Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

​

In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including

	●	an overview of the key drivers of the automotive aftermarket industry;

	●	key events and recent developments within our company;

	●	our results of operations for the years ended December 31, 2019, 2018, and 2017;

	●	our liquidity and capital resources;

	●	any contractual obligations, to which we are committed;

	●	any off-balance sheet arrangements we utilize;

	●	our critical accounting estimates;

	●	the inflation and seasonality of our business;

	●	our quarterly results for the years ended December 31, 2019, and 2018; and

	●	recent accounting pronouncements that may affect our Company.

​

The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this annual report.

​

FORWARD-LOOKING STATEMENTS

​

We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “estimate,” “may,” “could,” “will,” “believe,” “expect,” “would,” “consider,” “should,” “anticipate,” “project,” “plan,” “intend” or similar words. In addition, statements contained within this annual report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the economy in general, inflation, tariffs, product demand, the market for auto parts, competition, weather, risks associated with the performance of acquired businesses, our ability to hire and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt, governmental regulations, information security and cyber-attacks, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section in this annual report on Form 10-K for the year ended December 31, 2019, and subsequent Securities and Exchange Commission filings, for additional factors that could materially affect our financial performance. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

​

OVERVIEW

​

We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both DIY customers and professional service providers – our “dual market strategy.” Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment.

​

Our extensive product line includes an assortment of products that are differentiated by quality and price for most of the product lines we offer. For many of our product offerings, this quality differentiation reflects “good,” “better,” and “best” alternatives. Our sales and total gross profit dollars are highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point on the value spectrum is a driver of sales and profitability in our industry. We have ongoing initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.

​

Our stores also offer enhanced services and programs to our customers, including used oil, oil filter and battery recycling; battery, wiper and bulb replacement; battery diagnostic testing; electrical and module testing; check engine light code extraction; loaner tool program; drum and rotor resurfacing; custom hydraulic hoses; professional paint shop mixing and related materials; and machine shops. As of December 31, 2019, we operated 5,439 stores in 47 U.S. states and 21 stores in Mexico.

​

We are influenced by a number of general macroeconomic factors that influence both our industry and our consumers, including, but not limited to, fuel costs, unemployment trends, interest rates, and other economic factors. Due to the nature of these macroeconomic

​

factors, we are unable to determine how long current conditions will persist and the degree of impact future changes may have on our business.

​

The sustained trends of low U.S. unemployment have been favorable to our industry through the support of miles driven and consumer confidence; however, this has also resulted in pressure on wages, particularly when combined with legislated wage increases in certain market areas.

​

We believe the key drivers of current and future long-term demand for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations and average vehicle age.

​

Number of Miles Driven

The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation. According to the Department of Transportation, the number of total miles driven in the U.S. increased 0.4% and 1.2% in 2018 and 2017, respectively, and through November of 2019, year-to-date miles driven increased 0.9%. We would expect to continue to see modest improvements in total miles driven in the U.S., supported by an increasing number of registered vehicles on the road, resulting in continued demand for automotive aftermarket products.

​

Size and Age of the Vehicle Fleet

The total number of vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the automotive aftermarket industry. As reported by The Auto Care Association, the total number of registered vehicles increased 8.1% from 2008 to 2018, bringing the number of light vehicles on the road to 272 million by the end of 2018. For the year ended December 31, 2019, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 16.7 million, contributing to the continued growth in the total number of registered vehicles on the road. In the past decade, vehicle scrappage rates have remained relatively stable, ranging from 4.4% to 5.7% annually. As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 20.6%, from 9.7 years in 2008 to 11.7 years in 2018.

​

We believe this increase in average age can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains, interiors and exteriors, and the consumer’s willingness to invest in maintaining these higher-mileage, better built vehicles. As the average age of vehicles on the road increases, a larger percentage of miles are being driven by vehicles that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet, will support continued demand for automotive aftermarket products.

​

We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values of hard work and excellent customer service.

​

KEY EVENTS AND RECENT DEVELOPMENTS

​

Several key events have had or may have a significant impact on our operations and are identified below:

	●	After the close of business on December 31, 2018, we completed an asset purchase of Bennett, a privately held automotive parts supplier operating 33 stores and a warehouse in Florida. These stores were not operated by the Company in 2018 and were therefore not included in our 2018 store count. Beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, consolidated financial statements and results of operations. During the year ended December 31, 2019, the Company merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores.

	●	Under the Company’s share repurchase program, as approved by our Board of Directors in January of 2011, we may, from time to time, repurchase shares of our 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. Our Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 31, 2019, and February 5, 2020, our Board of Directors approved a resolution each time to increase the authorization amount under our share repurchase program by an additional $1.00 billion, resulting in a cumulative authorization amount of $13.75 billion. Each additional authorization is effective for a

​

		three-year period, beginning on its respective announcement date. As of February 28, 2020, we had repurchased approximately 77.1 million shares of our common stock at an aggregate cost of $12.54 billion under this program.

	●	On May 20, 2019, we issued $500 million aggregate principal amount of unsecured 3.900% Senior Notes due 2029 (“3.900% Senior Notes due 2029”) at a price to the public of 99.991% of their face value with U.S. Bank National Association (“U.S. Bank”) as trustee. Interest on the 3.900% Senior Notes due 2029 is payable on June 1 and December 1 of each year, which began on December 1, 2019, and is computed on the basis of a 360-day year.

	●	After the close of business on November 29, 2019, we completed the acquisition of Mayasa, a specialty retailer of automotive aftermarket parts headquartered in Guadalajara, Jalisco, Mexico pursuant to a stock purchase agreement. At the time of the acquisition, Mayasa operated six distribution centers, 21 Orma Autopartes stores and served over 2,000 independent jobber locations in 28 Mexican states. The results of Mayasa’s operations have been included in the Company’s consolidated financial statements and results of operations beginning from the date of acquisition. Pro forma results of operations related to the acquisition of Mayasa are not presented as Mayasa’s results are not material to the Company’s results of operations.

​

RESULTS OF OPERATIONS

​

The following table includes income statement data as a percentage of sales for the years ended December 31, 2019, 2018 and 2017

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019		​	2018		​	2017
Sales		100.0	%	​	100.0	%	​	100.0	%
Cost of goods sold, including warehouse and distribution expenses		46.9		​	47.2		​	47.4
Gross profit		53.1		​	52.8		​	52.6
Selling, general and administrative expenses		34.2		​	33.8		​	33.4
Operating income		18.9		​	19.0		​	19.2
Interest expense		(1.4)		​	(1.3)		​	(1.0)
Interest income		0.1		​	—		​	—
Income before income taxes (1)		17.6		​	17.8		​	18.2
Provision for income taxes		3.9		​	3.9		​	5.6
Net income		13.7	%	​	13.9	%	​	12.6	%

(1)	Each percentage of sales amount is computed independently and may not compute to presented totals.

​

2019 Compared to 2018

​

Sales:

Sales for the year ended December 31, 2019, increased $614 million, or 6%, to $10.15 billion from $9.54 billion for the same period in 2018. Comparable store sales for stores open at least one year increased 4.0% and 3.8% for the years ended December 31, 2019 and 2018, respectively. U.S. domestic comparable store sales are calculated based on the change in sales for stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members. Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation.

​

​

The following table presents the components of the increase in sales for the year ended December 31, 2019 (in millions):

​	​	​	​
​		Increase in Sales for the Year Ended
​	​	December 31, 2019
​	​	Compared to the Same Period in 2018
Store sales:		​
Comparable store sales	​	$	375
Non-comparable store sales:	​		​
Sales for stores opened throughout 2018, excluding stores open at least one year that are included in comparable store sales	​		87
Sales for stores opened throughout 2019 and sales from the acquired Bennett and Mayasa stores	​		141
Decline in sales for stores that have closed	​		(8)
Non-store sales:	​
Includes sales of machinery and sales to independent parts stores and Team Members	​		19
Total increase in sales	​	$	614

​

We believe the increased sales achieved by our stores were the result of store growth, the high levels of customer service provided by our well-trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory in our regional distribution centers, enhanced services and programs offered in our stores, a broad selection of product offerings in most of our stores with a dynamic catalog system to identify and source parts, a targeted promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of our stores, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers.

​

Our comparable store sales increase for the year ended December 31, 2019, was driven by an increase in average ticket values for both DIY and professional service provider customers. Transaction counts were flat for the year ended December 31, 2019, comprised of positive transaction counts for professional service provider customers, offset by negative transaction counts for DIY customers. The improvement in average ticket values was the result of the increasing complexity and cost of replacement parts necessary to maintain the newer population of vehicles and increased selling prices on a same-SKU basis, as compared to one year ago. The increased complexity and replacement costs are a result of the current population of better-engineered and more technically advanced vehicles that require less frequent repairs, as the component parts are more durable and last for longer periods of time, which creates pressure on customer transaction counts. However, when repairs are needed, the cost of replacement parts is, on average, greater, which benefits average ticket values. The increase in selling prices on a same-SKU basis was driven by increases in acquisition costs of inventory, which were passed through in market prices. Transaction counts for the year ended December 31, 2019, as compared to the same period in 2018, were also negatively impacted by wetter, cooler than normal temperatures in many of our markets during the first half of 2019, which is a headwind to DIY business. DIY transaction counts continue to be impacted by the inflationary environment.

​

We opened 200 net, new U.S. stores during the year ended December 31, 2019, compared to opening 200 net, new U.S. stores during the year ended December 31, 2018. In addition, on January 1, 2019, we began operating 33 acquired Bennett stores, and during the year ended December 31, 2019, we merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores. After the close of business on November 29, 2019, we acquired 21 stores from Mayasa. As of December 31, 2019, we operated 5,439 stores in 47 U.S. states and 21 stores in Mexico compared to 5,219 U.S. stores in 47 states at December 31, 2018. We anticipate U.S. new store growth will be approximately 180 net, new store openings in 2020.

​

Gross profit:

Gross profit for the year ended December 31, 2019, increased 7% to $5.39 billion (or 53.1% of sales) from $5.04 billion (or 52.8% of sales) for the same period in 2018. The increase in gross profit dollars for the year ended December 31, 2019, was primarily the result of sales from new stores and the increase in comparable store sales at existing stores. The increase in gross profit as a percentage of sales for the year ended December 31, 2019, was due to a benefit from selling through inventory purchased prior to recent industry-wide acquisition cost increases and corresponding selling price increases. Beginning in the last six months of 2018, inventory acquisition costs in our industry increased, as a result of tariffs on products imported from China and other increases in supplier input costs, which were passed through in higher retail and wholesale prices in our industry. We determine inventory cost using the last-in, first-out (“LIFO”) method, but have, over time, seen our LIFO reserve balance exhausted, as a result of cumulative historical acquisition cost decreases. Our policy is to not write up inventory in excess of replacement cost, and accordingly, we are effectively valuing our inventory at replacement cost.

​

​

Selling, general and administrative expenses:

Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2019, increased 8% to $3.47 billion (or 34.2% of sales) from $3.22 billion (or 33.8% of sales) for the same period in 2018. The increase in total SG&A dollars for the year ended December 31, 2019, was the result of Team Members, facilities and vehicles to support our increased sales and store count. The increase in SG&A as a percentage of sales for the year ended December 31, 2019, was principally due to wage pressure, driven by a low unemployment, inflationary environment, and other variable costs, including health benefit costs and cost of insurance, primarily auto related, and increased spending on Omnichannel and technology initiatives.

​

Operating income:

As a result of the impacts discussed above, operating income for the year ended December 31, 2019, increased 6% to $1.92 billion (or 18.9% of sales) from $1.82 billion (or 19.0% of sales) for the same period in 2018.

​

Other income and expense:

Total other expense for the year ended December 31, 2019, increased 8% to $130 million (or 1.3% of sales), from $121 million (or 1.3% of sales) for the same period in 2018. The increase in total other expense for the year ended December 31, 2019, was the result of increased interest expense on higher average outstanding borrowings, partially offset by an increase in the value of our trading securities.

​

Income taxes:

Our provision for income taxes for the year ended December 31, 2019, increased 8% to $399 million (22.3% effective tax rate) from $370 million (21.8% effective tax rate) for the same period in 2018. The increase in our provision for income taxes for the year ended December 31, 2019, was the result of higher taxable income and lower excess tax benefits from share-based compensation. The increase in our effective tax rate for the year ended December 31, 2019, was the result of lower excess tax benefits from share-based compensation. During the years ended December 31, 2019 and 2018, excess tax benefits from share-based compensation were approximately $26 million and $35 million, respectively.

​

Net income:

As a result of the impacts discussed above, net income for the year ended December 31, 2019, increased 5% to $1.39 billion (or 13.7% of sales), from $1.32 billion (or 13.9% of sales) for the same period in 2018.

​

Earnings per share:

Our diluted earnings per common share for the year ended December 31, 2019, increased 11% to $17.88 on 78 million shares from $16.10 on 82 million shares for the same period in 2018.

​

2018 Compared to 2017

​

Sales:

Sales for the year ended December 31, 2018, increased $559 million, or 6%, to $9.54 billion from $8.98 billion for the same period in 2017. Comparable store sales for stores open at least one year increased 3.8% and 1.4% for the years ended December 31, 2018 and 2017, respectively. Comparable store sales are calculated based on the change in sales for stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members. Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation.

​

​

The following table presents the components of the increase in sales for the year ended December 31, 2018 (in millions):

​	​	​	​
​		Increase in Sales for the Year Ended
​	​	December 31, 2018,
​	​	Compared to the Same Period in 2017
Store sales:		​
Comparable store sales	​	$	336
Non-comparable store sales:	​
Sales for stores opened throughout 2017, excluding stores open at least one year that are included in comparable store sales	​		101
Sales for stores opened throughout 2018	​		120
Decline in sales for stores that have closed	​		(7)
Non-store sales:	​
Includes sales of machinery and sales to independent parts stores and Team Members	​		9
Total increase in sales	​	$	559

​

We believe the increased sales achieved by our stores were the result of store growth, the high levels of customer service provided by our well-trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory in our regional distribution centers, enhanced services and programs offered in our stores, a broad selection of product offerings with a dynamic catalog system to identify and source parts, a targeted promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of our stores, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers.

​

Our comparable store sales increase for the year ended December 31, 2018, was driven by an increase in average ticket values for both DIY and professional service provider customers and positive transaction counts for professional service provider customers, offset by negative transaction counts for DIY customers. The improvement in average ticket values was the result of the increasing complexity and cost of replacement parts necessary to maintain the current population of better-engineered and more technically advanced vehicles and same SKU inflation. These better-engineered, more technically advanced vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of time. This decrease in repair frequency creates pressure on customer transaction counts; however, when repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit to average ticket values. During the year ended December 31, 2018, DIY transaction counts also continued to be pressured by increased gas prices and other inflationary impacts, resulting in an increased deferral of vehicle maintenance and repairs over the short term.

​

We opened 200 net, new stores during the year ended December 31, 2018, compared to opening 190 net, new stores during the year ended December 31, 2017. As of December 31, 2018, we operated 5,219 stores in 47 states compared to 5,019 stores in 47 states at December 31, 2017. After the close of business on December 31, 2018, we acquired the 33 Bennett stores that were not included in our 2018 store count and were not operated by the Company in 2018.

​

Gross profit:

Gross profit for the year ended December 31, 2018, increased 7% to $5.04 billion (or 52.8% of sales) from $4.72 billion (or 52.6% of sales) for the same period in 2017. The increase in gross profit dollars for the year ended December 31, 2018, was primarily the result of sales from new stores and the increase in comparable store sales at existing stores. The increase in gross profit as a percentage of sales for the year ended December 31, 2018, was primarily due to a non-cash LIFO charge in 2017, partially offset by an increase in distribution expenses. The increase in distribution expenses was primarily due to wage pressure and increased transportation costs, as compared to 2017. During the year ended December 31, 2018, we did not realize net acquisition cost decreases, and as a result, we did not record a LIFO charge. During the year ended December 31, 2017, our LIFO costs were written down by approximately $22 million to reflect replacement cost.

​

Selling, general and administrative expenses:

SG&A for the year ended December 31, 2018, increased 8% to $3.22 billion (or 33.8% of sales) from $3.00 billion (or 33.4% of sales) for the same period in 2017. The increase in total SG&A dollars for the year ended December 31, 2018, was primarily the result of additional Team Members, facilities and vehicles to support our increased sales and store count, the planned allocation of a portion of the tax savings realized as a result of the U.S. Tax Cuts and Jobs Act, enacted in December 2017 (the “Tax Act”) and unfavorable comparison to a 2017 benefit of $9.1 million from the reduction in our legal accrual following the expiration of the statute of limitations related to a legacy claim. The increase in SG&A as a percentage of sales for the year ended December 31, 2018, was primarily due to our tax savings allocation initiatives and the 2017 legal accrual benefit.

​

​

Operating income:

As a result of the impacts discussed above, operating income for the year ended December 31, 2018, increased 5% to $1.82 billion (or 19.0% of sales) from $1.73 billion (or 19.2% of sales) for the same period in 2017.

​

Other income and expense:

Total other expense for the year ended December 31, 2018, increased 38% to $121 million (or 1.3% of sales), from $88 million (or 1.0% of sales) for the same period in 2017. The increase in total other expense for the year ended December 31, 2018, was primarily the result of increased interest expense on higher average outstanding borrowings.

​

Income taxes:

Our provision for income taxes for the year ended December 31, 2018, decreased 27% to $370 million (21.8% effective tax rate) from $504 million (30.8% effective tax rate) for the same period in 2017. The decreases in our provision for income taxes and our effective tax rate for the year ended December 31, 2018, were primarily the result of the lower federal corporate tax rate set forth by the Tax Act, partially offset by a $53 million benefit in 2017 from the required revaluation of our deferred income tax liabilities based on the lower federal corporate tax rate set forth by the Tax Act and lower excess tax benefits from share-based compensation in 2018, as compared 2017. During the year ended December 31, 2018 and 2017, excess tax benefits from share-based compensation were approximately $35 million and $49 million, respectively.

​

Net income:

As a result of the impacts discussed above, net income for the year ended December 31, 2018, increased 17% to $1.32 billion (or 13.9% of sales), from $1.13 billion (or 12.6% of sales) for the same period in 2017.

​

Earnings per share:

Our diluted earnings per common share for the year ended December 31, 2018, increased 27% to $16.10 on 82 million shares from $12.67 on 90 million shares for the same period in 2017. Due to the revaluation of our deferred income tax liabilities in 2017, our diluted earnings per common share for the year ended December 31, 2017, included a one-time benefit of $0.59.

​

LIQUIDITY AND CAPITAL RESOURCES

​

Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain our existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured revolving credit facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility. We believe that cash expected to be provided by operating activities and availability under our unsecured revolving credit facility will be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future. However, there can be no assurance that we will continue to generate cash flows at or above recent levels.

​

Liquidity and related ratios:

The following table highlights our liquidity and related ratios as of December 31, 2019 and 2018 (dollars in millions):

​	​	​	​	​	​	​	​	​	​
​	​	December 31,					​	Percentage
Liquidity and Related Ratios		2019			2018		​	Change
Current assets	​	$	3,834	​	$	3,543		8.2	%
Current liabilities	​		4,469	​		3,894		14.8	%
Working capital (1)	​		(636)	​		(351)		(81.2)	%
Total debt	​		3,891	​		3,417		13.9	%
Total equity	​	$	397	​	$	354		12.3	%
Debt to equity (2)	​		9.79:1	​		9.66:1		1.3	%

(1)	Working capital is calculated as current assets less current liabilities.

(2)	Debt to equity is calculated as total debt divided by total equity.

​

Current assets increased 8%, current liabilities increased 15%, total debt increased 14% and total equity increased 12% from 2018 to 2019. The increase in current assets was primarily due to the increase in inventory, resulting from our distribution expansion projects and the opening and acquiring of 241 net, new stores in 2019. The increase in current liabilities was primarily due to the adoption of

​

ASC 842 during 2019, resulting in the recognition of $316 million of current operating lease liabilities at December 31, 2019, and an increase in accounts payable, resulting from inventory growth related to distribution expansion projects and new store openings. Our accounts payable to inventory ratio was 104.4% as of December 31, 2019, as compared to 105.7% for the same period in 2018. The increase in total debt was attributable to the issuance of $500 million of 3.900% Senior Notes due 2029 and borrowings of $261 million on our revolving credit facility at December 31, 2019. The increase in total equity was due to a decrease in retained deficit, resulting from net income for the year ended December 31, 2019, and increased additional paid-in-capital, which was due to employee stock option exercises, partially offset by the impact of share repurchase activity, under our share repurchase program, on retained deficit and additional paid-in capital.

​

The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31, 2019, 2018 and 2017 (in thousands):

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
Liquidity:		2019			2018			2017
Total cash provided by/(used in):		​			​			​
Operating activities	​	$	1,708,479	​	$	1,727,555	​	$	1,403,687
Investing activities	​		(796,746)	​		(534,302)	​		(464,223)
Financing activities	​		(902,811)	​		(1,208,286)	​		(1,039,714)
Effect of exchange rate changes on cash	​	​	169	​	​	—	​	​	—
Net increase (decrease) in cash and cash equivalents	​	$	9,091	​	$	(15,033)	​	$	(100,250)
​	​	​	​	​	​	​	​	​	​
Capital expenditures	​	$	628,057	​	$	504,268	​	$	465,940
Free cash flow (1)	​	​	1,020,649	​	​	1,188,584	​		889,059

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

​

Cash and cash equivalents balances held outside of the U.S. were $5.7 million as of December 31, 2019, which was generally utilized to support the liquidity needs of foreign operations in Mexico, and no cash or cash equivalents were held outside of the U.S. as of December 31, 2018 and 2017.

​

Operating activities:

The decrease in net cash provided by operating activities in 2019 compared to 2018 was primarily due to a decrease in income taxes payable, a larger increase in net inventory investment and an increase in accounts receivable, primarily offset by increased operating income. The decrease from income taxes payable in 2019, compared to the increase in income taxes payable in 2018, was primarily the result of a prepaid income taxes position at the end of 2019, versus an income taxes payable position at the end of 2018. The increase in net inventory investment was the result of a larger increase in inventory in 2019, compared to 2018, primarily driven by our distribution expansion projects. The increase in accounts receivable during 2019, as compared to the decrease in 2018, was primarily due to the respective year-over-year business day timing of year-end.

​

The increase in net cash provided by operating activities in 2018 compared to 2017 was primarily due to increased operating income, reduced cash taxes paid, due to the Tax Act, and a reduction of accounts receivable, due to the business day timing of year-end 2018, as compared to 2017.

​

Investing activities:

The increase in net cash used in investing activities in 2019 compared to 2018 was primarily the result of an increase in capital expenditures, investments in tax credit equity investments and an increase in other investing activities. Total capital expenditures were $628 million in 2019 versus $504 million in 2018, and the increase was primarily related to distribution expansion projects, the timing of property acquisitions and construction costs for new stores and technology investments during 2019, as compared to 2018. Investments in tax credit equity investments were the result of entering into tax credit equity investments for the purpose of receiving renewable energy tax credits. The increase in other investing activities was due to the acquisition of Mayasa in 2019.

​

The increase in net cash used in investing activities in 2018 compared to 2017 was primarily the result of an increase in capital expenditures in 2018 and an increase in other investing activities. Total capital expenditures were $504 million and $466 million in 2018 and 2017, respectively, and the increase was primarily related to the timing of property acquisitions, closings, construction costs for new stores and the mix of owned versus leased stores opened during 2018, as compared to 2017. The increase in other investing activities was primarily due to more acquisition related expenditures in 2018, as compared to 2017.

​

​

We opened 200, 200, and 190 net, new domestic stores in 2019, 2018 and 2017, respectively. In addition, on January 1, 2019, we began operating 33 acquired Bennett stores, and during the year ended December 31, 2019, we merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores. After the close of business on November 29, 2019, we acquired 21 stores from Mayasa. We plan to open approximately 180 net, new domestic stores in 2020. The current costs associated with the opening of a new store, including the cost of land acquisition, building improvements, fixtures, vehicles, net inventory investment and computer equipment, are estimated to average approximately $1.5 million to $1.8 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.

​

Financing activities:

The decrease in net cash used in financing activities in 2019 compared to 2018 was primarily attributable to a lower level of repurchases of our common stock in 2019, compared to 2018, and a higher level of net borrowings during 2019, as compared to 2018.

​

The increase in net cash used in financing activities in 2018 compared to 2017 was primarily attributable to a lower level of net borrowings during 2018, as compared to 2017, partially offset by a lower level of repurchases of our common stock in 2018, as compared to 2017.

​

Unsecured revolving credit facility:

On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a five-year $1.20 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. 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 $1.80 billion at any time.

​

As of December 31, 2019 and 2018, we had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amounts of $39 million and $35 million, respectively, reducing the aggregate availability under the Credit Agreement by those amounts. As of December 31, 2019 and 2018, we had outstanding borrowings under the Revolving Credit Facility in the amounts of $261 million and $287 million, respectively.

​

Senior Notes:

On May 20, 2019, we issued $500 million aggregate principal amount of unsecured 3.900% Senior Notes due 2029 (“3.900% Senior Notes due 2029”) at a price to the public of 99.991% of their face value with U.S. Bank National Association (“U.S. Bank”) as trustee. Interest on the 3.900% Senior Notes due 2029 is payable on June 1 and December 1 of each year, which began on December 1, 2019, and is computed on the basis of a 360-day year.

​

We have issued a cumulative $3.65 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2029, with UMB Bank, N.A. and U.S. Bank as trustees. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year. None of our subsidiaries is a guarantor under our senior notes.

​

Debt covenants:

The indentures governing our senior notes contain covenants that limit our ability and the ability of certain of our subsidiaries to, among other things, create certain liens on assets to secure certain debt and enter into certain sale and leaseback transactions, and limit our ability to merge or consolidate with another company or transfer all or substantially all of our property, in each case as set forth in the indentures. These covenants are, however, subject to a number of important limitations and exceptions. As of December 31, 2019, we were in compliance with the covenants applicable to our senior notes.

​

The Credit Agreement contains certain covenants, including limitations on 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 we should default on any covenant contained within 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 our lenders.

​

​

We had a consolidated fixed charge coverage ratio of 5.21 times and 5.38 times as of December 31, 2019 and 2018, respectively, and a consolidated leverage ratio of 2.20 times and 2.10 times as of December 31, 2019 and 2018, respectively, remaining in compliance with all covenants related to the borrowing arrangements.

​

The table below outlines the calculations of the consolidated fixed charge coverage ratio and consolidated leverage ratio covenants, as defined in the Credit Agreement governing the Revolving Credit Facility, for the years ended December 31, 2019 and 2018 (dollars in thousands):

​	​	​	​	​	​	​	​
​	​	​	For the Year Ended
​	​	​	December 31,
​	​		2019			2018
GAAP net income		​	$	1,391,042	​	$	1,324,487
Add:	Interest expense	​		139,975	​		122,129
​	Rent expense (1)	​		338,697	​		317,283
​	Provision for income taxes	​		399,287	​		369,600
​	Depreciation expense	​		270,076	​		255,866
​	Amortization expense	​		799	​		3,071
​	Non-cash share-based compensation	​		21,921	​		20,176
Non-GAAP EBITDAR		​	$	2,561,797	​	$	2,412,612
​		​	​	​	​	​	​
​	Interest expense	​	$	139,975	​	$	122,129
​	Capitalized interest	​		12,998	​		9,092
​	Rent expense (1)	​		338,697	​		317,283
Total fixed charges		​	$	491,670	​	$	448,504
​	​	​	​	​	​	​	​
Consolidated fixed charge coverage ratio		​		5.21	​		5.38
​	​	​	​	​	​	​	​
GAAP debt		​	$	3,890,527	​	$	3,417,122
Add:	Stand-by letters of credit	​		38,870	​		35,148
​	Discount on senior notes	​		3,515	​		4,294
​	Debt issuance costs	​		16,958	​		15,584
​	Five-times rent expense	​		1,693,485	​		1,586,415
Non-GAAP adjusted debt		​	$	5,643,355	​	$	5,058,563
​	​	​	​	​	​	​	​
Consolidated leverage ratio		​		2.20	​		2.10

(1)	The table below outlines the calculation of Rent expense and reconciles Rent expense to Total lease cost, per Accounting Standard Codification 842 (“ASC 842”), adopted and effective January 1, 2019, the most directly comparable GAAP financial measure, for the twelve months ended December 31, 2019 (in thousands):

​	​	​	​	​
Total lease cost, per ASC 842, for the year ended December 31, 2019			$	398,294
Less:	Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2019	​		59,597
Rent expense for the year ended December 31, 2019		​	$	338,697

​

The table below outlines the calculation of Free cash flow and reconciles Free cash flow to Net cash provided by operating activities, the most directly comparable GAAP financial measure, for the years ended December 31, 2019, 2018 and 2017 (in thousands):

​	​	​	​	​	​	​	​	​	​	​
​	​	​	For the Year Ended
​	​	​	December 31,
​	​		2019			2018			2017
Cash provided by operating activities		​	$	1,708,479	​	$	1,727,555	​	$	1,403,687
Less:	Capital expenditures	​		628,057	​		504,268	​		465,940
​	Excess tax benefit from share-based compensation payments	​		25,992	​		34,703	​		48,688
​	Investment in tax credit equity investments	​		33,781	​		—	​		—
Free cash flow		​	$	1,020,649	​	$	1,188,584	​	$	889,059

​

​

Free cash flow, the consolidated fixed charge coverage ratio and the consolidated leverage ratio discussed and presented in the tables above are not derived in accordance with United States generally accepted accounting principles (“GAAP”). We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. We believe that the presentation of our free cash flow, consolidated fixed charge coverage ratio and consolidated leverage ratio provides meaningful supplemental information to both management and investors and reflects the required covenants under the Credit Agreement. We include these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the tables above, a reconciliation to the most directly comparable GAAP measures.

​

Share repurchase program:

In January of 2011, our Board of Directors approved a share repurchase program. Under the program, we may, from time to time, repurchase shares of our 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. Our Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 31, 2019, and February 5, 2020, our Board of Directors each time approved a resolution to increase the authorization amount under our share repurchase program by an additional $1.00 billion, resulting in a cumulative authorization amount of $13.75 billion. Each additional authorization is effective for a three-year period, beginning on its respective announcement date.

​

The following table identifies shares of our common stock that have been repurchased as part of our publicly announced share repurchase program for the year ended December 31, 2019 and 2018 (in thousands, except per share data):

​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018
Shares repurchased		​	3,877		​	6,061
Average price per share	​	$	369.55	​	$	282.80
Total investment	​	$	1,432,752	​	$	1,713,953

​

As of December 31, 2019, we had $569 million remaining under our share repurchase program. Subsequent to the end of the year and through February 28, 2020, we repurchased an additional 0.9 million shares of our common stock under our share repurchase program, at an average price of $400.78, for a total investment of $363 million. We have repurchased a total of 77.1 million shares of our common stock under our share repurchase program since the inception of the program in January of 2011 and through February 28, 2020, at an average price of $162.72 for a total aggregate investment of $12.54 billion. As of February 28, 2020, we had approximately $1.21 billion remaining under our share repurchase program.

​

CONTRACTUAL OBLIGATIONS

​

Our contractual obligations as of December 31, 2019, included commitments for short and long-term debt arrangements, interest payments related to long-term debt, future payments under non-cancelable lease arrangements, self-insurance reserves, purchase obligations for construction contract commitments and other long-term liabilities, which are identified in the table below and are fully disclosed in Note 5 “Leases,” Note 11 “Share-Based Compensation and Benefit Plans” and Note 13 “Commitments” to the Consolidated Financial Statements. We expect to fund these commitments primarily with operating cash flows expected to be generated in the normal course of business or through borrowings under our Revolving Credit Facility.

​

Deferred income taxes, as well as commitments with various suppliers for the purchase of inventory, are not reflected in the table below due to the absence of scheduled maturities, the nature of the account or the commitment’s cancellation terms. Due to the absence of scheduled maturities, the timing of certain of these payments cannot be determined, except for amounts estimated to be payable in 2020, which are included in “Current liabilities” on our Consolidated Balance Sheets.

​

We record a reserve for potential liabilities related to uncertain tax positions, including estimated interest and penalties, which are fully disclosed in Note 15 “Income Taxes” to the Consolidated Financial Statements. These estimates are not included in the table below because the timing related to the ultimate resolution or settlement of these positions cannot be determined. As of December 31, 2019, we recorded a net liability of $36.6 million related to these uncertain tax positions on our Consolidated Balance Sheets, all of which was included in “Other liabilities.”

​

We record a reserve for the projected obligation related to future payments under the Company’s nonqualified deferred compensation plan, which is fully disclosed in Note 11 “Share-Based Compensation and Benefit Plans” to the Consolidated Financial Statements. This estimate is not included in the table below because the timing related to the ultimate payment cannot be determined. As of

​

December 31, 2019, we recorded a liability of $32 million related to this uncertain liability on our Consolidated Balance Sheets, all of which was included in “Other liabilities.”

​

The following table identifies the estimated payments of the Company’s contractual obligations as of December 31, 2019 (in thousands):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Payments Due By Period
​	​	​		​	Before		​	Years		​	Years		​	Years 5
Contractual Obligations		Total			1 Year			1 and 2			3 and 4			and Over
Long-term debt principal and interest payments (1)	​	$	4,779,438	​	$	157,958	​	$	1,624,882	​	$	477,935	​	$	2,518,663
Future minimum lease payments under operating leases (2)	​		2,437,219	​		316,050	​		574,102	​		456,857	​		1,090,210
Self-insurance reserves (3)	​		168,279	​		79,079	​		54,148	​		21,772	​		13,280
Construction commitments	​		100,086	​		100,086	​		—	​		—	​		—
Capital contributions to certain tax credit equity investments (4)	​	​	95,000	​	​	95,000	​	​	—	​	​	—	​	​	—
Total contractual cash obligations	​	$	7,580,022	​	$	748,173	​	$	2,253,132	​	$	956,564	​	$	3,622,153

(1)

Our Revolving Credit Facility, which has a maximum aggregate commitment of $1.20 billion and matures in April 2022, bears interest (other than swing line loans), at our option, at either the Alternate Base Rate or Adjusted LIBO Rate (both as defined in the Credit Agreement) plus a margin, that will vary from 0.000% to 0.250% in the case of loans bearing interest at the Alternate Base Rate and 0.680% to 1.250% in the case of loans bearing interest at the Adjusted LIBO Rate, in each case based upon the better of the ratings assigned to our debt by Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, subject to limited exceptions. Swing line loans made under the Revolving Credit Facility bear interest at the Alternate Base Rate plus the applicable margin described above. In addition, we pay a facility fee on the aggregate amount of the commitments in an amount equal to a percentage of such commitments, varying from 0.070% to 0.250% per annum based upon the better of the ratings assigned to our debt by Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, subject to limited exceptions. Based on our current credit ratings, our margin for Alternate Base Rate loans was 0.000%, our margin for Eurodollar Revolving Loans was 0.900% and our facility fee was 0.100%. As of December 31, 2019, we had outstanding borrowings in the amount of $261 million under our Revolving Credit Facility.

(2)	The minimum lease payments above do not include potential amounts for percentage rent and other variable operating lease related costs, which are also required contractual obligations under our operating leases but are generally not fixed and can fluctuate from year to year. See Note 5 “Leases” to the Consolidated Financial Statements for further information on our operating leases.

(3)

We use various self-insurance mechanisms to provide for potential liabilities from workers’ compensation, vehicle and general liability, and employee health care benefits. The self-insurance reserves above are at the undiscounted obligation amount. The self-insurance reserves liabilities are recorded on our Consolidated Balance Sheets at our estimate of their net present value and do not have scheduled maturities; however, we can estimate the timing of future payments based upon historical patterns. See Note 13 “Commitments” to the Consolidated Financial Statements for further information on our self-insurance reserves.

(4)

We have entered into an agreement to make capital contributions to certain tax credit equity investments for the purpose of receiving renewable energy tax credits. We are required to make capital contributions upon achievement of project milestones by the solar energy farms, the timing of which is variable and outside of the Company’s control. See Note 13 “Commitments” to the Consolidated Financial Statements for further information on our capital contribution obligations.

​

OFF-BALANCE SHEET ARRANGEMENTS

​

Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity, for which we have an obligation to the entity that is not recorded in our consolidated financial statements. We historically utilized various off-balance sheet financial instruments, including sale-leaseback and synthetic lease transactions, but we have not entered into any such transactions for over 10 years and do not plan to utilize off-balance sheet arrangements in the future to fund our working capital requirements, operations or growth plans.

​

We issue stand-by letters of credit provided by a $200 million sub-limit under the Revolving Credit Facility that reduce our available borrowings under the Revolving Credit Facility. Those letters of credit are issued primarily to satisfy the requirements of workers’ compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term from the date of issuance. Letters of credit totaling $39 million and $35 million were outstanding at December 31, 2019 and 2018, respectively.

​

We have entered into an agreement to make capital contributions to certain tax credit equity investments for the purpose of receiving renewable energy tax credits. We are required to make capital contributions totaling $95 million upon achievement of project milestones by the solar energy farms, the timing of which is variable and outside of the Company’s control.

​

We do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

​

​

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

​

The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by management. Management bases its assumptions, estimates, and adjustments on historical experience, current trends and other factors believed to be relevant at the time the consolidated financial statements are prepared. Management believes that the following policies are critical due to the inherent uncertainty of these matters and the complex and subjective judgments required in establishing these estimates. Management continues to review these critical accounting policies and estimates to ensure that the consolidated financial statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates and such differences could be material.

​

Inventory Obsolescence and Shrink:

Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of obsolescence of our inventory is minimal. The products that we sell generally have applications in our markets for a long period of time in conjunction with the corresponding vehicle population. We have developed sophisticated systems for monitoring the life cycle of a given product and, accordingly, have historically been very successful in adjusting the volume of our inventory in conjunction with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory through a charge to cost of sales in the isolated instances where we believe that the market value of products is lower than our recorded cost. This reserve is based on our assumptions about the marketability of our existing inventory and is subject to uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be sold in future periods. Ultimately, our projections could differ from actual results and could result in a material impact to our stated inventory balances. We have historically not had to materially adjust our obsolescence reserves due to the factors discussed above and do not anticipate that we will experience material changes in our estimates in the future.

​

We also record a reserve to reduce the carrying value of our perpetual inventory to account for quantities in our perpetual records above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our extensive and frequent cycle counting programs and periodic, full physical inventories. To the extent that our estimates do not accurately reflect the actual unrecorded inventory shrinkage, we could potentially experience a material impact to our inventory balances. We have historically been able to provide a timely and accurate measurement of shrink and have not experienced material adjustments to our estimates. If the shrink reserve changed 10% from the estimate that we recorded based on our historical experience at December 31, 2019, the financial impact would have been approximately less than $1 million or less than 0.1% of pretax income for the year ended December 31, 2019.

​

Valuation of Long-Lived Assets and Goodwill:

We evaluate the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. As part of the evaluation, we review performance at the store level to identify any stores with current period operating losses that should be considered for impairment. A potential impairment has occurred if the projected future undiscounted cash flows realized from the best possible use of the asset are less than the carrying value of the asset. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual results could differ from these estimates, which could materially impact our impairment assessment.

​

We review 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. We have never recorded an impairment to goodwill. The process of evaluating goodwill for impairment involves a detailed qualitative assessment to be performed first and then, based on the conclusion of the totality of events and circumstances, a quantitative assessment may be performed, which involves the determination of the fair value of our Company using the market approach. When a quantitative assessment is performed, inherent in such fair value determinations are certain judgments and estimates, including estimates that incorporate assumptions marketplace participants would use in making their estimates of fair value. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, we will adjust the carrying value of these assets in the period in which the impairment occurs. Based on our qualitative assessment, we do not believe there has been any change of events or circumstances that would indicate that a reevaluation of goodwill is required as of December 31, 2019, nor do we believe goodwill would be at risk of failing impairment testing.

​

Supplier Concessions:

We receive concessions from our suppliers through a variety of programs and arrangements, including co-operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising allowances that are

​

incremental to our 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 material supplier concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also include amounts due to us relating to supplier purchases and product returns. Management regularly reviews amounts receivable from suppliers and assesses the need for a reserve for uncollectible amounts based on our evaluation of our suppliers’ financial position and corresponding ability to meet their financial obligations. Based on our historical results and current assessment, we have not recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not believe there is a reasonable likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability of our suppliers to pay us the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or gains that could be material.

​

Warranty Reserves:

We offer warranties on certain merchandise we sell with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of our suppliers. Certain suppliers provide upfront allowances to us in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, we bear the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received in lieu of warranty obligations and estimated warranty expense are recorded as an adjustment to the 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. Our historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. If warranty reserves were changed 10% from our estimated reserves at December 31, 2019, the financial impact would have been approximately $6 million or 0.3% of pretax income for the year ended December 31, 2019.

​

Self-Insurance Reserves:

We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities from workers’ compensation, general liability, vehicle liability, property loss, and Team Member health care benefits. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, we obtain third-party insurance coverage to limit our exposure for any individual workers’ compensation, general liability, vehicle liability or property loss claim. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. The assumptions made by management as they relate to each of these factors represent our judgment as to the most probable cumulative impact of each factor to our future obligations. Our calculation of self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date, and the application of alternative assumptions could result in a different estimate of these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may result in material losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on this additional information. These liabilities are recorded at our estimate of their net present value, using a credit-adjusted discount rate. These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We could apply alternative assumptions regarding the timing of payments or the applicable discount rate that could result in materially different estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves at December 31, 2019, the financial impact would have been approximately $16 million or 0.9% of pretax income for the year ended December 31, 2019.

​

Legal Reserves:

We maintain reserves for expenses associated with litigation, for which O’Reilly is currently involved. We are currently involved in litigation incidental to the ordinary conduct of our business. Management, with the assistance of outside legal counsel, must make estimates of potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures. If legal reserves were changed 10% from our estimated reserves at December 31, 2019, the financial impact would have been approximately $1 million or less than 0.1% of pretax income for the year ended December 31, 2019.

​

Taxes:

We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We regularly review our 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. Changes in our tax liability may occur in the future as our assessments change based on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s opinion, adequate provisions for income taxes have been made for all years presented. The estimates of our potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated with our various tax

​

positions and actual results could differ from our estimates. Alternatively, we could have applied assumptions regarding the eventual outcome of the resolution of open tax positions that could differ from our current estimates but would still be reasonable given the nature of a particular position. While our estimates are subject to the uncertainty noted in the preceding discussion, our initial estimates of our potential tax liabilities have historically not been materially different from actual results, except in instances where we have reversed liabilities that were recorded for periods that were subsequently closed with the applicable taxing authority.

​

INFLATION AND SEASONALITY

​

We have generally been successful in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition cost increased due to price increases industry-wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.

​

To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.

​

QUARTERLY RESULTS

​

The following tables set forth certain quarterly unaudited operating data for fiscal years ended December 31, 2019 and 2018. The unaudited quarterly information includes all adjustments, which management considers necessary for a fair presentation of the information shown (in thousands, except per share and comparable store sales data):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Fiscal 2019
​	​	First			​	Second			​	Third			​	Fourth
​		Quarter			​	Quarter			​	Quarter			​	Quarter
Comparable store sales		​	3.2	%	​	​	3.4	%	​	​	5.0	%	​	​	4.4	%
Sales	​	$	2,410,608		​	$	2,589,874		​	$	2,666,528		​	$	2,482,975
Gross profit	​		1,279,290		​		1,368,287		​		1,422,530		​		1,324,584
Operating income	​		444,786		​		498,074		​		536,363		​		441,503
Net income	​		321,152		​		353,681		​		391,293		​		324,916
Earnings per share – basic (1)	​	$	4.09		​	$	4.56		​	$	5.14		​	$	4.29
Earnings per share – assuming dilution (1)	​	$	4.05		​	$	4.51		​	$	5.08		​	$	4.25

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Fiscal 2018
​	​	First			​	Second			​	Third			​	Fourth
​		Quarter			​	Quarter			​	Quarter			​	Quarter
Comparable store sales		​	3.4	%	​	​	4.6	%	​	​	3.9	%	​	​	3.3	%
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

(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 our consolidated financial statements and related notes included elsewhere in this annual report, and the other financial information included therein.

​

RECENT ACCOUNTING PRONOUNCEMENTS

​

See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for information about recent accounting pronouncements.

​

​

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

​

Interest rate risk:

We are subject to interest rate risk to the extent we borrow against our unsecured revolving credit facility (the “Revolving Credit Facility”) with variable interest rates based on either an Alternative Base Rate or Adjusted LIBO Rate, as defined in the credit agreement governing the Revolving Credit Facility. As of December 31, 2019, we had outstanding borrowings under our Revolving Credit Facility in the amount of $261 million, at the weighted-average variable interest rate of 3.318%. At this borrowing level, a 0.25% increase in interest rates would have had an unfavorable annual impact on our pre-tax earnings and cash flows in the amount of $0.7 million.

​

We had outstanding fixed rate debt of $3.65 billion and $3.15 billion as of December 31, 2019 and 2018, respectively. The fair value of our fixed rate debt was estimated at $3.88 billion and $3.12 billion as of December 31, 2019 and 2018, respectively, which was determined by reference to quoted market prices.

​

Cash equivalents risk:

We invest certain of our excess cash balances in short-term, highly-liquid instruments with maturities of 90 days or less. We do not expect any material losses from our invested cash balances and we believe that our interest rate exposure is minimal. As of December 31, 2019, our cash and cash equivalents totaled $40 million.

​

Foreign currency risk:

Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than our entities’ functional currencies. To minimize our risk, we generally enter into transactions denominated in the respective functional currencies. Our foreign currency exposure arises from Mexican peso-denominated revenues and profits and their translation into U.S. dollars.

​

We view our investments in Mexican subsidiaries as long-term. The net asset exposure in the Mexican subsidiaries translated into U.S. dollars using the year-end exchange rates was $151.9 million at December 31, 2019. The year-end exchange rates of the Mexican peso with respect to the U.S. dollar increased by approximately 3% from the acquisition date of November 29, 2019. The potential loss in value of our net assets in the Mexican subsidiaries resulting from a 10% change in quoted foreign currency exchange rates at December 31, 2019, would be approximately $13.8 million. Any changes in our net assets in the Mexican subsidiaries relating to foreign currency exchange rates would be reflected in the financial statement through the foreign currency translation component of accumulated other comprehensive income, unless the Mexican subsidiaries are sold or otherwise disposed.

​

A 10% change in average exchange rates would not have had a material impact on our results of operations.

​

​

​

Item 8. Financial Statements and Supplementary Data

​

Index

​

​	​
​	Page
Management’s Report on Internal Control over Financial Reporting	41
Report of Independent Registered Public Accounting Firm: Internal Control over Financial Reporting	42
Report of Independent Registered Public Accounting Firm: Financial Statements	43
Consolidated Balance Sheets	45
Consolidated Statements of Income	46
Consolidated Statements of Comprehensive Income	47
Consolidated Statements of Shareholders’ Equity	48
Consolidated Statements of Cash Flows	49
Notes to Consolidated Financial Statements	50

​

​

​

​

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

​

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

​

Internal control over financial reporting includes all policies and procedures that

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

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

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

​

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

​

Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. 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, 2019, the Company’s internal control over financial reporting is effective based on those criteria.

​

As permitted by guidance issued by the Securities and Exchange Commission, management excluded from its assessment of its system of internal control over financial reporting the operations associated with the acquisition of Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), pursuant to a stock purchase agreement, which was completed after the close of business on November 29, 2019. The acquired operations were included in the consolidated financial statements of the Company, which constituted 2% of total assets as of December 31, 2019, and less than 1% of revenues and less than 1% of net income for the year ended December 31, 2019.

​

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 28, 2020		​	February 28, 2020

​

​

​

​

​

​

​

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, 2019, 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, 2019, based on the COSO criteria.

​

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Mayoreo de Autopartes y Aceites, S.A. de C.V. (Mayasa), which is included in the 2019 consolidated financial statements of the Company and constituted 2% of total assets as of December 31, 2019 and less than 1% of revenues and less than 1% of net income for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Mayasa.

​

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, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 28, 2020 expressed an unqualified opinion thereon.

​

Basis for Opinion

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

​

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

​

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

​

Definition and Limitations of Internal Control Over Financial Reporting

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

​

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

​

/s/ Ernst & Young LLP

​

Kansas City, Missouri

February 28, 2020

​

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, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2020 expressed an unqualified opinion thereon.

​

Adoption of New Accounting Standard

​

As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for leasing arrangements upon the adoption of Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. See below for discussion of our related critical audit matter.

​

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.

​

Critical Audit Matters

​

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

​

​	​
​	​	Valuation of Self-insurance Reserves
Description of the Matter	​	At December 31, 2019, the Company’s self-insurance reserve was $157 million. As discussed in Note 1 of the financial statements, self-insurance liabilities are estimated based upon historical claim experience and trend-lines. Furthermore, certain of these liabilities were recorded at an estimate of their net present value, using a discount rate. ​ Auditing management’s self-insurance reserves was complex and judgmental and required us to use our actuarial specialists due to the estimation required in determining the ultimate claim value and net present value

​

		of certain liabilities. The estimate is sensitive to assumptions such as the projected cost inflation, claim growth patterns and exposure forecasts.
How We Addressed the Matter in Our Audit	​	We obtained an understanding, evaluated the design of controls over the Company’s self-insurance estimation process and tested the operating effectiveness of those controls including management’s controls over reviewing the appropriateness of assumptions and the completeness and accuracy of the data underlying the reserves. ​ To test the Company’s determination of the estimated self-insurance reserves, we performed audit procedures that included, among others, involving a specialist to assist in the development of an independent actuarial estimate for the reserve balance based upon current industry and economic trends, comparing certain selected assumptions used by management to our independent estimates which were developed with the assistance of our specialists, testing the underlying data used by management in the development of the reserves and testing the mathematical accuracy of the calculations.

​

​	​
​	​	Adoption of New Lease Accounting Standard
Description of the Matter	​	As discussed above and in Note 1 to the consolidated financial statements, the Company adopted Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. The adoption of ASC 842 resulted in the recognition of right-of-use operating lease assets and operating lease liabilities of approximately $1.9 billion as of January 1, 2019. Since most of the leases do not provide a determinable implicit rate, the Company estimated its incremental borrowing rate (IBR) used to calculate its right of use assets and lease liabilities. ​ Auditing the Company’s adoption of ASC 842 was challenging and involved subjective auditor judgment because the Company is party to a significant number of lease contracts and certain aspects of adopting ASC 842 required management to exercise judgment in applying the new standard to its portfolio of lease contracts. In particular, auditing management’s estimate of the incremental borrowing rate was especially challenging as it involved a high degree of subjective auditor judgment when testing the reasonableness of the inputs and appropriateness of the rates applied to each lease.
How We Addressed the Matter in Our Audit	​	We obtained an understanding and evaluated the design of controls over the Company’s accounting for the adoption of the ASC 842. We tested the operating effectiveness of those controls over management’s application of accounting policies, evaluation of the completeness of the lease portfolio, and over management’s review of the IBR. ​ To test the Company’s implementation of the new leasing standard, our audit procedures included, among others, an evaluation of the completeness of the population of contracts that meet the definition of a lease under ASC 842 and testing the accuracy of the Company’s calculations of initial right-of-use assets and lease liabilities. Additionally, we evaluated management’s methodology for developing the IBR, sensitized the impacts of discounting, and compared the management’s IBRs to the Company’s existing market transactions with comparable terms.

​

​

/s/ Ernst & Young LLP

​

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

Kansas City, Missouri

February 28, 2020

​

​

​

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

​

​	​	​	​	​	​	​
​	​	December 31,
​	​	2019		​	2018
Assets		​			​
Current assets:		​			​
Cash and cash equivalents	​	$	40,406	​	$	31,315
Accounts receivable, less allowance for doubtful accounts $14,417 in 2019 and $13,238 in 2018	​		214,915	​		192,026
Amounts receivable from suppliers	​		79,492	​		78,155
Inventory	​		3,454,092	​		3,193,344
Other current assets	​		44,757	​		48,262
Total current assets	​		3,833,662	​		3,543,102
​	​	​	​	​	​	​
Property and equipment, at cost	​		6,191,427	​		5,645,552
Less: accumulated depreciation and amortization	​		2,243,224	​		2,058,550
Net property and equipment	​		3,948,203	​		3,587,002
​	​	​	​	​	​	​
Operating lease, right-of-use assets	​	​	1,928,369	​	​	—
Goodwill	​		936,814	​		807,260
Other assets, net	​		70,112	​		43,425
Total assets	​	$	10,717,160	​	$	7,980,789
​	​	​	​	​	​	​
Liabilities and shareholders’ equity	​			​
Current liabilities:	​			​
Accounts payable	​	$	3,604,722	​	$	3,376,403
Self-insurance reserves	​		79,079	​		77,012
Accrued payroll	​		100,816	​		86,520
Accrued benefits and withholdings	​		98,539	​		89,082
Income taxes payable	​		—	​		11,013
Current portion of operating lease liabilities	​	​	316,061	​	​	—
Other current liabilities	​		270,210	​		253,990
Total current liabilities	​		4,469,427	​		3,894,020
​	​	​	​	​	​	​
Long-term debt	​		3,890,527	​		3,417,122
Operating lease liabilities, less current portion	​	​	1,655,297	​	​	—
Deferred income taxes	​		133,280	​		105,566
Other liabilities	​		171,289	​		210,414
​	​	​	​	​	​	​
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 –	​	​	​	​	​	​
75,618,659 as of December 31, 2019, and	​	​	​	​	​	​
79,043,919 as of December 31, 2018	​	​	756	​		790
Additional paid-in capital	​		1,280,760	​		1,262,063
Retained deficit	​		(889,066)	​		(909,186)
Accumulated other comprehensive income	​	​	4,890	​	​	—
Total shareholders’ equity	​		397,340	​		353,667
​	​	​	​	​	​	​
Total liabilities and shareholders’ equity	​	$	10,717,160	​	$	7,980,789

​

See accompanying Notes to consolidated financial statements.

​

​

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Sales	​	$	10,149,985	​	$	9,536,428	​	$	8,977,726
Cost of goods sold, including warehouse and distribution expenses	​		4,755,294	​		4,496,462	​		4,257,043
Gross profit	​		5,394,691	​		5,039,966	​		4,720,683
​	​	​	​	​	​	​	​	​	​
Selling, general and administrative expenses	​		3,473,965	​		3,224,782	​		2,995,283
Operating income	​		1,920,726	​		1,815,184	​		1,725,400
​	​	​	​	​	​	​	​	​	​
Other income (expense):	​			​			​
Interest expense	​		(139,975)	​		(122,129)	​		(91,349)
Interest income	​		2,545	​		2,521	​		2,347
Other, net	​		7,033	​		(1,489)	​		1,406
Total other expense	​		(130,397)	​		(121,097)	​		(87,596)
​	​	​	​	​	​	​	​	​	​
Income before income taxes	​		1,790,329	​		1,694,087	​		1,637,804
Provision for income taxes	​		399,287	​		369,600	​		504,000
Net income	​	$	1,391,042	​	$	1,324,487	​	$	1,133,804
​	​	​	​	​	​	​	​	​	​
Earnings per share-basic:	​			​			​
Earnings per share	​	$	18.07	​	$	16.27	​	$	12.82
Weighted-average common shares outstanding – basic	​		76,985	​		81,406	​		88,426
​	​	​	​	​	​	​	​	​	​
Earnings per share-assuming dilution:	​			​			​
Earnings per share	​	$	17.88	​	$	16.10	​	$	12.67
Weighted-average common shares outstanding – assuming dilution	​		77,788	​		82,280	​		89,502

​

See accompanying Notes to consolidated financial statements.

​

​

​

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Net income	​	$	1,391,042	​	$	1,324,487	​	$	1,133,804
Other comprehensive income:	​	​	​	​	​	​	​	​	​
Foreign currency translation adjustments	​		4,890	​		—	​		—
Total other comprehensive income	​	​	4,890	​	​	—	​	​	—
​	​	​	​	​	​	​	​	​	​
Comprehensive income	​	$	1,395,932	​	$	1,324,487	​	$	1,133,804

​

See accompanying Notes to consolidated financial statements.

​

​

​

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		​	​	​	​		​			​		​	Accumulated			​	​
​	​	​	​	​	​	​	Additional		​	Retained		​	Other		​	​	​
​	​	Common Stock				​	Paid-In		​	Earnings		​	Comprehensive		​	​	​
​		Shares		Par Value			Capital			(Deficit)		​	Income			Total
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
Cumulative effective adjustment from adoption of ASU 2016-02	​	—	​	​	—	​	​	—	​	​	(1,410)	​	​	—	​	​	(1,410)
Net income		—	​		—	​		—	​		1,391,042	​		​	​		1,391,042
Other comprehensive income	​	—	​	​	—	​	​	—	​	​	—	​	​	4,890	​	​	4,890
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes		46	​		—	​		15,302	​		—	​		—	​		15,302
Net issuance of common stock upon exercise of stock options		406	​		5	​		46,101	​		—	​		—	​		46,106
Share based compensation		—	​		—	​		20,534	​		—	​		—	​		20,534
Share repurchases, including fees		(3,877)	​		(39)	​		(63,240)	​		(1,369,512)	​		—	​		(1,432,791)
Balance at December 31, 2019		75,619	​	$	756	​	$	1,280,760	​	$	(889,066)	​	$	4,890	​	$	397,340

​

See accompanying Notes to consolidated financial statements.

​

​

​

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Operating activities:		​			​			​
Net income	​	$	1,391,042	​	$	1,324,487	​	$	1,133,804
Adjustments to reconcile net income to net cash provided by operating activities:	​			​			​
Depreciation and amortization of property, equipment and intangibles	​		270,875	​		258,937	​		233,845
Amortization of debt discount and issuance costs	​		3,916	​		3,470	​		2,871
Deferred income taxes	​		21,158	​		20,160	​		(4,593)
Share-based compensation programs	​		21,921	​		20,176	​		19,401
Other	​		7,529	​		9,895	​		11,790
Changes in operating assets and liabilities:	​		​	​		​	​
Accounts receivable	​		(15,577)	​		18,138	​		(27,742)
Inventory	​		(239,912)	​		(163,367)	​		(231,802)
Accounts payable	​		213,423	​		177,676	​		253,265
Income taxes payable	​		(20,139)	​		22,903	​		14,220
Accrued payroll	​		14,296	​		9,373	​		5,430
Accrued benefits and withholdings	​		16,868	​		28,022	​		3,042
Other	​		23,079	​		(2,315)	​		(9,844)
Net cash provided by operating activities	​		1,708,479	​		1,727,555	​		1,403,687
​	​	​	​	​	​	​	​	​	​
Investing activities:	​			​			​
Purchases of property and equipment	​		(628,057)	​		(504,268)	​		(465,940)
Proceeds from sale of property and equipment	​		7,118	​		4,784	​		4,464
Investment in tax credit equity investments	​	​	(33,781)	​	​	—	​	​	—
Other, including acquisitions, net of cash acquired	​		(142,026)	​		(34,818)	​		(2,747)
Net cash used in investing activities	​		(796,746)	​		(534,302)	​		(464,223)
​	​	​	​	​	​	​	​	​	​
Financing activities:	​			​			​
Proceeds from borrowings on revolving credit facility	​		2,708,000	​		2,414,000	​		3,101,000
Payments on revolving credit facility	​		(2,734,000)	​		(2,473,000)	​		(2,755,000)
Proceeds from the issuance of long-term debt	​		499,955	​		498,660	​		748,800
Payment of debt issuance costs	​		(3,990)	​		(3,923)	​		(7,590)
Repurchases of common stock	​		(1,432,791)	​		(1,714,013)	​		(2,172,530)
Net proceeds from issuance of common stock	​		60,206	​		72,146	​		45,762
Other	​		(191)	​		(2,156)	​		(156)
Net cash used in financing activities	​		(902,811)	​		(1,208,286)	​		(1,039,714)
​	​	​	​	​	​	​	​	​	​
Effect of exchange rate changes on cash	​	​	169	​	​	—	​	​	—
Net increase (decrease) in cash and cash equivalents	​		9,091	​		(15,033)	​		(100,250)
Cash and cash equivalents at beginning of the year	​		31,315	​		46,348	​		146,598
Cash and cash equivalents at end of the year	​	$	40,406	​	$	31,315	​	$	46,348
​	​	​	​	​	​	​	​	​	​
Supplemental disclosures of cash flow information:	​			​			​
Income taxes paid	​	$	394,931	​	$	311,376	​	$	496,728
Interest paid, net of capitalized interest	​		134,634	​		117,938	​		77,766

​

See accompanying Notes to consolidated financial statements.

​

​

​

​

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

​

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, 2019, the Company owned and operated 5,439 stores in 47 U.S. states and 21 stores in Mexico, servicing both do-it-yourself (“DIY”) and the professional service provider customers. The Company’s robust distribution system provides stores with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of other auto parts retailers.

​

Segment reporting:

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

​

Principles of consolidation:

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

​

Use of estimates:

The preparation of the consolidated financial statements, in conformity with United States (“U.S.”) 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.

​

Foreign Currency:

The Company accounts for its Mexican operations using the local market currency, the Mexican peso, and converts its financial statements compiled for these operations from the Mexican peso to U.S. dollars. The cumulative gain on currency translation is included as a component of “Accumulated other comprehensive income” on the accompanying Consolidated Balance Sheets. See Note 12 for further information concerning the Company’s accumulated other comprehensive income.

​

Accounts receivable:

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable. Amounts due to the Company from its Team Members are included in “Accounts receivable” on the accompanying Consolidated Balance Sheets. These amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts receivable due from Team Members was approximately $0.9 million and $1.1 million as of December 31, 2019 and 2018, 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, 2019 or 2018.

​

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 $3.47 billion and $3.20 billion as of December 31, 2019 and 2018, respectively. LIFO costs exceeded replacement costs by $31.0 million and $107.3 million at December 31, 2019 and 2018, 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 3 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 4 for further information concerning the Company’s property and equipment.

​

Goodwill and other intangibles:

The accompanying Consolidated Balance Sheets at December 31, 2019 and 2018, include goodwill and other intangible assets recorded as the result of acquisitions. The Company operates a single reporting unit and 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 2019, the goodwill impairment test included a qualitative assessment. During 2018, 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’s qualitative assessment found no evidence to suggest it is more likely than not that its fair value is less than its carrying amount, including goodwill, as of December 31, 2019. The Company’s quantitative assessment determined that its fair value exceeded

​

its carrying value, including goodwill, as of December 31, 2018. As such, no goodwill impairment adjustment was required as of December 31, 2019 and 2018. Finite-lived intangibles are carried at amortized cost and amortization is calculated using the straight-line method, generally over the estimated useful lives of the intangibles. See Note 6 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; however, during the years ended December 31, 2019 and 2018, the Company recorded a charge of $1.9 million and $11.4 million, respectively, related to its long-lived assets, primarily due to the disposal of certain software projects that were 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, 2019 and 2018. See Note 3 for further information concerning the fair value measurements of the Company’s marketable securities. See Note 11 for further information concerning the Company’s benefit plans.

​

Leases:

The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases. Lease components are not accounted for separately from nonlease components. Leases generally include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or incremental step increase provisions. The exercise of renewal options is typically at the Company’s sole discretion and all operating lease expense is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain surplus real estate to third parties. Right-of-use assets and corresponding operating lease liabilities are recognized for all leases with an initial term greater than 12 months. See Note 5 for further information concerning the Company’s operating leases.

​

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, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​
​	​	December 31,
​		2019			2018
Self-insurance reserves (undiscounted)	​	$	168,397	​	$	157,538
Self-insurance reserves (discounted)	​		156,585	​		146,718

​

The current portion of the Company’s discounted self-insurance reserves totaled $79.1 million and $77.0 million as of December 31, 2019 and 2018, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidate Balance Sheets as of December 31, 2019 and 2018. The remainder was included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2019 and 2018.

​

​

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 8 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 9 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.

​

Over-the-counter retail sales to 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 10 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

​

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 $79.3 million, $81.4 million and $83.7 million for the years ended December 31, 2019, 2018 and 2017, 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 share-based compensation plans and benefit 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, restricted stock awards and stock appreciation rights issued under the Company’s incentive plans and stock issued through the Company’s employee stock purchase plan. See Note 11 for further information concerning the Company’s share-based compensation and benefit 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, 2019, 2018 and 2017, were $13.0 million, $9.1 million and $8.5 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 $18.0 million and $17.1 million, net of accumulated amortization, as of December 31, 2019 and 2018, respectively, of which $1.1 million and $1.5 million

​

were included in “Other assets, net” as of December 31, 2019 and 2018, 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 $3.5 million and $4.3 million as of December 31, 2019 and 2018, respectively.

​

See Note 7 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 U.S. 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, 2019 and 2018, 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 15 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 16 for further information concerning the Company’s common stock equivalents.

​

New accounting pronouncements:

In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity is 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 adopted this new guidance with its first quarter ending March 31, 2019, 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, the transitional practical expedient for the treatment of existing land easements and the practical expedient to make an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components; however, the Company did not elect the hindsight transitional practical expedient. The Company made an accounting policy election to not apply recognition requirements of the guidance to short-term leases. Due to the adoption of this new guidance, the Company recognized right-of-use assets and lease liabilities of $1.9 billion and $2.0 billion, respectively, on the accompanying Condensed Consolidated Balance Sheets as of December 31, 2019. The difference between the right-of-use assets and lease liabilities on the accompanying Condensed Consolidated Balance Sheet was primarily due to the accrual for straight-line rent expense. The Company made an adjustment to opening “Retained Deficit” on the accompanying Condensed Consolidated Balance Sheet in the amount of $1.4 million, net of the deferred tax impact, related to the adoption of this new guidance. With the adoption of this new guidance, the Company’s favorable lease assets and unfavorable lease liabilities, from a previous acquisition, were eliminated through an adjustment to opening “Operating lease, right-of-use assets” on the accompanying Condensed Consolidated Balance Sheet. The adoption of this new guidance did 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 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 early adopted this guidance beginning with its first quarter ending March 31, 2019. The application of this new guidance did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

​

NOTE 2 – BUSINESS COMBINATION

​

After the close of business on November 29, 2019, the Company completed the acquisition of Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), a specialty retailer of automotive aftermarket parts headquartered in Guadalajara, Jalisco, Mexico pursuant to a stock purchase agreement. At the time of the acquisition, Mayasa operated six distribution centers, 21 Orma Autopartes stores and served over 2,000 independent jobber locations in 28 Mexican states. The results of Mayasa’s operations have been included in the Company’s consolidated financial statements beginning from the date of acquisition. Pro forma results of operations related to the acquisition of Mayasa are not presented as Mayasa’s results are not material to the Company’s results of operations.

​

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

​

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

​

See Note 6 for further information concerning the Company’s goodwill and other intangible assets.

​

​

NOTE 3 – 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, 2019 and 2018. The Company recorded an increase in fair value related to its marketable securities in the amount of $5.8 million for the year ended December 31, 2019, and a decrease in the amount of $1.7 million for the year ended December 31, 2018, 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, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2019
​	​	Quoted Priced in Active Markets		​	Significant Other		​	Significant		​	​	​
​	​	for Identical Instruments		​	Observable Inputs		​	Unobservable Inputs		​	​	​
​		(Level 1)			(Level 2)			(Level 3)			Total
Marketable securities	​	$	32,201	​	$	—	​	$	—	​	$	32,201

​

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

​

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, 2019 and 2018, 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, 2019 and 2018.

​

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, 2019 and 2018, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2019					​	December 31, 2018
​	​	Carrying Amount		​	Estimated Fair Value		​	Carrying Amount		​	Estimated Fair Value
Senior Notes	​	$	3,629,527	​	$	3,881,925	​	$	3,130,122	​	$	3,116,046

​

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 7 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 4 – 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, 2019 and 2018, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):

​

​	​	​	​	​	​	​	​	​
​		Original Useful		​		​	​
​	​	Lives	​	December 31, 2019		​	December 31, 2018
Land	​	​	​	$	805,556		$	745,050
Buildings and building improvements	​	15 – 39 years	​		2,378,074		​	2,147,969
Leasehold improvements	​	3 – 25 years	​		751,155		​	686,058
Furniture, fixtures and equipment	​	3 – 20 years	​		1,450,444		​	1,350,808
Vehicles	​	5 – 10 years	​		447,939		​	424,421
Construction in progress	​	​	​		358,259		​	291,246
Total property and equipment	​	​	​		6,191,427		​	5,645,552
Less: accumulated depreciation and amortization	​	​	​		2,243,224		​	2,058,550
Net property and equipment	​	​	​	$	3,948,203	​	$	3,587,002

​

The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $267.3 million, $246.0 million and $232.7 million for the years ended December 31, 2019, 2018 and 2017, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

​

The Company recorded a charge of $1.9 million and $11.4 million related to property and equipment for the year ended December 31, 2019 and 2018, respectively, primarily due to the disposal of certain software projects that were 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 5 – LEASES

​

Operating lease commitments:

See Note 1 for further information concerning the Company’s adoption of Accounting Standard Codification 842 - Leases.

​

The following table summarizes Total lease cost for the year ended December 31, 2019, which was primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in thousands):

​

​	​	​	​
​	​	For the Year Ended
​		December 31, 2019
Operating lease cost	​	$	320,480
Short-term operating lease cost	​		5,899
Variable operating lease cost	​		76,027
Sublease income	​		(4,112)
Total lease cost	​	$	398,294

​

The following table summarizes the Net rent expense amounts, prior to the adoption of Accounting Standard Codification 842 – Leases, for the years ended December 31, 2018 and 2017, 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
Minimum operating lease expense	​	$	305,613	​	$	289,245
Contingent rents	​		806	​		1,049
Other lease related occupancy costs	​		14,449	​		12,478
Total rent expense	​		320,868	​		302,772
Less: sublease income	​		3,585	​		4,158
Net rent expense	​	$	317,283	​	$	298,614

​

​

The following table summarizes other lease related information for the year ended December 31, 2019:

​

​	​	​	​	​
​		For the Year Ended
​	​	December 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities:		​		​
Operating cash flows from operating leases (in thousands)	​	$	318,048	​
Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands)	​	$	233,584	​
Weighted-average remaining lease term - operating leases	​		10.4	Years
Weighted-average discount rate - operating leases	​		4.1	%

​

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 thereafter, and reconciles to the present value of the “Operating lease liabilities, less current portion” included in the accompanying Consolidated Balance Sheet as of December 31, 2019 (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​	​	December 31, 2019
​		Related Parties			Non-Related Parties			Total
2020	​	$	4,765	​	$	311,285	​	$	316,050
2021	​	​	4,347	​	​	294,909	​	​	299,256
2022	​		3,590	​		271,256	​		274,846
2023	​		3,218	​		240,815	​		244,033
2024	​		1,472	​		211,352	​		212,824
Thereafter	​		2,801	​		1,087,409	​		1,090,210
Total operating lease payments	​		20,193	​		2,417,026	​		2,437,219
Less: present value discount	​		2,049	​		463,812	​		465,861
Total operating lease liabilities	​		18,144	​		1,953,214	​		1,971,358
Less: current portion of operating lease liabilities	​		4,765	​		311,296	​		316,061
Operating lease liabilities, less current portion	​	$	13,379	​	$	1,641,918	​	$	1,655,297

​

See Note 14 for further information concerning the Company’s related party operating leases.

​

The future minimum lease payments under the Company’s operating leases, in the table above, do not include potential amounts for percentage rent and other variable operating lease related costs and have not been reduced by expected future minimum sublease income under non-cancelable subleases, which was approximately $18.6 million as of December 31, 2019.

​

The present value discount component of the future minimum lease payments under the Company’s operating leases, in the table above, was primarily calculated using the Company’s incremental borrowing rate based on information available at the lease commencement or modification date. Inputs for the calculation of the Company’s incremental borrowing rate include valuations and yields of U.S. domestic investment grade corporate bonds and the applicable credit spread over comparable U.S. Treasury rates, adjusted to a collateralized basis by estimating the credit spread improvement that would result from an upgrade of one ratings classification. For leases that commenced prior to January 1, 2019, the incremental borrowing rate used was as of January 1, 2019. When the implicit rate of a lease is available, the implicit rate is used in the calculation and not the Company’s incremental borrowing rate.

​

​

NOTE 6 – GOODWILL AND OTHER INTANGIBLES

​

Goodwill:

Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances 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, 2019 or 2018.

​

The carrying amount of the Company’s goodwill was included in “Goodwill” on the accompanying Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively. During the years ended December 31, 2019 and 2018, the Company recorded an increase in goodwill of $1.5 million and $18.2 million, respectively, resulting from small acquisitions.

​

The preliminary purchase price allocation related to the acquisition of Mayasa resulted in the initial recognition of goodwill and intangible assets in the amount of $128.1 million as of December 31, 2019, including changes resulting from foreign currency translations. This provisional amount will change as additional information is obtained and valuation work is completed during the initial measurement period.

​

​

The following table identifies the changes in goodwill and acquisition intangibles, which were included in “Goodwill” on the accompanying Consolidated Balance Sheets for the years ended December 31, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​
​		2019			2018
Goodwill, balance at January 1,	​	$	807,260	​	$	789,058
Change in goodwill related to small acquisitions	​		1,464	​		18,202
Provisional goodwill and intangibles related to Mayasa acquisition	​	​	128,090	​	​	—
Goodwill, balance at December 31,	​	$	936,814	​	$	807,260

​

As of December 31, 2019 and 2018, other than goodwill, the Company did not have any indefinite-lived intangible assets. Indefinite lived intangible assets related to the acquisition of Mayasa may be identified, valued and recorded during the measurement period.

​

Intangibles other than goodwill:

The following table identifies the components of the Company’s amortizable intangibles as of December 31, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Cost of Amortizable					​	Accumulated Amortization					​	​
​	​	Intangibles					​	(Expense) Benefit					​	Net Amortizable Intangibles
​		December 31,			December 31,			December 31,			December 31,			December 31,			December 31,
​	​	2019		​	2018		​	2019		​	2018		​	2019		​	2018
Amortizable intangible assets:		​			​			​			​			​			​
Favorable leases	​	$	—	​	$	18,930	​	$	—	​	$	(12,564)	​	$	—	​	$	6,366
Non-compete agreements	​		2,717	​		2,757	​		(928)	​		(679)	​		1,789	​		2,078
Total amortizable intangible assets	​	$	2,717	​	$	21,687	​	$	(928)	​	$	(13,243)	​	$	1,789	​	$	8,444
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Unfavorable leases	​	$	—	​	$	10,180	​	$	—	​	$	8,486	​	$	—	​	$	1,694

​

During the years ended December 31, 2019 and 2018, the Company recorded non-compete agreement assets in conjunction with small acquisitions in the amounts of less than $0.1 million and $0.9 million, respectively.

​

With the adoption of Accounting Standard Codification 842 – Leases, the Company’s favorable lease assets and unfavorable lease liabilities, from a previous acquisition, were eliminated. See Note 1 for further information concerning the Company’s adoption of Accounting Standard Codification 842 – Leases.

​

In prior years, 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. For the years ended December 31, 2018 and 2017, the Company recorded amortization expense of $1.4 million and $1.6 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.

​

In prior years, 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. For the years ended December 31, 2018 and 2017, the Company recognized an amortized benefit of $0.9 million and $1.5 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.

​

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, 2019 (in thousands):

​

​	​	​	​
​	​	December 31, 2019
​		Amortization Expense
2020	​	$	296
2021	​		275
2022	​		247
2023	​		218
2024	​		201
Total	​	$	1,237

​

​

​

​

NOTE 7 – 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, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​
​	​	December 31,
​	​	​	2019	​	​	2018
Revolving Credit Facility, weighted-average variable interest rate of 3.318%	​	$	261,000	​	$	287,000
4.875% Senior Notes due 2021, effective interest rate of 4.949%	​		500,000	​		500,000
4.625% Senior Notes due 2021, effective interest rate of 4.644%	​		300,000	​		300,000
3.800% Senior Notes due 2022, effective interest rate of 3.845%	​		300,000	​		300,000
3.850% Senior Notes due 2023, effective interest rate of 3.851%	​		300,000	​		300,000
3.550% Senior Notes due 2026, effective interest rate of 3.570%	​		500,000	​		500,000
3.600% Senior Notes due 2027, effective interest rate of 3.619%	​		750,000	​		750,000
4.350% Senior Notes due 2028, effective interest rate of 4.383%	​		500,000	​		500,000
3.900% Senior Notes due 2029, effective interest rate of 3.901%	​	​	500,000	​	​	—
Principal amount of long-term debt	​	​	3,911,000	​	​	3,437,000
Less: Unamortized discount and debt issuance costs	​	​	20,473	​	​	19,878
Long-term debt	​	$	3,890,527	​	$	3,417,122

​

The following table identifies the principal maturities of the Company’s financing facilities as of December 31, 2019 (in thousands):

​

​	​	​	​
​		Scheduled Maturities
2020	​	$	—
2021	​		800,000
2022	​		561,000
2023	​		300,000
2024	​		—
Thereafter	​		2,250,000
Total	​	$	3,911,000

​

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, 2019 and 2018, 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 $38.9 million and $35.1 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, 2019, 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, 2019, the Company remained in compliance with all covenants under the Credit Agreement.

​

Senior notes:

On May 20, 2019, the Company issued $500 million aggregate principal amount of unsecured 3.900% Senior Notes due 2029 (“3.900% Senior Notes due 2029”) at a price to the public of 99.991% of their face value with U.S. Bank National Association (“U.S. Bank”) as trustee. Interest on the 3.900% Senior Notes due 2029 is payable on June 1 and December 1 of each year, which began on December 1, 2019, and is computed on the basis of a 360-day year.

​

The Company has issued a cumulative $3.7 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2029, with UMB Bank, N.A. and U.S. Bank as trustees. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year. None of the Company’s subsidiaries is a guarantor under the senior notes. Each of the senior notes is subject to certain customary covenants, with which the Company complied as of December 31, 2019.

​

​

NOTE 8 – WARRANTIES

​

The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2019 and 2018. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​
​		2019			2018
Warranty liabilities, balance at January 1,	​	$	52,220	​	$	44,398
Warranty claims	​		(99,267)	​		(89,557)
Warranty accruals	​		108,116	​		97,379
Warranty liabilities, balance at December 31,	​	$	61,069	​	$	52,220

​

​

​

NOTE 9 – SHARE REPURCHASE PROGRAM

​

In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on May 31, 2019, and February 5, 2020, 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 $13.8 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 for the year ended December 31, 2019 and 2018 (in thousands, except per share data):

​

​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018
Shares repurchased		​	3,877		​	6,061
Average price per share	​	$	369.55	​	$	282.80
Total investment	​	$	1,432,752	​	$	1,713,953

​

As of December 31, 2019, the Company had $568.7 million remaining under its share repurchase program. Subsequent to the end of the year and through February 28, 2020, the Company repurchased an additional 0.9 million shares of its common stock under its share repurchase program, at an average price of $400.78, for a total investment of $363.4 million. The Company has repurchased a total of 77.1 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through February 28, 2020, at an average price of $162.72, for a total aggregate investment of $12.5 billion.

​

​

NOTE 10 – REVENUE

​

The table below identifies the Company’s revenues disaggregated by major customer type for the years ended December 31, 2019, 2018 and 2017 (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Sales to do-it-yourself customers	​	$	5,612,390	​	$	5,351,035	​	$	5,113,288
Sales to professional service provider customers		​	4,369,541		​	4,035,898		​	3,724,220
Other sales and sales adjustments		​	168,054		​	149,495		​	140,218
Total sales	​	$	10,149,985	​	$	9,536,428	​	$	8,977,726

​

As of December 31, 2019 and 2018, the Company had recorded a deferred revenue liability of $4.1 million and $4.3 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, 2019, 2018 and 2017, the Company recognized $15.6 million, $15.9 million and $17.6 million, respectively, of revenue related to its loyalty program, which were included in “Sales” on the accompanying Consolidated Statements of Income.

​

NOTE 11 – SHARE-BASED COMPENSATION AND BENEFIT PLANS

​

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

​

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, 2019 (in thousands):

​

​	​	​	​	​
​	​	December 31, 2019
​		Total Shares Authorized for		Shares Available for Future
Plans	​	Issuance under the Plans	​	Issuance under the Plans
Incentive Plans		34,650		5,749
Employee Stock Purchase Plan		4,250		551
Profit Sharing and Savings Plan		4,200		349

​

Stock options:

The Company’s incentive plans provide for the granting of stock options for the purchase of common stock of the Company to certain key employees of the Company. Employee stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant. Employee stock options granted under the plans expire after 10 years and typically vest 25% per year, over four years. The Company records compensation expense for the grant date fair value of the option awards evenly over the vesting period or minimum required service period.

​

The table below identifies the employee stock option activity under these plans during the year ended December 31, 2019:

​

​	​	​	​	​	​	​	​	​	​	​	​
​		​		​			Average			Aggregate
​	​	Shares	​	Weighted- Average		​	Remaining		​	Intrinsic Value
​	​	(in thousands)	​	Exercise Price		​	Contractual Terms		​	(in thousands)
Outstanding at December 31, 2018		1,860	​	$	178.57			​		​
Granted		214	​		370.63			​		​
Exercised		(406)	​		113.66			​		​
Forfeited or expired		(33)	​		263.15			​		​
Outstanding at December 31, 2019		1,635	​	$	218.10		5.9	Years	​	$	360,003
Vested or expected to vest at December 31, 2019		1,598	​	$	215.97		5.9	Years	​	$	355,172
Exercisable at December 31, 2019		1,033	​	$	170.77		4.6	Years	​	$	276,414

​

​

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, 2019, 2018 and 2017:

​

​	​	​	​	​	​	​	​	​	​
​	​	December 31,
​		2019		​	2018		​	2017
Risk free interest rate		2.26	%	​	2.63	%	​	1.98	%
Expected life		5.7	Years	​	5.9	Years	​	5.4	Years
Expected volatility		25.1	%	​	24.0	%	​	22.4	%
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. 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, 2019, 2018 and 2017:

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019		​	2018		​	2017
Compensation expense for stock options awarded (in thousands)	​	$	18,044	​	$	16,521	​	$	15,561
Income tax benefit from compensation expense related to stock options (in thousands)	​		4,436	​		4,093	​		5,934
Total intrinsic value of stock options exercised (in thousands)	​		117,489	​		156,327	​		135,533
Cash received from exercise of stock options (in thousands)	​		46,106	​		61,403	​		33,229
Weighted-average grant-date fair value of options awarded	​	$	105.37	​	$	76.57	​	$	62.79
Weighted-average remaining contractual life of exercisable options (in years)	​		4.6	​		4.4	​		3.8

​

At December 31, 2019, the remaining unrecognized compensation expense related to unvested stock option awards was $33.7 million, and the weighted-average period of time, over which this cost will be recognized, is 2.6 years.

​

Restricted stock:

The Company’s incentive plans provide for the awarding of shares of restricted stock to certain key employees 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, 2019 (in thousands, except per share data):

​

​	​	​	​	​	​
​	​	​	​	Weighted-Average Grant-Date
​		Shares		Fair Value
Non-vested at December 31, 2018		4	​	$	260.42
Granted during the period		2	​		344.66
Vested during the period (1)		(2)	​		259.43
Forfeited during the period		—	​		—
Non-vested at December 31, 2019		4	​	$	301.40

​

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

​

The Company’s incentive plans provide for the awarding 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 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 evenly over the minimum required service period.

​

The table below identifies director restricted stock activity under these plans during the year ended December 31, 2019 (in thousands, except per share data):

​

​	​	​	​	​	​
​	​	​	​	Weighted-Average Grant-Date
​		Shares		Fair Value
Non-vested at December 31, 2018		5	​	$	261.07
Granted during the period		2	​		367.77
Vested during the period		(3)	​		280.41
Forfeited during the period		—	​		—
Non-vested at December 31, 2019		4	​	$	312.96

​

The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2019, 2018 and 2017 (in thousands, except per share data):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Compensation expense for restricted shares awarded	​	$	1,387	​	$	1,370	​	$	1,628
Income tax benefit from compensation expense related to restricted shares	​	$	341	​	$	340	​	$	621
Total fair value of restricted shares at vest date	​	$	1,633	​	$	1,230	​	$	1,202
Shares awarded under the plans	​		4	​		5	​		4
Weighted-average grant-date fair value of shares awarded under the plans	​	$	355.91	​	$	263.89	​	$	253.78

​

At December 31, 2019, 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 0.5 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, 2019, 2018 and 2017 (in thousands, except per share data):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Compensation expense for shares issued under the ESPP	​	$	2,490	​	$	2,285	​	$	2,212
Income tax benefit from compensation expense related to shares issued under the ESPP	​	$	612	​	$	566	​	$	844
Shares issued under the ESPP	​		43	​		53	​		64
Weighted-average price of shares issued under the ESPP	​	$	329.69	​	$	245.26	​	$	196.72

​

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, 2019, 2018 or 2017. The Company expensed matching contributions under the 401(k) Plan in the amounts of $27.5 million, $24.8 million and $22.6 million for the years ended December 31, 2019, 2018 and 2017, 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 $32.2 million and $25.5 million as of December 31, 2019 and 2018, respectively, which were included in “Other liabilities” on the Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amounts of $0.2 million, $0.1 million and $0.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

​

Stock appreciation rights:

During the year ended December 31, 2019, the Company awarded 8,009 stock appreciation rights under the incentive plan, all of which were outstanding at December 31, 2019. Stock appreciation rights granted under the plan expire after 10 years and vest 25% per year, over four years, and are settled in cash. As of December 31, 2018, there were no stock appreciation rights outstanding. The liability for compensation to be paid for redeemed stock appreciation rights was less than $0.1 million as of December 31, 2019, which was included in “Other liabilities” on the Consolidated Balance Sheets. Compensation expense for stock appreciation rights was less than $0.1 million for the year ended December 31, 2019, which was included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

​

​

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME

​

Accumulated other comprehensive income includes adjustments for foreign currency translations. The table below summarizes activity for changes in accumulated other comprehensive income included in “Accumulated other comprehensive income” on the accompanying Consolidated Balance Sheets as of December 31, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​
​	​	Foreign		​	Total Accumulated Other
​	​	Currency (1)		​	Comprehensive Income
Accumulated other comprehensive income, balance at December 31, 2017	​	$	—	​	$	—
Change in accumulated other comprehensive income	​	​	—	​	​	—
Accumulated other comprehensive income, balance at December 31, 2018	​	​	—	​	​	—
Change in accumulated other comprehensive income	​	​	4,890	​	​	4,890
Accumulated other comprehensive income, balance at December 31, 2019	​	$	4,890	​	$	4,890

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

​

NOTE 13 – COMMITMENTS

​

Construction commitments:

As of December 31, 2019, the Company had construction commitments in the amount of $100.1 million.

​

Letters of credit commitments:

As of December 31, 2019, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of $38.9 million. See Note 7 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 7 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.

​

Solar investment:

The Company has entered into an agreement to make capital contributions to certain tax credit equity investments for the purpose of receiving renewable energy tax credits. The Company is required to make capital contributions totaling $95.4 million upon achievement of project milestones by the solar energy farms, the timing of which is variable and outside of the Company’s control.

​

NOTE 14 – 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 $4.7 million, $4.6 million and $4.6 million during the years ended

​

December 31, 2019, 2018 and 2017, respectively. The Company believes that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties. See Note 5 for further information concerning the Company’s operating leases.

​

NOTE 15 – INCOME TAXES

​

The following table identifies components of income from continuing operations before income taxes included in “Income before income taxes” on the accompanying Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​	​	2019		​	2018		​	2017
Domestic	​	$	1,790,207	​	$	1,694,087	​	$	1,637,804
International	​	​	122	​	​	—	​	​	—
Income before income taxes	​	$	1,790,329	​	$	1,694,087	​	$	1,637,804

​

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, 2019, 2018 and 2017 (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Current:	​	​	​	​	​	​	​	​	​
Federal income tax expense	​	$	315,061	​	$	289,953	​	$	467,577
State income tax expense	​		62,795	​		59,487	​		41,183
International income tax expense	​	​	273	​	​	—	​	​	—
Total current	​	​	378,129	​	​	349,440	​	​	508,760
​	​	​	​	​	​	​	​	​	​
Deferred:	​	​	​	​	​	​	​	​	​
Federal income tax expense (benefit)	​	​	19,367	​	​	16,309	​	​	(13,053)
State income tax expense	​	​	2,027	​	​	3,851	​	​	8,293
International income tax benefit	​	​	(236)	​	​	—	​	​	—
Total deferred	​	​	21,158	​	​	20,160	​	​	(4,760)
​	​	​	​	​	​	​	​	​	​
Net income tax expense	​	$	399,287	​	$	369,600	​	$	504,000

​

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, 2019, 2018 and 2017 (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Federal income taxes at statutory rate	​	$	375,942	​	$	355,758	​	$	573,231
State income taxes, net of federal tax benefit	​		54,739	​		56,345	​		39,062
Excess tax benefit from share-based compensation	​		(25,992)	​		(34,703)	​		(48,688)
Revaluation of deferred tax liability	​		—	​		(1,262)	​		(53,240)
Other items, net	​		(5,402)	​		(6,538)	​		(6,365)
Total provision for income taxes	​	$	399,287	​	$	369,600	​	$	504,000

​

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.

​

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, 2019 and 2018 (in thousands):

​

​	​	​	​	​	​	​
​	​	December 31,
​		2019			2018
Deferred tax assets:		​			​
Allowance for doubtful accounts	​	$	2,008	​	$	1,944
Tax credits	​		3,417	​		5,606
Other accruals	​		97,189	​		105,894
Operating lease liability	​	​	494,093	​	​	—
Other	​		15,732	​		14,770
Total deferred tax assets	​		612,439	​		128,214
​	​	​	​	​	​	​
Deferred tax liabilities:	​			​
Inventories	​		65,346	​		62,846
Property and equipment	​		162,613	​		140,019
Operating lease asset	​	​	479,821	​	​	—
Other	​		37,939	​		30,915
Total deferred tax liabilities	​		745,719	​		233,780
​	​	​	​	​	​	​
Net deferred tax liabilities	​	$	(133,280)	​	$	(105,566)

​

As of December 31, 2019, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $3.4 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, 2019, 2018 and 2017 (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Unrealized tax benefit, balance at January 1,	​	$	33,766	​	$	35,388	​	$	34,798
Additions based on tax positions related to the current year	​		4,627	​		3,550	​		6,299
Additions based on tax positions related to prior years	​		—	​		4,255	​		—
Payments related to items settled with taxing authorities	​		(443)	​		(2,792)	​		—
Reductions due to the lapse of statute of limitations and settlements	​		(6,475)	​		(6,635)	​		(5,709)
Unrealized tax benefit, balance at December 31,	​	$	31,475	​	$	33,766	​	$	35,388

​

For the years ended December 31, 2019, 2018 and 2017, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $36.6 million, $38.9 million and $40.9 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2019, 2018 and 2017, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $7.7 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019, 2018 and 2017, the Company had accrued approximately $5.1 million, $5.1 million and $5.5 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, 2019, 2018 and 2017, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.7 million, $2.3 million and $2.0 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2020, the Company expects a reduction of $7.8 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2019, resulting from settlement or expiration of the statute of limitations.

​

The Company’s United States federal income tax returns for tax years 2016 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 2008 through 2018.

​

NOTE 16 – EARNINGS PER SHARE

​

The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2019, 2018 and 2017 (in thousands, except per share data):

​

​	​	​	​	​	​	​	​	​	​
​	​	For the Year Ended
​	​	December 31,
​		2019			2018			2017
Numerator (basic and diluted):		​			​			​
Net income	​	$	1,391,042	​	$	1,324,487	​	$	1,133,804
​	​	​	​	​	​	​	​	​	​
Denominator:	​			​			​
Weighted-average common shares outstanding – basic	​		76,985	​		81,406	​		88,426
Effect of stock options (1)	​		803	​		874	​		1,076
Weighted-average common shares outstanding – assuming dilution	​		77,788	​		82,280	​		89,502
​	​	​	​	​	​	​	​	​	​
Earnings per share:	​			​			​
Earnings per share-basic	​	$	18.07	​	$	16.27	​	$	12.82
Earnings per share-assuming dilution	​	$	17.88	​	$	16.10	​	$	12.67
​	​	​	​	​	​	​	​	​	​
Antidilutive potential common shares not included in the calculation of diluted earnings per share:	​			​			​
Stock options (1)	​		229	​		567	​		715
Weighted-average exercise price per share of antidilutive stock options (1)	​	$	368.11	​	$	268.55	​	$	252.16

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

​

Subsequent to the end of the year and through February 28, 2020, the Company repurchased 0.9 million shares of its common stock, at an average price of $400.78, for a total investment of $363.4 million.

​

NOTE 17 – QUARTERLY RESULTS (Unaudited)

​

The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2019 and 2018. 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 2019
​		First			Second			Third			Fourth
​	​	Quarter		​	Quarter		​	Quarter		​	Quarter
Sales	​	$	2,410,608	​	$	2,589,874	​	$	2,666,528	​	$	2,482,975
Gross profit	​		1,279,290	​		1,368,287	​		1,422,530	​		1,324,584
Operating income	​		444,786	​		498,074	​		536,363	​		441,503
Net income	​		321,152	​		353,681	​		391,293	​		324,916
Earnings per share – basic (1)	​	$	4.09	​	$	4.56	​	$	5.14	​	$	4.29
Earnings per share – assuming dilution (1)	​	$	4.05	​	$	4.51	​	$	5.08	​	$	4.25

​

​	​	​	​	​	​	​	​	​	​	​	​	​

​

​	​	Fiscal 2018
​		First			Second			Third			Fourth
​	​	Quarter		​	Quarter		​	Quarter		​	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

​

(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.

​

​

​

​