Item 8. Financial Statements and Supplementary Data

Index
			Page
Management’s Report on Internal Control over Financial Reporting			43
Report of Independent Registered Public Accounting Firm: Internal Control over Financial Reporting			44
Report of Independent Registered Public Accounting Firm: Financial Statements			45
Consolidated Balance Sheets			46
Consolidated Statements of Income			47
Consolidated Statements of Shareholders’ Equity			48
Consolidated Statements of Cash Flows			49
Notes to Consolidated Financial Statements			50

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”), under the supervision and with the participation of the Company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Internal control over financial reporting includes all policies and procedures that

•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management recognizes that all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 framework). Based on this assessment, management believes that as of December 31, 2017, the Company’s internal control over financial reporting is effective based on those criteria.

Ernst & Young LLP, Independent Registered Public Accounting Firm, has audited the Company’s consolidated financial statements and has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, as stated in their report, which is included herein.

/s/	Greg Henslee		/s/	Thomas McFall
Greg Henslee			Thomas McFall
Chief Executive Officer			Executive Vice President and
February 28, 2018			Chief Financial Officer
			February 28, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of O’Reilly Automotive, Inc. and Subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited O’Reilly Automotive, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, O’Reilly Automotive, Inc. and subsidiaries (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 28, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Kansas City, Missouri

February 28, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of O’Reilly Automotive, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of O’Reilly Automotive, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1992.

Kansas City, Missouri

February 28, 2018

Consolidated Balance Sheets

(In thousands, except share data)

	December 31,
	2017				2016
Assets
Current assets:
Cash and cash equivalents	$	46,348			$	146,598
Accounts receivable, less allowance for doubtful accounts $12,717 in 2017 and $12,040 in 2016	216,251				197,274
Amounts receivable from suppliers	76,236				82,105
Inventory	3,009,800				2,778,976
Other current assets	49,037				53,022
Total current assets	3,397,672				3,257,975
Property and equipment, at cost	5,191,135				4,832,342
Less: accumulated depreciation and amortization	1,847,329				1,708,911
Net property and equipment	3,343,806				3,123,431
Goodwill	789,058				785,399
Other assets, net	41,349				37,384
Total assets	$	7,571,885			$	7,204,189
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	3,190,029			$	2,936,656
Self-insurance reserves	71,695				67,921
Accrued payroll	77,147				71,717
Accrued benefits and withholdings	69,308				74,454
Other current liabilities	239,187				249,901
Total current liabilities	3,647,366				3,400,649
Long-term debt	2,978,390				1,887,019
Deferred income taxes	85,406				90,166
Other liabilities	207,677				199,219
Shareholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none	—				—
Common stock, $0.01 par value:
Authorized shares – 245,000,000
Issued and outstanding shares –
84,302,187 as of December 31, 2017, and
92,851,815 as of December 31, 2016	843				929
Additional paid-in capital	1,265,043				1,336,707
Retained (deficit) earnings	(612,840		)		289,500
Total shareholders’ equity	653,046				1,627,136
Total liabilities and shareholders’ equity	$	7,571,885			$	7,204,189

See accompanying Notes to consolidated financial statements.

Consolidated Statements of Income

(In thousands, except per share data)

	For the Year Ended December 31,
	2017				2016				2015
Sales	$	8,977,726			$	8,593,096			$	7,966,674
Cost of goods sold, including warehouse and distribution expenses	4,257,043				4,084,085				3,804,031
Gross profit	4,720,683				4,509,011				4,162,643
Selling, general and administrative expenses	2,995,283				2,809,805				2,648,622
Operating income	1,725,400				1,699,206				1,514,021
Other income (expense):
Interest expense	(91,349		)		(70,931		)		(57,129		)
Interest income	2,347				4,224				2,340
Other, net	1,406				4,692				1,134
Total other expense	(87,596		)		(62,015		)		(53,655		)
Income before income taxes	1,637,804				1,637,191				1,460,366
Provision for income taxes	504,000				599,500				529,150
Net income	$	1,133,804			$	1,037,691			$	931,216
Earnings per share-basic:
Earnings per share	$	12.82			$	10.87			$	9.32
Weighted-average common shares outstanding – basic	88,426				95,447				99,965
Earnings per share-assuming dilution:
Earnings per share	$	12.67			$	10.73			$	9.17
Weighted-average common shares outstanding – assuming dilution	89,502				96,720				101,514

See accompanying Notes to consolidated financial statements.

Consolidated Statements of Shareholders’ Equity

(In thousands)

	Common Stock							Additional Paid-In Capital				Retained Earnings (Deficit)				Total
	Shares			Par Value
Balance at December 31, 2014	101,603			$	1,016			$	1,194,929			$	822,473			$	2,018,418
Net income	—			—				—				931,216				931,216
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	59			—				11,630				—				11,630
Net issuance of common stock upon exercise of stock options	976			10				52,901				—				52,911
Excess tax benefit from share-based compensation	—			—				63,078				—				63,078
Share based compensation	—			—				20,274				—				20,274
Share repurchases, including fees	(4,901	)		(49		)		(61,315		)		(1,074,849		)		(1,136,213		)
Balance at December 31, 2015	97,737			$	977			$	1,281,497			$	678,840			$	1,961,314
Net income	—			—				—				1,037,691				1,037,691
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	56			1				12,613				—				12,614
Net issuance of common stock upon exercise of stock options	757			8				47,386				—				47,394
Excess tax benefit from share-based compensation	—			—				55,994				—				55,994
Share based compensation	—			—				17,566				—				17,566
Share repurchases, including fees	(5,698	)		(57		)		(78,349		)		(1,427,031		)		(1,505,437		)
Balance at December 31, 2016	92,852			$	929			$	1,336,707			$	289,500			$	1,627,136
Cumulative effective adjustment from adoption of ASU 2016-09 (See Note 1)	—			—				434				(266		)		168
Net income	—			—				—				1,133,804				1,133,804
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	66			—				13,466				—				13,466
Net issuance of common stock upon exercise of stock options	685			7				33,222				—				33,229
Share based compensation	—			—				17,773				—				17,773
Share repurchases, including fees	(9,301	)		(93		)		(136,559		)		(2,035,878		)		(2,172,530		)
Balance at December 31, 2017	84,302			$	843			$	1,265,043			$	(612,840	)		$	653,046

See accompanying Notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(In thousands)

	For the Year Ended December 31,
	2017				2016				2015
					(As Adjusted, Note)				(As Adjusted, Note)
Operating activities:
Net income	$	1,133,804			$	1,037,691			$	931,216
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and intangibles	233,845				217,866				210,256
Amortization of debt discount and issuance costs	2,871				2,451				2,106
Deferred income taxes	(4,593		)		10,394				(22,650		)
Share-based compensation programs	19,401				18,859				21,899
Other	11,790				6,434				6,839
Changes in operating assets and liabilities:
Accounts receivable	(27,742		)		(38,548		)		(23,858		)
Inventory	(231,802		)		(119,270		)		(76,226		)
Accounts payable	253,265				322,427				191,064
Income taxes payable	14,220				26,880				81,617
Accrued payroll	5,430				12,616				(19,341		)
Accrued benefits and withholdings	3,042				(256		)		18,904
Other	(9,844		)		13,169				23,662
Net cash provided by operating activities	1,403,687				1,510,713				1,345,488
Investing activities:
Purchases of property and equipment	(465,940		)		(476,344		)		(414,020		)
Proceeds from sale of property and equipment	4,464				5,119				2,758
Payments received on notes receivable	—				1,047				4,074
Other	(2,747		)		(58,918		)		—
Net cash used in investing activities	(464,223		)		(529,096		)		(407,188		)
Financing activities:
Proceeds from borrowings on revolving credit facility	3,101,000				—				—
Payments on revolving credit facility	(2,755,000		)		—				—
Proceeds from the issuance of long-term debt	748,800				499,160				—
Payment of debt issuance costs	(7,590		)		(4,125		)		—
Principal payments on capital leases	—				—				(25		)
Repurchases of common stock	(2,172,530		)		(1,505,437		)		(1,136,213		)
Net proceeds from issuance of common stock	45,762				59,634				64,613
Other	(156		)		(552		)		(934		)
Net cash used in financing activities	(1,039,714		)		(951,320		)		(1,072,559		)
Net (decrease) increase in cash and cash equivalents	(100,250		)		30,297				(134,259		)
Cash and cash equivalents at beginning of the year	146,598				116,301				250,560
Cash and cash equivalents at end of the year	$	46,348			$	146,598			$	116,301
Supplemental disclosures of cash flow information:
Income taxes paid	$	496,728			$	569,677			$	485,824
Interest paid, net of capitalized interest	77,766				63,648				55,061

Note: Certain prior period amounts have been reclassified to conform to current period presentation. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for more information.

See accompanying Notes to consolidated financial statements.

Notes to Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business:

O’Reilly Automotive, Inc. and its subsidiaries, collectively, “O’Reilly” or the “Company,” is a specialty retailer and supplier of automotive aftermarket parts. The Company’s stores carry an extensive product line, including new and remanufactured automotive hard parts, maintenance items and various automotive accessories. As of December 31, 2017, the Company owned and operated 5,019 stores in 47 states, servicing both do-it-yourself (“DIY”) and the professional service provider customers. The Company’s robust distribution system provides stores with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of other auto parts retailers.

Segment reporting:

The Company is managed and operated by a single management team reporting to the chief operating decision maker. O’Reilly stores have similar characteristics, including the nature of the products and services, the type and class of customers and the methods used to distribute products and provide service to its customers and, as a whole, make up a single operating segment. The Company does not prepare discrete financial information with respect to product lines, types of customers or geographic locations and as such has one reportable segment.

Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Use of estimates:

The preparation of the consolidated financial statements, in conformity with United States generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Cash equivalents:

Cash equivalents include investments with maturities of 90 days or less on the date of purchase.

Accounts receivable:

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable. Amounts due to the Company from its Team Members are included in “Accounts receivable” on the accompanying Consolidated Balance Sheets. These amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts receivable due from Team Members was approximately $0.9 million and $1.2 million as of December 31, 2017 and 2016, respectively.

The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Concentrations of credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of small customers, spreading the credit risk across a broad base. The Company also controls this credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures. Generally, the Company does not require security when credit is granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and have consistently been within management’s expectations.

Amounts receivable from suppliers:

The Company receives concessions from its suppliers through a variety of programs and arrangements, including allowances for new stores and warranties, volume purchase rebates and co-operative advertising. Co-operative advertising allowances that are incremental to the Company’s advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred. All other supplier concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also include amounts due to the Company for changeover merchandise and product returns. The Company regularly reviews supplier receivables for collectability and assesses the need for a reserve for uncollectable amounts based on an evaluation of the Company’s suppliers’ financial positions and corresponding abilities to meet financial obligations. Management does not believe there is a reasonable likelihood that the Company will be unable to collect the amounts receivable from suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as of December 31, 2017 or 2016.

Inventory:

Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Inventory also includes capitalized costs related to procurement, warehousing and distribution centers (“DC”s). Cost has been determined using the last-in, first-out (“LIFO”) method, which more accurately matches costs with related revenues. Over time, as the Company’s merchandise inventory purchases have increased, the Company negotiated improved acquisition costs from its suppliers and the corresponding price deflation exhausted the Company’s LIFO reserve balance. The Company’s policy is to not write up the value of its inventory in excess of its replacement cost, and accordingly, the Company’s merchandise inventory has been effectively recorded at replacement cost since December 31, 2013. The replacement cost of inventory was $3.01 billion and $2.78 billion as of December 31, 2017 and 2016, respectively. LIFO costs exceeded replacement costs by $157.3 million and $132.0 million at December 31, 2017 and 2016, respectively.

Fair value of financial instruments:

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

•	Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

•	Level 2 – Inputs other than quoted prices in active markets included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•	Level 3 – Unobservable inputs for the asset or liability.

See Note 2 for further information concerning the Company’s financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis.

Property and equipment:

Property and equipment are carried at cost. Depreciation is calculated using the straight-line method, generally over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease term includes renewal options determined by management at lease inception, for which failure to execute renewal options would result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is recognized in the Company’s Consolidated Statements of Income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

Notes receivable:

Historically, the Company has utilized notes receivable from supplier and other third parties; however, during the year ended December 31, 2016, the notes receivable from suppliers and other third parties were dissolved, in connection with new supplier contracts, and during the years ended December 31, 2017 and 2016, no new notes receivable arrangements were entered into.

Goodwill and other intangibles:

The accompanying Consolidated Balance Sheets at December 31, 2017 and 2016, include goodwill and other intangible assets recorded as the result of acquisitions. The Company reviews goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. During 2017 and 2016, the goodwill impairment test included a quantitative assessment, which compared the fair value of the reporting unit to its carrying amount, including goodwill. The Company operates as a single reporting unit, and the Company determined that its fair value exceeded its carrying value, including goodwill, as of December 31, 2017 and 2016; as such, no goodwill impairment adjustment was required as of December 31, 2017 and 2016. Finite-lived intangibles are carried at cost and amortization is calculated using the straight-line method, generally over the estimated useful lives of the intangibles.

Impairment of long-lived assets:

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than the carrying value of the assets, the Company measures the amount of impairment loss as the amount, by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not historically recorded any material impairment charges to its long-lived assets and the Company did not record a material impairment charge to its long-lived assets during the year ended December 31, 2017 or 2016.

Valuation of investments:

The Company has an unsecured obligation to pay, in the future, the value of deferred compensation and a Company match relating to employee participation in the Company’s nonqualified deferred compensation plan (the “Deferred Compensation Plan”). See Note 9 for further information concerning the Company’s benefit plans. The future obligation is adjusted to reflect the performance, whether positive or negative, of selected investment measurement options, chosen by each participant. The Company invests in various marketable securities with the intention of selling these securities to fulfill its future obligations under the Deferred Compensation Plan. The investments in this plan were stated at fair value based on quoted market prices, were accounted for as trading securities and were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016. See Note 2 for further information concerning the fair value measurements of the Company’s marketable securities.

Self-insurance reserves:

The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure. The Company estimates its self-insurance liabilities by considering a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value, using a credit-adjusted discount rate.

The following table identifies the components of the Company’s self-insurance reserves as of December 31, 2017 and 2016 (in thousands):

	December 31,
	2017				2016
Self-insurance reserves (undiscounted)	$	147,664			$	138,687
Self-insurance reserves (discounted)	137,970				129,437

The current portion of the Company’s discounted self-insurance reserves totaled $71.7 million and $67.9 million as of December 31, 2017 and 2016, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidate Balance Sheets as of December 31, 2017 and 2016. The remainder was included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016.

Warranties:

The Company offers warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. See Note 7 for further information concerning the Company’s aggregate product warranty liabilities.

Litigation reserves:

O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company records reserves 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 reserves 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 reserves, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period. See Note 14 for further information concerning the Company’s litigation reserves.

Share repurchases:

In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying Consolidated Balance Sheets. See Note 8 for further information concerning the Company’s share repurchase program.

Revenue recognition:

Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional service provider customers, also referred to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at the customer’s place of business. Wholesale sales to other retailers, also referred to as “jobber sales,” are recorded upon shipment of the merchandise from a regional DC with same-day delivery to the jobber customer’s location. Internet retail sales are recorded when the merchandise is shipped or when the merchandise is picked up in a store. All sales are recorded net of estimated returns allowances, discounts and taxes.

The Company maintains a retail loyalty program named O’Reilly O’Rewards, designed to build brand recognition. The program allows a retail customer to enroll at no charge, does not impose a membership fee and provides members with the ability to earn loyalty points by making qualifying purchases at the Company’s stores. Upon reaching established thresholds, the members are automatically issued coupons, which expire 90 days after issuance, have no cash value and may be redeemed for most items in the Company’s stores with a total purchase price equal to or greater than the value of the coupon. Points accrued in a member’s account, which have not been awarded to the member with a coupon, expire 12 months after the date that they were earned. The Company records a deferred revenue liability, based on a breakage adjusted estimated redemption rate, and a corresponding reduction in revenue in periods when loyalty points are earned by members. The Company recognizes revenue and a corresponding reduction to the deferred revenue liability in periods when loyalty program issued coupons are redeemed by members.

As of December 31, 2017 and 2016, the Company had recorded a deferred revenue liability of $4.7 million and $4.8 million, respectively, related to its loyalty program, which were included in “Other liabilities” in the accompanying Consolidated Balance Sheets. During the year ended December 31, 2017 and 2016, the Company recognized $17.6 million and $12.7 million, respectively, of deferred revenue related to its loyalty program.

Cost of goods sold and selling, general and administrative expenses:

The following table illustrates the primary costs classified in each major expense category:

Cost of goods sold, including warehouse and distribution expenses		Selling, general and administrative expenses
Total cost of merchandise sold, including:		Payroll and benefit costs for store and corporate Team Members
Freight expenses associated with acquiring merchandise and with moving merchandise inventories from the Company’s distribution centers to the stores		Occupancy costs of store and corporate facilities
Defective merchandise and warranty costs		Depreciation and amortization related to store and corporate assets
Supplier allowances and incentives, including:		Vehicle expenses for store delivery services
Allowances that are not reimbursements for specific, incremental and identifiable costs		Self-insurance costs
Cash discounts on payments to suppliers		Closed store expenses
Costs associated with the Company’s supply chain, including:		Other administrative costs, including:
Payroll and benefit costs		Accounting, legal and other professional services
Warehouse occupancy costs		Bad debt, banking and credit card fees
Transportation costs		Supplies
Depreciation		Travel
Inventory shrinkage		Advertising costs

Operating leases:

The Company recognizes rent expense on a straight-line basis over the lease terms of its stores, DCs and corporate offices. Generally, the lease term for stores and corporate offices is the base lease term and the lease term for DCs includes the base lease term plus certain renewal option periods, for which renewal is reasonably assured and failure to exercise the renewal option would result in a significant economic penalty. The Company’s policy is to amortize leasehold improvements associated with the Company’s operating leases over the lesser of the lease term or the estimated economic life of those assets. See Note 6 for further information concerning the Company’s operating leases.

Advertising expenses:

Advertising expense consists primarily of expenses related to the Company’s integrated marketing program, which includes television, radio, direct mail and newspaper distribution, in-store and online promotions, and sports and event sponsorships. The Company expenses advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its suppliers. Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the advertising program, specific

to the product or event and identifiable for accounting purposes, total $83.7 million, $83.0 million and $79.3 million for the years ended December 31, 2017, 2016 and 2015, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

Share-based compensation and benefit plans:

The Company sponsors employee share-based benefit plans and employee and director share-based compensation plans. The Company recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the date of the grant, award or issuance. Share-based plans include stock option awards issued under the Company’s employee incentive plans and director stock plan, stock issued through the Company’s employee stock purchase plan and restricted stock awarded to employees and directors through other compensation plans. See Note 9 for further information concerning the Company’s share-based compensation and plans.

Pre-opening expenses:

Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income as incurred. Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are included in “Cost of goods sold, including warehouse and distribution expenses” on the accompanying Consolidated Statements of Income as incurred.

Interest expense:

The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average interest rates incurred on its long-term borrowings. Total interest costs capitalized for the years ended December 31, 2017, 2016 and 2015, were $8.5 million, $7.9 million and $7.4 million, respectively, which were included in “Interest expense” on the accompanying Consolidated Statements of Income.

In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs, including debt registration fees, accounting and legal fees and underwriter and book runner fees. Debt issuance costs related to the Company’s long-term unsecured senior notes are recorded as a reduction of the principal amount of the corresponding unsecured senior notes. Debt issuance costs related to the Company’s unsecured revolving credit facility are recorded as an asset. These debt issuance costs have been deferred and are being amortized over the term of the corresponding debt instrument and the amortization expense is included in “Interest expense” on the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled $15.9 million and $10.6 million, net of accumulated amortization, as of December 31, 2017 and 2016, respectively, of which $2.0 million and $0.7 million were included in “Other assets, net” as of December 31, 2017 and 2016, respectively, with the remainder included in “Long-term debt” on the accompanying Consolidated Balance Sheets.

The Company issued its long-term unsecured senior notes at a discount. The original issuance discount on the senior notes is recorded as a reduction of the principal amount due for the corresponding senior notes and is accreted over the term of the applicable senior note, with the accretion expense included in “Interest expense” on the accompanying Consolidated Statements of Income. Original issuance discounts, net of accretion, totaled $3.7 million and $3.1 million as of December 31, 2017 and 2016, respectively.

See Note 5 for further information concerning debt issuance costs and original issuance discounts associated with the Company’s issuances of long-term debt instruments.

Income taxes:

The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on differences between the GAAP basis and tax basis of assets and liabilities using enacted tax rules and rates currently scheduled to be in effect for the year in which the differences are expected to reverse. Tax carry forwards are also recognized in deferred tax assets and liabilities under this method. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date. The Company would record a valuation allowance against deferred tax assets to the extent it is more likely than not the amount will not be realized, based upon evidence available at the time of the determination and any change in the valuation allowance is recorded in the period of a change in such determination.

The Company did not establish a valuation allowance for deferred tax assets as of December 31, 2017 and 2016, as it was considered more likely than not that deferred tax assets were realizable through a combination of future taxable income, the realization of deferred tax liabilities and tax planning strategies. The Company regularly reviews its potential tax liabilities for tax years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. In management’s opinion, adequate provisions for income taxes have been made for all years presented. The estimates of the Company’s potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated with the Company’s various tax positions and actual results could differ from estimates. See Note 12 for further information concerning the Company’s income taxes.

Earnings per share:

Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding plus the common stock equivalents associated with the potential impact of dilutive stock options. Certain common stock equivalents that could potentially dilute basic earnings per share in the future were not included in the fully diluted computation because they would have been antidilutive. Generally, stock options are antidilutive and excluded from the earnings per share calculation when the exercise price exceeds the market price of the common shares. See Note 13 for further information concerning the Company’s common stock equivalents.

New accounting pronouncements:

In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity is required to follow a five-step process to determine the amount of revenue to recognize when promised goods or services are transferred to customers. ASU 2014-09 offers specific accounting guidance for costs to obtain or fulfill a contract with a customer. In addition, an entity is required to disclose sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August of 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), to defer the effective date of ASU 2014-09 by one year. For public companies, ASU 2015-14 changes ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. These ASUs can be adopted retrospectively or as a cumulative-effective adjustment at the date of adoption. The Company has substantially completed its evaluation of the impact of the adoption of ASU 2014-09, and the Company will adopt this guidance beginning with its first quarter ending March 31, 2018, using the modified retrospective transition method. Results for annual reporting periods beginning after December 31, 2017, will be presented under ASU 2014-09, while prior period amounts will not be adjusted and will continue to be reported under the accounting standards in effect for the prior periods. The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts to its customers, and generally, the Company’s performance obligations are satisfied immediately when the parts are delivered to the customer, which normally occurs the same day the customer orders the part. As such, the adoption of the new standard will not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows; further, the Company does not expect significant changes to its business process, internal controls or systems as a result of adopting ASU 2014-09.

In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The Company has established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the new guidance, all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force has not completed its full evaluation; however, the Company believes the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on the Company’s consolidated balance sheets.

In March of 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, several aspects of the accounting for share-based payment transactions, including tax consequence, classification of awards as equity or liabilities, and classification on the statement of cash flows, were changed. The Company adopted this guidance with its first quarter ending March 31, 2017. Upon adoption of ASU 2016-09, the Company elected to change its accounting policy to account for forfeitures as they occur; this change was applied using the modified retrospective transition method with a cumulative effect adjustment of $0.3 million to opening “Retained earnings” on the accompanying Consolidated Balance Sheet as of December 31, 2017. The Company applied the amendments related to the presentation of tax withholdings on the statements of cash flows using the retrospective transition method, which resulted in $0.6 million and $0.9 million of tax withholdings being reclassified from “Net cash provided by operating activities” to “Net cash used in financing activities” on the accompanying Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015, respectively. The Company elected to apply the amendments related to the presentation of excess tax benefits on the statements of cash flows using the retrospective transition method, which resulted in $56.0 million and $63.1 million of excess tax benefits related to share-based compensation being reclassified from “Net cash used in financing activities” to “Net cash provided by operating activities” in the accompanying Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015, respectively. ASU 2016-09 amendments related to accounting

for excess tax benefits in the income statement have been adopted prospectively, resulting in the reduction of $48.7 million in “Provision for income taxes” in the accompanying Consolidated Statement of Income for the year ended December 31, 2017, which lowered the Company’s effective tax rate, increased dilutive shares outstanding and increased diluted earnings per share for the year ended December 31, 2017, by $0.50.

In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2020. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In August of 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice for eight specific parts on cash flow statement presentation and classification: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. For public companies, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In January of 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 revises the definition of a business in the Accounting Standards Codification and clarifies the guidance for determining whether the purchase or disposal of an asset or group of assets qualifies as the purchase or disposal of a business. For public companies, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted with certain conditions. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In January of 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step in the previous process for goodwill impairment testing; instead, the test is now a one-step process that calls for goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. For public companies, ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires prospective adoption, with early adoption after January 1, 2017. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In May of 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarity and reduces both the diversity in practice and cost and complexity when applying stock compensation guidance to a change to the terms or conditions of a share-based payment award. For public companies, ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. 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.

NOTE 2 – FAIR VALUE MEASUREMENTS

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

The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016. The Company recorded an increase in fair value related to its marketable securities in the amounts of $3.6 million and $1.9 million for the years ended December 31, 2017 and 2016, respectively, which were included in “Other income (expense)” on the accompanying 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 December 31, 2017 and 2016 (in thousands):

	December 31, 2017
	Quoted Prices in Active Markets for Identical Instruments (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Marketable securities	$	25,706			$	—			$	—			$	25,706

	December 31, 2016
	Quoted Prices in Active Markets for Identical Instruments (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Marketable securities	$	20,462			$	—			$	—			$	20,462

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

Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. These non-financial assets and liabilities may include assets acquired in a business combination or property and equipment that are determined to be impaired. As of December 31, 2017 and 2016, the Company did not have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.

Fair value of financial instruments:

The carrying amounts of the Company’s senior notes and unsecured revolving credit facility borrowings are included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016. See Note 5 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 values as of December 31, 2017 and 2016, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

	December 31, 2017								December 31, 2016
	Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Senior Notes	$	2,632,390			$	2,728,167			$	1,887,019			$	1,977,510

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

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

NOTE 3 – PROPERTY AND EQUIPMENT

The following table identifies the types and balances of property and equipment included in “Property and equipment, at cost” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):

	Original Useful Lives		December 31, 2017				December 31, 2016
Land			$	695,669			$	648,689
Buildings and building improvements	15 – 39 years		1,968,079				1,805,347
Leasehold improvements	3 – 25 years		626,714				593,785
Furniture, fixtures and equipment	3 – 20 years		1,250,690				1,215,929
Vehicles	5 – 10 years		392,130				359,362
Construction in progress			257,853				209,230
Total property and equipment			5,191,135				4,832,342
Less: accumulated depreciation and amortization			1,847,329				1,708,911
Net property and equipment			$	3,343,806			$	3,123,431

The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $232.7 million, $217.0 million and $203.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

NOTE 4 – GOODWILL AND OTHER INTANGIBLES

Goodwill:

Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in business conditions indicate that impairment may exist. Goodwill is not amortizable for financial statement purposes. The Company did not record any goodwill impairment during the years ended December 31, 2017 or 2016.

The carrying amount of the Company’s goodwill was included in “Goodwill” on the accompanying Consolidate Balance Sheets as of December 31, 2017 and 2016. During the year ended December 31, 2017 and 2016, the Company recorded an increase in goodwill of $3.7 million and $28.3 million, respectively, resulting from small acquisitions.

The following table identifies the changes in goodwill for the years ended December 31, 2017 and 2016 (in thousands):

	2017				2016
Goodwill, balance at January 1,	$	785,399			$	757,142
Change in goodwill	3,659				28,257
Goodwill, balance at December 31,	$	789,058			$	785,399

As of December 31, 2017 and 2016, other than goodwill, the Company did not have any indefinite-lived intangible assets.

Intangibles other than goodwill:

The following table identifies the components of the Company’s amortizable intangibles as of December 31, 2017 and 2016 (in thousands):

	Cost of Amortizable Intangibles								Accumulated Amortization (Expense) Benefit								Net Amortizable Intangibles
	December 31, 2017				December 31, 2016				December 31, 2017				December 31, 2016				December 31, 2017				December 31, 2016
Amortizable intangible assets:
Favorable leases	$	22,500			$	27,960			$	(14,495	)		$	(18,104	)		$	8,005			$	9,856
Non-compete agreements	1,851				1,887				(464		)		(414		)		1,387				1,473
Total amortizable intangible assets	$	24,351			$	29,847			$	(14,959	)		$	(18,518	)		$	9,392			$	11,329
Unfavorable leases	$	14,470			$	19,950			$	11,853			$	15,840			$	2,617			$	4,110

During the years ended December 31, 2017 and 2016, the Company recorded non-compete agreement assets in conjunction with small acquisitions in the amounts of $0.2 million and $1.1 million, respectively.

The Company recorded favorable lease assets in conjunction with a previous acquisition; these favorable lease assets represent the values of operating leases acquired with favorable terms. These favorable leases had an estimated weighted-average remaining useful life of approximately 8.8 years as of December 31, 2017. For the years ended December 31, 2017, 2016 and 2015, the Company recorded amortization expense of $1.6 million, $2.1 million and $2.7 million, respectively, related to its amortizable intangible assets, which were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016.

The Company recorded unfavorable lease liabilities in conjunction with a previous acquisition; these unfavorable lease liabilities represent the values of operating leases acquired with unfavorable terms. These unfavorable leases had an estimated weighted-average remaining useful life of approximately 3.3 years as of December 31, 2017. For the years ended December 31, 2017, 2016 and 2015, the Company recognized an amortized benefit of $1.5 million, $2.1 million and $2.8 million, respectively, related to these unfavorable operating leases, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016.

The following table identifies the estimated amortization expense and benefit of the Company’s intangibles for each of the next five years as of December 31, 2017 (in thousands):

	December 31, 2017
	Amortization Expense				Amortization Benefit				Total Amortization Expense
2018	$	(1,622	)		$	923			$	(699	)
2019	(1,405		)		713				(692		)
2020	(1,228		)		541				(687		)
2021	(1,001		)		389				(612		)
2022	(883		)		51				(832		)
Total	$	(6,139	)		$	2,617			$	(3,522	)

NOTE 5 – FINANCING

The following table identifies the amounts of the Company’s financing facilities, which were included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016 (in thousands):

	December 31,
	2017				2016
Revolving Credit Facility, weighted-average variable interest rate of 2.675%	$	346,000			$	—
$500 million, 4.875% Senior Notes due 2021(1), effective interest rate of 4.956%	497,565				496,758
$300 million, 4.625% Senior Notes due 2021(2), effective interest rate of 4.645%	298,961				298,679
$300 million, 3.800% Senior Notes due 2022(3), effective interest rate of 3.845%	298,214				297,868
$300 million, 3.850% Senior Notes due 2023(4), effective interest rate of 3.851%	298,583				298,355
$500 million, 3.550% Senior Notes due 2026(5), effective interest rate of 3.570%	495,792				495,359
$750 million, 3.600% Senior Notes due 2027(6), effective interest rate of 3.619%	743,275				—
Long-term debt	$	2,978,390			$	1,887,019

(1)	Net of unamortized discount of $1.1 million and $1.4 million as of December 31, 2017 and 2016, respectively, and debt issuance costs of $1.4 million and $1.8 million as of December 31, 2017 and 2016, respectively.

(2)	Net of unamortized discount of $0.2 million and $0.2 million as of December 31, 2017 and 2016, respectively, and debt issuance costs of $0.8 million and $1.1 million as of December 31, 2017 and 2016, respectively.

(3)	Net of unamortized discount of $0.6 million and $0.7 million as of December 31, 2017 and 2016, respectively, and debt issuance costs of $1.2 million and $1.5 million as of December 31, 2017 and 2016, respectively.

(4)	Net of unamortized discount of less than $0.1 million as of December 31, 2017 and 2016, and debt issuance costs of $1.4 million and $1.6 million as of December 31, 2017 and 2016, respectively.

(5)	Net of unamortized discount of $0.7 million and $0.8 million as of December 31, 2017 and 2016, respectively, and debt issuance costs of $3.5 million and $3.9 million as of December 31, 2017 and 2016, respectively.

(6)	Net of unamortized discount of $1.2 million as of December 31, 2017, and debt issuance costs of $5.6 million as of December 31, 2017.

The following table identifies the principal maturities of the Company’s financing facilities as of December 31, 2017 (in thousands):

	Scheduled Maturities
2018	$	—
2019	—
2020	—
2021	800,000
2022	646,000
Thereafter	1,550,000
Total	$	2,996,000

Unsecured revolving credit facility:

On April 5, 2017, the Company entered into a new credit agreement (the “Credit Agreement”). The new 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 new 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 new 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.

In conjunction with the closing of the new Credit Agreement, the Company’s previous credit agreement, which was originally entered into on January 14, 2011, as amended, was terminated (the “Terminated Credit Agreement”), and all outstanding loans and commitments, including the guarantees of each of the subsidiary guarantors, under the Terminated Credit Agreement were terminated and replaced by the loans and commitments under the new Credit Agreement. None of the Company’s subsidiaries are guarantors or obligors under the new Credit Agreement.

As of December 31, 2017 and 2016, 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 $36.8 million and $38.7 million, respectively, reducing the aggregate availability under the Revolving Credit Facility by those amounts.

Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company’s option, at either an Alternate Base Rate or an Adjusted LIBO Rate (both as defined in the new 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 new Credit Agreement in an amount equal to a percentage of such commitments. The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions. As of December 31, 2017, 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 new 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 new 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 new Credit Agreement and litigation from lenders. As of December 31, 2017, the Company remained in compliance with all covenants under the new Credit Agreement.

Senior notes:

On August 17, 2017, the Company issued $750 million aggregate principal amount of unsecured 3.600% Senior Notes due 2027 (“3.600% Senior Notes due 2027”) at a price to the public of 99.840% of their face value with UMB Bank, N.A. (“UMB”) as trustee. Interest on the 3.600% Senior Notes due 2027 is payable on March 1 and September 1 of each year, beginning on March 1, 2018, and is computed on the basis of a 360-day year.

The Company has issued a cumulative $2.7 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2027, with UMB as trustee. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year. Each of the senior notes is subject to certain customary covenants, with which the Company complied as of December 31, 2017.

In connection with entering into the Credit Agreement (under which none of the Company’s subsidiaries are guarantors or obligors), and upon termination of the Terminated Credit Agreement, the guarantees by the Company’s subsidiary guarantors with respect to all of the Company’s then outstanding senior notes were automatically released in accordance with the terms of the respective indentures governing these senior notes. The 3.600% Senior Notes due 2027 also are not guaranteed by any of the Company’s subsidiaries.

NOTE 6 – LEASING

The following table identifies the future minimum lease payments under all of the Company’s operating leases for each of the next five years and in the aggregate as of December 31, 2017 (in thousands):

	December 31, 2017
	Related Parties				Non-Related Parties				Total
2018	$	4,663			$	288,654			$	293,317
2019	3,210				274,694				277,904
2020	2,389				255,376				257,765
2021	1,922				227,392				229,314
2022	1,164				203,028				204,192
Thereafter	4,476				1,100,193				1,104,669
Total	$	17,824			$	2,349,337			$	2,367,161

See Note 11 for further information concerning the Company’s related party operating leases.

Operating lease commitments:

The Company leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most of these leases include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or incremental step increase provisions.

The future minimum lease payments under the Company’s operating leases, in the table above, do not include potential amounts for percentage rent or other operating lease related costs and have not been reduced by expected future minimum sublease income. Expected future minimum sublease income under non-cancelable subleases is approximately $15.7 million at December 31, 2017.

The following table summarizes the net rent expense amounts for the years ended December 31, 2017, 2016 and 2015, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in thousands):

	For the Year Ended December 31,
	2017				2016				2015
Minimum operating lease expense	$	289,245			$	273,559			$	263,479
Contingent rents	1,049				892				947
Other lease related occupancy costs	12,478				13,241				12,852
Total rent expense	302,772				287,692				277,278
Less: sublease income	4,158				4,439				4,019
Net rent expense	$	298,614			$	283,253			$	273,259

NOTE 7 – WARRANTIES

The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31, 2017 and 2016 (in thousands):

	2017				2016
Warranty liabilities, balance at January 1,	$	36,623			$	35,223
Warranty claims	(79,660		)		(73,925		)
Warranty accruals	87,435				75,325
Warranty liabilities, balance at December 31,	$	44,398			$	36,623

NOTE 8 – SHARE REPURCHASE PROGRAM

In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at

prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 10, 2017, September 1, 2017, and February 7, 2018, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a cumulative authorization amount of $10.8 billion. Each additional authorization is effective for a three-year period, beginning on its respective announcement date.

The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly announced share repurchase program (in thousands, except per share data):

	For the Year Ended December 31,
	2017				2016
Shares repurchased	9,301				5,698
Average price per share	$	233.57			$	264.21
Total investment	$	2,172,437			$	1,505,371

As of December 31, 2017, the Company had $715.4 million remaining under its share repurchase program. Subsequent to the end of the year and through February 28, 2018, the Company repurchased an additional 1.1 million shares of its common stock under its share repurchase program, at an average price of $255.48, for a total investment of $289.9 million. The Company has repurchased a total of 67.4 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through February 28, 2018, at an average price of $138.38, for a total aggregate investment of $9.3 billion.

NOTE 9 – SHARE-BASED COMPENSATION AND BENEFIT PLANS

The Company recognizes share-based compensation expense based on the fair value of the grants, awards or shares at the time of the grant, award or issuance. Share-based compensation includes stock option awards issued under the Company’s employee incentive plans and director stock plan, restricted stock awarded under the Company’s employee incentive plans and director stock plan and stock issued through the Company’s employee stock purchase plan.

The table below identifies the shares that have been authorized for issuance and the shares available for future issuance under the Company plans, as of December 31, 2017 (in thousands):

		December 31, 2017
Plans		Total Shares Authorized for Issuance under the Plans			Shares Available for Future Issuance under the Plans
Employee Incentive Plans		34,000			5,834
Director Stock Plan		1,000			263
Performance Incentive Plan		650			370
Employee Stock Purchase Plans		4,250			646
Profit Sharing and Savings Plan		4,200			349

Stock options:

The Company’s employee incentive plans provide for the granting of stock options for the purchase of common stock of the Company to certain key employees of the Company. Employee stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant. Employee stock options granted under the plans expire after ten years and typically vest 25% per year, over four years. The Company records compensation expense for the grant date fair value of the option awards evenly over the vesting period or minimum required service period.

The table below identifies the employee stock option activity under these plans during the year ended December 31, 2017:

	Shares (in thousands)			Weighted-Average Exercise Price				Average Remaining Contractual Terms		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016	2,789			$	105.11
Granted	282			251.26
Exercised	(674	)		48.58
Forfeited or expired	(33	)		215.46
Outstanding at December 31, 2017	2,364			$	137.08			5.3 Years		$	244,562
Vested or expected to vest at December 31, 2017	2,319			$	135.11			5.2 Years		$	244,492
Exercisable at December 31, 2017	1,571			$	85.00			3.8 Years		$	244,360

The Company’s director stock plan provides for the granting of stock options for the purchase of common stock of the Company to directors of the Company. Director stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant. Director stock options granted under the plans expire after seven years and vest fully after six months. The Company records compensation expense for the grant date fair value of the option awards evenly over the vesting period or minimum required service period.

The table below identifies the director stock option activity under this plan during the year ended December 31, 2017:

	Shares (in thousands)			Weighted-Average Exercise Price				Average Remaining Contractual Terms			Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016	11			$	48.31
Granted	—			—
Exercised	(11	)		48.31
Forfeited	—			—
Outstanding at December 31, 2017	—			$	—			—			$	—
Vested or expected to vest at December 31, 2017	—			$	—			—			$	—
Exercisable at December 31, 2017	—			$	—			—			$	—

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 years ended December 31, 2017, 2016 and 2015:

	December 31,
	2017			2016			2015
Risk free interest rate	1.98	%		1.44	%		1.52	%
Expected life	5.4 Years			5.5 Years			5.7 Years
Expected volatility	22.4	%		22.3	%		22.3	%
Expected dividend yield	—	%		—	%		—	%

Upon adoption of the new share-based compensation accounting standard, ASU 2016-09, during the three months ended March 31, 2017, the Company elected to change its accounting policy to account for forfeitures as they occur; this change resulted in the calculation for

forfeitures for the years ended December 31, 2016 and 2015, not being altered or restated. Prior to the year ended December 31, 2017, the Company’s forfeiture rate was the estimated percentage of options awarded that were expected to be forfeited or canceled prior to becoming fully vested, and the estimate was evaluated periodically and was based upon historical experience at the time of evaluation and reduced expense ratably over the vesting period or the minimum required service period. See Note 1 for further information concerning the Company’s adoption of ASU 2016-09.

The following table summarizes activity related to stock options awarded by the Company for the years ended December 31, 2017, 2016 and 2015:

	For the Year Ended December 31,
	2017				2016				2015
Compensation expense for stock options awarded (in thousands)	$	15,561			$	15,404			$	18,209
Income tax benefit from compensation expense related to stock options (in thousands)	5,934				5,753				6,811
Total intrinsic value of stock options exercised (in thousands)	135,533				157,115				169,248
Cash received from exercise of stock options (in thousands)	33,229				47,394				105,822
Weighted-average grant-date fair value of options awarded	$	62.79			$	63.42			$	51.56
Weighted-average remaining contractual life of exercisable options	3.8 Years				3.9 Years				4.2 Years

At December 31, 2017, the remaining unrecognized compensation expense related to unvested stock option awards was $26.8 million, and the weighted-average period of time, over which this cost will be recognized, is 2.5 years.

Restricted stock:

The Company’s performance incentive plans provide for the award of shares of restricted stock to its corporate and senior management that vest evenly over a three-year period and are held in escrow until such vesting has occurred. Generally, unvested shares are forfeited when an employee ceases employment. The fair value of shares awarded under these plans is based on the closing market price of the Company’s common stock on the date of award and compensation expense is recorded over the minimum required service period.

The table below identifies the employee restricted stock activity under these plans during the year ended December 31, 2017 (in thousands, except per share data):

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2016	3			$	204.33
Granted during the period	1			256.69
Vested during the period (1)	(1	)		182.10
Forfeited during the period	—			—
Non-vested at December 31, 2017	3			$	244.06

(1)	Includes less than one thousand shares withheld to cover employees’ taxes upon vesting.

The Company’s director stock plan provides for the award of shares of restricted stock to the directors of the Company that vest evenly over a three-year period and are held in escrow until such vesting has occurred. Unvested shares are forfeited when a director ceases their service on the Company’s Board of Directors for reasons other than death or retirement. The fair value of shares awarded under this plan is based on the closing market price of the Company’s common stock on the date of award, and compensation expense is recorded evenly over the vesting period.

The table below identifies the director restricted stock activity under this plan during the year ended December 31, 2017 (in thousands, except per share data):

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2016	6			$	222.77
Granted during the period	3			252.45
Vested during the period	(4	)		200.81
Forfeited during the period	—			—
Non-vested at December 31, 2017	5			$	250.85

The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2017, 2016 and 2015 (in thousands, except per share data):

	For the Year Ended December 31,
	2017				2016				2015
Compensation expense for restricted shares awarded	$	1,628			$	1,293			$	1,625
Income tax benefit from compensation expense related to restricted shares	$	621			$	483			$	610
Total fair value of restricted shares at vest date	$	1,202			$	2,384			$	3,284
Shares awarded under the plans	4				4				4
Weighted-average grant-date fair value of shares awarded under the plans	$	253.78			$	264.24			$	208.56

At December 31, 2017, the remaining unrecognized compensation expense related to unvested restricted share awards was $0.3 million, and the weighted-average period of time, over which this cost will be recognized, is 0.1 years.

Employee stock purchase plan:

The Company’s employee stock purchase plan (the “ESPP”) permits eligible employees to purchase shares of the Company’s common stock at 85% of the fair market value. Employees may authorize the Company to withhold up to 5% of their annual salary to participate in the plan. The fair value of shares issued under the ESPP is based on the average of the high and low market prices of the Company’s common stock during the offering periods. Compensation expense is recognized based on the discount between the grant-date fair value and the employee purchase price for the shares sold to employees.

The table below summarizes activity related to the Company’s ESPP for the years ended December 31, 2017, 2016 and 2015 (in thousands, except per share data):

	For the Year Ended December 31,
	2017				2016				2015
Compensation expense for shares issued under the ESPP	$	2,212			$	2,162			$	2,065
Income tax benefit from compensation expense for shares issued under the ESPP	$	844			$	807			$	773
Shares issued under the ESPP	64				54				60
Weighted-average price of shares issued under the ESPP	$	196.72			$	227.12			$	195.04

Profit sharing and savings plan:

The Company sponsors a contributory profit sharing and savings plan (the “401(k) Plan”) that covers substantially all employees who are at least 21 years of age and have completed one year of service. The Company makes matching contributions equal to 100% of the first 2% of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed. An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. The Company may also make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The Company did not make any discretionary contributions to the 401(k) Plan during the years ended December 31, 2017, 2016 or 2015. The Company expensed matching contributions under the 401(k) Plan in the amounts of $22.6 million, $20.6 million and $18.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

Nonqualified deferred compensation plan:

The Company sponsors a nonqualified deferred compensation plan (the “Deferred Compensation Plan”) for highly compensated employees whose contributions to the 401(k) Plan are limited due to the application of the annual limitations under the Internal Revenue Code. The Deferred Compensation Plan provides these employees with the opportunity to defer the full 6% of matched compensation, including salary and incentive based compensation, that was precluded under the Company’s 401(k) Plan, which is then matched by the Company using the same formula as the 401(k) Plan. An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The Company has an unsecured obligation to pay, in the future, the value of the deferred compensation and Company match, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. The liability for compensation deferred under the Deferred Compensation Plan was $25.7 million and $20.5 million as of December 31, 2017 and 2016, respectively, which were included in “Other liabilities” on the Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amount of $0.1 million for each of the years ended December 31, 2017, 2016 and 2015, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

NOTE 10 – COMMITMENTS

Construction commitments:

As of December 31, 2017, the Company had construction commitments in the amount of $54.4 million.

Letters of credit commitments:

As of December 31, 2017, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of $36.8 million. See Note 5 for further information concerning the Company’s letters of credit commitments.

Debt financing commitments:

The Company’s senior notes are redeemable in whole, at any time, or in part, from time to time, at the Company’s option upon not less than 30 nor more than 60 days notice at a redemption price, plus any accrued and unpaid interest to, but not including the redemption date, equal to the greater of (i) 100% of the principal amount thereof or (ii) the sum of the present value of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semiannual basis at the applicable Treasury Yield plus basis points identified in the indentures governing the notes. In addition, if at any time the Company undergoes a Change of Control Triggering Event, as defined in the indentures governing the notes, the holders may require the Company to repurchase all or a portion of their senior notes at a price equal to 101% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, but not including the repurchase date. See Note 5 for further information concerning the Company’s debt financing commitments.

Self-insurance reserves:

The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure to this obligation.

NOTE 11 – RELATED PARTIES

The Company leases certain land and buildings related to 75 of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating lease agreements with entities, in which certain of the Company’s affiliated directors, or members of an affiliated director’s immediate family are affiliated. Generally, these lease agreements provide for renewal options for an additional five years at the option of the Company and the lease agreements are periodically modified to further extend the lease term for specific stores under the agreements. Lease payments under these operating leases totaled $4.6 million, $4.5 million and $4.5 million during the years ended December 31, 2017, 2016 and 2015, respectively. The Company believes that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties. See Note 6 for further information concerning the Company’s operating leases.

NOTE 12 – INCOME TAXES

Deferred income tax assets and liabilities:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.

The following table identifies significant components of the Company’s net deferred tax liabilities included in “Deferred income taxes” on the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016 (in thousands):

	December 31,
	2017				2016
Deferred tax assets:
Allowance for doubtful accounts	$	1,885			$	2,686
Tax credits	7,179				9,363
Other accruals	97,247				153,955
Net operating losses	346				304
Other	14,784				19,870
Total deferred tax assets	121,441				186,178
Deferred tax liabilities:
Inventories	55,965				76,694
Property and equipment	122,354				157,228
Other	28,528				42,422
Total deferred tax liabilities	206,847				276,344
Net deferred tax liabilities	$	(85,406	)		$	(90,166	)

Provision for income taxes:

The following tables reconcile the amounts included in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 (in thousands):

	For the Year Ended December 31, 2017
	Current				Deferred				Total
Federal income tax expense (benefit)	$	467,577			$	(13,053	)		$	454,524
State income tax expense	41,183				8,293				49,476
Net income tax expense (benefit)	$	508,760			$	(4,760	)		$	504,000

	For the Year Ended December 31, 2016
	Current				Deferred				Total
Federal income tax expense	$	540,090			$	7,558			$	547,648
State income tax expense	49,016				2,836				51,852
Net income tax expense	$	589,106			$	10,394			$	599,500

	For the Year Ended December 31, 2015
	Current				Deferred				Total
Federal income tax expense (benefit)	$	504,558			$	(21,973	)		$	482,585
State income tax expense (benefit)	47,242				(677		)		46,565
Net income tax expense (benefit)	$	551,800			$	(22,650	)		$	529,150

The following table outlines the reconciliation of the “Provision for income taxes” amounts included on the accompanying Consolidated Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2017, 2016 and 2015 (in thousands):

	For the Year Ended December 31,
	2017				2016				2015
Federal income taxes at statutory rate	$	573,231			$	573,020			$	511,128
State income taxes, net of federal tax benefit	39,062				35,285				32,137
Excess tax benefit from share-based compensation	(48,688		)		—				—
Revaluation of deferred tax liability	(53,240		)		—				—
Other items, net	(6,365		)		(8,805		)		(14,115		)
Total provision for income taxes	$	504,000			$	599,500			$	529,150

As a result of the adoption of the required, new share-based compensation accounting standard, ASU 2016-09, during the three months ended March 31, 2017, the excess tax benefit associated with the exercise of non-qualified stock options has been included in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the year ended December 31, 2017. Prior to the year ended December 31, 2017, the excess tax benefit associated with the exercise of non-qualified stock options was included in “Additional paid-in capital” on the accompanying Consolidated Balance Sheets. See Note 1 for further information concerning the Company’s adoption of ASU 2016-09.

The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (“Tax Act”), significantly reduced the federal corporate income tax rate for tax years beginning in 2018, requiring the Company to revalue its deferred income tax liabilities. The Company recorded a one-time tax benefit of $53.2 million in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the year ended December 31, 2017, to reflect the reduced federal corporate income tax rate in the tax years the deferred tax differences are expected to reverse. This provisional tax benefit from the revaluation of the Company’s deferred income tax liabilities was recorded based on the Company’s initial evaluation of the impact of the Tax Act and is subject to change in 2018 as the Company continues to refine, analyze and update the underlying data, computations and assumptions used to prepare this provisional amount during the measurement period.

As of December 31, 2017, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $7.2 million. As of December 31, 2017, the Company had net operating loss carryforwards available for state purposes in the amount of $9.5 million. The Company’s state net operating loss carryforwards generally expire in 2028, and the Company’s tax credits generally expire in 2024.

Unrecognized tax benefits:

The following table summarizes the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2017, 2016 and 2015 (in thousands):

	2017				2016				2015
Unrealized tax benefit, balance at January 1,	$	34,798			$	36,928			$	49,598
Additions based on tax positions related to the current year	6,299				6,116				5,405
Additions based on tax positions related to prior years	—				—				995
Payments related to items settled with taxing authorities	—				(195		)		(4,012		)
Reductions due to the lapse of statute of limitations and settlements	(5,709		)		(8,051		)		(15,058		)
Unrealized tax benefit, balance at December 31,	$	35,388			$	34,798			$	36,928

For the years ended December 31, 2017, 2016 and 2015, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $40.9 million, $40.6 million and $43.6 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2017, 2016 and 2015, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $8.3 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, 2016 and 2015, the Company had accrued approximately $5.5 million, $5.8 million and $6.7 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for interest on state and federal returns. During the years ended December 31, 2017, 2016 and 2015, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.0 million, $2.4 million and $2.8 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2018, the Company expects a reduction of $7.5 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2017, resulting from settlement or expiration of the statute of limitations.

The Company’s United States federal income tax returns for tax years 2015 and beyond remain subject to examination by the Internal Revenue Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2012 and 2013 federal income tax returns in the second quarter of 2015. The statute of limitations for the Company’s federal income tax returns for tax years 2013 and prior expired on September 15, 2017. The statute of limitations for the Company’s U.S. federal income tax return for 2014 will expire on September 15, 2018, unless otherwise extended. The IRS is currently conducting an examination of the Company’s consolidated returns for tax years 2014 and 2015. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2006 through 2016.

NOTE 13 – EARNINGS PER SHARE

The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2017, 2016 and 2015 (in thousands, except per share data):

	For the Year Ended December 31,
	2017				2016				2015
Numerator (basic and diluted):
Net income	$	1,133,804			$	1,037,691			$	931,216
Denominator:
Weighted-average common shares outstanding – basic	88,426				95,447				99,965
Effect of stock options (1)	1,076				1,273				1,549
Weighted-average common shares outstanding – assuming dilution	89,502				96,720				101,514
Earnings per share:
Earnings per share-basic	$	12.82			$	10.87			$	9.32
Earnings per share-assuming dilution	$	12.67			$	10.73			$	9.17
Antidilutive potential common shares not included in the calculation of diluted earnings per share:
Stock options (1)	715				332				245
Weighted-average exercise price per share of antidilutive stock options (1)	$	252.16			$	265.77			$	216.29

(1)	See Note 9 for further information concerning the terms of the Company’s share-based compensation plans.

Subsequent to the end of the year and through February 28, 2018, the Company repurchased 1.1 million shares of its common stock, at an average price of $255.48, for a total investment of $289.9 million.

NOTE 14 – 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 effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.

As previously reported, on June 18, 2015, a jury in Greene County, Missouri, returned an unfavorable verdict in a litigated contract dispute in the matter Meridian Creative Alliance vs. O’Reilly Automotive Stores, Inc. et. al. in the amount of $12.5 million. As previously reported, the verdict was appealed, reversed in part and remanded to the trial court for a new trial. The matter has been set for trial to commence May 7, 2018, in the Circuit Court of Greene County, Missouri. The Company will continue to vigorously defend the matter. As of December 31, 2017, the Company had accrued $18.6 million with respect to this matter.

NOTE 15 – QUARTERLY RESULTS (Unaudited)

The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2017 and 2016. The unaudited quarterly information includes all adjustments, which the Company considers necessary for a fair presentation of the information shown (in thousands, except per share data):

	Fiscal 2017
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Sales	$	2,156,259			$	2,290,829			$	2,339,830			$	2,190,808
Gross profit	1,131,147				1,200,062				1,230,294				1,159,180
Operating income	403,157				457,445				461,963				402,835
Net income	264,934				282,821				283,734				302,315
Earnings per share – basic (1)	$	2.88			$	3.14			$	3.26			$	3.56
Earnings per share – assuming dilution (1)	$	2.83			$	3.10			$	3.22			$	3.52

	Fiscal 2016
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Sales	$	2,096,150			$	2,176,689			$	2,220,955			$	2,099,302
Gross profit	1,097,579				1,127,179				1,170,026				1,114,227
Operating income	418,626				425,061				447,809				407,710
Net income	255,374				257,794				278,493				246,030
Earnings per share – basic (1)	$	2.63			$	2.69			$	2.93			$	2.62
Earnings per share – assuming dilution (1)	$	2.59			$	2.65			$	2.90			$	2.59

(1)	Earnings per share amounts are computed independently for each quarter and annual period. The quarterly earnings per share amounts may not sum to equal the full-year earnings per share amount.

The unaudited operating data presented above should be read in conjunction with the Company’s consolidated financial statements and related notes, and the other financial information included therein.