 3.901%

500,000

500,000

4.200% Senior Notes due 2030, effective interest rate of 4.205%

500,000

500,000

1.750% Senior Notes due 2031, effective interest rate of 1.798%

500,000

500,000

Total principal amount of debt

3,850,000

4,150,000

Less: Unamortized discount and debt issuance costs

23,927

26,783

Total long-term debt

$

3,826,073

$

4,123,217

Unsecured revolving credit facility:

On June 15, 2021, the Company entered into a new credit agreement (the “Credit Agreement”).  The Credit Agreement provides for a five-year $1.8 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in June of 2026.  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 $900 million, provided that the aggregate amount of the commitments does not exceed $2.7 billion at any time.

In conjunction with the closing of the Credit Agreement, the Company’s previous credit agreement, which was originally entered into on April 5, 2017, was terminated (the “Terminated Credit Agreement”), and all outstanding loans and commitments under the Terminated Credit Agreement were terminated and replaced by the loans and commitments under the Credit Agreement.

As of September 30, 2021, and December 31, 2020, 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 $84.0 million and $66.4 million,

10

respectively, reducing the aggregate availability under the credit agreements by those amounts.  As of September 30, 2021, and December 31, 2020, the Company had no outstanding borrowings under its revolving credit facilities.

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.  The Credit Agreement includes customary provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate.  Swing line loans made under the Revolving Credit Facility bear interest at an Alternate Base Rate plus the applicable margin for Alternate Base Rate loans.  In addition, the Company pays a facility fee on the aggregate amount of the commitments under the Credit Agreement in an amount equal to a percentage of such commitments.  The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions.  As of September 30, 2021, based upon the Company’s current credit ratings, its margin for Alternate Base Rate loans was 0.000%, its margin for Eurodollar Revolving Loans was 0.900% and its facility fee was 0.100%.

The Credit Agreement contains certain covenants, including limitations on subsidiary indebtedness, a minimum consolidated fixed charge coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00.  The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed charges.  Fixed charges include interest expense, capitalized interest and rent expense.  The consolidated leverage ratio includes a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense.  Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, five-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt.  In the event that the Company should default on any covenant (subject to customary grace periods, cure rights and materiality thresholds) contained in the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from lenders.  As of September 30, 2021, the Company remained in compliance with all covenants under the Credit Agreement.

Senior notes:

On June 15, 2021, the Company redeemed its $300 million aggregate principal amount of unsecured 4.625% Senior Notes due 2021 at a redemption price of $300 million, plus accrued and unpaid interest up to, but not including, the date of redemption.

As of September 30, 2021, the Company has issued and outstanding a cumulative $3.9 billion aggregate principal amount of unsecured senior notes, which are due between 2022 and 2031, with UMB Bank, N.A. and U.S. Bank as trustees.  Interest on the senior notes, ranging from 1.750% to 4.350%, is payable semi-annually and is computed on the basis of a 360-day year.  The $300 million aggregate principle amount of unsecured 3.800% Senior Notes due 2022 were included in “Long-term debt” on the accompanying Consolidated Balance Sheet as of September 30, 2021, as the Company has the ability and intent to refinance these notes on a long-term basis.  None of the Company’s subsidiaries is a guarantor under the senior notes.  Each of the senior notes is subject to certain customary covenants, with which the Company complied as of September 30, 2021.      

NOTE 7 – WARRANTIES

The Company provides warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims.  For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims.  Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales.  Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line.  The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims.

The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020; the following table identifies the changes in the Company’s aggregate product warranty liabilities for the nine months ended September 30, 2021 (in thousands):

Warranty liabilities, balance at December 31, 2020

$

65,886

Warranty claims

 

(94,451)

Warranty accruals

 

104,054

Foreign currency translation

(18)

Warranty liabilities, balance at September 30, 2021

$

75,471

11

NOTE 8 – SHARE REPURCHASE PROGRAM

In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.  The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice.  As announced on February 10, 2021, and May 27, 2021, 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 and $1.5 billion, respectively, resulting in a cumulative authorization amount of $17.3 billion.  The additional authorizations are effective for three years, beginning on their respective announcement dates.

The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly announced share repurchase program for the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share data):

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Shares repurchased

 

1,583

965

 

3,801

2,634

Average price per share

$

595.96

$

458.70

$

528.09

$

415.28

Total investment

$

942,955

$

442,962

$

2,007,122

$

1,093,973

As of September 30, 2021, the Company had $974.4 million remaining under its share repurchase authorization.  Subsequent to the end of the third quarter and through November 8, 2021, the Company repurchased 0.4 million additional shares of its common stock under its share repurchase program, at an average price of $618.44, for a total investment of $246.9 million.  The Company has repurchased a total of 85.2 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through November 8, 2021, at an average price of $193.88, for a total aggregate investment of $16.5 billion.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes adjustments for foreign currency translations. The tables below summarize activity for changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 (in thousands):

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Loss

Accumulated other comprehensive loss, balance at June 30, 2021

$

(2,591)

$

(2,591)

Change in accumulated other comprehensive loss

(5,237)

(5,237)

Accumulated other comprehensive loss, balance at September 30, 2021

$

(7,828)

$

(7,828)

Foreign

Total Accumulated Other

Currency (1)