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

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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 and other influences on the automotive aftermarket industry;

	●	our results of operations for the years ended December 31, 2022 and 2021;

	●	our liquidity and capital resources;

	●	our critical accounting estimates; and

	●	recent accounting pronouncements that may affect our Company.

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

OVERVIEW

We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States and Mexico. 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, generally, highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point on the value spectrum is a driver of enhanced sales and profitability in our industry. We have ongoing initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.

Our stores also offer enhanced services and programs to our customers, including used oil, oil filter and battery recycling; battery, wiper and bulb replacement; battery diagnostic testing; electrical and module testing; check engine light code extraction; loaner tool program; drum and rotor resurfacing; custom hydraulic hoses; professional paint shop mixing and related materials; and machine shops. As of December 31, 2022, we operated 5,929 stores in 47 U.S. states and 42 stores in Mexico.

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

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

Number of Miles Driven

The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation. According to the U.S. Department of Transportation, the number of total miles driven in the U.S. decreased 13.2% in 2020, as a result of responses to the coronavirus pandemic, including work from home arrangements and reduced travel. In 2021, miles driven improved and increased 11.2%, and year-to-date through November of 2022, miles driven continued to improve, increasing 1.2%. Total miles driven can be impacted by macroeconomic factors, including rapid increases in fuel cost, but we are unable to predict the degree of impact these factors may have on miles driven in the future.

Size and Age of the Vehicle Fleet

The total number of vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the automotive aftermarket industry. As reported by the Auto Care Association, the total number of registered vehicles increased 12.1% from 2011 to 2021, bringing the number of light vehicles on the road to 279 million by the end of 2021. In 2022, the rate of new

vehicle sales was pressured due to supply chain constraints experienced by manufacturers, and the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was below the historical average at approximately 13.3 million vehicles for the year ended December 31, 2022. From 2011 to 2021, vehicle scrappage rates have remained relatively stable, ranging from 4.1% to 5.7% annually. As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 11.0%, from 10.9 years in 2011 to 12.1 years in 2021. While the annual changes to the vehicle population resulting from new vehicle sales and the fluctuation in vehicle scrappage rates in any given year represent a small percentage of the total light vehicle population and have a muted impact on the total number and average age of vehicles on the road over the short term, we believe our business benefits from the current environment of new vehicle scarcity and higher than typical used vehicle prices, as consumers are more willing to continue to invest in their current vehicle.

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

Inflationary cost pressures impact our business; however, historically we have been successful, in many cases, in reducing the effects of merchandise cost increases, principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition costs increase due to base commodity price increases or other input cost increases affecting the entire industry, we have typically been able to pass along these cost increases through higher selling prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.

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

RESULTS OF OPERATIONS

The table below compares the Company’s selected financial data over a ten-year period:


Year ended December 31,	2022		2021		2020		2019		2018		2017		2016		2015		2014		2013
(In thousands, except per share, Team Members, stores and ratio data)

SELECT INCOME STATEMENT RELATED DATA:

Percentage increase in comparable store sales (a)(b)	6.4	%	13.3	%	10.9	%	4.0	%	3.8	%	1.4	%	4.8	%	7.5	%	6.0	%	4.6	%
Sales ($)	14,409,860		13,327,563		11,604,493		10,149,985		9,536,428		8,977,726		8,593,096		7,966,674		7,216,081		6,649,237
Gross profit	7,381,706		7,019,949		6,085,692		5,394,691		5,039,966		4,720,683		4,509,011		4,162,643		3,708,901		3,369,001
Operating income	2,954,491		2,917,168		2,419,336		1,920,726		1,815,184		1,725,400		1,699,206		1,514,021		1,270,374		1,103,485
Net income ($) (c)(d)	2,172,650		2,164,685		1,752,302		1,391,042		1,324,487		1,133,804		1,037,691		931,216		778,182		670,292
Earnings per share – basic ($)	33.75		31.39		23.74		18.07		16.27		12.82		10.87		9.32		7.46		6.14
Earnings per share – assuming dilution ($) (c)(d)	33.44		31.10		23.53		17.88		16.10		12.67		10.73		9.17		7.34		6.03

SELECT BALANCE SHEET AND CASH FLOW RELATED DATA:
Total assets ($) (e)	12,627,979		11,718,707		11,596,642		10,717,160		7,980,789		7,571,885		7,204,189		6,676,684		6,532,083		6,057,895
Total debt ($) (e)	4,371,653		3,826,978		4,123,217		3,890,527		3,417,122		2,978,390		1,887,019		1,390,018		1,388,422		1,386,895
Shareholders’ equity ($) (c)	(1,060,752)		(66,423)		140,258		397,340		353,667		653,046		1,627,136		1,961,314		2,018,418		1,966,321
Inventory turnover (f)	1.7		1.7		1.5		1.4		1.4		1.4		1.5		1.5		1.4		1.4
Accounts payable to inventory (g)	134.9	%	127.4	%	114.5	%	104.4	%	105.7	%	106.0	%	105.7	%	99.1	%	94.6	%	86.6	%
Cash provided by operating activities ($) (h)	3,148,250		3,207,310		2,836,603		1,708,479		1,727,555		1,403,687		1,510,713		1,345,488		1,190,430		908,026
Capital expenditures ($)	563,342		442,853		465,579		628,057		504,268		465,940		476,344		414,020		429,987		395,881
Free cash flow ($) (h)(i)	2,371,123		2,548,922		2,189,995		1,020,649		1,188,584		889,059		978,375		868,390		760,443		512,145

SELECT OPERATING DATA:

Number of Team Members at year end	87,377		82,852		77,654		82,484		78,882		75,552		74,580		71,621		67,569		61,909
Total number of stores at year end (j)(k)	5,971		5,784		5,616		5,460		5,219		5,019		4,829		4,571		4,366		4,166
Number of U.S. stores at year end (j)	5,929		5,759		5,594		5,439		5,219		5,019		4,829		4,571		4,366		4,166
Number of Mexico stores at year end (k)	42		25		22		21		—		—		—		—		—		—
Store square footage at year end (a)(l)	44,604		43,185		41,668		40,227		38,455		36,685		35,123		33,148		31,591		30,077
Sales per weighted-average store ($) (a)(m)	2,415		2,298		2,057		1,881		1,842		1,807		1,826		1,769		1,678		1,614
Sales per weighted-average square foot ($) (a)(l)(n)	322		307		277		255		251		248		251		244		232		224

(a)	Represents O’Reilly’s U.S. operations only.

(b)

Comparable store sales are calculated based on the change in sales of U.S. stores open at least one year and excludes sales of specialty machinery, sales to independent parts stores, sales to Team Members, and sales from Leap Day during the years ended December 31, 2020 and 2016. Online sales, resulting from ship-to-home orders and pick-up-in-store orders for U.S. stores open at least one year are included in the comparable store sales calculation.

(c)

During the year ended December 31, 2017, the Company adopted a new accounting standard that requires excess tax benefits related to share-based compensation payments to be recorded through the income statement. In compliance with the standard, the Company did not restate prior period amounts to conform to current period presentation. The Company recorded a cumulative effect adjustment to opening retained earnings, due to the adoption of the new accounting standard. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information.

(d)

Following the enactment of the U.S. Tax Cuts and Jobs Act in December of 2017, the Company revalued its deferred income tax liabilities, which resulted in a one-time benefit to the Company’s Consolidated Statement of Income for the years ended December 31, 2018 and 2017. See Note 13 “Income Taxes” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2018, for more information.

(e)

Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of new accounting standards during the fourth quarter ended December 31, 2015. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2015, for more information.

(f)	Inventory turnover is calculated as cost of goods sold for the last 12 months divided by average inventory. Average inventory is calculated as the average of inventory for the trailing four quarters used in determining the denominator.

(g)	Accounts payable to inventory is calculated as accounts payable divided by inventory.

(h)	Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard during the first quarter ended March 31, 2017. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information.

(i)	Free cash flow is 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.

(j)

In 2016 and 2018, the Company acquired materially all assets of Bond Auto Parts (“Bond”) and Bennett Auto Supply, Inc. (“Bennett”), respectively. After the close of business on December 31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett, including 33 stores that were not included in the 2018 store count and were not operated by the Company in 2018, but beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, and 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. Financial results for these acquired companies have been included in the Company’s consolidated financial statements from the dates of the acquisitions forward.

(k)	In 2019, the Company acquired Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), which added 21 stores to the O’Reilly store count. Financial results for this acquired company have been included in the Company’s consolidated financial statements beginning from the date of the acquisition.

(l)	Square footage includes normal selling, office, stockroom and receiving space.

(m)	Sales per weighted-average store are weighted to consider the approximate dates of store openings, acquisitions or closures.

(n)	Sales per weighted-average square foot are weighted to consider the approximate dates of domestic store openings, acquisitions, expansions or closures.

The following table includes income statement data as a percentage of sales, which is calculated independently and may not compute to presented totals due to rounding differences, for the years ended December 31, 2022 and 2021:


	For the Year Ended
	December 31,
	2022		2021
Sales	100.0	%	100.0	%
Cost of goods sold, including warehouse and distribution expenses	48.8		47.3
Gross profit	51.2		52.7
Selling, general and administrative expenses	30.7		30.8
Operating income	20.5		21.9
Interest expense	(1.1)		(1.1)
Interest income	—		0.1
Income before income taxes	19.4		20.9
Provision for income taxes	4.3		4.6
Net income (1)	15.1	%	16.2	%

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

2022 Compared to 2021

Sales:

Sales for the year ended December 31, 2022, increased $1.08 billion, or 8%, to $14.41 billion from $13.33 billion for the same period in 2021. Comparable store sales for stores open at least one year increased 6.4% and 13.3% for the years ended December 31, 2022 and 2021, respectively. Comparable store sales are calculated based on changes in sales for U.S. stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members. Online sales, resulting from ship-to-home orders and pickup in-store orders for U.S. stores open at least one year are included in the comparable store sales calculation.

The following table presents the components of the increase in sales for the year ended December 31, 2022 (in millions):


	Increase in Sales for the Year Ended
	December 31, 2022,
	Compared to the Same Period in 2021
Store sales:
Comparable store sales	$	835
Non-comparable store sales:
Sales for U.S. stores opened throughout 2021, excluding stores open at least one year that are included in comparable store sales, and Mexico store sales		95
Sales for U.S. stores opened throughout 2022		137
Sales for stores that have closed, including temporarily closed stores		(6)
Non-store sales:
Includes sales of machinery, sales to independent parts stores and sales to Team Members		21
Total increase in sales	$	1,082

We believe the increased sales are 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 from our regional distribution centers and hub store network, enhanced services and programs offered in our stores, a broader selection of product offerings in most 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, the Omnichannel experience, 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. In addition, the strength of our distribution network and our strong supplier relationships allowed us to maintain better in-stock inventory positions than the broader market and contributed to our sales growth.

Our comparable store sales increase for the year ended December 31, 2022, was driven by increases in average ticket values for both professional service provider and DIY customers and positive transaction counts from professional service provider customers, partially offset by negative transaction counts from DIY customers. Average ticket values benefited from increases in average selling prices, on a same-SKU basis, as compared to 2021, driven by increases in acquisition costs of inventory, which were passed on in selling prices. Average ticket values also continue to be positively impacted by the increasing complexity and cost of replacement parts necessary to maintain the current population of better-engineered and more technically advanced vehicles. These better-engineered, more technically advanced vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of time. The resulting decrease in repair frequency creates pressure on customer transaction counts; however, when repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit to average ticket values. The decrease in DIY customer transaction counts was driven by a challenging comparison to the strong transaction counts in 2021, which were aided by government stimulus, and broad-based inflationary pressures on the consumer.

We opened 187 and 168 net, new stores during the years ended December 31, 2022 and 2021, respectively. We anticipate new store growth will be 180 to 190 net, new store openings in 2023.

Gross profit:

Gross profit for the year ended December 31, 2022, increased 5% to $7.38 billion (or 51.2% of sales) from $7.02 billion (or 52.7% of sales) for the same period in 2021. The increase in gross profit dollars for the year ended December 31, 2022, was primarily the result of new store sales and the increase in comparable store sales at existing stores. The decrease in gross profit as a percentage of sales for the year ended December 31, 2022, was due to the impact from the rollout of our professional pricing initiative, which was a strategic investment aimed at ensuring we are more competitively priced on the professional side of our business; a greater percentage of our total sales mix generated from professional service provider customers, which carry a lower gross margin than DIY sales; and a greater benefit in the prior year from selling through inventory purchased prior to recent acquisition cost increases and corresponding selling price increases. We determine inventory cost using the last-in, first-out (“LIFO”) method but had, over time, seen our LIFO reserve balance exhausted, which resulted in a LIFO inventory value above replacement cost prior to September 30, 2021. As our policy is to not write-up inventory in excess of replacement cost, we had been effectively valuing our inventory at replacement cost, which resulted in a benefit when selling prices increased as we sold through this lower cost inventory. In the third quarter of 2021, our LIFO reserve reverted back to a more typical credit balance, due to the significant inflationary acquisition cost increases. During the three months ended March 31, 2022, we realized the final benefit from selling through inventory valued at the older, lower replacement cost, at a lesser amount than the full year benefit received in 2021.

Selling, general and administrative expenses:

Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2022, increased 8% to $4.43 billion (or 30.7% of sales) from $4.10 billion (or 30.8% of sales) for the same period in 2021. The increase in total SG&A dollars for the year ended December 31, 2022, was the result of additional Team Members, facilities and vehicles to support our increased sales and store count, inflationary pressures on wages, benefits and fuel costs, as compared to the same period one year ago, and a non-cash charge associated with our transition to an enhanced paid time-off program for our Team Members. The decrease in SG&A as a percentage of sales for the year ended December 31, 2022, was principally due to leverage of fixed store operating costs on strong comparable store sales, partially offset by inflationary pressures on wages, benefits and fuel costs, as compared to the same period one year ago, and the charge associated with our transition to an enhanced paid time-off program.

Operating income:

As a result of the impacts discussed above, operating income for the year ended December 31, 2022, increased 1% to $2.95 billion (or 20.5% of sales) from $2.92 billion (or 21.9% of sales) for the same period in 2021.

Other income and expense:

Total other expense for the year ended December 31, 2022, increased 15% to $156 million (or 1.1% of sales), from $135 million (or 1.0% of sales) for the same period in 2021. The increase in total other expense for the year ended December 31, 2022, was the result of increased interest expense on higher average outstanding borrowings, as well as a decrease in the value of our trading securities, as compared to an increase in the same period in 2021.

Income taxes:

Our provision for income taxes for the year ended December 31, 2022, increased 1% to $626 million (22.4% effective tax rate) from $617 million (22.2% effective tax rate) for the same period in 2021. The increase in our provision for income taxes for the year ended December 31, 2022, 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, 2022, was the result of the lower excess tax benefits from share-based compensation.

Net income:

As a result of the impacts discussed above, net income for the year ended December 31, 2022, increased to $2.17 billion (or 15.1% of sales), from $2.16 billion (or 16.2% of sales) for the same period in 2021.

Earnings per share:

Our diluted earnings per common share for the year ended December 31, 2022, increased 8% to $33.44 on 65 million shares from $31.10 on 70 million shares for the same period in 2021.

2021 Compared to 2020

A discussion of the changes in our results of operations for the year ended December 31, 2021, as compared to the year ended December 31, 2020, has been omitted from this Form 10-K but may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the annual report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2022, which is available free of charge on the SEC’s website at www.sec.gov by searching with our ticker symbol “ORLY” or at our internet address, www.OReillyAuto.com, by clicking “Investor Relations” located at the bottom of the page.

LIQUIDITY AND CAPITAL RESOURCES

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

products or changes in customer buying patterns. Additionally, these factors could also impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.

Our material contractual cash obligations as of December 31, 2022, included commitments for short and long-term debt arrangements and interest payments related to long-term debt, future minimum payments under non-cancelable lease arrangements, self-insurance reserves, projected obligations related to future payments under the Company’s nonqualified deferred compensation plan, purchase obligations for construction contract commitments, uncertain tax positions and associated estimated interest and penalties, payments for certain deferred income taxes and commitments for the purchase of inventory. We expect to fund these various commitments and obligations primarily with operating cash flows expected to be generated in the normal course of business or through borrowings under our unsecured revolving credit facility. See Note 5 “Leases,” Note 12 “Share-Based Compensation and Benefit Plans,” Note 13 “Commitments” and Note 15 “Income Taxes” to the Consolidated Financial Statements for further information on our leasing arrangements, share-based compensation payments, construction commitments and uncertain tax positions, respectively, which are not reflected in the table below.

The following table identifies the estimated payments for each of the next five years, and in the aggregate thereafter, of the Company’s debt instruments and related interest payments and self-insurance reserves as of December 31, 2022 (in thousands):


	December 31, 2022
	Long-Term Debt Principal		Self-Insurance
	and Interest Payments (1)		Reserves (2)
2023	$	463,275	$	138,926
2024		157,500		40,347
2025		157,500		27,803
2026		647,650		16,736
2027		887,950		8,192
Thereafter		3,153,025		13,558
Contractual cash obligations	$	5,466,900	$	245,562

(1)	See Note 7 “Financing” to the Consolidated Financial Statements for further information on our debt instruments and related interest payments.

(2)	See Note 13 “Commitments” and Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for further information on our self-insurance reserves.

Due to the absence of scheduled maturities, the nature of the account or the commitment’s cancellation terms, the timing of payments for certain deferred income taxes, uncertain tax positions and commitments related to future payments under the Company’s nonqualified compensation plan cannot be determined and are therefore excluded from the above table, except for amounts estimated to be payable in 2023, which are included in “Current liabilities” on our Consolidated Balance Sheets.

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 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 $3.4 million upon achievement of project milestones by the solar or wind energy farms, the timing of which is variable and outside of the Company’s control. See Note 7 “Financing” to the Consolidated Financial Statements for further information on our stand-by letters of credit.

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.

The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31, 2022, 2021 and 2020 (in thousands):


	For the Year Ended
	December 31,
Liquidity:	2022		2021		2020
Total cash provided by/(used in):
Operating activities	$	3,148,250	$	3,207,310	$	2,836,603
Investing activities		(739,985)		(615,620)		(614,895)
Financing activities		(2,662,536)		(2,694,858)		(1,796,577)
Effect of exchange rate changes on cash		741		(359)		103
Net (decrease) increase in cash and cash equivalents	$	(253,530)	$	(103,527)	$	425,234

Capital expenditures	$	563,342	$	442,853	$	465,579
Free cash flow (1)		2,371,123		2,548,922		2,189,995

(1)	Calculated as net cash provided by operating activities, less capital expenditures, excess tax benefit from share-based compensation payments and investment in tax credit equity investments for the period. See page 35 for the reconciliation of the calculation of free cash flow.

Cash and cash equivalents balances held outside of the U.S. were $11.1 million and $7.5 million as of December 31, 2022 and 2021, respectively, which was generally utilized to support the liquidity needs of foreign operations in Mexico.

Operating activities:

The decrease in net cash provided by operating activities in 2022 compared to 2021 was primarily due to a larger decrease in accrued benefits and withholdings. The larger decrease in accrued benefits and withholdings was primarily due to higher accrued incentive compensation payments in 2022 versus 2021.

Investing activities:

The increase in net cash used in investing activities in 2022 compared to 2021 was primarily the result of an increase in capital expenditures. The increase in capital expenditures was primarily due to an increase in store and distribution enhancement and expansion projects in 2022 versus 2021.

We opened 187 and 168 net, new stores in 2022 and 2021, respectively. We plan to open 180 to 190 net, new stores in 2023. The costs associated with the expected openings of owned store locations in 2023, including the cost of land acquisition, building construction, fixtures, vehicles, net inventory investment and computer equipment, are estimated to average approximately $2.8 million to $3.0 million per store; 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 2022 compared to 2021 was primarily attributable to net proceeds from the issuance of long-term debt in 2022, partially offset by an increase in repurchases of our common stock in 2022.

2021 Compared to 2020:

A discussion of the changes in our operating activities, liquidity activities and financing activities for the year ended December 31, 2021, as compared to the year ended December 31, 2020, has been omitted from this Form 10-K but may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the annual report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2022, which is available free of charge on the SEC’s website at www.sec.gov by searching with our ticker symbol “ORLY” or at our internet address, www.OReillyAuto.com, by clicking “Investor Relations” located at the bottom of the page.

Debt instruments:

See Note 7 “Financing” to the Consolidated Financial Statements for information concerning the Company’s credit agreement, unsecured revolving credit facility, outstanding letters of credit and unsecured 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, 2022, 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 and 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 6.71 times and 6.97 times as of December 31, 2022 and 2021, respectively, and a consolidated leverage ratio of 1.73 times and 1.59 times as of December 31, 2022 and 2021, 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, 2022 and 2021 (dollars in thousands):


		For the Year Ended
		December 31,
		2022		2021
GAAP net income		$	2,172,650	$	2,164,685
Add:	Interest expense		157,720		144,768
	Rent expense (1)		393,032		372,022
	Provision for income taxes		626,005		617,229
	Depreciation expense		352,224		320,352
	Amortization expense		5,709		7,865
	Non-cash share-based compensation		26,458		24,656
Non-GAAP EBITDAR		$	3,733,798	$	3,651,577

	Interest expense	$	157,720	$	144,768
	Capitalized interest		5,488		7,001
	Rent expense (1)		393,032		372,022
Total fixed charges		$	556,240	$	523,791

Consolidated fixed charge coverage ratio			6.71		6.97

GAAP debt		$	4,371,653	$	3,826,978
Add:	Stand-by letters of credit		101,741		83,985
	Discount on senior notes		6,285		4,360
	Debt issuance costs		22,062		18,662
	Five-times rent expense		1,965,160		1,860,110
Non-GAAP adjusted debt		$	6,466,901	$	5,794,095

Consolidated leverage ratio			1.73		1.59

(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”), the most directly comparable GAAP financial measure, for the years ended December 31, 2022 and 2021 (in thousands):


Total lease cost, per ASC 842, for the year ended December 31, 2022		$	467,758
Less:	Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2022		74,726
Rent expense for the year ended December 31, 2022		$	393,032

Total lease cost, per ASC 842, for the year ended December 31, 2021		$	443,484
Less:	Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2021		71,462
Rent expense for the year ended December 31, 2021		$	372,022

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, 2022, 2021 and 2020 (in thousands):


		For the Year Ended
		December 31,
		2022		2021		2020
Cash provided by operating activities		$	3,148,250	$	3,207,310	$	2,836,603
Less:	Capital expenditures		563,342		442,853		465,579
	Excess tax benefit from share-based compensation payments		25,503		35,202		16,918
	Investment in tax credit equity investments		188,282		180,333		164,111
Free cash flow		$	2,371,123	$	2,548,922	$	2,189,995

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:

See Note 9 “Share Repurchase Program” to the Consolidated Financial Statements for information on our share repurchase program.

CRITICAL ACCOUNTING 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 estimates and assumptions 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.

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. Certain of the self-insurance liabilities are determined at an estimate of their net present value, using the U.S. treasury risk-free rate. Our calculation of self-insurance liabilities requires management to apply a significant amount of subjective judgment to estimate the ultimate cost to resolve reported claims and claims incurred but not yet reported as of the balance sheet date. The application of alternative assumptions could result in a different estimate of these liabilities. Management believes the assumptions developed and used to determine the estimate for our self-insurance reserve are reasonable. 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. 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 that could result in materially different estimates of the net present value of the liabilities.

Our self-insurance reserve estimate included on our Consolidated Balance Sheets increased $11 million from 2021 to 2022, which is primarily due to our growing operations, inflation, increases in healthcare costs, the number of vehicles and the number of hours worked, as well as our historical claims experience. If the underlying assumptions in management’s estimate changed self-insurance reserves 10% from our estimated reserves at December 31, 2022, the financial impact would have been approximately $23 million or 0.8% of pretax income for the year ended December 31, 2022. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for further information on our self-insurance reserves.

Valuation of Long-Lived Assets:

We evaluate the carrying value of finite and indefinite 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 a component of the finite long-lived assets 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.

As a component of the indefinite long-lived assets evaluation, we perform a qualitative assessment to determine if events or circumstances that could affect the inputs used to determine the fair value of the intangible asset have occurred, as well as if they continue to support an indefinite useful life. Areas evaluated include changes in cost factors such as raw materials or labor, financial performance including declining revenues or cash flows, the legal, regulatory and political environment, and other industry and market considerations, including the competitive environment and changes in product demand. If events or market conditions exist that would more likely than not indicate that impairment may be necessary, a detailed quantitative assessment would be performed.

Based on our qualitative assessment, we do not believe there has been a change of events or circumstances that would indicate that a calculation of fair value of indefinite long-lived assets is required as of December 31, 2022. 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. See Note 6 “Goodwill and Other Intangibles” to the Consolidated Financial Statements for further information on our finite and indefinite long-lived assets.

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, 2022, we had no outstanding borrowings under our Revolving Credit Facility.

We had outstanding fixed rate debt of $4.4 billion and $3.9 billion as of December 31, 2022 and 2021, respectively. The fair value of our fixed rate debt was estimated at $4.1 billion as of December 31, 2022 and 2021, 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, 2022, our cash and cash equivalents totaled $108.6 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 $228.0 million at December 31, 2022. The year ended December 31, 2022, exchange rates of the Mexican peso, relative to the U.S. dollar, strengthened by approximately 5.2% from December 31, 2021. 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, 2022, would be approximately $20.7 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	40
Report of Independent Registered Public Accounting Firm: Internal Control over Financial Reporting (PCAOB ID: 42)	41
Report of Independent Registered Public Accounting Firm: Financial Statements (PCAOB ID: 42)	42
Consolidated Balance Sheets	44
Consolidated Statements of Income	45
Consolidated Statements of Comprehensive Income	46
Consolidated Statements of Shareholders’ Equity	47
Consolidated Statements of Cash Flows	48
Notes to Consolidated Financial Statements	49

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

Internal control over financial reporting includes all policies and procedures that

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

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

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

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

Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. 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, 2022, the Company’s internal control over financial reporting is effective based on those criteria.

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


/s/	Gregory D. Johnson	/s/	Jeremy A. Fletcher
Gregory D. Johnson		Jeremy A. Fletcher
Chief Executive Officer		Executive Vice President and
February 28, 2023		Chief Financial Officer
		February 28, 2023

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, 2022, 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, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, 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, 2022, and the related notes and our report dated February 28, 2023 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, 2023

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, 2022 and 2021, 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, 2022, and the related notes (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was 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 the critical audit matter 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 matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.


		Valuation of Self-insurance Reserves
Description of the Matter		At December 31, 2022, the Company’s self-insurance reserve was $233 million. As discussed in Note 1 of the financial statements, self-insurance liabilities are estimated based upon historical claim experience and trend-lines. Auditing management’s self-insurance reserves was complex and judgmental and required us to use our actuarial specialists for certain reserves due to the estimation required in determining the ultimate claim value. 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 certain of the reserve balances 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.

/s/ Ernst & Young LLP

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

Kansas City, Missouri

February 28, 2023

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	108,583	$	362,113
Accounts receivable, less allowance for doubtful accounts $14,695 in 2022 and $11,870 in 2021		343,155		272,562
Amounts receivable from suppliers		127,019		113,112
Inventory		4,359,126		3,686,383
Other current assets		110,376		70,092
Total current assets		5,048,259		4,504,262

Property and equipment, at cost		7,438,065		6,948,038
Less: accumulated depreciation and amortization		3,014,024		2,734,523
Net property and equipment		4,424,041		4,213,515

Operating lease, right-of-use assets		2,112,267		1,982,478
Goodwill		884,445		879,340
Other assets, net		158,967		139,112
Total assets	$	12,627,979	$	11,718,707

Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable	$	5,881,157	$	4,695,312
Self-insurance reserves		138,926		128,794
Accrued payroll		126,888		107,588
Accrued benefits and withholdings		166,433		234,872
Current portion of operating lease liabilities		366,721		337,832
Other current liabilities		383,692		370,217
Total current liabilities		7,063,817		5,874,615

Long-term debt		4,371,653		3,826,978
Operating lease liabilities, less current portion		1,806,656		1,701,757
Deferred income taxes		245,347		175,212
Other liabilities		201,258		206,568

Shareholders’ equity (deficit):
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 –
62,353,221 as of December 31, 2022, and
67,029,042 as of December 31, 2021		624		670
Additional paid-in capital		1,311,488		1,305,508
Retained deficit		(2,375,860)		(1,365,802)
Accumulated other comprehensive income (loss)		2,996		(6,799)
Total shareholders’ deficit		(1,060,752)		(66,423)

Total liabilities and shareholders’ deficit	$	12,627,979	$	11,718,707

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,
	2022		2021		2020
Sales	$	14,409,860	$	13,327,563	$	11,604,493
Cost of goods sold, including warehouse and distribution expenses		7,028,154		6,307,614		5,518,801
Gross profit		7,381,706		7,019,949		6,085,692

Selling, general and administrative expenses		4,427,215		4,102,781		3,666,356
Operating income		2,954,491		2,917,168		2,419,336

Other income (expense):
Interest expense		(157,720)		(144,768)		(161,126)
Interest income		4,763		1,971		2,491
Other, net		(2,879)		7,543		5,704
Total other expense		(155,836)		(135,254)		(152,931)

Income before income taxes		2,798,655		2,781,914		2,266,405
Provision for income taxes		626,005		617,229		514,103
Net income	$	2,172,650	$	2,164,685	$	1,752,302

Earnings per share-basic:
Earnings per share	$	33.75	$	31.39	$	23.74
Weighted-average common shares outstanding – basic		64,372		68,967		73,817

Earnings per share-assuming dilution:
Earnings per share	$	33.44	$	31.10	$	23.53
Weighted-average common shares outstanding – assuming dilution		64,962		69,611		74,462

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,
	2022		2021		2020
Net income	$	2,172,650	$	2,164,685	$	1,752,302
Other comprehensive income (loss):
Foreign currency translation adjustments		9,795		(4,644)		(7,045)
Total other comprehensive income (loss)		9,795		(4,644)		(7,045)

Comprehensive income	$	2,182,445	$	2,160,041	$	1,745,257

See accompanying Notes to consolidated financial statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)


								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive
	Shares	Par Value		Capital		Deficit		Income (Loss)		Total
Balance at December 31, 2019	75,619	$	756	$	1,280,760	$	(889,066)	$	4,890	$	397,340
Net income	—		—		—		1,752,302		—		1,752,302
Other comprehensive loss	—		—		—		—		(7,045)		(7,045)
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	48		—		17,314		—		—		17,314
Net issuance of common stock upon exercise of stock options	288		3		46,279		—		—		46,282
Share based compensation	—		—		21,259		—		—		21,259
Share repurchases, including fees	(4,832)		(48)		(84,771)		(2,002,375)		—		(2,087,194)
Balance at December 31, 2020	71,123	$	711	$	1,280,841	$	(1,139,139)	$	(2,155)	$	140,258
Net income	—		—		—		2,164,685		—		2,164,685
Other comprehensive loss	—		—		—		—		(4,644)		(4,644)
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	39		—		18,511		—		—		18,511
Net issuance of common stock upon exercise of stock options	404		4		67,757		—		—		67,761
Share based compensation	—		—		23,054		—		—		23,054
Share repurchases, including fees	(4,537)		(45)		(84,655)		(2,391,348)		—		(2,476,048)
Balance at December 31, 2021	67,029	$	670	$	1,305,508	$	(1,365,802)	$	(6,799)	$	(66,423)
Net income	—		—		—		2,172,650		—		2,172,650
Other comprehensive income	—		—		—		—		9,795		9,795
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes	34		—		19,864		—		—		19,864
Net issuance of common stock upon exercise of stock options	251		3		60,974		—		—		60,977
Share based compensation	—		—		24,650		—		—		24,650
Share repurchases, including fees	(4,961)		(49)		(99,508)		(3,182,708)		—		(3,282,265)
Balance at December 31, 2022	62,353	$	624	$	1,311,488	$	(2,375,860)	$	2,996	$	(1,060,752)

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,
	2022		2021		2020
Operating activities:
Net income	$	2,172,650	$	2,164,685	$	1,752,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and intangibles		357,933		328,217		314,635
Amortization of debt discount and issuance costs		4,704		4,388		4,580
Deferred income taxes		69,575		20,383		12,381
Share-based compensation programs		26,458		24,656		22,747
Other		885		2,128		4,686
Changes in operating assets and liabilities:
Accounts receivable		(75,859)		(47,427)		(20,515)
Inventory		(669,046)		(32,634)		(198,864)
Accounts payable		1,184,858		510,911		580,608
Income taxes payable		151,063		152,339		197,739
Accrued payroll		19,300		18,714		(11,941)
Accrued benefits and withholdings		(60,072)		9,214		189,332
Other		(34,199)		51,736		(11,087)
Net cash provided by operating activities		3,148,250		3,207,310		2,836,603

Investing activities:
Purchases of property and equipment		(563,342)		(442,853)		(465,579)
Proceeds from sale of property and equipment		14,803		9,494		15,770
Investment in tax credit equity investments		(188,282)		(180,333)		(164,111)
Other		(3,164)		(1,928)		(975)
Net cash used in investing activities		(739,985)		(615,620)		(614,895)

Financing activities:
Proceeds from borrowings on revolving credit facility		785,800		—		1,162,000
Payments on revolving credit facility		(785,800)		—		(1,423,000)
Proceeds from the issuance of long-term debt		847,314		—		997,515
Principal payments on long-term debt		(300,000)		(300,000)		(500,000)
Payment of debt issuance costs		(6,591)		(3,412)		(7,929)
Repurchases of common stock		(3,282,265)		(2,476,048)		(2,087,194)
Net proceeds from issuance of common stock		79,356		84,915		62,284
Other		(350)		(313)		(253)
Net cash used in financing activities		(2,662,536)		(2,694,858)		(1,796,577)

Effect of exchange rate changes on cash		741		(359)		103
Net (decrease) increase in cash and cash equivalents		(253,530)		(103,527)		425,234
Cash and cash equivalents at beginning of the period		362,113		465,640		40,406
Cash and cash equivalents at end of the period	$	108,583	$	362,113	$	465,640

Supplemental disclosures of cash flow information:
Income taxes paid	$	415,165	$	450,935	$	305,087
Interest paid, net of capitalized interest		155,853		144,293		159,717

See accompanying Notes to consolidated financial statements.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business:

O’Reilly Automotive, Inc. and 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, 2022, the Company owned and operated 5,929 stores in 47 U.S. states and 42 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. Product sales are the only material source of revenue for the Company and the products sold by the Company have similar economic characteristics, are sourced from the Company’s suppliers in a similar manner, and are available for sale to all of the Company’s customers through the Company’s stores. The Company’s 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 regularly prepare for review by the chief operating decision maker discrete financial information with respect to product categories or types of customers 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 or loss on currency translation is included as a component of “Accumulated other comprehensive income” on the accompanying Consolidated Balance Sheets. See Note 10 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 expectations of future economic and industry trends, changes in customer payment terms and management’s expectations. Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable.

The Company grants credit to certain professional service provider and jobber customers who meet the Company’s pre-established credit requirements. Concentrations of credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of relatively small customers, spreading the credit risk across a broad base regarded as a single class of financing receivable by the Company. The Company also controls this credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures. Generally, the Company does not require security when credit is granted to customers. Credit is granted to customers on a short-term basis, consisting primarily of daily, weekly or monthly accounts. Credit losses are provided for in the Company’s consolidated financial statements and have consistently been within management’s expectations.

Management does not believe there is a reasonable likelihood that the Company will be unable to collect the aggregate amounts receivable from suppliers, and the Company did not record a reserve for uncollectable amounts from suppliers in the consolidated financial statements as of December 31, 2022 and 2021.

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 $0.8 million and $0.7 million as of December 31, 2022 and 2021, respectively.

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, 2022 or 2021.

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 (“DCs”). Cost has been determined using the last-in, first-out (“LIFO”) method, which more accurately matches costs with related revenues. The replacement cost of inventory was $4.70 billion and $3.92 billion as of December 31, 2022 and 2021, respectively.

Fair value of financial instruments:

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

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

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

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

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

Property and equipment:

Property and equipment are carried at cost. Depreciation is calculated using the straight-line method, generally over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease term includes renewal options determined by management at lease inception, for which failure to execute renewal options would result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is recognized in the Company’s Consolidated Statements of Income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. See Note 4 for further information concerning the Company’s property and equipment.

Goodwill and other intangibles:

The accompanying Consolidated Balance Sheets at December 31, 2022 and 2021, include goodwill and other intangible assets recorded as the result of acquisitions. The Company operates a single reporting unit and evaluates goodwill and indefinite-lived intangibles 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. The goodwill impairment test includes an optional qualitative assessment. 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, 2022 and 2021. As such, no goodwill impairment adjustment was required as of December 31, 2022 and 2021. 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.

Leases:

The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases. The Company does not separate non-lease components from lease components for any current lease contracts. 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.

Impairment of long-lived assets:

The Company reviews its long-lived assets, including its right-of-use 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. See Note 4 for further information concerning the Company’s impairment of long-lived assets activities.

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, 2022 and 2021. See Note 2 for further information concerning the fair value measurements of the Company’s marketable securities. See Note 12 for further information concerning the Company’s benefit plans.

Variable Interest Entities:

The Company invests in certain tax credit funds that promote renewable energy. These investments generate a return primarily through the realization of federal tax credits and other tax benefits. The Company accounts for the tax attributes of its renewable energy investments using the deferral method. Under this method, realized investment tax credits and other tax benefits are recognized as a reduction of the renewable energy investments.

The Company has determined its investment in these tax credit funds were investments in variable interest entities (“VIEs”). The Company analyzes any investments in VIEs at inception and again if certain triggering events are identified to determine if it is the primary beneficiary. The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIEs’ economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. As of December 31, 2022, the Company had invested in six unconsolidated tax credit fund entities that were considered to be VIEs and concluded it was not the primary beneficiary of any of the entities, as it did not have the power to control the activities that most significantly impact the entities, and has therefore accounted for these investments using the equity method. The Company’s maximum exposure to losses associated with these VIEs is generally limited to its net investment, which was $38.0 million as of December 31, 2022, and was included in “Other assets, net” on the accompanying Consolidated Balance Sheets. During the years ended December 31, 2022, 2021 and 2020, the Company recognized investment tax credits in the amounts of $167.6 million, $177.1 million and $170.5 million, respectively, all of which were realized through reductions in cash income taxes paid and were reflected as a component of the change in Income taxes payable on the accompanying Consolidated Statements of Cash Flows for the respective years.

During the year ended December 31, 2022, the Company entered into two agreements to invest in additional tax credit funds, which promote renewable energy through the development of solar energy farms, primarily for the purpose of receiving renewable energy tax

credits. As of December 31, 2022, the Company had commitments to make certain additional capital contributions to its tax credit funds totaling approximately $3.4 million upon achievement of project milestones by the solar energy farms, the timing of which is uncertain and outside of the Company’s control. See Note 15 for further information concerning the Company’s investment in renewable energy tax credits.

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 cost inflation, growth patterns and exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value.

The following table identifies the components of the Company’s self-insurance reserves as of December 31, 2022 and 2021 (in thousands):


	December 31,
	2022		2021
Self-insurance reserves (undiscounted)	$	245,562	$	233,185
Self-insurance reserves (discounted)		233,017		222,273

The current portion of the Company’s discounted self-insurance reserves totaled $138.9 million and $128.8 million as of December 31, 2022 and 2021, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021. The remainder was included in “Other liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021.

Warranties:

The Company provides warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. See Note 8 for further information concerning the Company’s aggregate product warranty liabilities.

Litigation accruals:

The Company is currently involved in litigation incidental to the ordinary conduct of the Company’s business. Based on existing facts and historical patterns, the Company accrues for litigation losses in instances where an adverse outcome is probable and the Company is able to reasonably estimate the probable loss in accordance with Accounting Standard Codification 450-20. The Company also accrues for an estimate of legal costs to be incurred for litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from legal matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.

Share repurchases:

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 11 for further information concerning the Company’s revenue.

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

Below follows the primary costs classified in each major expense category.

Cost of goods sold, including warehouse and distribution expenses:

	●	Total cost of merchandise sold, including freight expenses associated with acquiring merchandise and with moving merchandise inventories from the Company’s distribution centers to the stores; and defective merchandise and warranty costs.

	●	Supplier allowances and incentives, including allowances that are not reimbursements for specific, incremental and identifiable costs; and cash discounts on payments to suppliers.

	●	Costs associated with the Company’s supply chain, including payroll and benefit costs; warehouse occupancy costs; transportation costs; depreciation; and inventory shrinkage.

Selling general and administrative expenses:

	●	Payroll benefit costs for store and corporate Team Members;

	●	Occupancy costs of store and corporate facilities;

	●	Depreciation and amortization related to store and corporate assets;

	●	Vehicle expenses for store and Hub delivery services;

	●	Self-insurance costs;

	●	Closed store expenses; and

	●	Other administrative costs, including accounting, legal and other professional services; bad debt, banking and credit card fees; supplies; travel; and 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 $81.5 million, $72.5 million and $73.8 million for the years ended December 31, 2022, 2021 and 2020, 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 and

accounts for forfeitures as they occur. 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 12 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, 2022, 2021 and 2020, were $5.5 million, $7.0 million and $10.2 million, respectively.

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 $24.7 million and $22.0 million net of accumulated amortization, as of December 31, 2022 and 2021, respectively, of which $2.6 million and $3.4 million were included in “Other assets, net” as of December 31, 2022 and 2021, 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 $6.3 million and $4.4 million as of December 31, 2022 and 2021, 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, 2022 and 2021, as it was considered more likely than not that deferred tax assets were realizable through a combination of future taxable income, the realization of deferred tax liabilities and tax planning strategies.

The Company regularly reviews its potential tax liabilities for tax years subject to audit. The amount of such liabilities is based on various factors, such as differing interpretations of tax regulations by the responsible tax authority, experience with previous tax audits and applicable tax law rulings. In management’s opinion, adequate provisions for income taxes have been made for all years presented. The estimates of the Company’s potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated with the Company’s various tax positions and actual results could differ from estimates. See Note 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 September of 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2022- 04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” ASU 2022-04 enhances the transparency of supplier finance programs. Under ASU 2022-04, a buyer in a supplier finance program would be required to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period and potential magnitude. ASU 2022-04 is effective for annual reporting periods beginning after December 15, 2022, including interim periods within that reporting period, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. ASU 2022-04 allows for early adoption and requires retrospective adoption, except on rollforward information, which should be applied prospectively. The Company will adopt this guidance beginning with its first quarter ending March 31, 2023. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows, as the guidance pertains to disclosure.

NOTE 2 – FAIR VALUE MEASUREMENTS

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

The Company invests in various marketable securities with the intention of selling these securities to fulfill its future unsecured obligations under the Company’s nonqualified deferred compensation plan. See Note 12 for further information concerning the Company’s benefit plans.

The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021. The Company recorded a decrease in fair value related to its marketable securities in the amount of $8.3 million and an increase in fair value to its related to its marketable securities in the amount of $5.7 million for the years ended December 31, 2022 and 2021, respectively, which were included in “Other income (expense)” on the accompanying Consolidated Statements of Income.

The tables below identify the estimated fair value of the Company’s marketable securities, determined by reference to quoted market prices (Level 1), as of December 31, 2022 and 2021 (in thousands):


	December 31, 2022
	Quoted Priced in Active Markets		Significant Other		Significant
	for Identical Instruments		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Marketable securities	$	49,371	$	—	$	—	$	49,371


	December 31, 2021
	Quoted Prices in Active Markets		Significant Other		Significant
	for Identical Instruments		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Marketable securities	$	52,456	$	—	$	—	$	52,456

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, 2022 and 2021, the Company did not have any material 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, 2022 and 2021.

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, 2022 and 2021, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):


	December 31, 2022				December 31, 2021
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Senior Notes	$	4,371,653	$	4,119,777	$	3,826,978	$	4,135,629

The carrying amount of the Company’s unsecured revolving credit facility approximates fair value (Level 2), as borrowings under the facility bear variable interest at current market rates. 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 3 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following table identifies the changes in the Company’s allowance for doubtful accounts included in “Accounts receivable” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021 (in thousands):


	2022		2021
Allowance for doubtful accounts, balance at January 1	$	11,870	$	12,670
Reserve accruals		6,718		4,158
Uncollectable accounts written-off		(3,928)		(4,937)
Foreign currency translation		35		(21)
Allowance for doubtful accounts, balance at December 31	$	14,695	$	11,870

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, 2022 and 2021, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):


	Original Useful
	Lives	December 31, 2022		December 31, 2021
Land		$	931,993	$	888,558
Buildings and building improvements	15 – 39 years		2,896,071		2,737,212
Leasehold improvements	3 – 25 years		951,652		864,169
Furniture, fixtures and equipment	3 – 20 years		1,847,248		1,700,149
Vehicles	5 – 10 years		571,328		502,643
Construction in progress			239,773		255,307
Total property and equipment			7,438,065		6,948,038
Less: accumulated depreciation and amortization			3,014,024		2,734,523
Net property and equipment		$	4,424,041	$	4,213,515

The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $343.6 million, $320.4 million and $303.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, which were primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

The Company recorded charges of $7.6 million related to property and equipment for the year ended December 31, 2022, primarily due to the write-down on surplus land and buildings that exceeded market value and certain hardware and software projects that disposed or were no longer expected to provide a long-term benefit, $12.6 million related to property and equipment for the year ended December 31, 2021, primarily due to certain hardware and software projects that disposed or were no longer expected to provide a long-term benefit, and $3.4 million related to property and equipment for the year ended December 31, 2020, primarily due to the write-down on surplus land and buildings that exceeded market value, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

NOTE 5 – LEASES

Operating lease commitments:

The following table summarizes Total lease cost for the years ended December 31, 2022, 2021 and 2020, 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,
	2022		2021		2020
Operating lease cost	$	367,724	$	351,296	$	336,156
Short-term operating lease cost		11,314		7,694		6,131
Variable operating lease cost		93,940		89,065		82,868
Sublease income		(5,220)		(4,571)		(4,790)
Total lease cost	$	467,758	$	443,484	$	420,365

The following table summarizes other lease related information for the years ended December 31, 2022 and 2021 (in thousands):


		For the Year Ended
		December 31,
		2022		2021
Cash paid for amounts included in the measurement of operating lease liabilities:
	Operating cash flows from operating leases	$	366,866	$	343,749
Right-of-use assets obtained in exchange for new operating lease liabilities			416,615		257,830

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, 2022 (in thousands):


	December 31, 2022
	Related Parties		Non-Related Parties		Total
2023	$	4,779	$	356,996	$	361,775
2024		3,068		339,047		342,115
2025		2,296		301,716		304,012
2026		1,680		265,109		266,789
2027		704		216,950		217,654
Thereafter		1,314		1,006,239		1,007,553
Total operating lease payments		13,841		2,486,057		2,499,898
Less: present value discount		1,087		325,434		326,521
Total operating lease liabilities		12,754		2,160,623		2,173,377
Less: current portion of operating lease liabilities		4,779		361,942		366,721
Operating lease liabilities, less current portion	$	7,975	$	1,798,681	$	1,806,656

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 $13.2 million as of December 31, 2022. The weighted-average remaining lease term and weighted-average discount rate for the Company’s operating leases was 9.6 years and 4.0%, respectively, as of December 31, 2022.

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. 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, 2022, 2021 or 2020.

The following table identifies the changes in goodwill and certain acquisition intangibles, which were included in “Goodwill” on the accompanying Consolidated Balance Sheets for the years ended December 31, 2022 and 2021 (in thousands):


	2022		2021
Goodwill, balance at January 1,	$	879,340	$	881,030
Change in goodwill related to small acquisitions		1,452		493
Foreign currency translation		3,653		(2,183)
Goodwill, balance at December 31,	$	884,445	$	879,340

Intangibles other than goodwill:

The following table identifies the components of the Company’s intangible assets, inclusive of foreign currency translation adjustments, which were included in “Other assets, net” on the accompanying Consolidated Balance Sheets for the years ended December 31, 2022 and 2021 (in thousands):


	December 31, 2022						December 31, 2021
	Cost of		Accumulated		Net		Cost of		Accumulated		Net
	Intangibles		Amortization		Intangibles		Intangibles		Amortization		Intangibles
Finite-lived intangible assets:
Trade names (1)	$	8,532	$	(5,532)	$	3,000	$	8,110	$	(3,553)	$	4,557
Non-compete agreements (2)		7,010		(5,965)		1,045		6,915		(4,275)		2,640
Other intangible assets (3)		12,446		(6,406)		6,040		11,832		(4,181)		7,651
Total finite-lived intangible assets		27,988		(17,903)		10,085		26,857		(12,009)		14,848

Indefinite-lived intangible assets:
Trade names		36,134		—		36,134		34,348		—		34,348

Total intangible assets	$	64,122	$	(17,903)	$	46,219	$	61,205	$	(12,009)	$	49,196

(1)	Weighted-average remaining useful life of approximately 3.1 years as of December 31, 2022.

(2)	Weighted-average remaining useful life of approximately 1.6 years as of December 31, 2022.

(3)	Includes internally-developed software and customer relationships and has an estimated weighted-average remaining useful life of approximately 6.9 years as of December 31, 2022.

During the years ended December 31, 2022 and 2021, the Company recorded non-compete agreement assets in conjunction with small acquisitions in the amount of less than $0.1 million. Other than the non-compete agreement assets, the Company did not record additional finite-lived or indefinite-lived intangible assets during the year ended December 31, 2022 and 2021. For the years ended December 31, 2022, 2021 and 2020, the Company recorded aggregate amortization expense related to its intangible assets in the amounts of $4.8 million, $4.9 million and $5.3 million, respectively.

Indefinite-lived intangible assets, such as trade names, are reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that impairment may exist. The Company did not record any indefinite-lived intangible asset impairment during the years ended December 31, 2022, 2021 or 2020.

The following table identifies the estimated amortization expense of the Company’s intangibles for each of the next five years, and the aggregate thereafter, and reconciles to net, finite-lived intangible assets included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2022 (in thousands):


	December 31, 2022
	Amortization Expense
2023	$	2,787
2024		1,436
2025		1,429
2026		1,405
2027		1,269
Thereafter		1,759
Total net, finite-lived intangible assets	$	10,085

NOTE 7 – FINANCING

The following table identifies the amounts included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021 (in thousands):


	December 31,
		2022		2021
3.800% Senior Notes due 2022, effective interest rate of 3.845%	$	—	$	300,000
3.850% Senior Notes due 2023, effective interest rate of 3.851%		300,000		300,000
3.550% Senior Notes due 2026, effective interest rate of 3.570%		500,000		500,000
3.600% Senior Notes due 2027, effective interest rate of 3.619%		750,000		750,000
4.350% Senior Notes due 2028, effective interest rate of 4.383%		500,000		500,000
3.900% Senior Notes due 2029, effective interest rate of 3.901%		500,000		500,000
4.200% Senior Notes due 2030, effective interest rate of 4.205%		500,000		500,000
1.750% Senior Notes due 2031, effective interest rate of 1.798%		500,000		500,000
4.700% Senior Notes due 2032, effective interest rate of 4.740%		850,000		—
Total principal amount of debt		4,400,000		3,850,000
Less: Unamortized discount and debt issuance costs		28,347		23,022
Total long-term debt	$	4,371,653	$	3,826,978

The following table identifies the principal maturity payments of the Company’s financing facilities for each of the next five years, and in the aggregate thereafter, as of December 31, 2022 (in thousands):


	December 31, 2022
	Scheduled Maturities
2023	$	300,000
2024		—
2025		—
2026		500,000
2027		750,000
Thereafter		2,850,000
Total principal amount of debt	$	4,400,000

Unsecured revolving credit facility:

The Company is party to a credit agreement dated June 15, 2021 (the “Credit Agreement”). The Credit Agreement provides for a five-year $1.8 billion unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in June of 2026. The Credit Agreement includes a $200 million sub-limit for the issuance of letters of credit and a $75 million sub-limit for swing line borrowings under the Revolving Credit Facility. As described in the Credit Agreement governing the Revolving Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $900 million, provided that the aggregate amount of the commitments does not exceed $2.7 billion at any time.

As of December 31, 2022 and 2021, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, under the Credit Agreement in the amounts of $5.1 million and $84.0

million, respectively, reducing the aggregate availability under the Credit Agreement by those amounts. Substantially all of the outstanding letters of credit have a one-year term from the date of issuance. As of December 31, 2022 and 2021, the Company had no outstanding borrowings under its Revolving Credit Facility.

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, which 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. The Credit Agreement includes customary provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate. 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, varying from 0.070% to 0.250% per annum. 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, 2022, 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 and 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, 2022, the Company remained in compliance with all covenants under the Credit Agreement.

In addition to the letters of credit issued under the Credit Agreement described above, as of December 31, 2022, the Company had other outstanding letters of credit, primarily to support obligations under workers’ compensation, general liability and other insurance policies, in the amount of $96.6 million. Substantially all of these letters of credit have a one-year term from the date of issuance and were not issued under the Company’s Credit Agreement or another committed facility.

Senior notes:

On June 15, 2022, the Company issued $850 million aggregate principal amount of unsecured 4.700% Senior Notes due 2032 (“4.700% Senior Notes due 2032”) at a price to the public of 99.684% of their face value with U.S. Bank Trust Company, National Association (“U.S. Bank”) as trustee. Interest on the 4.700% Senior Notes due 2032 is payable on June 15 and December 15 of each year, beginning on December 15, 2022, and is computed on the basis of a 360-day year.

On September 1, 2022, the Company’s $300 million aggregate principal amount of unsecured 3.800% Senior Notes due 2022 matured, and the Company repaid these notes using available cash on hand.

As of December 31, 2022, the Company has issued and outstanding a cumulative $4.4 billion aggregate principal amount of unsecured senior notes, which are due between 2023 and 2032, with UMB Bank, N.A. and U.S. Bank Trust Company as trustees. Interest on the senior notes, ranging from 1.750% to 4.700%, is payable semi-annually and is computed on the basis of a 360-day year. The $300 million aggregate principal amount of unsecured 3.850% Senior Notes due 2023 were included in “Long-term debt” on the accompanying Consolidated Balance Sheet as of December 31, 2022, as the Company has the ability and intent to refinance these notes on a long-term basis. 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, 2022.

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, 2022 and 2021. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31, 2022 and 2021 (in thousands):


	2022		2021
Warranty liabilities, balance at January 1,	$	77,199	$	65,886
Warranty claims		(152,777)		(126,632)
Warranty accruals		174,118		137,960
Foreign currency translation		24		(15)
Warranty liabilities, balance at December 31,	$	98,564	$	77,199

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 November 17, 2021, May 16, 2022, and November 15, 2022, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.5 billion, resulting in a cumulative authorization amount of $21.8 billion. The additional authorizations are effective for three years, 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 years ended December 31, 2022 and 2021 (in thousands, except per share data):


	For the Year Ended
	December 31,
	2022		2021
Shares repurchased		4,961		4,537
Average price per share	$	661.66	$	545.78
Total investment	$	3,282,215	$	2,476,003

As of December 31, 2022, the Company had $1.7 billion remaining under its share repurchase program. Subsequent to the end of the year and through February 28, 2023, the Company repurchased an additional 0.7 million shares of its common stock under its share repurchase program, at an average price of $816.69, for a total investment of $539.6 million. The Company has repurchased a total of 91.2 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, 2023, at an average price of $225.56, for a total aggregate investment of $20.6 billion. As of February 28, 2023, we had approximately $1.2 billion remaining under our share repurchase program.

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes adjustments for foreign currency translations. The table below summarizes activity for changes in accumulated other comprehensive loss included in “Accumulated other comprehensive income (loss)” on the accompanying Consolidated Balance Sheets as of December 31, 2022 and 2021 (in thousands):


	Foreign		Total Accumulated Other
	Currency (1)		Comprehensive Income (Loss)
Accumulated other comprehensive loss, balance at December 31, 2020	$	(2,155)	$	(2,155)
Change in accumulated other comprehensive loss		(4,644)		(4,644)
Accumulated other comprehensive loss, balance at December 31, 2021	$	(6,799)	$	(6,799)
Change in accumulated other comprehensive income		9,795		9,795
Accumulated other comprehensive income, balance at December 31, 2022	$	2,996	$	2,996

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

NOTE 11 – REVENUE

The table below identifies the Company’s revenues disaggregated by major customer type for the years ended December 31, 2022, 2021 and 2020 (in thousands):


	For the Year Ended
	December 31,
	2022		2021		2020
Sales to do-it-yourself customers	$	7,903,359	$	7,643,832	$	6,684,183
Sales to professional service provider customers		6,170,239		5,368,657		4,647,189
Other sales and sales adjustments		336,262		315,074		273,121
Total sales	$	14,409,860	$	13,327,563	$	11,604,493

As of December 31, 2022 and 2021, the Company had recorded a deferred revenue liability of $5.0 million and $3.4 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, 2022, 2021 and 2020, the Company recognized $12.2 million, $13.6 million and $14.4 million, respectively, of revenue related to its loyalty program, which were included in “Sales” on the accompanying Consolidated Statements of Income.

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

NOTE 12 – SHARE-BASED COMPENSATION AND BENEFIT PLANS

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

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, 2022 (in thousands):


	December 31, 2022
	Total Shares Authorized for	Shares Available for Future
Plans	Issuance under the Plans	Issuance under the Plans
Incentive Plans	35,650	5,575
Employee Stock Purchase Plan	4,250	438
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 stock option activity under these plans during the year ended December 31, 2022:


				Average		Aggregate
	Shares	Weighted- Average		Remaining		Intrinsic Value
	(in thousands)	Exercise Price		Contractual Terms		(in thousands)
Outstanding at December 31, 2021	1,206	$	300.09
Granted	130		676.48
Exercised	(251)		242.51
Forfeited or expired	(16)		475.16
Outstanding at December 31, 2022	1,069	$	356.76	5.6	Years	$	520,691
Vested or expected to vest at December 31, 2022	1,049	$	353.40	5.6	Years	$	514,833
Exercisable at December 31, 2022	739	$	280.98	4.5	Years	$	416,152

The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of assumptions, including the risk-free rate, expected life, expected volatility and expected dividend yield.

	●	Risk-free interest rate – The United States Treasury rates in effect at the time the options are granted for the options’ expected life.

	●	Expected life – Represents the period of time that options granted are expected to be outstanding. The Company uses historical experience to estimate the expected life of options granted.

	●	Expected volatility – Measure of the amount, by which the Company’s stock price is expected to fluctuate, based on a historical trend.

	●	Expected dividend yield – The Company has not paid, nor does it have plans in the foreseeable future to pay, any dividends.

The table below identifies the weighted-average assumptions used for grants awarded during the years ended December 31, 2022, 2021 and 2020:


	December 31,
	2022		2021		2020
Risk free interest rate	2.09	%	0.82	%	0.86	%
Expected life	6.3	Years	5.9	Years	5.9	Years
Expected volatility	28.9	%	30.0	%	26.4	%
Expected dividend yield	—	%	—	%	—	%

The following table summarizes activity related to stock options awarded by the Company for the years ended December 31, 2022, 2021 and 2020:


	For the Year Ended
	December 31,
	2022		2021		2020
Compensation expense for stock options awarded (in thousands)	$	21,412	$	20,035	$	18,435
Income tax benefit from compensation expense related to stock options (in thousands)		5,332		4,989		4,620
Total intrinsic value of stock options exercised (in thousands)		123,911		163,722		79,451
Cash received from exercise of stock options (in thousands)		60,976		67,761		46,282
Weighted-average grant-date fair value of options awarded	$	221.19	$	146.57	$	106.76
Weighted-average remaining contractual life of exercisable options (in years)		4.5		4.7		4.5

At December 31, 2022, the remaining unrecognized compensation expense related to unvested stock option awards was $35.2 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, 2022 (in thousands, except per share data):


		Weighted-Average Grant-Date
	Shares	Fair Value
Non-vested at December 31, 2021	3	$	419.47
Granted during the period	1		660.48
Vested during the period (1)	(1)		400.23
Forfeited during the period	—		—
Non-vested at December 31, 2022	3	$	531.66

(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 non-employee directors of the Company that vest after one-year or 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 non-employee director restricted stock activity under these plans during the year ended December 31, 2022 (in thousands, except per share data):


		Weighted-Average Grant-Date
	Shares	Fair Value
Non-vested at December 31, 2021	2	$	508.45
Granted during the period	2		635.62
Vested during the period	(2)		508.45
Forfeited during the period	—		—
Non-vested at December 31, 2022	2	$	635.62

The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share data):


	For the Year Ended
	December 31,
	2022		2021		2020
Compensation expense for restricted shares awarded	$	1,808	$	1,602	$	1,488
Income tax benefit from compensation expense related to restricted shares	$	450	$	399	$	373
Total fair value of restricted shares at vest date	$	2,595	$	2,815	$	1,591
Shares awarded under the plans		3		3		4
Weighted-average grant-date fair value of shares awarded under the plans	$	645.31	$	509.24	$	412.67

At December 31, 2022, the remaining unrecognized compensation expense related to unvested restricted share awards was $0.5 million, and the weighted-average period of time, over which this cost will be recognized, is 0.3 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, and 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, 2022, 2021 and 2020 (in thousands, except per share data):


	For the Year Ended
	December 31,
	2022		2021		2020
Compensation expense for shares issued under the ESPP	$	3,238	$	3,019	$	2,824
Income tax benefit from compensation expense related to shares issued under the ESPP	$	806	$	752	$	708
Shares issued under the ESPP		31		36		45
Weighted-average price of shares issued under the ESPP	$	592.22	$	473.22	$	353.04

Profit sharing and savings plan:

The Company sponsors a contributory profit sharing and savings plan (the “401(k) Plan”) that covers substantially all employees who are at least 21 years of age and have completed one year of service. The Company makes matching contributions equal to 100% of the first 2% of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed. An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. The Company may also make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The Company did not make any discretionary contributions to the 401(k) Plan during the years ended

December 31, 2022, 2021 or 2020. The Company expensed matching contributions under the 401(k) Plan in the amounts of $36.7 million, $32.5 million and $31.0 million for the years ended December 31, 2022, 2021 and 2020, 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 timing related to the ultimate payment of these future share-based compensation related payments cannot be determined. The liability for compensation deferred under the Deferred Compensation Plan was $49.4 million and $52.5 million as of December 31, 2022 and 2021, respectively, which were included in “Other liabilities” on the accompanying Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amount of $0.2 million for each of the years ended December 31, 2022, 2021 and 2020, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

Stock appreciation rights:

The Company’s incentive plans provide for the granting of stock appreciation rights, which expire after 10 years and vest 25% per year, over four years, and are settled in cash. There were 13,159 and 9,811 stock appreciation rights outstanding as of December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, there were 3,348 stock appreciation rights granted. The liability for compensation to be paid for redeemed stock appreciation rights was $2.9 million and $1.3 million as of December 31, 2022 and 2021, respectively, which were included in “Other liabilities” on the Consolidated Balance Sheets. The Company recorded compensation expense for stock appreciation rights in the amounts of $1.7 million and $1.0 million and $0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively, which were included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.

NOTE 13 – COMMITMENTS

Construction commitments:

As of December 31, 2022, the Company had purchase obligations for construction contract commitments in the amount of $152.3 million.

Letters of credit commitments:

As of December 31, 2022, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of $101.7 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. See Note 1 for further information concerning the Company’s self-insurance reserves.

Renewable energy tax credit equity investments:

The Company has entered into agreements to make capital contributions to certain tax credit equity investments for the purpose of receiving renewable energy tax credits. As of December 31, 2022, the Company is required to make capital contributions totaling approximately $3.4 million upon achievement of project milestones by the solar energy farms, the timing of which is uncertain and outside of the Company’s control. See Note 1 for further information concerning the Company’s renewable energy tax credit equity investments.

NOTE 14 – RELATED PARTIES

The Company leases certain land and buildings related to 70 of its O’Reilly Auto Parts stores and two surplus properties 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 for each of the years ended December 31, 2022, 2021 and 2020. 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, 2022, 2021 and 2020 (in thousands):


	For the Year Ended
	December 31,
	2022		2021		2020
Domestic	$	2,786,866	$	2,770,485	$	2,260,385
International		11,789		11,429		6,020
Income before income taxes	$	2,798,655	$	2,781,914	$	2,266,405

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, 2022, 2021 and 2020 (in thousands):


	For the Year Ended
	December 31,
	2022		2021		2020
Current:
Federal income tax expense	$	455,779	$	485,988	$	401,331
State income tax expense		95,388		104,837		97,085
International income tax expense		5,263		6,021		3,306
Total current		556,430		596,846		501,722

Deferred:
Federal income tax expense		62,719		20,543		16,749
State income tax expense (benefit)		8,583		2,432		(2,865)
International income tax benefit		(1,727)		(2,592)		(1,503)
Total deferred		69,575		20,383		12,381

Net income tax expense	$	626,005	$	617,229	$	514,103

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, 2022, 2021 and 2020 (in thousands):


	For the Year Ended
	December 31,
	2022		2021		2020
Federal income taxes at statutory rate	$	587,716	$	584,202	$	474,681
State income taxes, net of federal tax benefit		87,352		90,360		76,810
Excess tax benefit from share-based compensation		(25,503)		(35,202)		(16,918)
Benefit from investment in renewable energy tax credits		(17,593)		(18,592)		(17,904)
Other items, net		(5,967)		(3,539)		(2,566)
Total provision for income taxes	$	626,005	$	617,229	$	514,103

The Company has invested in tax credit equity investments for the purposes of receiving renewable energy tax credits. During the years ended December 31, 2022, 2021 and 2020, the Company recognized investment tax credits in the amount of $167.6 million, $177.1 million and $170.5 million, respectively, all of which were realized through reductions in cash income taxes paid and were reflected as a component of the change in Income taxes payable on the accompanying Consolidated Statements of Cash Flows for the respective years. See Note 1 for further information concerning the Company’s investment in tax credit funds.

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, 2022 and 2021 (in thousands):


	December 31,
	2022		2021
Deferred tax assets:
Allowance for doubtful accounts	$	2,196	$	1,538
Tax credits		—		284
Other accruals		137,474		142,714
Operating lease liability		538,890		513,492
Other		17,115		16,117
Total deferred tax assets		695,675		674,145

Deferred tax liabilities:
Inventories		104,572		64,562
Property and equipment		233,288		212,649
Operating lease asset		521,541		496,996
Other		81,621		75,150
Total deferred tax liabilities		941,022		849,357

Net deferred tax liabilities	$	(245,347)	$	(175,212)

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, 2022, 2021 and 2020 (in thousands):


	2022		2021		2020
Unrealized tax benefit, balance at January 1,	$	26,847	$	30,967	$	31,475
Additions based on tax positions related to the current year		4,146		5,446		4,795
Payments related to items settled with taxing authorities		(1,000)		(2,570)		—
Reductions due to the lapse of statute of limitations and settlements		(5,195)		(6,996)		(5,303)
Unrealized tax benefit, balance at December 31,	$	24,798	$	26,847	$	30,967

For the years ended December 31, 2022, 2021 and 2020, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $28.3 million, $30.7 million and $35.9 million, respectively. The timing related to the ultimate resolution or settlement of these uncertain tax positions cannot be determined. All of the unrecognized tax benefits recorded as of December 31, 2022, 2021 and 2020, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $6.2 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2022, 2021 and 2020, the Company had accrued approximately $3.5 million, $3.8 million and $5.0 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, 2022, 2021 and 2020, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $1.5 million, $1.6 million and $2.2 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2023, the Company expects a reduction of $5.7 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2022, resulting from settlement or expiration of the statute of limitations.

The Company’s United States federal income tax returns for tax years 2019 and beyond remain subject to examination by the Internal Revenue Service. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2011 through 2021.

NOTE 16 – EARNINGS PER SHARE

The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share data):


	For the Year Ended
	December 31,
	2022		2021		2020
Numerator (basic and diluted):
Net income	$	2,172,650	$	2,164,685	$	1,752,302

Denominator:
Weighted-average common shares outstanding – basic		64,372		68,967		73,817
Effect of stock options (1)		590		644		645
Weighted-average common shares outstanding – assuming dilution		64,962		69,611		74,462

Earnings per share:
Earnings per share-basic	$	33.75	$	31.39	$	23.74
Earnings per share-assuming dilution	$	33.44	$	31.10	$	23.53

Antidilutive potential common shares not included in the calculation of diluted earnings per share:
Stock options (1)		144		111		291
Weighted-average exercise price per share of antidilutive stock options (1)	$	663.36	$	479.90	$	393.42

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

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

NOTE 17 – QUARTERLY RESULTS (Unaudited)

The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2022 and 2021. 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 2022
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Sales	$	3,296,011	$	3,670,737	$	3,798,619	$	3,644,493
Gross profit		1,708,072		1,884,718		1,934,962		1,853,954
Operating income		669,530		798,550		804,194		682,217
Net income		481,880		576,760		585,438		528,572
Earnings per share – basic (1)	$	7.24	$	8.86	$	9.25	$	8.45
Earnings per share – assuming dilution (1)	$	7.17	$	8.78	$	9.17	$	8.37


	Fiscal 2021
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Sales	$	3,090,899	$	3,465,601	$	3,479,570	$	3,291,493
Gross profit		1,640,795		1,826,378		1,818,240		1,734,536
Operating income		691,105		795,583		754,599		675,881
Net income		501,609		585,451		558,652		518,973
Earnings per share – basic (1)	$	7.13	$	8.41	$	8.14	$	7.71
Earnings per share – assuming dilution (1)	$	7.06	$	8.33	$	8.07	$	7.64

(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.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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