Item 8. Financial Statements and Supplementary Data

Index
			Page
Management’s Report on Internal Control over Financial Reporting			42
Report of Independent Registered Public Accounting Firm: Internal Control over Financial Reporting			43
Report of Independent Registered Public Accounting Firm: Financial Statements			44
Consolidated Balance Sheets			45
Consolidated Statements of Income			46
Consolidated Statements of Shareholders’ Equity			47
Consolidated Statements of Cash Flows			48
Notes to Consolidated Financial Statements			49

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, 2018. 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, 2018, 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/	Gregory D. Johnson		/s/	Thomas McFall
Gregory D. Johnson			Thomas McFall
Chief Executive Officer and			Executive Vice President and
Co-President			Chief Financial Officer
February 27, 2019			February 27, 2019

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, 2018, 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, 2018, 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, 2018 and 2017, the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 27, 2019, 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 27, 2019

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, 2018 and 2017, the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 27, 2019, 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 27, 2019

Consolidated Balance Sheets

(In thousands, except share data)

	December 31,
	2018				2017
Assets
Current assets:
Cash and cash equivalents	$	31,315			$	46,348
Accounts receivable, less allowance for doubtful accounts $13,238 in 2018 and $12,717 in 2017	192,026				216,251
Amounts receivable from suppliers	78,155				76,236
Inventory	3,193,344				3,009,800
Other current assets	48,262				49,037
Total current assets	3,543,102				3,397,672
Property and equipment, at cost	5,645,552				5,191,135
Less: accumulated depreciation and amortization	2,058,550				1,847,329
Net property and equipment	3,587,002				3,343,806
Goodwill	807,260				789,058
Other assets, net	43,425				41,349
Total assets	$	7,980,789			$	7,571,885
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	3,376,403			$	3,190,029
Self-insurance reserves	77,012				71,695
Accrued payroll	86,520				77,147
Accrued benefits and withholdings	89,082				69,308
Income taxes payable	11,013				—
Other current liabilities	253,990				239,187
Total current liabilities	3,894,020				3,647,366
Long-term debt	3,417,122				2,978,390
Deferred income taxes	105,566				85,406
Other liabilities	210,414				207,677
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 –
79,043,919 as of December 31, 2018, and
84,302,187 as of December 31, 2017	790				843
Additional paid-in capital	1,262,063				1,265,043
Retained deficit	(909,186		)		(612,840		)
Total shareholders’ equity	353,667				653,046
Total liabilities and shareholders’ equity	$	7,980,789			$	7,571,885

See accompanying Notes to consolidated financial statements.

Consolidated Statements of Income

(In thousands, except per share data)

	For the Year Ended December 31,
	2018				2017				2016
Sales	$	9,536,428			$	8,977,726			$	8,593,096
Cost of goods sold, including warehouse and distribution expenses	4,496,462				4,257,043				4,084,085
Gross profit	5,039,966				4,720,683				4,509,011
Selling, general and administrative expenses	3,224,782				2,995,283				2,809,805
Operating income	1,815,184				1,725,400				1,699,206
Other income (expense):
Interest expense	(122,129		)		(91,349		)		(70,931		)
Interest income	2,521				2,347				4,224
Other, net	(1,489		)		1,406				4,692
Total other expense	(121,097		)		(87,596		)		(62,015		)
Income before income taxes	1,694,087				1,637,804				1,637,191
Provision for income taxes	369,600				504,000				599,500
Net income	$	1,324,487			$	1,133,804			$	1,037,691
Earnings per share-basic:
Earnings per share	$	16.27			$	12.82			$	10.87
Weighted-average common shares outstanding – basic	81,406				88,426				95,447
Earnings per share-assuming dilution:
Earnings per share	$	16.10			$	12.67			$	10.73
Weighted-average common shares outstanding – assuming dilution	82,280				89,502				96,720

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, 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	—			—				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
Net income	—			—				—				1,324,487				1,324,487
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	58			—				14,173				—				14,173
Net issuance of common stock upon exercise of stock options	745			8				57,160				—				57,168
Share based compensation	—			—				18,806				—				18,806
Share repurchases, including fees	(6,061	)		(61		)		(93,119		)		(1,620,833		)		(1,714,013		)
Balance at December 31, 2018	79,044			$	790			$	1,262,063			$	(909,186	)		$	353,667

See accompanying Notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(In thousands)

	For the Year Ended December 31,
	2018				2017				2016
Operating activities:
Net income	$	1,324,487			$	1,133,804			$	1,037,691
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and intangibles	258,937				233,845				217,866
Amortization of debt discount and issuance costs	3,470				2,871				2,451
Deferred income taxes	20,160				(4,593		)		10,394
Share-based compensation programs	20,176				19,401				18,859
Other	9,895				11,790				6,434
Changes in operating assets and liabilities:
Accounts receivable	18,138				(27,742		)		(38,548		)
Inventory	(163,367		)		(231,802		)		(119,270		)
Accounts payable	177,676				253,265				322,427
Income taxes payable	22,903				14,220				26,880
Accrued payroll	9,373				5,430				12,616
Accrued benefits and withholdings	28,022				3,042				(256		)
Other	(2,315		)		(9,844		)		13,169
Net cash provided by operating activities	1,727,555				1,403,687				1,510,713
Investing activities:
Purchases of property and equipment	(504,268		)		(465,940		)		(476,344		)
Proceeds from sale of property and equipment	4,784				4,464				5,119
Payments received on notes receivable	—				—				1,047
Other	(34,818		)		(2,747		)		(58,918		)
Net cash used in investing activities	(534,302		)		(464,223		)		(529,096		)
Financing activities:
Proceeds from borrowings on revolving credit facility	2,414,000				3,101,000				—
Payments on revolving credit facility	(2,473,000		)		(2,755,000		)		—
Proceeds from the issuance of long-term debt	498,660				748,800				499,160
Payment of debt issuance costs	(3,923		)		(7,590		)		(4,125		)
Repurchases of common stock	(1,714,013		)		(2,172,530		)		(1,505,437		)
Net proceeds from issuance of common stock	72,146				45,762				59,634
Other	(2,156		)		(156		)		(552		)
Net cash used in financing activities	(1,208,286		)		(1,039,714		)		(951,320		)
Net (decrease) increase in cash and cash equivalents	(15,033		)		(100,250		)		30,297
Cash and cash equivalents at beginning of the year	46,348				146,598				116,301
Cash and cash equivalents at end of the year	$	31,315			$	46,348			$	146,598
Supplemental disclosures of cash flow information:
Income taxes paid	$	311,376			$	496,728			$	569,677
Interest paid, net of capitalized interest	117,938				77,766				63,648

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, 2018, the Company owned and operated 5,219 stores in 47 states, servicing both do-it-yourself (“DIY”) and the professional service provider customers. After the close of business on December 31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett Auto Supply, Inc. and its affiliates, including 33 stores that were not included in the 2018 store count and were not operated by the Company in 2018. 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 $1.1 million and $0.9 million as of December 31, 2018 and 2017, 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, 2018 or 2017.

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 $3.20 billion and $3.01 billion as of December 31, 2018 and 2017, respectively. LIFO costs exceeded replacement costs by $107.3 million and $157.3 million at December 31, 2018 and 2017, 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. See Note 3 for further information concerning the Company’s property and equipment.

Goodwill and other intangibles:

The accompanying Consolidated Balance Sheets at December 31, 2018 and 2017, 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 2018 and 2017, 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, 2018 and 2017; as such, no goodwill impairment adjustment was required as of December 31, 2018 and 2017. 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. See Note 4 for further information concerning the Company’s goodwill and other 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. The Company recorded a charge of $11.4 million related to its long-lived assets during the year ended December 31, 2018, primarily due to the disposal of a software project that was no longer expected to provide a long-term benefit.

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”). 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, 2018 and 2017. See Note 2 for further information concerning the fair value measurements of the Company’s marketable securities. See Note 10 for further information concerning the Company’s benefit plans.

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, 2018 and 2017 (in thousands):

	December 31,
	2018				2017
Self-insurance reserves (undiscounted)	$	157,538			$	147,664
Self-insurance reserves (discounted)	146,718				137,970

The current portion of the Company’s discounted self-insurance reserves totaled $77.0 million and $71.7 million as of December 31, 2018 and 2017, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidate Balance Sheets as of December 31, 2018 and 2017. The remainder was included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2018 and 2017.

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 accruals:

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.

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:

The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts and merchandise to its customers. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, in an amount representing the consideration the Company expects to receive in exchange for transferring goods to the customer. Generally, the Company’s performance obligations are satisfied when the customer takes possession of the merchandise, which normally occurs immediately at the point of sale or through same day delivery of the merchandise. All sales are recorded net of estimated returns allowances, discounts and

taxes. The company does not recognize revenue related to product warranties, as these are considered assurance warranty obligations. See the new recent accounting pronouncements section for information regarding the adoption implementation of Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”

Over-the-counter retail sales to do-it-yourself (“DIY”) customers are recorded when the customer takes possession of the merchandise. Internet retail sales, included in sales to DIY customers, are recorded when the merchandise is shipped or when the customer picks up the merchandise at a store. 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. Other sales and sales adjustments primarily includes sales to Team Members, wholesale sales to other retailers (“jobber sales”), equipment sales, discounts, rebates, deferred revenue adjustments relating to the Company’s retail loyalty program and adjustments to estimated sales returns allowances. Sales to Team Members are recorded when the Team Member takes possession of the merchandise. Jobber sales are recorded upon shipment of the merchandise from a regional distribution center with same-day delivery to the jobber customer’s location.

The Company maintains a retail loyalty program named O’Reilly O’Rewards, which represents a performance obligation. 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, generally within a period of three months from issuance, or when unredeemed points expire, generally within 12 months after the date they were earned, which satisfies the Company’s performance obligation. See Note 9 for further information concerning the Company’s revenue.

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 radio, in-store, digital and social media promotions, as well as sports and event sponsorships and direct mail and newspaper promotional distribution. 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 $81.4 million, $83.7 million and $83.0 million for the years ended December 31, 2018, 2017 and 2016, 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 10 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, 2018, 2017 and 2016, were $9.1 million, $8.5 million and $7.9 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 $17.1 million and $15.9 million, net of accumulated amortization, as of December 31, 2018 and 2017, respectively, of which $1.5 million and $2.0 million were included in “Other assets, net” as of December 31, 2018 and 2017, 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 discounts on the senior notes are recorded as a reduction of the principal amount of the corresponding senior notes and are 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 $4.3 million and $3.7 million as of December 31, 2018 and 2017, 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, 2018 and 2017, 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 invests in certain tax credit funds that promote renewable energy. These investments generate a return primarily through the realization of federal tax credits and other tax benefits. The Company accounts for its renewable energy investments using the deferral method. Under this method, realized investment tax credits are recognized as a reduction of the renewable energy investments.

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 13 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 14 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),” now codified in the Accounting Standards Codification (“Topic 606”). Under Topic 606, 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. Topic 606 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. The Company adopted this guidance using the modified retrospective transition method with its first quarter ended March 31, 2018. Results of the year ended December 31, 2018, were presented under Topic 606, while amounts in prior periods were not adjusted and continue to be reported under the accounting standard in effect for the prior periods. The adoption of Topic 606 did not have a material impact on the Company’s business process, internal controls, systems, consolidated financial condition, results of operations or cash flows; as such, a cumulative effective adjustment was not recorded to opening retained earnings.

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. In July of 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvement” (“ASU 2018-11”), to provide an additional, optional transition method for adopting ASU 2016-02, which allows for an entity to choose to apply the new lease standard at adoption date and recognize a cumulative-effective adjustment to the opening balance of retained earnings in the period of adoption, while comparative periods presented will continue to be in accordance with current U.S. GAAP Topic 840. For public companies, Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company established a task force, composed of multiple functional groups inside of the Company, which has substantially completed its objective of reviewing the critical components of the standard and implementing changes to systems and controls necessary to support the adoption of the new standard beginning with its first quarter ending March 31, 2019. The Company will adopt this guidance using the additional, optional transition method, the package of transitional practical expedients relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842, and the transitional practical expedient for the treatment of existing land easements; however, the Company will not elect the hindsight transitional practical expedient. The Company will make an accounting policy election to not apply recognition requirements of the guidance to short-term leases. The adoption of the new guidance will have a material impact on the total assets and liabilities reported on the Company’s consolidated balance sheet, and the Company estimates net right-of-use assets and lease liabilities to be approximately $1.9 billion and $2.0 billion, respectively, as of January 1, 2019. The difference between these amounts is primarily due to the accrual for straight-line rent expense. These estimates are based on the Company’s current lease portfolio and changes to the lease portfolio, including the total number of leases, lease commencement and end dates and lease termination expectations, as well as changes in anticipated lease discount rates, could impact these estimates. The Company expects to make an adjustment to opening “Retained Deficit” on the Consolidated Balance Sheet of approximately $1.4 million related to the adoption of this new guidance. The adoption of this new guidance will not have a material impact on the Company’s results of operations, cash flows, liquidity or the Company’s covenant compliance under its existing credit agreement.

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 statement of cash flows using the retrospective transition method, which resulted in $0.6 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 year ended December 31, 2016. The Company elected to apply the amendments related

to the presentation of excess tax benefits on the statement of cash flows using the retrospective transition method, which resulted in $56.0 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 year ended December 31, 2016. ASU 2016-09 amendments related to accounting for excess tax benefits in the income statement were adopted prospectively, resulting in the reduction of $34.7 million and $48.7 million in “Provision for income taxes” in the accompanying Consolidated Statements of Income for the years ended December 31, 2018, and 2017, respectively.

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 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 August of 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period, and allows for either retrospective or prospective adoption, with early adoption permitted. The Company early adopted this guidance with its third quarter ended September 30, 2018, using the prospective adoption method. The Company did not capitalize any implementation costs incurred in cloud computing arrangements that are service contracts subsequent to adoption, and therefore, the adoption of this new guidance did not impact the Company’s consolidated financial condition, results of operations or cash flows during the period. The Company does not expect that the application of this new guidance will 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, 2018 and 2017. The Company recorded a decrease in fair value related to its marketable securities in the amount of $1.7 million for the year ended December 31, 2018, and an increase in the amount of $3.6 million for the year ended December 31, 2017, 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, 2018 and 2017 (in thousands):

	December 31, 2018
	Quoted Prices in Active Markets for Identical Instruments (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Marketable securities	$	25,493			$	—			$	—			$	25,493

	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

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, 2018 and 2017, 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, 2018 and 2017.

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, 2018 and 2017, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

	December 31, 2018								December 31, 2017
	Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Senior Notes	$	3,130,122			$	3,116,046			$	2,632,390			$	2,728,167

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

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, 2018 and 2017, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):

	Original Useful Lives		December 31, 2018				December 31, 2017
Land			$	745,050			$	695,669
Buildings and building improvements	15 – 39 years		2,147,969				1,968,079
Leasehold improvements	3 – 25 years		686,058				626,714
Furniture, fixtures and equipment	3 – 20 years		1,350,808				1,250,690
Vehicles	5 – 10 years		424,421				392,130
Construction in progress			291,246				257,853
Total property and equipment			5,645,552				5,191,135
Less: accumulated depreciation and amortization			2,058,550				1,847,329
Net property and equipment			$	3,587,002			$	3,343,806

The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $246.0 million, $232.7 million and $217.0 million for the years ended December 31, 2018, 2017 and 2016, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

The Company recorded a charge of $11.4 million related to property and equipment for the year ended December 31, 2018, primarily due to the disposal of a software project that was no longer expected to provide a long-term benefit, which was 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, 2018 or 2017.

The carrying amount of the Company’s goodwill was included in “Goodwill” on the accompanying Consolidate Balance Sheets as of December 31, 2018 and 2017. During the year ended December 31, 2018 and 2017, the Company recorded an increase in goodwill of $18.2 million and $3.7 million, respectively, resulting from small acquisitions.

The following table identifies the changes in goodwill for the years ended December 31, 2018 and 2017 (in thousands):

	2018				2017
Goodwill, balance at January 1,	$	789,058			$	785,399
Change in goodwill	18,202				3,659
Goodwill, balance at December 31,	$	807,260			$	789,058

As of December 31, 2018 and 2017, 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, 2018 and 2017 (in thousands):

	Cost of Amortizable Intangibles								Accumulated Amortization (Expense) Benefit								Net Amortizable Intangibles
	December 31, 2018				December 31, 2017				December 31, 2018				December 31, 2017				December 31, 2018				December 31, 2017
Amortizable intangible assets:
Favorable leases	$	18,930			$	22,500			$	(12,564	)		$	(14,495	)		$	6,366			$	8,005
Non-compete agreements	2,757				1,851				(679		)		(464		)		2,078				1,387
Total amortizable intangible assets	$	21,687			$	24,351			$	(13,243	)		$	(14,959	)		$	8,444			$	9,392
Unfavorable leases	$	10,180			$	14,470			$	8,486			$	11,853			$	1,694			$	2,617

During the years ended December 31, 2018 and 2017, the Company recorded non-compete agreement assets in conjunction with small acquisitions in the amounts of $0.9 million and $0.2 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 8.4 years as of December 31, 2018. For the years ended December 31, 2018, 2017 and 2016, the Company recorded amortization expense of $1.4 million, $1.6 million and $2.1 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, 2018 and 2017.

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 2.7 years as of December 31, 2018. For the years ended December 31, 2018, 2017 and 2016, the Company recognized an amortized benefit of $0.9 million, $1.5 million and $2.1 million, respectively, related to these unfavorable operating leases, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2018 and 2017.

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, 2018 (in thousands):

	December 31, 2018
	Amortization Expense				Amortization Benefit				Total Amortization Expense
2019	$	(1,483	)		$	713			$	(770	)
2020	(1,306		)		541				(765		)
2021	(1,078		)		389				(689		)
2022	(961		)		51				(910		)
2023	(787		)		—				(787		)
Total	$	(5,615	)		$	1,694			$	(3,921	)

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, 2018 and 2017 (in thousands):

	December 31,
	2018				2017
Revolving Credit Facility, weighted-average variable interest rate of 4.560%	$	287,000			$	346,000
$500 million, 4.875% Senior Notes due 2021(1), effective interest rate of 4.952%	498,371				497,565
$300 million, 4.625% Senior Notes due 2021(2), effective interest rate of 4.645%	299,244				298,961
$300 million, 3.800% Senior Notes due 2022(3), effective interest rate of 3.845%	298,574				298,214
$300 million, 3.850% Senior Notes due 2023(4), effective interest rate of 3.851%	298,821				298,583
$500 million, 3.550% Senior Notes due 2026(5), effective interest rate of 3.570%	496,240				495,792
$750 million, 3.600% Senior Notes due 2027(6), effective interest rate of 3.619%	743,868				743,275
$500 million, 4.350% Senior Notes due 2028(7), effective interest rate of 4.383%	495,004				—
Long-term debt	$	3,417,122			$	2,978,390

(1)	Net of unamortized discount of $0.7 million and $1.1 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $0.9 million and $1.4 million as of December 31, 2018 and 2017, respectively.

(2)	Net of unamortized discount of $0.1 million and $0.2 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $0.6 million and $0.8 million as of December 31, 2018 and 2017, respectively.

(3)	Net of unamortized discount of $0.5 million and $0.6 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $1.0 million and $1.2 million as of December 31, 2018 and 2017, respectively.

(4)	Net of unamortized discount of less than $0.1 million as of December 31, 2018 and 2017, and debt issuance costs of $1.2 million and $1.4 million as of December 31, 2018 and 2017, respectively.

(5)	Net of unamortized discount of $0.6 million and $0.7 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $3.1 million and $3.5 million as of December 31, 2018 and 2017, respectively.

(6)	Net of unamortized discount of $1.1 million and $1.2 million as of December 31, 2018 and 2017, respectively, and debt issuance costs of $5.1 million and $5.6 million as of December 31, 2018 and 2017, respectively.

(7)	Net of unamortized discount of $1.3 million as of December 31, 2018, and debt issuance costs of $3.7 million as of December 31, 2018.

The following table identifies the principal maturities of the Company’s financing facilities as of December 31, 2018 (in thousands):

	Scheduled Maturities
2019	$	—
2020	—
2021	800,000
2022	587,000
2023	300,000
Thereafter	1,750,000
Total	$	3,437,000

Unsecured revolving credit facility:

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

As of December 31, 2018 and 2017, 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 $35.1 million and $36.8 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 Credit Agreement) plus an applicable margin. Swing line loans made under the Revolving Credit Facility bear interest at an Alternate Base Rate plus the applicable margin for Alternate Base Rate loans. In addition, the Company pays a facility fee on the aggregate amount of the commitments under the Credit Agreement in an amount equal to a percentage of such commitments. The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions. As of December 31, 2018, based upon the Company’s current credit ratings, its margin for Alternate Base Rate loans was 0.000%, its margin for Eurodollar Revolving Loans was 0.900% and its facility fee was 0.100%.

The Credit Agreement contains certain covenants, including limitations on subsidiary indebtedness, a minimum consolidated fixed charge coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, five-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that the Company should default on any covenant (subject to customary grace periods, cure rights and materiality thresholds) contained in the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from lenders. As of December 31, 2018, the Company remained in compliance with all covenants under the Credit Agreement.

Senior notes:

On May 17, 2018, the Company issued $500 million aggregate principal amount of unsecured 4.350% Senior Notes due 2028 (“4.350% Senior Notes due 2028”) at a price to the public of 99.732% of their face value with UMB Bank, N.A. (“UMB”) as trustee. Interest on the 4.350% Senior Notes due 2028 is payable on June 1 and December 1 of each year, which began on December 1, 2018, and is computed on the basis of a 360-day year.

The Company has issued a cumulative $3.2 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2028, 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. None of the Company’s subsidiaries is a guarantor under the senior notes. Each of the senior notes is subject to certain customary covenants, with which the Company complied as of December 31, 2018.

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, 2018 (in thousands):

	December 31, 2018
	Related Parties				Non-Related Parties				Total
2019	$	4,682			$	305,061			$	309,743
2020	3,896				288,972				292,868
2021	3,429				260,794				264,223
2022	2,671				236,485				239,156
2023	2,448				206,003				208,451
Thereafter	3,515				1,111,088				1,114,603
Total	$	20,641			$	2,408,403			$	2,429,044

See Note 12 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 $15.6 million at December 31, 2018.

The following table summarizes the net rent expense amounts for the years ended December 31, 2018, 2017 and 2016, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in thousands):

	For the Year Ended December 31,
	2018				2017				2016
Minimum operating lease expense	$	305,613			$	289,245			$	273,559
Contingent rents	806				1,049				892
Other lease related occupancy costs	14,449				12,478				13,241
Total rent expense	320,868				302,772				287,692
Less: sublease income	3,585				4,158				4,439
Net rent expense	$	317,283			$	298,614			$	283,253

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, 2018 and 2017. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31, 2018 and 2017 (in thousands):

	2018				2017
Warranty liabilities, balance at January 1,	$	44,398			$	36,623
Warranty claims	(89,557		)		(79,660		)
Warranty accruals	97,379				87,435
Warranty liabilities, balance at December 31,	$	52,220			$	44,398

NOTE 8 – SHARE REPURCHASE PROGRAM

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

prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on February 7, 2018, and November 13, 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 $11.8 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,
	2018				2017
Shares repurchased	6,061				9,301
Average price per share	$	282.80			$	233.57
Total investment	$	1,713,953			$	2,172,437

As of December 31, 2018, the Company had $1.0 billion remaining under its share repurchase program. Subsequent to the end of the year and through February 27, 2019, the Company repurchased an additional 0.8 million shares of its common stock under its share repurchase program, at an average price of $342.95, for a total investment of $268.9 million. The Company has repurchased a total of 73.1 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through February 27, 2019, at an average price of $150.73, for a total aggregate investment of $11.0 billion.

NOTE 9 – REVENUE

The table below identifies the Company’s revenues disaggregated by major customer type for the years ended December 31, 2018, 2017 and 2016 (in thousands):

	For the Year Ended December 31,
	2018				2017				2016
Sales to do-it-yourself customers	$	5,351,035			$	5,113,288			$	4,911,826
Sales to professional service provider customers	4,035,898				3,724,220				3,540,116
Other sales and sales adjustments	149,495				140,218				141,154
Total sales	$	9,536,428			$	8,977,726			$	8,593,096

As of December 31, 2018 and 2017, the Company had recorded a deferred revenue liability of $4.3 million and $4.7 million, respectively, related to its loyalty program, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets. During the years ended December 31, 2018, 2017 and 2016, the Company recognized $15.9 million, $17.6 million and $12.7 million, respectively, of deferred revenue related to its loyalty program, which were included in “Sales” on the accompanying Consolidated Statements of Income.

NOTE 10 – 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, 2018 (in thousands):

		December 31, 2018
Plans		Total Shares Authorized for Issuance under the Plans			Shares Available for Future Issuance under the Plans
Employee Incentive Plans		34,000			5,573
Director Stock Plan		1,000			263
Performance Incentive Plan		650			368
Employee Stock Purchase Plans		4,250			594
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, 2018:

	Shares (in thousands)			Weighted-Average Exercise Price				Average Remaining Contractual Terms		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017	2,364			$	137.08
Granted	293			264.34
Exercised	(763	)		80.52
Forfeited or expired	(34	)		231.53
Outstanding at December 31, 2018	1,860			$	178.57			5.9 Years		$	308,297
Vested or expected to vest at December 31, 2018	1,819			$	176.78			5.8 Years		$	304,818
Exercisable at December 31, 2018	1,174			$	133.24			4.4 Years		$	247,816

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. As of December 31, 2018 and 2017, there were no director stock options outstanding under this plan.

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 stock options awarded by the Company during the years ended December 31, 2018, 2017 and 2016:

	December 31,
	2018			2017			2016
Risk free interest rate	2.63	%		1.98	%		1.44	%
Expected life	5.9 Years			5.4 Years			5.5 Years
Expected volatility	24.0	%		22.4	%		22.3	%
Expected dividend yield	—	%		—	%		—	%

Upon adoption of 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 year ended December 31, 2016, 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.

The following table summarizes activity related to stock options awarded by the Company for the years ended December 31, 2018, 2017 and 2016:

	For the Year Ended December 31,
	2018				2017				2016
Compensation expense for stock options awarded (in thousands)	$	16,521			$	15,561			$	15,404
Income tax benefit from compensation expense related to stock options (in thousands)	4,093				5,934				5,753
Total intrinsic value of stock options exercised (in thousands)	156,327				135,533				157,115
Cash received from exercise of stock options (in thousands)	61,403				33,229				47,394
Weighted-average grant-date fair value of options awarded	$	76.57			$	62.79			$	63.42
Weighted-average remaining contractual life of exercisable options	4.4 Years				3.8 Years				3.9 Years

At December 31, 2018, the remaining unrecognized compensation expense related to unvested stock option awards was $31.3 million, and the weighted-average period of time, over which this cost will be recognized, is 2.6 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 vesting period or minimum required service period.

The table below identifies employee restricted stock activity under these plans during the year ended December 31, 2018 (in thousands, except per share data):

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2017	3			$	244.06
Granted during the period	2			262.38
Vested during the period (1)	(1	)		232.30
Forfeited during the period	—			—
Non-vested at December 31, 2018	4			$	260.42

(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 minimum required service period.

The table below identifies director restricted stock activity under this plan during the year ended December 31, 2018 (in thousands, except per share data):

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2017	5			$	250.85
Granted during the period	3			265.41
Vested during the period	(3	)		248.53
Forfeited during the period	—			—
Non-vested at December 31, 2018	5			$	261.07

The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2018, 2017 and 2016 (in thousands, except per share data):

	For the Year Ended December 31,
	2018				2017				2016
Compensation expense for restricted shares awarded	$	1,370			$	1,628			$	1,293
Income tax benefit from compensation expense related to restricted shares	$	340			$	621			$	483
Total fair value of restricted shares at vest date	$	1,230			$	1,202			$	2,384
Shares awarded under the plans	5				4				4
Weighted-average grant-date fair value of shares awarded under the plans	$	263.89			$	253.78			$	264.24

At December 31, 2018, 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, 2018, 2017 and 2016 (in thousands, except per share data):

	For the Year Ended December 31,
	2018				2017				2016
Compensation expense for shares issued under the ESPP	$	2,285			$	2,212			$	2,162
Income tax benefit from compensation expense for shares issued under the ESPP	$	566			$	844			$	807
Shares issued under the ESPP	53				64				54
Weighted-average price of shares issued under the ESPP	$	245.26			$	196.72			$	227.12

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, 2018, 2017 or 2016. The Company expensed matching contributions under the 401(k) Plan in the amounts of $24.8 million, $22.6 million

and $20.6 million for the years ended December 31, 2018, 2017 and 2016, respectively, which were primarily 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 $25.5 million and $25.7 million as of December 31, 2018 and 2017, 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, 2018, 2017 and 2016, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

NOTE 11 – COMMITMENTS

Construction commitments:

As of December 31, 2018, the Company had construction commitments in the amount of $177.7 million.

Letters of credit commitments:

As of December 31, 2018, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of $35.1 million. See Note 5 for further information concerning the Company’s letters of credit commitments.

Debt financing commitments:

Each series of senior notes is 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 values 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 indenture governing such series of senior notes; provided, that on or after the date that is three months prior to the maturity date of the series of senior notes, such series of senior notes is redeemable at a redemption price equal to par plus accrued and unpaid interest to, but not including, the redemption date. In addition, if at any time the Company undergoes a Change of Control Triggering Event, as defined in the indenture governing such series of senior 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 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 12 – RELATED PARTIES

The Company leases certain land and buildings related to 74 of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating lease agreements with entities that include one or more of the Company’s affiliated directors or members of an affiliated director’s immediate family. 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, $4.6 million and $4.5 million during the years ended December 31, 2018, 2017 and 2016, 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 13 – 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, 2018 and 2017 (in thousands):

	December 31,
	2018				2017
Deferred tax assets:
Allowance for doubtful accounts	$	1,944			$	1,885
Tax credits	5,606				7,179
Other accruals	105,894				97,247
Net operating losses	—				346
Other	14,770				14,784
Total deferred tax assets	128,214				121,441
Deferred tax liabilities:
Inventories	62,846				55,965
Property and equipment	140,019				122,354
Other	30,915				28,528
Total deferred tax liabilities	233,780				206,847
Net deferred tax liabilities	$	(105,566	)		$	(85,406	)

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, 2018, 2017 and 2016 (in thousands):

	For the Year Ended December 31, 2018
	Current				Deferred				Total
Federal income tax expense	$	289,953			$	16,309			$	306,262
State income tax expense	59,487				3,851				63,338
Net income tax expense	$	349,440			$	20,160			$	369,600

	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

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, 2018, 2017 and 2016 (in thousands):

	For the Year Ended December 31,
	2018				2017				2016
Federal income taxes at statutory rate	$	355,758			$	573,231			$	573,020
State income taxes, net of federal tax benefit	56,345				39,062				35,285
Excess tax benefit from share-based compensation	(34,703		)		(48,688		)		—
Revaluation of deferred tax liability	(1,262		)		(53,240		)		—
Other items, net	(6,538		)		(6,365		)		(8,805		)
Total provision for income taxes	$	369,600			$	504,000			$	599,500

As a result of the adoption of 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 beginning with 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.

The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (the “Tax Act”), significantly reduced the federal corporate income tax rate for tax years beginning in 2018 and required 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. During the year ended December 31, 2018, the Company completed its evaluation of the impact of the Tax Act and recorded an additional $1.3 million of tax benefit, finalizing the revaluation of its deferred income tax liabilities due to the Tax Act, which was recorded in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the year ended December 31, 2018.

As of December 31, 2018, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $5.6 million, which 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, 2018, 2017 and 2016 (in thousands):

	2018				2017				2016
Unrealized tax benefit, balance at January 1,	$	35,388			$	34,798			$	36,928
Additions based on tax positions related to the current year	3,550				6,299				6,116
Additions based on tax positions related to prior years	4,255				—				—
Payments related to items settled with taxing authorities	(2,792		)		—				(195		)
Reductions due to the lapse of statute of limitations and settlements	(6,635		)		(5,709		)		(8,051		)
Unrealized tax benefit, balance at December 31,	$	33,766			$	35,388			$	34,798

For the years ended December 31, 2018, 2017 and 2016, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $38.9 million, $40.9 million and $40.6 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2018, 2017 and 2016, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $8.2 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018, 2017 and 2016, the Company had accrued approximately $5.1 million, $5.5 million and $5.8 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, 2018, 2017 and 2016, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.3 million, $2.0 million and $2.4 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2019, the Company expects a reduction of $8.1 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2018, 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 2014, 2015 and 2016 federal income tax returns in the third quarter of 2018. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2007 through 2017.

NOTE 14 – EARNINGS PER SHARE

The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 (in thousands, except per share data):

	For the Year Ended December 31,
	2018				2017				2016
Numerator (basic and diluted):
Net income	$	1,324,487			$	1,133,804			$	1,037,691
Denominator:
Weighted-average common shares outstanding – basic	81,406				88,426				95,447
Effect of stock options (1)	874				1,076				1,273
Weighted-average common shares outstanding – assuming dilution	82,280				89,502				96,720
Earnings per share:
Earnings per share-basic	$	16.27			$	12.82			$	10.87
Earnings per share-assuming dilution	$	16.10			$	12.67			$	10.73
Antidilutive potential common shares not included in the calculation of diluted earnings per share:
Stock options (1)	567				715				332
Weighted-average exercise price per share of antidilutive stock options (1)	$	268.55			$	252.16			$	265.77

(1)	See Note 10 for further information concerning the terms of the Company’s share-based compensation plans.

Subsequent to the end of the year and through February 27, 2019, the Company repurchased 0.8 million shares of its common stock, at an average price of $342.95, for a total investment of $268.9 million.

NOTE 15 – QUARTERLY RESULTS (Unaudited)

The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2018 and 2017. 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 2018
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Sales	$	2,282,681			$	2,456,073			$	2,482,717			$	2,314,957
Gross profit	1,201,258				1,288,638				1,315,755				1,234,315
Operating income	422,846				479,150				485,148				428,040
Net income	304,906				353,073				366,151				300,357
Earnings per share – basic (1)	$	3.65			$	4.32			$	4.54			$	3.76
Earnings per share – assuming dilution (1)	$	3.61			$	4.28			$	4.50			$	3.72

	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

(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.