10-Q 1 orly-20220930x10q.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, 2022

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 - 62,575,911 shares outstanding as of October 31, 2022.  

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022

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 (Deficit)

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

16

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

ITEM 4 - CONTROLS AND PROCEDURES

23

PART II - OTHER INFORMATION

25

ITEM 1 - LEGAL PROCEEDINGS

25

ITEM 1A - RISK FACTORS

25

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

25

ITEM 6 - EXHIBITS

26

SIGNATURE PAGES

27

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, 2022

    

December 31, 2021

(Unaudited)

(Note)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

67,060

$

362,113

Accounts receivable, net

 

338,122

 

272,562

Amounts receivable from suppliers

 

135,584

 

113,112

Inventory

 

4,137,945

 

3,686,383

Other current assets

 

82,045

 

70,092

Total current assets

 

4,760,756

 

4,504,262

Property and equipment, at cost

 

7,291,681

 

6,948,038

Less: accumulated depreciation and amortization

 

2,947,861

 

2,734,523

Net property and equipment

 

4,343,820

 

4,213,515

Operating lease, right-of-use assets

2,109,581

1,982,478

Goodwill

 

881,102

 

879,340

Other assets, net

 

142,769

 

139,112

Total assets

$

12,238,028

$

11,718,707

Liabilities and shareholders’ deficit

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

5,574,098

$

4,695,312

Self-insurance reserves

 

142,390

 

128,794

Accrued payroll

 

109,095

 

107,588

Accrued benefits and withholdings

 

167,452

 

234,872

Income taxes payable

 

63,916

 

Current portion of operating lease liabilities

360,529

337,832

Other current liabilities

 

423,999

 

370,217

Total current liabilities

 

6,841,479

 

5,874,615

Long-term debt

 

4,370,772

 

3,826,978

Operating lease liabilities, less current portion

1,809,241

1,701,757

Deferred income taxes

 

218,087

 

175,212

Other liabilities

 

203,912

 

206,568

Shareholders’ equity (deficit):

 

  

 

  

Common stock, $0.01 par value:

 

Authorized shares – 245,000,000

Issued and outstanding shares –

62,798,821 as of September 30, 2022, and

67,029,042 as of December 31, 2021

628

 

670

Additional paid-in capital

 

1,292,725

 

1,305,508

Retained deficit

 

(2,494,833)

 

(1,365,802)

Accumulated other comprehensive loss

(3,983)

(6,799)

Total shareholders’ deficit

 

(1,205,463)

 

(66,423)

Total liabilities and shareholders’ deficit

$

12,238,028

$

11,718,707

Note:  The balance sheet at December 31, 2021, 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, 

    

2022

    

2021

    

2022

    

2021

Sales

$

3,798,619

$

3,479,570

$

10,765,367

$

10,036,070

Cost of goods sold, including warehouse and distribution expenses

 

1,863,657

 

1,661,330

 

5,237,615

 

4,750,657

Gross profit

 

1,934,962

 

1,818,240

 

5,527,752

 

5,285,413

Selling, general and administrative expenses

 

1,130,768

 

1,063,641

 

3,255,478

 

3,044,126

Operating income

 

804,194

 

754,599

 

2,272,274

 

2,241,287

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(43,164)

 

(34,873)

 

(115,389)

 

(110,036)

Interest income

 

1,435

 

485

 

2,627

 

1,478

Other, net

 

(616)

 

318

 

(7,104)

 

4,961

Total other expense

 

(42,345)

 

(34,070)

 

(119,866)

 

(103,597)

Income before income taxes

 

761,849

 

720,529

 

2,152,408

 

2,137,690

Provision for income taxes

 

176,411

 

161,877

 

508,330

 

491,978

Net income

$

585,438

$

558,652

$

1,644,078

$

1,645,712

Earnings per share-basic:

 

  

 

  

 

  

 

  

Earnings per share

$

9.25

$

8.14

$

25.30

$

23.67

Weighted-average common shares outstanding – basic

 

63,288

 

68,608

 

64,979

 

69,529

Earnings per share-assuming dilution:

 

  

 

  

 

  

 

  

Earnings per share

$

9.17

$

8.07

$

25.08

$

23.45

Weighted-average common shares outstanding – assuming dilution

 

63,860

 

69,240

 

65,566

 

70,174

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, 

    

2022

    

2021

    

2022

    

2021

Net income

$

585,438

$

558,652

$

1,644,078

$

1,645,712

Other comprehensive income (loss):

Foreign currency translation adjustments

 

(372)

 

(5,237)

 

2,816

 

(5,673)

Total other comprehensive (loss) income

(372)

(5,237)

2,816

(5,673)

 

Comprehensive income

$

585,066

$

553,415

$

1,646,894

$

1,640,039

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, 2022

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Loss

    

Total

Balance at June 30, 2022

 

63,753

$

638

$

1,286,651

$

(2,391,108)

$

(3,611)

$

(1,107,430)

Net income

 

 

 

 

585,438

 

585,438

Total other comprehensive loss

(372)

(372)

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

 

7

 

 

4,698

 

 

4,698

Net issuance of common stock upon exercise of stock options

 

78

 

1

 

16,765

 

 

16,766

Share based compensation

 

 

 

5,752

 

 

5,752

Share repurchases, including fees

 

(1,039)

 

(11)

 

(21,141)

 

(689,163)

 

(710,315)

Balance at September 30, 2022

 

62,799

$

628

$

1,292,725

$

(2,494,833)

$

(3,983)

$

(1,205,463)

For the Nine Months Ended September 30, 2022

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Loss

    

Total

Balance at December 31, 2021

 

67,029

$

670

$

1,305,508

$

(1,365,802)

$

(6,799)

$

(66,423)

Net income

 

 

 

 

1,644,078

 

1,644,078

Total other comprehensive income

2,816

2,816

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

 

26

 

 

15,272

 

 

15,272

Net issuance of common stock upon exercise of stock options

 

169

 

2

 

42,786

 

 

42,788

Share-based compensation

 

 

 

17,563

 

 

17,563

Share repurchases, including fees

 

(4,425)

 

(44)

 

(88,404)

 

(2,773,109)

 

(2,861,557)

Balance at September 30, 2022

 

62,799

$

628

$

1,292,725

$

(2,494,833)

$

(3,983)

$

(1,205,463)

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)

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, 

    

2022

    

2021

Operating activities:

 

  

 

  

Net income

$

1,644,078

$

1,645,712

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

 

  

 

Depreciation and amortization of property, equipment and intangibles

 

258,048

 

237,654

Amortization of debt discount and issuance costs

 

3,490

 

3,294

Deferred income taxes

 

42,673

 

18,053

Share-based compensation programs

 

18,913

 

18,544

Other

 

716

 

1,803

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(69,965)

 

(56,743)

Inventory

 

(450,991)

 

6,420

Accounts payable

 

878,501

 

424,710

Income taxes payable

 

73,853

 

141,273

Other

 

(46,296)

 

124,607

Net cash provided by operating activities

 

2,353,020

 

2,565,327

Investing activities:

 

  

 

  

Purchases of property and equipment

 

(388,820)

 

(340,687)

Proceeds from sale of property and equipment

 

10,829

 

6,643

Investment in tax credit equity investments

(5,262)

(1,795)

Other

 

(448)

 

(1,897)

Net cash used in investing activities

 

(383,701)

 

(337,736)

Financing activities:

 

  

 

  

Proceeds from borrowings on revolving credit facility

 

785,800

 

Payments on revolving credit facility

 

(785,800)

 

Proceeds from the issuance of long-term debt

 

847,314

 

Principal payments on long-term debt

(300,000)

(300,000)

Payment of debt issuance costs

 

(6,442)

 

(3,404)

Repurchases of common stock

 

(2,861,557)

 

(2,007,161)

Net proceeds from issuance of common stock

 

56,575

 

67,361

Other

 

(350)

 

(313)

Net cash used in financing activities

 

(2,264,460)

 

(2,243,517)

Effect of exchange rate changes on cash

88

(412)

Net decrease in cash and cash equivalents

 

(295,053)

 

(16,338)

Cash and cash equivalents at beginning of the period

 

362,113

 

465,640

Cash and cash equivalents at end of the period

$

67,060

$

449,302

Supplemental disclosures of cash flow information:

 

  

 

  

Income taxes paid

$

392,490

$

333,360

Interest paid, net of capitalized interest

 

99,674

 

107,971

See accompanying Notes to condensed consolidated financial statements.

6

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2022

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, 2022, are not necessarily indicative of the results that may be expected for the year ended December 31, 2022.  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, 2021.

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, 2022, the Company had invested in five 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 $25.0 million as of September 30, 2022, and was included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets.

As of September 30, 2022, the Company had commitments to make certain additional capital contributions to one of its tax credit funds totaling approximately $122.0 million upon achievement of project milestones by the solar energy farms, the timing of which is uncertain and outside of the Company’s control.  Subsequent to September 30, 2022, the Company entered into an agreement to invest in an additional tax credit fund, which promotes renewable energy through the development of solar energy farms, primarily for the purpose of receiving renewable energy tax credits.  Per the terms of this agreement, the Company is required to make capital contributions totaling approximately $60.0 million upon achievement of project milestones by the solar energy farms, the timing of which is uncertain and outside of the Company’s control.    

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.

7

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 10 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, 2022, and December 31, 2021.  The Company recorded a decrease in fair value related to its marketable securities in the amount of $2.0 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively, which were included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income.  The Company recorded a decrease in fair value related to its marketable securities in the amount of $11.2 million and an increase in fair value related to its marketable securities in the amount of $3.8 million for the nine months ended September 30, 2022 and 2021, 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, 2022, and December 31, 2021 (in thousands):

September 30, 2022

Quoted Priced in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

45,897

$

$

$

45,897

December 31, 2021

Quoted Prices in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

52,456

$

$

$

52,456

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, 2022, and December 31, 2021, 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, 2022, and December 31, 2021.  

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, 2022, and December 31, 2021, was determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

September 30, 2022

December 31, 2021

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Senior Notes

$

4,370,772

$

4,022,512

$

3,826,978

$

4,135,629

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.  See Note 5 for further information concerning the Company’s senior notes and unsecured revolving credit facility.

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.

8

NOTE 4 – 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, 2022 and 2021, 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, 

    

2022

2021

    

2022

2021

Operating lease cost

$

92,677

$

87,601

$

273,475

$

262,183

Short-term operating lease cost

 

2,594

 

1,803

 

7,710

 

5,397

Variable operating lease cost

 

23,547

 

22,436

 

70,650

 

67,025

Sublease income

 

(1,553)

 

(1,177)

 

(3,975)

 

(3,560)

Total lease cost

$

117,265

$

110,663

$

347,860

$

331,045

The following table summarizes other lease-related information for the nine months ended September 30, 2022 and 2021:

    

For the Nine Months Ended

September 30, 

2022

2021

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

 

  

Operating cash flows from operating leases

$

272,620

$

256,282

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

341,272

216,825

NOTE 5 – FINANCING

The following table identifies the amounts included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021 (in thousands):

    

September 30, 2022

    

December 31, 2021

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

$

$

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

4.700% Senior Notes due 2032, effective interest rate of 4.740%

850,000

Total principal amount of debt

4,400,000

3,850,000

Less: Unamortized discount and debt issuance costs

29,228

23,022

Total long-term debt

$

4,370,772

$

3,826,978

Unsecured revolving credit facility:

The Company is party to a credit agreement dated June 15, 2021 (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.

As of September 30, 2022, and December 31, 2021, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, under the Credit Agreement in the amounts of $5.1 million and $84.0 million, respectively, reducing the aggregate availability under the Credit Agreement by those amounts.  Substantially all of these outstanding letters of credit have a one-year term from the date of issuance.  As of September 30, 2022, and December 31, 2021, the Company had no outstanding borrowings under its Revolving Credit Facility.

9

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, 2022, 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, 2022, the Company remained in compliance with all covenants under the Credit Agreement.

In addition to the letters of credit issued under the Credit Agreement described above, as of September 30, 2022, the Company had additional outstanding letters of credit, primarily to support obligations under workers’ compensation, general liability and other insurance policies, in the amount of $96.6 million.  Substantially all of these letters of credit have a one-year term from the date of issuance and were not issued under the Company’s Credit Agreement or another committed facility.

Senior notes:

On June 15, 2022, the Company issued $850 million aggregate principal amount of unsecured 4.700% Senior Notes due 2032 (“4.700% Senior Notes due 2032”) at a price to the public of 99.684% of their face value with U.S. Bank Trust Company, National Association (f/k/a U.S. Bank National Association) (“U.S. Bank”) as trustee.  Interest on the 4.700% Senior Notes due 2032 is payable on June 15 and December 15 of each year, beginning on December 15, 2022, and is computed on the basis of a 360–day year.

On September 1, 2022, the Company’s $300 million aggregate principal amount of unsecured 3.800% Senior Notes due 2022 matured, and the Company repaid these notes using available cash on hand.

As of September 30, 2022, the Company has issued and outstanding a cumulative $4.4 billion aggregate principal amount of unsecured senior notes, which are due between 2023 and 2032, with UMB Bank, N.A. and U.S. Bank as trustees.  Interest on the senior notes, ranging from 1.750% to 4.700%, is payable semi-annually and is computed on the basis of a 360-day year.  The $300 million aggregate principal amount of unsecured 3.850% Senior Notes due 2023 was included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheet as of September 30, 2022, 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, 2022.      

NOTE 6 – 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.

10

The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021; the following table identifies the changes in the Company’s aggregate product warranty liabilities for the nine months ended September 30, 2022 (in thousands):

Warranty liabilities, balance at December 31, 2021

$

77,199

Warranty claims

 

(113,167)

Warranty accruals

 

121,373

Foreign currency translation

8

Warranty liabilities, balance at September 30, 2022

$

85,413

NOTE 7 – 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 November 17, 2021, and May 16, 2022, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.5 billion, resulting in a cumulative authorization amount of $20.3 billion.  The additional authorizations are effective for three years, beginning on their respective announcement date.

The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly announced share repurchase program for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share data):

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Shares repurchased

 

1,039

1,583

 

4,425

3,801

Average price per share

$

683.09

$

595.96

$

646.61

$

528.09

Total investment

$

710,304

$

942,955

$

2,861,513

$

2,007,122

As of September 30, 2022, the Company had $644.0 million remaining under its share repurchase authorization.  Subsequent to the end of the third quarter and through November 8, 2022, the Company repurchased 0.3 million additional shares of its common stock under its share repurchase program, at an average price of $735.72, for a total investment of $184.5 million.  The Company has repurchased a total of 90.2 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, 2022, at an average price of $219.33, for a total aggregate investment of $19.8 billion.

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE 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, 2022 and 2021 (in thousands):

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Loss

Accumulated other comprehensive loss, balance at June 30, 2022

$

(3,611)

$

(3,611)

Change in accumulated other comprehensive loss

(372)

(372)

Accumulated other comprehensive loss, balance at September 30, 2022

$

(3,983)

$

(3,983)

Foreign

Total Accumulated Other

Currency