Company Quick10K Filing
O'Reilly Automotive
Price438.38 EPS19
Shares75 P/E24
MCap32,833 P/FCF10
Net Debt3,850 EBIT2,105
TEV36,684 TEV/EBIT17
TTM 2019-12-31, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
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10-K 2013-12-31 Filed 2014-02-28
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10-Q 2013-03-31 Filed 2013-05-09
10-K 2012-12-31 Filed 2013-02-28
10-Q 2012-09-30 Filed 2012-11-08
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10-K 2011-12-31 Filed 2012-02-28
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10-K 2010-12-31 Filed 2011-02-28
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10-K 2009-12-31 Filed 2010-02-26
8-K 2020-07-29 Earnings, Exhibits
8-K 2020-07-01 Regulation FD, Exhibits
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8-K 2019-11-21
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8-K 2018-05-17
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8-K 2018-04-25
8-K 2018-04-02
8-K 2018-03-02
8-K 2018-02-26
8-K 2018-02-07
8-K 2018-01-02

ORLY 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Business Combination
Note 3 - Fair Value Measurements
Note 4 - Allowance for Doubtful Accounts
Note 5 - Leases
Note 6 - Financing
Note 7 - Warranties
Note 8 - Share Repurchase Program
Note 9 - Accumulated Other Comprehensive Income (Loss)
Note 10 - Revenue
Note 11 - Share - Based Compensation and Benefit Plans
Note 12 - Earnings per Share
Note 13 - Legal Matters
Note 14 - Recent Accounting Pronouncements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 orly-20200331ex3116780f8.htm
EX-31.2 orly-20200331ex3123dd2e2.htm
EX-32.1 orly-20200331ex32103c808.htm
EX-32.2 orly-20200331ex322ef2b5e.htm

O'Reilly Automotive Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
151296302011201420172021
Assets, Equity
2.72.21.61.10.50.02011201420172021
Rev, G Profit, Net Income
1.81.30.80.4-0.1-0.62011201420172021
Ops, Inv, Fin

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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, 2020

OR

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

For the transition period from ________ to ________

O’REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

Missouri

    

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 - 74,225,644 shares outstanding as of May 4, 2020.  

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS

    

Page

PART I - FINANCIAL INFORMATION

2

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Income

3

Condensed Consolidated Statements of Comprehensive Income

4

Condensed Consolidated Statements of Shareholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

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

16

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

24

ITEM 4 - CONTROLS AND PROCEDURES

24

PART II - OTHER INFORMATION

26

ITEM 1 - LEGAL PROCEEDINGS

26

ITEM 1A - RISK FACTORS

26

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

26

ITEM 6 - EXHIBITS

27

SIGNATURE PAGES

28

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, 2020

    

December 31, 2019

(Unaudited)

(Note)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

287,067

$

40,406

Accounts receivable, net

 

221,167

 

214,915

Amounts receivable from suppliers

 

83,446

 

79,492

Inventory

 

3,556,723

 

3,454,092

Other current assets

 

53,397

 

44,757

Total current assets

 

4,201,800

 

3,833,662

Property and equipment, at cost

 

6,314,339

 

6,191,427

Less: accumulated depreciation and amortization

 

2,305,695

 

2,243,224

Net property and equipment

 

4,008,644

 

3,948,203

Operating lease, right-of-use assets

1,935,295

1,928,369

Goodwill

 

910,141

 

936,814

Other assets, net

 

52,982

 

70,112

Total assets

$

11,108,862

$

10,717,160

Liabilities and shareholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

3,758,199

$

3,604,722

Self-insurance reserves

 

83,262

 

79,079

Accrued payroll

 

103,804

 

100,816

Accrued benefits and withholdings

 

72,561

 

98,539

Income taxes payable

 

12,884

 

Current portion of operating lease liabilities

316,932

316,061

Other current liabilities

 

277,290

 

270,210

Total current liabilities

 

4,624,932

 

4,469,427

Long-term debt

 

4,471,248

 

3,890,527

Operating lease liabilities, less current portion

1,661,991

1,655,297

Deferred income taxes

 

73,212

 

133,280

Other liabilities

 

168,635

 

171,289

Shareholders’ equity:

 

  

 

  

Common stock, $0.01 par value:

 

Authorized shares – 245,000,000

Issued and outstanding shares –

74,199,261 as of March 31, 2020, and

75,618,659 as of December 31, 2019

742

 

756

Additional paid-in capital

 

1,271,250

 

1,280,760

Retained deficit

 

(1,137,392)

 

(889,066)

Accumulated other comprehensive (loss) income

(25,756)

4,890

Total shareholders’ equity

 

108,844

 

397,340

Total liabilities and shareholders’ equity

$

11,108,862

$

10,717,160

Note:  The balance sheet at December 31, 2019, 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, 

    

2020

    

2019

Sales

$

2,476,487

$

2,410,608

Cost of goods sold, including warehouse and distribution expenses

 

1,180,581

 

1,131,318

Gross profit

 

1,295,906

 

1,279,290

Selling, general and administrative expenses

 

872,345

 

834,504

Operating income

 

423,561

 

444,786

Other income (expense):

 

  

 

  

Interest expense

 

(39,386)

 

(34,291)

Interest income

 

675

 

554

Other, net

 

(5,190)

 

3,103

Total other expense

 

(43,901)

 

(30,634)

Income before income taxes

 

379,660

 

414,152

Provision for income taxes

 

79,222

 

93,000

Net income

$

300,438

$

321,152

Earnings per share-basic:

 

  

 

  

Earnings per share

$

4.00

$

4.09

Weighted-average common shares outstanding – basic

 

75,022

 

78,484

Earnings per share-assuming dilution:

 

  

 

  

Earnings per share

$

3.97

$

4.05

Weighted-average common shares outstanding – assuming dilution

 

75,663

 

79,297

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, 

    

2020

    

2019

Net income

$

300,438

$

321,152

Other comprehensive income (loss):

Foreign currency translation adjustments

 

(30,646)

 

Total other comprehensive loss

(30,646)

 

Comprehensive income

$

269,792

$

321,152

See accompanying Notes to condensed consolidated financial statements.

4

/O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)

For the Three Months Ended March 31, 2020

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income (Loss)

    

Total

Balance at December 31, 2019

 

75,619

$

756

$

1,280,760

$

(889,066)

$

4,890

$

397,340

Net income

 

 

 

 

300,438

 

300,438

Total other comprehensive loss

(30,646)

(30,646)

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

 

12

 

 

4,104

 

 

4,104

Net issuance of common stock upon exercise of stock options

 

52

 

1

 

6,135

 

 

6,136

Share-based compensation

 

 

 

5,524

 

 

5,524

Share repurchases, including fees

 

(1,484)

 

(15)

 

(25,273)

 

(548,764)

 

(574,052)

Balance at March 31, 2020

 

74,199

$

742

$

1,271,250

$

(1,137,392)

$

(25,756)

$

108,844

For the Three Months Ended March 31, 2019

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income

    

Total

Balance at December 31, 2018

 

79,044

$

790

$

1,262,063

$

(909,186)

$

$

353,667

Cumulative effective adjustment from adoption of ASU 2016-02

(1,410)

(1,410)

Net income

 

 

 

 

321,152

 

321,152

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

 

12

 

 

3,772

 

 

3,772

Net issuance of common stock upon exercise of stock options

 

133

 

2

 

11,953

 

 

11,955

Share-based compensation

 

 

 

5,085

 

 

5,085

Share repurchases, including fees

 

(927)

 

(9)

 

(14,841)

 

(307,006)

 

(321,856)

Balance at March 31, 2019

 

78,262

$

783

$

1,268,032

$

(896,450)

$

$

372,365

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, 

    

2020

    

2019

Operating activities:

 

  

 

  

Net income

$

300,438

$

321,152

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

 

  

 

  

Depreciation and amortization of property, equipment and intangibles

 

73,963

 

63,964

Amortization of debt discount and issuance costs

 

1,035

 

918

Deferred income taxes

 

(58,732)

 

4,312

Share-based compensation programs

 

5,875

 

5,424

Other

 

1,739

 

2,245

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(12,208)

 

(60,914)

Inventory

 

(106,937)

 

(35,405)

Accounts payable

 

156,584

 

60,918

Income taxes payable

 

131,949

 

82,476

Other

 

(34,613)

 

(4,468)

Net cash provided by operating activities

 

459,093

 

440,622

Investing activities:

 

  

 

  

Purchases of property and equipment

 

(133,284)

 

(152,914)

Proceeds from sale of property and equipment

 

1,901

 

1,811

Investment in tax credit equity investments

(95,259)

Other

 

 

(295)

Net cash used in investing activities

 

(226,642)

 

(151,398)

Financing activities:

 

  

 

  

Proceeds from borrowings on revolving credit facility

 

1,052,000

 

874,000

Payments on revolving credit facility

 

(969,000)

 

(831,000)

Proceeds from the issuance of long-term debt

 

499,795

 

Payment of debt issuance costs

 

(2,990)

 

Repurchases of common stock

 

(574,052)

 

(321,856)

Net proceeds from issuance of common stock

 

9,800

 

15,224

Other

 

(253)

 

(190)

Net cash provided by (used in) financing activities

 

15,300

 

(263,822)

Effect of exchange rate changes on cash

(1,090)

Net increase in cash and cash equivalents

 

246,661

 

25,402

Cash and cash equivalents at beginning of the period

 

40,406

 

31,315

Cash and cash equivalents at end of the period

$

287,067

$

56,717

Supplemental disclosures of cash flow information:

 

  

 

  

Income taxes paid

$

4,975

$

5,335

Interest paid, net of capitalized interest

 

46,282

 

47,796

See accompanying Notes to condensed consolidated financial statements.

6

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2020

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, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.  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, 2019.

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.

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 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 considers its investment in these tax credit funds as an investment in variable interest entities (“VIE”).  The Company analyzes any investments in VIEs 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 VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities.  As of March 31, 2020, the Company invested in two unconsolidated tax credit fund entities that were considered to be VIEs and concluded it was not the primary beneficiary of either entity, as it did not have the power to control the activities that most significantly impact the entities, and has accounted for these investments using the equity method.  The Company’s maximum exposure to losses associated with these VIEs is limited to its net investment, which was $14.3 million as of March 31, 2020, and was included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets.  

NOTE 2 – BUSINESS COMBINATION

After the close of business on November 29, 2019, the Company completed the acquisition of Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), a specialty retailer of automotive aftermarket parts headquartered in Guadalajara, Jalisco, Mexico pursuant to a stock purchase agreement.  The results of Mayasa’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 Mayasa are not presented as Mayasa’s results are not material to the Company’s results of operations.

The purchase price allocation process, which is still ongoing, 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.  The Company has substantially completed purchase price allocations related to working capital, including inventory, accounts receivable and accounts payable, and property, plant and equipment.  Potential identifiable intangible assets that continue to be evaluated 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 liabilities may be identified, valued and recorded.  The Company has engaged a third party valuation specialist to assist with the valuation of the intangible assets and internal use software.  This process is ongoing and the Company remains in the initial measurement period due to constrained resources resulting from the Company’s focus on managing through the novel coronavirus (“COVID-19”) pandemic.

The preliminary purchase price allocation is provisional and will change as additional information pertaining to the acquisition date is obtained and valuation work is completed during the initial measurement period.  The Company’s preliminary assessment resulted in the initial recognition of $128.1 million of goodwill and intangible assets included in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets as of December 31, 2019.  Goodwill generated from this acquisition is not amortizable for tax purposes.  

7

NOTE 3 – FAIR VALUE MEASUREMENTS

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

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

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

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

The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020, and December 31, 2019.  The Company recorded a decrease in fair value related to its marketable securities in the amount of $5.2 million for the three months ended March 31, 2020, and an increase in fair value to its marketable securities in the amount of $2.8 million for the three months ended March 31, 2019, 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, 2020, and December 31, 2019 (in thousands):

March 31, 2020

Quoted Priced in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

28,141

$

$

$

28,141

December 31, 2019

Quoted Prices in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

32,201

$

$

$

32,201

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, 2020, and December 31, 2019, 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 March 31, 2020, and December 31, 2019.  See Note 6 for further information concerning the Company’s senior notes and unsecured revolving credit facility.

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, 2020, and December 31, 2019, was determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

March 31, 2020

December 31, 2019

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Senior Notes

$

4,127,248

$

4,220,514

$

3,629,527

$

3,881,925

8

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

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

NOTE 4 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

The Company’s allowance for doubtful accounts are included in “Accounts receivable, net” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020, and December 31, 2019.  The following table identifies the changes in the Company’s allowance for doubtful accounts for the three months ended March 31, 2020 (in thousands):

Allowance for doubtful accounts, balance at December 31, 2019

$

14,417

Reserve accruals

 

2,322

Uncollectable accounts written-off

(1,666)

Foreign currency translation

 

(146)

Allowance for doubtful accounts, balance at March 31, 2020

$

14,927

The Company receives concessions from its suppliers through a variety of programs and arrangements, including allowances for new stores and warranties, volume purchase rebates and co-operative advertising.  Co-operative advertising allowances that are incremental to the Company’s advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred.  All other supplier concessions are recognized as a reduction to the cost of sales.  Amounts receivable from suppliers also include amounts due to the Company for changeover merchandise and product returns.  The Company regularly reviews supplier receivables for collectability and assesses the need for a reserve for uncollectable amounts based on an evaluation of the Company’s suppliers’ financial positions and corresponding abilities to meet financial obligations.  Management does not believe there is a reasonable likelihood that the Company will be unable to collect the aggregate amounts receivable from suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the condensed consolidated financial statements as of March 31, 2020, and December 31, 2019.

See Note 14 for further information concerning the Company’s adoption of Accounting Standard Codification 326 – Financial Instruments – Credit Losses.

9

NOTE 5 – LEASES

The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases.  The following table summarizes Total lease cost for the three months ended March 31, 2020 and 2019, which was 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, 

    

2020

2019

Operating lease cost

$

83,195

$

78,814

Short-term operating lease cost

 

1,784

 

2,058

Variable operating lease cost

 

20,333

 

18,378

Sublease income

 

(1,175)

 

(957)

Total lease cost

$

104,137

$

98,293

The following table summarizes other lease related information for the three months ended March 31, 2020:

    

For the Three Months Ended

March 31, 

2020

2019

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

 

  

Operating cash flows from operating leases

$

82,607

$

78,298

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

$

71,131

$

10,940

NOTE 6 – FINANCING

The following table identifies the amounts included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020, and December 31, 2019 (in thousands):

    

March 31, 2020

    

December 31, 2019

Revolving Credit Facility, weighted-average variable interest rate of 2.213%

$

344,000

$

261,000

4.875% Senior Notes due 2021, effective interest rate of 4.948%

 

500,000

 

500,000

4.625% Senior Notes due 2021, effective interest rate of 4.644%

 

300,000

 

300,000

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

 

300,000

 

300,000

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

 

300,000

 

300,000

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

 

500,000

 

500,000

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

 

750,000

 

750,000

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

 

500,000

 

500,000

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

500,000

500,000

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

500,000

Principal amount of long-term debt

4,494,000

3,911,000

Less: Unamortized discount and debt issuance costs

22,752

20,473

Long-term debt

$

4,471,248

$

3,890,527

Unsecured revolving credit facility:

On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”).  The Credit Agreement provides for a $1.2 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in April 2022.  The Credit Agreement includes a $200 million sub-limit for the issuance of letters of credit and a $75 million sub-limit for swing line borrowings under the Revolving Credit Facility.  As described in the Credit Agreement governing the Revolving Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $600 million, provided that the aggregate amount of the commitments does not exceed $1.8 billion at any time.

As of March 31, 2020, and December 31, 2019, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amounts of $39.1 million and $38.9 million, respectively, reducing the aggregate availability under the Credit Agreement by those amounts.

10

Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company’s option, at either an Alternate Base Rate or an Adjusted LIBO Rate (both as defined in the Credit Agreement) plus an applicable margin.  Swing line loans made under the Revolving Credit Facility bear interest at an Alternate Base Rate plus the applicable margin for Alternate Base Rate loans.  In addition, the Company pays a facility fee on the aggregate amount of the commitments under the Credit Agreement in an amount equal to a percentage of such commitments.  The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions.  As of March 31, 2020, 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 March 31, 2020, the Company remained in compliance with all covenants under the Credit Agreement.

Senior notes:

On March 25, 2020, the Company issued $500 million aggregate principal amount of unsecured 4.200% Senior Notes due 2030 (“4.200% Senior Notes due 2030”) at a price to the public of 99.959% of their face value with U.S. Bank National Association (“U.S. Bank”) as trustee. Interest on the 4.200% Senior Notes due 2030 is payable on April 1 and October 1 of each year, beginning on October 1, 2020, and is computed on the basis of a 360-day year.

The Company has issued a cumulative $4.2 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2030, with UMB Bank, N.A. and U.S. Bank as trustees. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year.  None of the Company’s subsidiaries is a guarantor under the senior notes.  Each of the senior notes is subject to certain customary covenants, with which the Company complied as of March 31, 2020.

NOTE 7 – WARRANTIES

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

The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020, and December 31, 2019; the following table identifies the changes in the Company’s aggregate product warranty liabilities for the three months ended March 31, 2020 (in thousands):

Warranty liabilities, balance at December 31, 2019

$

61,069

Warranty claims

 

(23,375)

Warranty accruals

 

22,901

Warranty liabilities, balance at March 31, 2020

$

60,595

NOTE 8 – SHARE REPURCHASE PROGRAM

In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.  The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any

11

time, without prior notice.  As announced on February 5, 2020, the Company’s Board of Directors approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a cumulative authorization amount of $13.8 billion.  The additional authorization is effective for three years, beginning on its respective announcement date.  On March 16, 2020, the Company ceased share repurchases under its share repurchase program to conserve liquidity in response to the uncertainty related to COVID-19, and the Company will continue to evaluate current and expected business conditions and resume share repurchases under its share repurchase program when appropriate.  

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, 2020 and 2019 (in thousands, except per share data):

For the Three Months Ended

March 31, 

    

2020

    

2019

Shares repurchased

 

1,484

 

927

Average price per share

$

386.71

$

347.09

Total investment

$

574,037

$

321,846

As of March 31, 2020, the Company had $1.0 billion remaining under its share repurchase program.  Subsequent to the end of the first quarter, the Company did not repurchase any additional shares of its common stock.  The Company has repurchased a total of 77.7 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through May 8, 2020, at an average price of $164.22, for a total aggregate investment of $12.8 billion.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes adjustments for foreign currency translations. The table below summarizes activity for changes in accumulated other comprehensive income (loss) for the three months March 31, 2020 (in thousands):

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Income (Loss)

Accumulated other comprehensive income, balance at December 31, 2019

$

4,890

$

4,890

Change in accumulated other comprehensive loss

(30,646)

(30,646)

Accumulated other comprehensive loss, balance at March 31, 2020

$

(25,756)

$

(25,756)

(1)Foreign currency 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 10 – REVENUE

The table below identifies the Company’s revenues disaggregated by major customer type for the three months ended March 31, 2020 and 2019 (in thousands):

For the Three Months Ended

March 31, 

    

2020

    

2019

Sales to do-it-yourself customers

$

1,345,482

$

1,337,029

Sales to professional service provider customers

 

1,070,199

 

1,038,781

Other sales and sales adjustments

 

60,806

 

34,798

Total sales

$

2,476,487

$

2,410,608

As of March 31, 2020, and December 31, 2019, the Company had recorded a deferred revenue liability of $4.2 million and $4.1 million, respectively, related to its loyalty program, which were included in “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets. During the three months ended March 31, 2020 and 2019, the Company recognized $3.2 million and $3.9 million, respectively, of deferred revenue related to its loyalty program, which were included in “Sales” on the accompanying Condensed Consolidated Statements of Income.

See Note 7 for information concerning the expected costs associated with the Company’s assurance warranty obligations.

12

NOTE 11 – 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, 2020 (in thousands, except per share data):

Shares

Weighted- Average

(in thousands)

Exercise Price

Outstanding at December 31, 2019

 

1,635

$

218.10

Granted

 

137

 

387.30

Exercised

 

(52)

 

116.78

Forfeited or expired

 

(7)

 

258.79

Outstanding at March 31, 2020

 

1,713

$

234.59

Exercisable at March 31, 2020

 

1,105

$

183.34

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, 2020 and 2019:

March 31, 

    

2020

2019

Risk free interest rate

 

1.02

%  

2.50

%  

Expected life

 

6.4

Years

6.2

Years

Expected volatility

 

25.5

%  

25.0

%  

Expected dividend yield

 

%  

%  

The following table summarizes activity related to stock options awarded by the Company for the three months ended March 31, 2020 and 2019 (in thousands, except per share data):

For the Three Months Ended

March 31, 

    

2020

    

2019

Compensation expense for stock options awarded

$

4,878

$

4,508

Income tax benefit from compensation expense related to stock options

 

1,276

 

1,112

Weighted-average grant-date fair value of options awarded

$

107.26

$

108.74

The remaining unrecognized compensation expense related to unvested stock option awards at March 31, 2020, was $43.2 million, and the weighted-average period of time over which this cost will be recognized is 2.9 years.

13

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 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, 2020 and 2019 (in thousands):

For the Three Months Ended

March 31, 

    

2020

    

2019

Compensation expense for shares issued under the ESPP

$

646

$

577

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

169

142

Compensation expense for restricted shares awarded

351

339

Income tax benefit from compensation expense related to restricted awards

$

92

$

84

Profit sharing and savings plan:

The Company sponsors a contributory profit sharing and savings plan (the “401(k) Plan”) that covers substantially all employees who are at least 21 years of age and have completed one year of service.  The Company makes matching contributions equal to 100% of the first 2% of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed.  An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned.  The Company may also make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of Directors.  The Company did not make any discretionary contributions to the 401(k) Plan during the three months ended March 31, 2020 or 2019.  The Company expensed matching contributions under the 401(k) Plan in the amounts of $7.0 million and $6.0 million for the three months ended March 31, 2020 and 2019, respectively, which were 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. The Deferred Compensation Plan provides these employees with the opportunity to defer the full 6% of matched compensation, including salary and incentive based compensation that was precluded under the Company’s 401(k) Plan, which is then matched by the Company using the same formula as the 401(k) Plan. An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The Company has an unsecured obligation to pay, in the future, the value of the deferred compensation and Company match, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. The liability for compensation deferred under the Deferred Compensation Plan was $28.1 million and $32.2 million as of March 31, 2020, and December 31, 2019, respectively, which was included in “Other liabilities” on the accompanying Condensed Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amount of $0.1 million for each of the three months ended March 31, 2020 and 2019, 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, 2020, there were 8,009 stock appreciation rights outstanding, and during the three months ended March 31, 2020, there was no stock appreciation rights activity.  The liability for compensation to be paid for redeemed stock appreciation rights was less than $0.1 million as of March 31, 2020, which was included in “Other liabilities” on the Condensed Consolidated Balance Sheets. Compensation expense for stock appreciation rights was less than $0.1 million for the three

14

months ended March 31, 2020, which was included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income.

NOTE 12 – EARNINGS PER SHARE

The following table illustrates the computation of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019 (in thousands, except per share data):

For the Three Months Ended

March 31, 

    

2020

    

2019

Numerator (basic and diluted):

 

  

 

  

Net income

$

300,438

$

321,152

Denominator:

 

  

 

  

Weighted-average common shares outstanding – basic

 

75,022

 

78,484

Effect of stock options (1)

 

641

 

813

Weighted-average common shares outstanding – assuming dilution

 

75,663

 

79,297

Earnings per share:

 

  

 

  

Earnings per share-basic

$

4.00

$

4.09

Earnings per share-assuming dilution

$

3.97

$

4.05

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

 

  

 

  

Stock options (1)

 

349

 

176

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

$

377.41

$

347.98

(1)See Note 11 for further information concerning the terms of the Company’s share-based compensation plans.

For the three months ended March 31, 2020 and 2019, 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.

NOTE 13 – LEGAL MATTERS

O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company accrues for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable loss. The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and accruals, will have a material adverse eff