10-Q 1 orly-20240331x10q.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 March 31, 2024

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 - 58,894,096 shares outstanding as of April 29, 2024.  

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2024

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

17

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

ITEM 4 - CONTROLS AND PROCEDURES

24

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 5 - OTHER INFORMATION

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)

    

March 31, 2024

    

December 31, 2023

(Unaudited)

(Note)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

89,264

$

279,132

Accounts receivable, net

 

437,821

 

375,049

Amounts receivable from suppliers

 

139,267

 

140,443

Inventory

 

4,805,164

 

4,658,367

Other current assets

 

128,181

 

105,311

Total current assets

 

5,599,697

 

5,558,302

Property and equipment, at cost

 

8,555,556

 

8,312,367

Less: accumulated depreciation and amortization

 

3,360,351

 

3,275,387

Net property and equipment

 

5,195,205

 

5,036,980

Operating lease, right-of-use assets

2,227,783

2,200,554

Goodwill

 

1,009,857

 

897,696

Other assets, net

 

180,512

 

179,463

Total assets

$

14,213,054

$

13,872,995

Liabilities and shareholders’ deficit

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

6,117,068

$

6,091,700

Self-insurance reserves

 

130,974

 

128,548

Accrued payroll

 

127,704

 

138,122

Accrued benefits and withholdings

 

174,125

 

174,650

Income taxes payable

 

147,645

 

7,860

Current portion of operating lease liabilities

399,245

389,536

Other current liabilities

 

791,633

 

730,937

Total current liabilities

 

7,888,394

 

7,661,353

Long-term debt

 

5,288,632

 

5,570,125

Operating lease liabilities, less current portion

1,900,200

1,881,344

Deferred income taxes

 

321,323

 

295,471

Other liabilities

 

205,703

 

203,980

Shareholders’ equity (deficit):

 

  

 

  

Common stock, $0.01 par value:

 

Authorized shares – 245,000,000

Issued and outstanding shares –

58,982,123 as of March 31, 2024, and

59,072,792 as of December 31, 2023

590

 

591

Additional paid-in capital

 

1,410,756

 

1,352,275

Retained deficit

 

(2,849,108)

 

(3,131,532)

Accumulated other comprehensive income

46,564

39,388

Total shareholders’ deficit

 

(1,391,198)

 

(1,739,278)

Total liabilities and shareholders’ deficit

$

14,213,054

$

13,872,995

Note:  The balance sheet at December 31, 2023, 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

March 31, 

    

2024

    

2023

Sales

$

3,976,240

$

3,707,864

Cost of goods sold, including warehouse and distribution expenses

 

1,942,068

 

1,817,535

Gross profit

 

2,034,172

 

1,890,329

Selling, general and administrative expenses

 

1,281,691

 

1,173,684

Operating income

 

752,481

 

716,645

Other income (expense):

 

  

 

  

Interest expense

 

(57,148)

 

(44,572)

Interest income

 

1,656

 

868

Other, net

 

3,401

 

4,479

Total other expense

 

(52,091)

 

(39,225)

Income before income taxes

 

700,390

 

677,420

Provision for income taxes

 

153,152

 

160,535

Net income

$

547,238

$

516,885

Earnings per share-basic:

 

  

 

  

Earnings per share

$

9.27

$

8.36

Weighted-average common shares outstanding – basic

 

59,017

 

61,840

Earnings per share-assuming dilution:

 

  

 

  

Earnings per share

$

9.20

$

8.28

Weighted-average common shares outstanding – assuming dilution

 

59,454

 

62,398

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

March 31, 

    

2024

    

2023

Net income

$

547,238

$

516,885

Other comprehensive income (loss):

Foreign currency translation adjustments

 

7,176

 

18,898

Total other comprehensive income

7,176

18,898

Comprehensive income

$

554,414

$

535,783

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 March 31, 2024

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income

    

Total

Balance at December 31, 2023

 

59,073

$

591

$

1,352,275

$

(3,131,532)

$

39,388

$

(1,739,278)

Net income

 

 

 

 

547,238

 

547,238

Total other comprehensive income

7,176

7,176

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

 

6

 

 

5,607

 

 

5,607

Net issuance of common stock upon exercise of stock options

 

165

 

2

 

52,414

 

 

52,416

Share-based compensation

 

 

 

6,548

 

 

6,548

Share repurchases, including fees

(262)

(3)

(6,088)

(263,928)

(270,019)

Excise tax on share repurchases

 

 

 

 

(886)

 

(886)

Balance at March 31, 2024

 

58,982

$

590

$

1,410,756

$

(2,849,108)

$

46,564

$

(1,391,198)

For the Three Months Ended March 31, 2023

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income

    

Total

Balance at December 31, 2022

 

62,353

$

624

$

1,311,488

$

(2,375,860)

$

2,996

$

(1,060,752)

Net income

 

 

 

 

516,885

 

516,885

Total other comprehensive income

18,898

18,898

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

 

8

 

 

5,293

 

 

5,293

Net issuance of common stock upon exercise of stock options

 

35

 

 

10,255

 

 

10,255

Share-based compensation

 

 

 

6,980

 

 

6,980

Share repurchases, including fees

 

(1,357)

 

(14)

 

(28,740)

 

(1,082,707)

 

(1,111,461)

Excise tax on share repurchases

(11,115)

(11,115)

Balance at March 31, 2023

 

61,039

$

610

$

1,305,276

$

(2,952,797)

$

21,894

$

(1,625,017)

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 Three Months Ended

March 31, 

    

2024

    

2023

Operating activities:

 

  

 

  

Net income

$

547,238

$

516,885

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

 

  

 

Depreciation and amortization of property, equipment and intangibles

 

109,648

 

93,747

Amortization of debt discount and issuance costs

 

1,593

 

1,215

Deferred income taxes

 

2,374

 

3,393

Share-based compensation programs

 

7,022

 

7,435

Other

 

2,997

 

29

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(36,954)

 

(2,610)

Inventory

 

(92,042)

 

(179,481)

Accounts payable

 

6,107

 

172,701

Income taxes payable

 

140,025

 

145,441

Other

 

16,207

 

(44,991)

Net cash provided by operating activities

 

704,215

 

713,764

Investing activities:

 

  

 

  

Purchases of property and equipment

 

(249,240)

 

(223,268)

Proceeds from sale of property and equipment

 

3,853

 

2,704

Other, including acquisitions, net of cash acquired

 

(155,366)

 

(956)

Net cash used in investing activities

 

(400,753)

 

(221,520)

Financing activities:

 

  

 

  

Proceeds from borrowings on revolving credit facility

 

30,000

 

1,216,000

Payments on revolving credit facility

 

 

(661,000)

Net payments of commercial paper

(310,805)

Repurchases of common stock

 

(270,019)

 

(1,111,461)

Net proceeds from issuance of common stock

 

57,815

 

15,146

Other

 

(569)

 

(354)

Net cash used in financing activities

 

(493,578)

 

(541,669)

Effect of exchange rate changes on cash

248

714

Net decrease in cash and cash equivalents

 

(189,868)

 

(48,711)

Cash and cash equivalents at beginning of the period

 

279,132

 

108,583

Cash and cash equivalents at end of the period

$

89,264

$

59,872

Supplemental disclosures of cash flow information:

 

  

 

  

Income taxes paid

$

9,798

$

9,696

Interest paid, net of capitalized interest

 

34,671

 

26,531

See accompanying Notes to condensed consolidated financial statements.

6

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2024

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 months ended March 31, 2024, are not necessarily indicative of the results that may be expected for the year ended December 31, 2024.  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, 2023.

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 – BUSINESS COMBINATION

On January 22, 2024, the Company completed the previously announced strategic acquisition of Groupe Del Vasto (“Vast Auto”), an auto parts supplier headquartered in Montreal, Quebec, Canada, pursuant to a stock purchase agreement whereby 100% of all outstanding shares of Vast Auto were acquired, with all consideration paid in cash at closing.  The acquisition of Vast Auto represents O’Reilly’s entrance into the Canadian automotive aftermarket.  At the time of the acquisition, Vast Auto operated two distribution centers and six satellite warehouses that support a network of 23 company-owned stores and thousands of independent jobber and professional customers across Eastern Canada.  The results of Vast Auto’s operations have been included in the Company’s condensed consolidated financial statements beginning from the date of acquisition.  Pro forma results of operations related to the acquisition of Vast Auto are not presented as Vast Auto’s results are not material to the Company’s results of operations.

The purchase price allocation process consists of collecting data and information to enable the Company to value the assets acquired and liabilities assumed as a result of the business combination.  Potential identifiable intangible assets under evaluation include, but are not limited to, trade names and trademarks, non-compete agreements, and customer relationships.  In addition, other assets, including internal use software, and other assumed liabilities may be identified, valued, and recorded.  Due to the close proximity of the Vast Auto acquisition closing date and the Company’s fiscal quarter end, the Company remains in the initial measurement period.

The preliminary purchase price allocation, which is provisional and will change as additional information is obtained and valuation work is completed during the initial measurement period, resulted in the initial recognition of $109.8 million of goodwill and intangible assets included in “Goodwill”, including impacts from the recognition of applicable deferred taxes related to the acquisition, on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2024.  Goodwill generated from this acquisition is not amortizable for tax purposes.

NOTE 3 – 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 tax credits.

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 March 31, 2024, the Company had invested in six 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.  

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The Company’s maximum exposure to losses associated with these VIEs is generally limited to its net investment, which was $29.8 million as of March 31, 2024, and was included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets.  

NOTE 4 – 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 12 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 March 31, 2024, and December 31, 2023.  The Company recorded an increase in fair value related to its marketable securities in the amount of $3.5 million and $2.5 million for the three months ended March 31, 2024 and 2023, 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 March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024

Quoted Priced in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

62,219

$

$

$

62,219

December 31, 2023

Quoted Prices in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

59,508

$

$

$

59,508

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 March 31, 2024, and December 31, 2023, 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, unsecured revolving credit facility borrowings, and commercial paper program borrowings are included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2024, and December 31, 2023.  

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The table below identifies the estimated fair value of the Company’s senior notes, using the market approach.  The fair value as of March 31, 2024, and December 31, 2023, was determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

March 31, 2024

December 31, 2023

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Senior Notes

$

4,821,943

$

4,643,028

$

4,820,543

$

4,687,065

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 carrying amount of the Company’s commercial paper program approximates fair value (Level 2), as borrowings under the program bear interest at market rates prevailing at the time of issuance.  See Note 7 for further information concerning the Company’s senior notes, unsecured revolving credit facility, and commercial paper program.

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 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 months ended March 31, 2024 and 2023, 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

March 31, 

    

2024

2023

Operating lease cost

$

103,556

$

96,518

Short-term operating lease cost

 

2,500

 

3,704

Variable operating lease cost

 

25,634

 

24,471

Sublease income

 

(1,154)

 

(1,214)

Total lease cost

$

130,536

$

123,479

The following table summarizes other lease-related information for the three months ended March 31, 2024 and 2023:

    

For the Three Months Ended

March 31, 

2024

2023

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

 

  

Operating cash flows from operating leases

$

101,616

$

95,494

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

88,091

126,986

NOTE 6 – SUPPLIER FINANCE PROGRAM

The Company has established and maintains supplier finance programs with certain third-party financial institutions, which allow participating merchandise suppliers to voluntarily elect to assign the Company’s payment obligations due to these merchandise suppliers to one of the designated third-party institutions.  Under these supplier finance programs, the Company has agreed to pay the third-party financial institutions the stated amount of confirmed merchandise supplier invoices on the original maturity dates of the invoices, which are generally for a term of one year.  The Company does not have any assets pledged as security or other forms of guarantees for the committed payment to the third-party financial institutions.  As of March 31, 2024, and December 31, 2023, the Company had obligations outstanding under these programs for invoices that were confirmed as valid to the third-party financial institutions in the amounts of $4.3 billion and $4.4 billion, respectively, which were included as a component of “Accounts payable” on the accompanying Condensed Consolidated Balance Sheets.

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NOTE 7 – FINANCING

The following table identifies the amounts included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2024, and December 31, 2023 (in thousands):

    

March 31, 2024

    

December 31, 2023

Revolving Credit Facility, weighted-average variable interest rate of 8.500%

$

30,000

$

Commercial paper program, weighted-average variable interest rate of 5.527% as of March 31, 2024, and 5.640% as of December 31, 2023

437,000

750,900

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

 

500,000

 

500,000

5.750% Senior Notes due 2026, effective interest rate of 5.767%

750,000

750,000

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

850,000

Total principal amount of debt

5,317,000

5,600,900

Less: Unamortized discount and debt issuance costs

28,368

30,775

Total long-term debt

$

5,288,632

$

5,570,125

Unsecured revolving credit facility:

The Company is party to a credit agreement dated June 15, 2021, as amended as of March 6, 2023 (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 March 31, 2024, and December 31, 2023, 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 $5.7 million and $5.4 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.    

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 Term SOFR 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 March 31, 2024, based upon the Company’s current credit ratings, its margin for Alternate Base Rate loans was 0.000%, its margin for Term Benchmark 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 March 31, 2024, 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 March 31, 2024, and December 31, 2023, 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 $132.1 million and $106.8 million, respectively.  Substantially all of these letters of credit

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have a one-year term from the date of issuance and were not issued under the Company’s Credit Agreement or another committed facility.

Commercial paper program:

On August 9, 2023, the Company established a commercial paper program (the “Program”) pursuant to which it may issue short-term, unsecured commercial paper notes (the “Notes”) under the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.  Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the Notes outstanding under the Program at any time not to exceed $1.8 billion.  The Notes will have maturities of up to 397 days from the date of issue.  The Notes rank at least pari passu with all of the Company’s other unsecured and unsubordinated indebtedness.  The Company plans to use its Revolving Credit Facility as a liquidity backstop for the repayment of Notes outstanding under the Program.  The Notes issued under the Program were included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheet as of March 31, 2024, as the Company has the ability and intent to refinance these Notes on a long-term basis.

Senior notes:

As of March 31, 2024, the Company has issued and outstanding a cumulative $4.9 billion aggregate principal amount of unsecured senior notes, which are due between 2026 and 2032, with UMB Bank, N.A. and U.S. Bank Trust Company, National Association as trustees.  Interest on the senior notes, ranging from 1.750% to 5.750%, 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 March 31, 2024.        

NOTE 8 – 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 March 31, 2024, and December 31, 2023; the following table identifies the changes in the Company’s aggregate product warranty liabilities for the three months ended March 31, 2024 (in thousands):

Warranty liabilities, balance at December 31, 2023

$

117,895

Warranty claims

 

(44,585)

Warranty accruals

 

48,275

Foreign currency translation

14

Warranty liabilities, balance at March 31, 2024

$

121,599

NOTE 9 – 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 May 23, 2023, and November 16, 2023, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $2.0 billion, resulting in a cumulative authorization amount of $25.8 billion.  The additional authorizations are effective for three years, beginning on its respective announcement date.

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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 months ended March 31, 2024 and 2023 (in thousands, except per share data):

For the Three Months Ended

March 31, 

    

2024

    

2023

Shares repurchased

 

262

1,357

Average price per share

$

1,029.24

$

819.06

Total investment

$

270,017

$

1,111,447

As of March 31, 2024, the Company had $2.3 billion remaining under its share repurchase authorization.  Excise tax on shares repurchased, assessed at one percent of the fair market value of shares repurchased, was $2.7 million for the three months ended March 31, 2024.

Subsequent to the end of the first quarter and through May 9, 2024, the Company repurchased 0.2 million additional shares of its common stock under its share repurchase program, at an average price of $1,053.19, for a total investment of $208.7 million.  The Company has repurchased a total of 94.5 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through May 9, 2024, at an average price of $250.21, for a total aggregate investment of $23.7 billion.

NOTE 10 – 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 months ended March 31, 2024 and 2023 (in thousands):

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Income

Accumulated other comprehensive income, balance at December 31, 2023

$

39,388

$

39,388

Change in accumulated other comprehensive income

7,176

7,176

Accumulated other comprehensive income, balance at March 31, 2024

$

46,564

$

46,564

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Income

Accumulated other comprehensive income, balance at December 31, 2022

$

2,996

$

2,996

Change in accumulated other comprehensive income

18,898

18,898

Accumulated other comprehensive income, balance at March 31, 2023

$

21,894

$

21,894

(1)Foreign currency translation is not shown net of additional U.S. tax, as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested.

NOTE 11 – REVENUE

The table below identifies the Company’s revenues disaggregated by major customer type for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended

March 31, 

    

2024

    

2023

Sales to do-it-yourself customers

$

2,001,986

$

1,918,467

Sales to professional service provider customers

 

1,869,740

 

1,711,964

Other sales, sales adjustments, and sales from the acquired Vast Auto stores

 

104,514

 

77,433

Total sales

$

3,976,240

$

3,707,864

See Note 8 for information concerning the expected costs associated with the Company’s assurance warranty obligations.

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NOTE 12 – 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, restricted stock awards, and stock appreciation rights issued under the Company’s incentive plans and stock issued through the Company’s employee stock purchase plan.

Stock options:

The Company’s 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 10 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 stock option activity under these plans during the three months ended March 31, 2024 (in thousands, except per share data):

    

    

Shares

Weighted- Average

(in thousands)

Exercise Price

Outstanding at December 31, 2023

 

884

$

428.50

Granted

 

54

 

1,069.20

Exercised

 

(165)

 

316.84

Forfeited or expired

 

(2)

 

641.53

Outstanding at March 31, 2024

 

771

$

496.55

Exercisable at March 31, 2024

 

545

$

369.68

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.

The table below identifies the weighted-average assumptions used for grants awarded during the three months ended March 31, 2024 and 2023:

March 31, 

    

2024

2023

Risk free interest rate

 

4.14

%  

3.91

%  

Expected life

 

6.6

Years

6.5

Years

Expected volatility

 

28.3

%  

29.1

%  

Expected dividend yield

 

%  

%  

The following table summarizes activity related to stock options awarded by the Company for the three months ended March 31, 2024 and 2023 (in thousands, except per share data):

For the Three Months Ended

March 31, 

    

2024

    

2023

Compensation expense for stock options awarded

$

5,595

$

6,119

Income tax benefit from compensation expense related to stock options

 

1,438

 

1,534

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2024, was $411.22, compared to $318.08 for the three months ended March 31, 2023.  The remaining unrecognized compensation expense related to unvested stock

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option awards at March 31, 2024, was $55.5 million, and the weighted-average period of time over which this cost will be recognized is 3.0 years.

Other share-based compensation plans:

The Company sponsors other share-based compensation plans:  an employee stock purchase plan and incentive plans that provide for the awarding of shares of restricted stock to certain key employees and directors.  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.  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, and compensation expense is recognized based on the discount between the fair value and the employee purchase price for the shares sold to employees.  Restricted stock awarded under the incentive plans to certain key employees and directors vests after one-year or evenly over a three-year period and is held in escrow until such vesting has occurred.  The fair value of shares awarded under the incentive plans is based on the closing market price of the Company’s common stock on the date of the award, and compensation expense is recorded evenly over the vesting period or the minimum required service period.

The table below summarizes activity related to the Company’s other share-based compensation plans for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended

March 31, 

    

2024

    

2023

Compensation expense for shares issued under the ESPP

$

953

$

861

Income tax benefit from compensation expense related to shares issued under the ESPP

245

216

Compensation expense for restricted shares awarded

474

455

Income tax benefit from compensation expense related to restricted awards

$

122

$

114

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.  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.  The Company may also make additional discretionary profit sharing contributions to the 401(k) 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 three months ended March 31, 2024 or 2023.  The Company expensed matching contributions under the 401(k) Plan in the amount of $13.8 million and $9.6 million for the three months ended March 31, 2024 and 2023, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Condensed 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, which could then be matched by the Company using the same formula as the 401(k) plan.  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, if applicable, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period.  See Note 4 for further information concerning the Company’s marketable securities held to fulfill our future unsecured obligations under this plan.

The liability for compensation deferred under the Deferred Compensation Plan was $62.2 million and $59.5 million as of March 31, 2024, and December 31, 2023, respectively, which was included in “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets.  The Company expensed contributions under the Deferred Compensation Plan in the amount of $0.1 million and less than $0.1 million for each of the three months ended March 31, 2024 and 2023, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income.        

Stock appreciation rights:

The Company’s incentive plans provide for the granting of stock appreciation rights, which expire after 10 years and vest 25% per year, over four years, and are settled in cash.  As of March 31, 2024, and December 31, 2023, there were 14,204 and 13,079 stock appreciation rights outstanding, respectively.  During the three months ended March 31, 2024, there were 1,125 stock appreciation rights granted and no stock appreciation rights exercised or forfeited.  The liability for compensation to be paid for redeemed stock appreciation rights was $6.2 million and $4.5 million as of March 31, 2024, and December 31, 2023, respectively, which were included in “Other liabilities” on the Condensed Consolidated Balance Sheets.  The Company recorded compensation expense for stock appreciation rights in the amount

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of $1.6 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income.  

NOTE 13 – COMMITMENTS

The Company has entered into a conditional agreement to purchase federal renewable energy tax credits (“RETC”).  As of March 31, 2024, the Company has committed to purchase approximately $375 million RETCs upon the credit transfer date, which is anticipated to occur by June of 2025.

NOTE 14 – EARNINGS PER SHARE

The following table illustrates the computation of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023 (in thousands, except per share data):

For the Three Months Ended

March 31, 

    

2024

    

2023

Numerator (basic and diluted):

 

  

 

  

Net income

$

547,238

$

516,885

Denominator:

 

  

 

  

Weighted-average common shares outstanding – basic

 

59,017

 

61,840

Effect of stock options (1)

 

437

 

558

Weighted-average common shares outstanding – assuming dilution

 

59,454

 

62,398

Earnings per share:

 

  

 

  

Earnings per share-basic

$

9.27

$

8.36

Earnings per share-assuming dilution

$

9.20

$

8.28

Antidilutive potential common shares not included in the calculation of diluted earnings per share:

 

  

 

  

Stock options (1)

 

119

 

149

Weighted-average exercise price per share of antidilutive stock options (1)

$

917.74

$

725.14

(1)See Note 12 for further information concerning the terms of the Company’s share-based compensation plans.

For the three months ended March 31, 2024 and 2023, the computation of diluted earnings per share did not include certain securities. These securities represent underlying stock options not included in the computation of diluted earnings per share, because the inclusion of such equity awards would have been antidilutive.

See Note 9 for information concerning the Company’s subsequent share repurchases.  

NOTE 15 – LEGAL MATTERS

The Company is currently involved in litigation incidental to the ordinary conduct of the Company’s business.  Based on existing facts and historical patterns, the Company accrues for litigation losses in instances where an adverse outcome is probable and the Company is able to reasonably estimate the probable loss in accordance with Accounting Standard Codification 450-20.  The Company also accrues for an estimate of legal costs to be incurred for litigation matters.  Although the Company cannot ascertain the amount of liability that it may incur from legal 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.  

NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS

In November of 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”).  ASU 2023-07 increases the disclosures about a public entity’s reportable segments.  Under ASU 2023-07, a public entity would be required to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), a description of other segment items by reportable segment, annual disclosures about a reportable segment’s profit or loss and assets required by Topic 280 in interim periods, any additional measures of a segment’s profit or loss used by the CODM to allocate resources, and the title and position of the CODM.  

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ASU 2023-07 is effective for annual reporting periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.  ASU 2023-07 allows for early adoption and requires retrospective adoption.  The Company will adopt this guidance beginning with its fourth quarter ending December 31, 2024.  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, as the guidance pertains to disclosure only.

In December of 2023, FASB issued Accounting Standard Update ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”).  Under ASU 2023-09, a public entity will be required to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, such as if the effect of the reconciling item is equal to or greater than five percent of the amount computed by multiplying pretax income/loss by the applicable statutory income tax rate.  Entities would also have to disclose the amount of income taxes paid disaggregated by federal, state, and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid, along with income/loss from continuing operations before income tax expense disaggregated between domestic and foreign and income tax expense from continuing operations disaggregated by federal, state, and foreign.  ASU 2023-09 is effective for annual reporting periods beginning after December 15, 2024.  ASU 2023-09 allows for early adoption for annual financial statements that have not yet been issued and allows retrospective and prospective adoption.  The Company will adopt this guidance beginning with its fourth quarter ending December 31, 2025.  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, as the guidance pertains to disclosure only.  

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Item 2. 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 and other influences on the automotive aftermarket industry;
our results of operations for the three months ended March 31, 2024 and 2023;
our liquidity and capital resources;
our critical accounting estimates; and
recent accounting pronouncements that may affect our Company.

The review of Management’s Discussion and Analysis should be made in conjunction with our condensed consolidated financial statements, related notes and other financial information, forward-looking statements, and other risk factors included elsewhere in this quarterly 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 quarterly 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; consumer debt levels; product demand; a public health crisis; the market for auto parts; competition; weather; tariffs; availability of key products and supply chain disruptions; business interruptions, including terrorist activities, war and the threat of war; failure to protect our brand and reputation; challenges in international markets; volatility of the market price of our common stock; our increased debt levels; credit ratings on public debt; damage, failure, or interruption of information technology systems, including information security and cyber-attacks; historical growth rate sustainability; our ability to hire and retain qualified employees; risks associated with the performance of acquired businesses; and governmental regulations.  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, 2023, and subsequent Securities and Exchange Commission filings, 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, Puerto Rico, Mexico, and Canada.  We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both DIY customers and professional service providers – our “dual market strategy.”  Our goal is to achieve growth in sales and profitability by capitalizing on our competitive advantages, such as our dual market strategy, superior customer service provided by well-trained and technically proficient Team Members, and strategic distribution and hub store network that provides same day and over-night inventory access for our stores to offer a broad selection of product offerings.  The successful execution of our growth strategy includes aggressively opening new stores, growing sales in existing stores, continually enhancing merchandising and store layouts, and implementing our Omnichannel initiatives.  As of March 31, 2024, we operated 6,131 stores in 48 U.S. states and Puerto Rico, 63 stores in Mexico, and 23 stores in Canada.

See Note 2 “Business Combination” to the Condensed Consolidated Financial Statements for further information concerning the Canada stores acquired through the recent Vast Auto acquisition.  

The extensive product line offered in our stores consists 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.  

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Our sales and total gross profit dollars are, generally, 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 enhanced sales and profitability in our industry.  We have ongoing 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.

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.

Our business is influenced by a number of general macroeconomic factors that impact both our industry and consumers, including, but not limited to, inflation, including rising consumer staples; fuel and energy costs; unemployment trends; interest rates; and other economic factors.  Future changes, such as continued broad-based inflation and rapid fuel cost increases that exceed wage growth, may negatively impact our consumers’ level of disposable income, and we cannot predict the degree these changes, or other future changes, may have on our business or industry.

We believe the key drivers of demand over the long-term for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, annual rate of light vehicle sales, and average vehicle age.

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 U.S. Department of Transportation, the number of total miles driven in the U.S. increased 0.9% and 2.1% in 2022 and 2023, respectively, and year-to-date through February of 2024, miles driven have increased 0.6%.  Total miles driven can be impacted by macroeconomic factors, including rapid increases in fuel cost, but we are unable to predict the degree of impact these factors may have on miles driven in the future.  

Size and Age of the Vehicle Fleet

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 13.9% from 2012 to 2022, bringing the number of light vehicles on the road to 283 million by the end of 2022.  For the year ended December 31, 2023, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 15.8 million vehicles, and for 2024, the SAAR is estimated to be approximately 15.5 million vehicles, contributing to the continued growth in the total number of registered vehicles on the road.  From 2012 to 2022, vehicle scrappage rates have remained relatively stable, ranging from 4.1% to 5.7% annually.  As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 9.9%, from 11.1 years in 2012 to 12.2 years in 2022.  While the annual changes to the vehicle population resulting from new vehicle sales and the fluctuation in vehicle scrappage rates in any given year represent a small percentage of the total light vehicle population and have a muted impact on the total number and average age of vehicles on the road over the short term, we believe our business benefits from the current environment of elevated new and used vehicle prices, as consumers are more willing to continue to invest in their current vehicle.  

We believe the increase in average vehicle age over the long term can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains, interiors and exteriors, coupled with consumers’ 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.

Inflationary cost pressures impact our business; however, historically we have been successful, in many cases, in reducing the effects of merchandise cost increases, principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying.  To the extent our acquisition costs increase due to base commodity price increases or other input cost increases affecting the entire industry, we have typically been able to pass along these cost increases through higher selling 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.

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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.    

RESULTS OF OPERATIONS

Sales:

Sales for the three months ended March 31, 2024, increased $268 million, or 7%, to $3.98 billion from $3.71 billion for the same period one year ago.  Comparable store sales for stores open at least one year increased 3.4% and 10.8% for the three months ended March 31, 2024 and 2023, respectively.  Comparable store sales are calculated based on the change in sales for U.S. stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores, and sales to Team Members, as well as sales from Leap Day in the three months ended March 31, 2024.  Online sales for ship-to-home orders and pickup in-store orders for U.S. stores open at least one year are included in the comparable store sales calculation. We opened 37 and 58 net, new stores during the three months ended March 31, 2024 and 2023, respectively.  Additionally, we began operating 23 stores in Canada from the Vast Auto acquisition during the three months ended March 31, 2024.  We anticipate total new store growth to be 190 to 200 net, new store openings in 2024.  

The increase in sales for the three months ended March 31, 2024, was primarily the result of the 3.4% increase in domestic comparable store sales, a $73 million increase in sales from new stores opened in 2023 and 2024 that are not considered comparable stores, sales from one additional day due to Leap Day, and sales from the acquired Vast Auto stores.  Our comparable store sales increase for the three months ended March 31, 2024, was driven by an increase in average ticket values for both professional service provider and DIY customers and positive transaction counts from both professional service provider and DIY customers.  Average ticket values benefited from inflationary increases in average selling prices, as compared to the same period in 2023.  Average ticket values also continue to be positively impacted by 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.  The resulting 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.  The increases in transaction counts were driven by consistently exceptional execution of our strategies surrounding superior service, inventory availability, and competitive pricing, partially offset by pressure from unfavorably cool and wet spring weather conditions in many of our markets during the three months ended March 31, 2024.  

See Note 11 “Revenue” to the Condensed Consolidated Financial Statements for further information concerning the Company’s sales.  See Note 2 “Business Combination” to the Condensed Consolidated Financial Statements for further information concerning the acquired Vast Auto stores.

Gross profit:

Gross profit for the three months ended March 31, 2024, increased 8% to $2.03 billion (or 51.2% of sales) from $1.89 billion (or 51.0% of sales) for the same period one year ago.  The increase in gross profit dollars for the three months ended March 31, 2024, was primarily the result of the increase in comparable store sales at existing stores, sales from new and acquired stores, and one additional day due to Leap Day.  The increase in gross profit as a percentage of sales for the three months ended March 31, 2024, was primarily due to improved acquisition costs, partially offset by the inclusion of the lower gross margin sales from the acquired Vast Auto business.  

Selling, general and administrative expenses:

Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2024, increased 9% to $1.28 billion (or 32.2% of sales) from $1.17 billion (or 31.7% of sales) for the same period one year ago.  The increase in total SG&A dollars for the three months ended March 31, 2024, was primarily the result of additional Team Members and vehicles to support our increased sales and store count, one additional day due to Leap Day, and SG&A associated with the Vast Auto acquisition and operations.  The increase in SG&A as a percentage of sales for the three months ended March 31, 2024, was principally due to depreciation costs on accelerated refreshment of store delivery fleet, investment initiatives aimed at refreshing the image and appearance of our stores, and continued information technology investments.    

Operating income:

As a result of the impacts discussed above, operating income for the three months ended March 31, 2024, increased 5% to $752 million (or 18.9% of sales) from $717 million (or 19.3% of sales) for the same period one year ago.    

Other income and expense:

Total other expense for the three months ended March 31, 2024, increased 33% to $52 million (or 1.3% of sales) from $39 million (or 1.1% of sales) for the same period one year ago.  The increase in total other expense for the three months ended March 31, 2024, was

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the result of increased interest expense on higher average outstanding borrowings.  See Note 7 “Financing” to the Condensed Consolidated Financial Statements for further information concerning the Company’s borrowings.    

Income taxes:

Our provision for income taxes for the three months ended March 31, 2024, decreased 5% to $153 million (21.9% effective tax rate) from $161 million (23.7% effective tax rate) for the same period one year ago.  The decreases in our provision for income taxes and our effective tax rate for the three months ended March 31, 2024, were the result of higher excess tax benefits from share-based compensation in the current period, as compared to the same period one year ago.    

Net income:

As a result of the impacts discussed above, net income for the three months ended March 31, 2024, increased 6% to $547 million (or 13.8% of sales) from $517 million (or 13.9% of sales) for the same period one year ago.    

Earnings per share:

Our diluted earnings per common share for the three months ended March 31, 2024, increased 11% to $9.20 on 59 million shares from $8.28 on 62 million shares for the same period one year ago.    

LIQUIDITY AND CAPITAL RESOURCES

Our long-term business strategy requires capital to maintain and enhance our existing stores, invest to open new stores, fund strategic acquisitions, expand distribution infrastructure, develop enhanced information technology systems and tools, and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program.  Our material cash requirements necessary to maintain the current operations of our long-term business strategy include, but are not limited to, inventory purchases; human capital obligations, including payroll and benefits; contractual obligations, including debt and interest obligations; capital expenditures; payment of income taxes; and other operational priorities.  We expect to fund our short- and long-term cash and capital requirements with our primary sources of liquidity, which include funds generated from the normal course of our business operations, borrowings under our unsecured revolving credit facility and our commercial paper program, and senior note offerings.  However, there can be no assurance that we will continue to generate cash flows or maintain liquidity at or above recent levels, as we are unable to predict decreased demand for our products or changes in customer buying patterns.  Additionally, these factors could also impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.

Other than the commitment discussed in Note 13 “Commitments” to the Condensed Consolidated Financial Statements, there have been no material changes to the contractual obligations, to which we are committed, since those discussed in our annual report on Form 10-K for the year ended December 31, 2023.

The following table identifies cash provided by/(used in) our operating, investing and financing activities for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended

March 31, 

Liquidity:

    

2024

    

2023

Total cash provided by/(used in):

 

  

 

  

Operating activities

$

704,215

$

713,764

Investing activities

 

(400,753)

 

(221,520)

Financing activities

 

(493,578)

 

(541,669)

Effect of exchange rate changes on cash

248

714

Net decrease in cash and cash equivalents

$

(189,868)

$

(48,711)

Capital expenditures

$

249,240

$

223,268

Free cash flow (1)

438,855

486,118

(1)Calculated as net cash provided by operating activities, less capital expenditures, excess tax benefit from share-based compensation payments, and investment in tax credit equity investments for the period.  See page 22 for the reconciliation of the calculation of free cash flow.

Operating activities:

The decrease in net cash provided by operating activities during the three months ended March 31, 2024, compared to the same period in 2023, was primarily due to a larger increase in net inventory investment and an increase in accounts receivable, partially offset by an increase in net income and a decrease in accrued benefits payments during the three months ended March 31, 2023.  The increase in

20

accounts receivable is timing in nature, as the current period ended on a weekend, resulting in a high credit card receivable balance.  The decrease in accrued benefits and withholdings was due to a decrease in accrued benefit payments.    

Investing activities:

The increase in net cash used in investing activities during the three months ended March 31, 2024, compared to the same period in 2023, was the result of the acquisition of Vast Auto and an increase in capital expenditures.  The increase in capital expenditures was primarily due to an increase in distribution enhancement and expansion projects, as well as an increase in the number of owned new store openings.    

Financing activities:

The decrease in net cash used in financing activities during