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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
(Exact name of registrant as specified in its charter)
|
| |||
(State or other jurisdiction | Commission file | (I.R.S. Employer | ||
of incorporation or organization) | number | Identification No.) |
(Address of principal executive offices, Zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | |||||||
$0.01 par value | The | ||||||||
(Nasdaq Global Select Market) | |||||||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At June 30, 2021, the aggregate market value of the voting stock held by non-affiliates of the Company was $
At February 21, 2022, an aggregate of
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2022 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 2021, are incorporated by reference into Part III.
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
3
Forward-Looking Statements
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “estimate,” “may,” “could,” “will,” “believe,” “expect,” “would,” “consider,” “should,” “anticipate,” “project,” “plan,” “intend” or similar words. In addition, statements contained within this annual report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the COVID-19 pandemic or other public health crises; the economy in general; inflation; consumer debt levels; product demand; the market for auto parts; competition; weather; tariffs; availability of key products and supply chain disruptions; business interruptions, including terrorist activities, war and the threat of war; failure to protect our brand and reputation; challenges in international markets; volatility of the market price of our common stock; our increased debt levels; credit ratings on public debt; historical growth rate sustainability; our ability to hire and retain qualified employees; risks associated with the performance of acquired businesses; information security and cyber-attacks; and governmental regulations. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section in this annual report on Form 10-K for the year ended December 31, 2021, and subsequent Securities and Exchange Commission filings, for additional factors that could materially affect our financial performance. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
4
PART I
Item 1. Business
GENERAL INFORMATION
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company,” refer to O’Reilly Automotive, Inc. and its Subsidiaries. O’Reilly is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States (“U.S.”), selling our products to both do-it-yourself (“DIY”) and professional service provider customers, our “dual market strategy.” The business was founded in 1957 by Charles F. O’Reilly and his son, Charles H. “Chub’’ O’Reilly, Sr., and initially operated from a single store in Springfield, Missouri. Our common stock has traded on The Nasdaq Global Select Market under the symbol “ORLY” since April 22, 1993.
At December 31, 2021, we operated 5,759 stores in 47 states in the United States and 25 stores in Mexico. Our stores carry an extensive product line, including
| ● | new and remanufactured automotive hard parts and maintenance items, such as alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts, fuel pumps, hoses, starters, temperature control, water pumps, antifreeze, appearance products, engine additives, filters, fluids, lighting, oil and wiper blades; and |
| ● | accessories, such as floor mats, seat covers and truck accessories. |
Our stores offer many enhanced services and programs to our customers, such as
| ● | battery diagnostic testing; |
| ● | battery, wiper and bulb replacement; |
| ● | check engine light code extraction, where allowed by law; |
| ● | custom hydraulic hoses; |
| ● | drum and rotor resurfacing; |
| ● | electrical and module testing; |
| ● | loaner tool program; |
| ● | professional paint shop mixing and related materials; and |
| ● | used oil, oil filter and battery recycling. |
See the “Risk Factors” section of this annual report on Form 10-K for a description of certain risks relevant to our business. These risk factors include, among others, risk related to the novel coronavirus (“COVID-19”) pandemic, deteriorating economic conditions, competition in the automotive aftermarket business, our sensitivity to regional economic and weather conditions, our relationships with key suppliers and availability of key products, complications in our distribution centers (“DCs”), failure to protect our brand and reputation, risks associated with international operations, unanticipated fluctuations in our quarterly results, the volatility of the market price of our common stock, our increased debt levels, a downgrade in our credit ratings, future growth assurance, our dependence upon key personnel, our acquisition strategies, data security and environmental legislation and other regulations.
OUR BUSINESS
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our growth strategy. We remain confident in our ability to continue 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, including superior customer service and expense control. Our intent is to be the dominant auto parts provider in all the markets we serve by providing a higher level of customer service and a better value position than our competitors to both DIY and professional service provider customers.
Competitive Advantages
We believe our effective dual market strategy, superior customer service, technically proficient store personnel, strategic distribution network and experienced management Team make up our key competitive advantages, which cannot be easily duplicated.
5
Proven Ability to Execute Our Dual Market Strategy:
For more than 40 years, we have established a track record of effectively serving, at a high level, both DIY and professional service provider customers. We believe our proven ability to effectively execute a dual market strategy is a unique competitive advantage. The execution of this strategy enables us to better compete by targeting a larger base of automotive aftermarket parts consumers, capitalizing on our existing store and distribution infrastructure, operating profitably in both large markets and less densely populated geographic areas that typically attract fewer competitors and enhancing service levels offered to DIY customers through the offering of a broad inventory and the extensive product knowledge required by professional service provider customers.
In 2021, we derived approximately 59% of our sales from our DIY customers and approximately 41% of our sales from our professional service provider customers. Historically, we have increased our sales to professional service provider customers at a faster pace than the increase in our sales to DIY customers due to the more fragmented nature of the professional service provider business, which offers a greater opportunity for consolidation. We believe we will continue to have a competitive advantage on the professional service provider portion of our business, due to our systems, knowledge, industry-leading parts availability and experience serving the professional service provider side of the automotive aftermarket, augmented by our approximately 750 full-time sales staff dedicated solely to calling upon and servicing the professional service provider customer. We will also continue to expand and enhance the level of offerings focused on growing our DIY business and will continue to execute our proven dual market strategy in both existing and new markets.
Superior Customer Service:
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations with a wide selection of automotive products. We believe the satisfaction of DIY and professional service provider customers is substantially dependent upon our ability to provide, in a timely fashion, the correct automotive products needed to complete their repairs. Accordingly, each O’Reilly store carries, or has same or next day availability to, a broad selection of automotive products designed to cover a wide range of vehicle applications. We continuously refine the inventory levels and assortments carried in each of our stores and within our network, based in large part on the sales movement tracked by our inventory control system, market vehicle registration data, failure rates and management’s assessment of the changes and trends in the marketplace. We have no material backorders for the products we sell.
We seek to attract new DIY and professional service provider customers and retain existing customers by offering superior customer service, the key elements of which are identified below:
| ● | superior in-store service through highly-motivated, technically-proficient store personnel (“Professional Parts People”); |
| ● | an extensive selection and superior availability of products; |
| ● | many enhanced service programs, including battery and electrical testing, battery, wiper and bulb replacement and check engine light code extractions; |
| ● | attractive stores in convenient locations; |
| ● | competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers’ quality and value preferences; |
| ● | a robust point-of-sale system integrated with our proprietary electronic catalog, which contains a wide variety of product images, schematics and technical specifications and equips our Team Members with highly effective tools to source products in our extensive supply network; |
| ● | online ordering for our professional customers through our proprietary professional customer platform, www.FirstCallOnline.com, with local delivery available; and |
| ● | online ordering for our DIY customers through our retail platform, www.OReillyAuto.com, with convenient store locations to pick up or home delivery. |
Technically Proficient Professional Parts People:
Our highly-motivated, technically-proficient Professional Parts People provide us with a significant competitive advantage, particularly over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be knowledgeable, particularly with respect to hard part repairs, in order to better serve the technically-oriented professional service provider customers with whom they interact on a daily basis. Such technical proficiency also enhances the customer service we provide to our DIY customers who value the expert assistance provided by our Professional Parts People. See our “Team Members and Human Capital Management” disclosure of the “Business” section of this annual report on Form 10-K for more information about our technically proficient professional parts people.
6
Strategic Regional Tiered Distribution Network:
We believe our commitment to a robust, regional, tiered distribution network provides superior replenishment and access to hard-to-find parts and enables us to optimize product availability and inventory levels throughout our store network. Our strategic, regional, tiered distribution network includes DCs and Hub stores. Our inventory management and distribution systems electronically link each of our stores to one or more DCs, which provides for efficient inventory control and management. We currently operate 28 regional DCs, which provide our stores with same-day or overnight access to an average of 158,000 stock keeping units (“SKUs”), many of which are hard-to-find items not typically stocked by other auto parts retailers. To augment our robust distribution network, we operate a total of 375 Hub stores that also provide delivery service and same-day access to an average of 45,000 SKUs from a Hub or 80,000 to 92,000 SKUs from a Super Hub to other stores within the surrounding area. We believe this timely access to a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business.
Experienced Management Team:
Our Company philosophy is to “promote from within” and the vast majority of our senior managers, district managers and store managers have been promoted from within the Company. We augment this promote from within philosophy by pursuing strategic hires with a strong emphasis on automotive aftermarket experience. We have a strong management Team that has demonstrated the consistent ability to successfully execute our business plan and growth strategy by generating 29 consecutive years of record revenues and earnings and positive comparable store sales results since becoming a public company in April of 1993. See our “Team Members and Human Capital Management” disclosure of the “Business” section of this annual report on Form 10-K for more information about our experienced management Team.
Growth Strategy
Aggressively Open New Stores:
We intend to continue to consolidate the fragmented automotive aftermarket. During 2021, we opened 165 net, new domestic stores and three new stores in Mexico. In 2022, we plan to open 175 to 185 net, new stores, which will increase our penetration in existing markets and allow for expansion into new, contiguous markets. The sites for these new stores have been identified, and to date, we have not experienced significant difficulties in locating suitable sites for construction of new stores or identifying suitable acquisition targets for conversion to O’Reilly stores. We typically open new stores by
| (i) | constructing a new facility or renovating an existing one on property we purchase or lease and stocking the new store with fixtures and inventory; |
| (ii) | acquiring an independently owned auto parts store (“jobber store”), typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store; or |
| (iii) | purchasing multi-store chains. |
New store sites are strategically located in clusters within geographic areas that complement our distribution network in order to achieve economies of scale in management, advertising and distribution. Other key factors we consider in the site selection process include population density and growth patterns, demographic lifestyle segmentation, age and per capita income, vehicle traffic counts, vehicles in operation, number and type of existing automotive repair facilities and competing auto parts stores within a predetermined radius.
We target both small and large markets for expansion of our store network. While we have, and continue to face, aggressive competition in the more densely populated markets, we believe we have competed effectively, and are well positioned to continue to compete effectively, in such markets and to achieve our goal of continued profitable sales growth within these markets. We also believe that with our dual market strategy, we are better able to operate stores in less densely populated areas, which would not otherwise support a national chain store selling primarily to the retail automotive aftermarket. Therefore, we continue to pursue opening new stores in less densely populated market areas as part of our growth strategy.
Grow Sales in Existing Stores:
Profitable comparable store sales growth is also an important part of our growth strategy. To achieve improved sales and profitability at existing O’Reilly stores, we continually strive to improve the service provided to our customers. We believe that while competitive pricing is an essential component of successful growth in the automotive aftermarket business, it is customer satisfaction, whether of the DIY consumer or professional service provider, resulting from superior customer service, that generates sustainable increased sales and profitability.
Selectively Pursue Strategic Acquisitions:
The automotive aftermarket industry is still highly fragmented, and we believe the ability of national auto parts chains, like O’Reilly, to operate more efficiently and effectively than smaller independent operators will result in continued industry consolidation. Our intention
7
is to continue to selectively pursue strategic acquisitions that will strengthen our position as a leading automotive aftermarket parts supplier in existing markets and provide a springboard for expansion into new markets, domestic and international.
Continually Enhance Store Design and Location:
Our current prototype store design features optimized square footage, high ceilings, convenient interior store layouts, in-store signage, multilingual signage when appropriate, bright lighting, convenient ingress and egress, ample parking and dedicated counters to serve professional service provider customers, each designed to increase sales and operating efficiencies to enhance overall customer service. We continually update the location and condition of our store network through systematic renovation and relocation of our existing stores to enhance store performance. During 2021, while experiencing constraints to construction timing due to the COVID-19 pandemic, we relocated 12 stores and performed minor to major updates or renovations to approximately 1,200 additional stores. We believe that our ability to consistently achieve growth in comparable store sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best attract and serve our customers.
Omnichannel Growth Strategy:
Our Omnichannel growth strategies reflect the continued evolution of customer preferences in researching and completing purchases. More than ever before, our customers’ purchase decisions are informed by a range of interactions, whether in-person, over the phone, or through a variety of digital channels, as they seek to find the professional parts knowledge and the product availability they need to meet their automotive repair and maintenance needs. Our Omnichannel growth strategies are focused on offering our customers an enhanced and seamless research and buying experience through any of these channels. We have long been known for excellent customer service and continue to grow the functionality and user-friendliness of our digital platforms, including www.OReillyAuto.com and www.FirstCallOnline.com, to enhance our customers’ shopping experience. Many of our customers interact over multiple channels to research and complete a purchase, and the functionality and features of our digital sites complement the outstanding customer service provided in our brick and mortar locations.
Team Members and Human Capital Management
Our tradition for 65 years has been to treat all of our Team Members with honesty and respect and to commit significant resources to instill in them our “Live Green” culture, which emphasizes the importance of each Team Member’s contribution to the success of O’Reilly. This focus on professionalism and respect has created an industry-leading Team, and we consider our relations with our Team Members to be excellent.
We are committed to providing a work environment that allows Team Members to feel highly valued and to be productive and effective in their jobs by maintaining an inclusive environment and healthy work/life balance, which we believe increases employee engagement. Our ongoing emphasis on diversity and inclusion, including our policies, recruitment and selection procedures, onboarding processes and training efforts, positively builds upon our successful “promote from within” philosophy and growth strategies.
Talent Acquisition, Retention and Training:
Our Company knows the value of a tenured Team, which is why our philosophy is to “promote from within” first. As management opportunities arise, we look first within the Company and promote those who have performed well, have the right expertise and have shown leadership potential before looking outside the Company; however, we augment this philosophy by pursuing strategic hires with a strong emphasis on automotive aftermarket experience when appropriate. This comprehensive approach increases Team Member commitment and has resulted in a very experienced leadership Team. As of December 31, 2021, our strong management Team was comprised of 229 senior managers who average 20 years of service, 289 corporate managers who average 16 years of service and 574 district managers who average 14 years of service.
Each of our stores is staffed with a store manager and one or more assistant managers, in addition to parts specialists, retail and/or installer service specialists and other positions required to meet the specific needs of each store. Each of our 574 district managers has general supervisory responsibility for an average of 10 stores, which provides our stores with strong operational support.
We offer a variety of specific training programs that address a broad spectrum of topics from store and distribution center operations to customer service. We believe our highly trained Team of Professional Parts People is essential in providing superior customer service to both DIY and professional service provider customers. A significant portion of our business is from professional service provider customers; therefore, our Professional Parts People are required to be highly technically proficient in automotive products. In addition, we have found that the typical DIY customer often seeks assistance from Professional Parts People, particularly when purchasing hard parts. The ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression and is a significant factor in generating repeat DIY business.
8
We screen prospective Team Members to identify highly motivated individuals who either have experience with automotive parts and repairs or automotive aptitude. New store Team Members go through a comprehensive orientation focused on the culture of our Company, as well as the requirements for their specific position. Additionally, during their first year of employment, our parts specialists go through extensive automotive systems and product knowledge training to ensure they are able to provide high levels of service to our customers. Once all of the required training has been satisfied, our parts specialists become eligible to take the O’Reilly Certified Parts Professional test. Passing the O’Reilly test helps prepare them to become certified by the National Institute for Automotive Service Excellence (“ASE”).
All of our stores have the ability to service professional service provider customers. For this reason, select Team Members in each store complete extensive sales call training with a regional field sales manager. These Team Members then spend at least one day per week calling on existing and potential professional service provider customers. Each Team Member engaged in such sales activities participates in quarterly advanced training programs for sales and business development.
Additionally, store and district managers complete a comprehensive training program to ensure each has a thorough understanding of customer service, leadership, inventory management and store profitability, as well as all other sales and operational aspects of our business model. Store and district managers are also required to complete a structured training program that is specific to their position, including attending a week-long manager development program at the corporate headquarters in Springfield, Missouri. Store and district managers also receive continuous training through online training programs, field workshops, regional meetings and our annual leadership conference.
Diversity and Inclusion:
At O’Reilly, valuing diversity is about creating an environment in which our Team Members feel included, respected and have opportunities to do their best work and achieve their greatest potential. We believe diversity within the workplace is crucial in running our business and building the best Team of Professional Parts People to serve our customers. We are committed to recruiting and building a diverse team through ongoing leadership development and actively identifying emerging talent. In order to ensure our diversity and inclusion efforts are successful, we survey our Team Members and build action plans and programs aimed at improving our work environments for our Team Members and customers.
Compensation, Benefits and Recognition:
Our compensation philosophy has always been to incentivize Team Members to “run it like you own it,” and we continually evaluate and benchmark our comprehensive compensation programs to ensure they remain competitive, providing an important tool to attract and retain the best and most qualified Team Members in every market. We provide financial incentives to all store Team Members through various incentive compensation programs. Store team members have the opportunity to earn incentive pay that increases their base hourly wage consistent with their individual performance or the performance of their store. Store managers, district managers, region directors and division vice presidents have the ability to earn additional compensation above their salary or base hourly wage based upon the performance of their stores. In addition, beginning with the district manager level, we augment our competitive programs with share-based compensation. We believe our incentive compensation programs significantly increase the motivation and overall performance of our Team Members.
Just as pay, benefits, and growth opportunities are critically important to our Team Member success, we believe it is equally important to recognize Team Members for a job well done. We regularly present many awards that range from recognizing individual service longevity to performance, allowing peer-to-peer recognition or management nomination of an individual’s excellent performance.
Team Composition:
We recognize that each and every one of our Team Members plays a very important role in our ability to provide outstanding customer service and achieve consistent, successful performance. As of January 31, 2022, we employed 83,636 Team Members (68,679 full-time Team Members and 14,957 part-time Team Members), of whom 68,086 were employed at our U.S. stores, 10,071 were employed at our U.S. DCs, 3,750 were employed at our U.S. corporate and regional offices and 1,729 were employed in Mexico. Ours is an increasingly technical business creating the need for knowledgeable Professional Parts People, and our ongoing focus on developing a technically proficient Team has resulted in the growth of the mix of our full-time work force, increasing from 65% at January 31, 2020 to 82% at January 31, 2022. While full-time Professional Parts People play a vital role in our ongoing success, the flexibility of incorporating part-time employment into our work force is also an important component of providing excellent customer service. Many of our part-time Team Members choose to work at O’Reilly while attending school, or during other transitional periods in their lives, or simply because of their passion for cars and knowledge of auto parts. Part-time Team Members have the opportunity to become career Professional Parts People because of our promote from within philosophy, and many of our leaders today began their careers as part-time Team Members in our stores or distribution centers.
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A union represents 419 Team Members in 49 stores in the Greater Bay Area in California and has for many years. There are 62 Team Members that drive over-the-road trucks in two of our domestic DCs that are also represented by a labor union. Additionally, two unions represent approximately 1,000 Team Members in Mexico stores and DCs. We consider our current relationship with these unions and union Team Members to be excellent. With the exception of the previously described Team Members, our Team Members are not represented by labor unions.
Additional information about our Team Member population and human capital management practices can be found in our most recent Sustainability, Social, and Governance report, which is available on our website at www.OReillyAuto.com. Our Sustainability, Social, and Governance report is not, and will not be deemed to be, a part of this annual report on Form 10-K for the year ended December 31, 2021, or incorporated by reference into any of our other filings with the Securities and Exchange Commission.
Store Network
New Store Site Selection:
In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in management, advertising and distribution. Other key factors we consider in the site selection process are
| ● | population density; |
| ● | demographics, including age, life style and per capita income; |
| ● | market economic strength, retail draw and growth patterns; |
| ● | number, age and percent of makes and models of registered vehicles; |
| ● | the number, type and sales potential of existing automotive repair facilities; |
| ● | the number of auto parts stores and other competitors within a predetermined radius; |
| ● | physical location, traffic count, size, economics and presentation of the site; |
| ● | financial review of adjacent existing locations; and |
| ● | the type and size of store that should be developed. |
When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve economies of scale. After opening this initial cluster of new stores, we begin penetrating the less densely populated surrounding areas. As these store clusters mature, we evaluate the need to open additional locations in the more densely populated markets where we believe opportunities exist to expand our market share or to improve the level of service provided in high volume areas. This strategy enables us to achieve additional distribution and advertising efficiencies in each market.
Store Locations and Size:
As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and small, less densely populated areas that would not otherwise support a national chain selling primarily to the retail automotive aftermarket. Our U.S. stores, on average, carry approximately 21,000 SKUs and average approximately 7,500 total square feet in size. At December 31, 2021, we had a total of approximately 43 million square feet in our 5,759 domestic stores. Our domestic stores are served primarily by the nearest DC, which averages 158,000 SKUs, but also have same-day access to the broad selection of inventory available at one of our 375 Hub stores, which are comprised of 281 Hubs that average approximately 10,200 square feet and carry an average of 45,000 SKUs and 94 larger Super Hubs that average approximately to 19,300 square feet and carry an average of 80,000 to 92,000 SKUs.
We believe that our stores are “destination stores” generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity. Consequently, most of our stores are freestanding buildings or prominent end caps situated on or near major traffic thoroughfares and offer ample parking, easy customer access and are generally located in close proximity to our professional service provider customers.
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The following table sets forth the geographic distribution and activity of our stores as of December 31, 2021 and 2020:
December 31, 2020 | 2021 Net, New Stores | December 31, 2021 | ||||||||||||||||
|
|
| % of Total |
|
| Cumulative | ||||||||||||
Store | % of Total | Store | Store | Store | % of Total | % of Total | ||||||||||||
State | Count | Store Count | Growth | Growth | Count | Store Count | Store Count | |||||||||||
Texas | 755 | 13.5 | % | 20 |
| 12.1 | % | 775 | 13.5 | % | 13.5 | % | ||||||
California | 562 | 10.0 | % | 8 |
| 4.8 | % | 570 | 9.9 | % | 23.4 | % | ||||||
Florida | 246 | 4.4 | % | 13 |
| 7.9 | % | 259 | 4.5 | % | 27.9 | % | ||||||
Georgia | 224 | 4.0 | % | 7 |
| 4.2 | % | 231 | 4.0 | % | 31.9 | % | ||||||
Illinois | 213 | 3.8 | % | 7 |
| 4.2 | % | 220 | 3.8 | % | 35.7 | % | ||||||
Ohio | 211 | 3.8 | % | 6 |
| 3.6 | % | 217 | 3.8 | % | 39.5 | % | ||||||
North Carolina | 199 | 3.6 | % | 12 |
| 7.3 | % | 211 | 3.7 | % | 43.2 | % | ||||||
Missouri | 204 | 3.6 | % | 2 |
| 1.2 | % | 206 | 3.6 | % | 46.8 | % | ||||||
Tennessee | 185 | 3.3 | % | 6 |
| 3.6 | % | 191 | 3.3 | % | 50.1 | % | ||||||
Michigan | 181 | 3.2 | % | 5 |
| 3.1 | % | 186 | 3.2 | % | 53.3 | % | ||||||
Washington | 158 | 2.8 | % | 3 |
| 1.9 | % | 161 | 2.7 | % | 56.0 | % | ||||||
Indiana | 156 | 2.8 | % | 4 |
| 2.4 | % | 160 | 2.7 | % | 58.7 | % | ||||||
Alabama | 152 | 2.7 | % | 4 |
| 2.4 | % | 156 | 2.6 | % | 61.3 | % | ||||||
Arizona | 142 | 2.5 | % | 3 |
| 1.9 | % | 145 | 2.5 | % | 63.8 | % | ||||||
Louisiana | 127 | 2.3 | % | 9 |
| 5.5 | % | 136 | 2.4 | % | 66.2 | % | ||||||
Wisconsin | 128 | 2.3 | % | 1 |
| 0.6 | % | 129 | 2.2 | % | 68.4 | % | ||||||
Minnesota | 124 | 2.2 | % | 4 |
| 2.4 | % | 128 | 2.2 | % | 70.6 | % | ||||||
Oklahoma | 124 | 2.2 | % | 1 |
| 0.6 | % | 125 | 2.2 | % | 72.8 | % | ||||||
Arkansas | 117 | 2.1 | % | 2 |
| 1.2 | % | 119 | 2.1 | % | 74.9 | % | ||||||
South Carolina | 115 | 2.1 | % | 4 |
| 2.4 | % | 119 | 2.1 | % | 77.0 | % | ||||||
Colorado | 109 | 1.9 | % | 2 |
| 1.2 | % | 111 | 1.9 | % | 78.9 | % | ||||||
Kentucky | 105 | 1.9 | % | 3 |
| 1.9 | % | 108 | 1.9 | % | 80.8 | % | ||||||
Virginia | 90 | 1.6 | % | 4 |
| 2.4 | % | 94 | 1.6 | % | 82.4 | % | ||||||
Kansas | 86 | 1.5 | % | — |
| — | % | 86 | 1.5 | % | 83.9 | % | ||||||
Mississippi | 82 | 1.5 | % | 2 |
| 1.2 | % | 84 | 1.5 | % | 85.4 | % | ||||||
Iowa | 80 | 1.4 | % | 1 |
| 0.6 | % | 81 | 1.4 | % | 86.8 | % | ||||||
Oregon | 71 | 1.3 | % | 1 |
| 0.6 | % | 72 | 1.3 | % | 88.1 | % | ||||||
Utah | 66 | 1.2 | % | 1 |
| 0.6 | % | 67 | 1.2 | % | 89.3 | % | ||||||
New Mexico | 60 | 1.1 | % | 2 |
| 1.2 | % | 62 | 1.1 | % | 90.4 | % | ||||||
Nevada | 57 | 1.0 | % | 2 |
| 1.2 | % | 59 | 1.0 | % | 91.4 | % | ||||||
Massachusetts | 51 | 0.9 | % | 5 |
| 3.1 | % | 56 | 1.0 | % | 92.4 | % | ||||||
Nebraska | 49 | 0.9 | % | 2 |
| 1.2 | % | 51 | 0.9 | % | 93.3 | % | ||||||
Idaho | 48 | 0.9 | % | — |
| — | % | 48 | 0.8 | % | 94.1 | % | ||||||
Pennsylvania | 37 | 0.7 | % | 2 |
| 1.2 | % | 39 | 0.7 | % | 94.8 | % | ||||||
New Hampshire | 33 | 0.6 | % | 2 |
| 1.2 | % | 35 | 0.6 | % | 95.4 | % | ||||||
Maine | 34 | 0.6 | % | — |
| — | % | 34 | 0.6 | % | 96.0 | % | ||||||
Montana | 28 | 0.5 | % | — |
| — | % | 28 | 0.5 | % | 96.5 | % | ||||||
Connecticut | 26 | 0.5 | % | 1 |
| 0.6 | % | 27 | 0.5 | % | 97.0 | % | ||||||
Vermont | 24 | 0.4 | % | — |
| — | % | 24 | 0.4 | % | 97.4 | % | ||||||
New York | 20 | 0.4 | % | 4 |
| 2.4 | % | 24 | 0.4 | % | 97.8 | % | ||||||
Wyoming | 23 | 0.4 | % | — |
| — | % | 23 | 0.4 | % | 98.2 | % | ||||||
West Virginia | 18 | 0.3 | % | 4 |
| 2.4 | % | 22 | 0.4 | % | 98.6 | % | ||||||
South Dakota | 19 | 0.3 | % | 1 |
| 0.6 | % | 20 | 0.3 | % | 98.9 | % | ||||||
Alaska | 15 | 0.3 | % | 1 |
| 0.6 | % | 16 | 0.3 | % | 99.2 | % | ||||||
North Dakota | 15 | 0.3 | % | 1 |
| 0.6 | % | 16 | 0.3 | % | 99.5 | % | ||||||
Rhode Island | 12 | 0.2 | % | 3 |
| 1.9 | % | 15 | 0.3 | % | 99.8 | % | ||||||
Hawaii | 13 | 0.2 | % | — |
| — | % | 13 | 0.2 | % | 100.0 | % | ||||||
Total U.S. stores | 5,594 | 100.0 | % | 165 | 100.0 | % | 5,759 | 100.0 | % | |||||||||
Mexico | 22 | 3 | 25 | |||||||||||||||
Total stores |
| 5,616 |
| 168 |
| 5,784 |
|
| ||||||||||
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Distribution Systems
We believe that our tiered distribution model provides industry-leading parts availability and store in-stock positions, while optimizing our inventory investment by controlling the depth of our store stocked inventory. Moreover, we believe our ongoing, significant capital investments made in our DC network allow us to efficiently service new stores that are planned to open in contiguous market areas as well as servicing our existing store network. Our distribution expansion strategy complements our new store opening strategy by supporting newly established clusters of stores, and additional penetration into existing markets, in the regions surrounding each DC. As of December 31, 2021, we had a total growth capacity of 300 to 450 stores in our distribution network, which benefited from completing the relocation of our Knoxville, Tennessee, DC into our larger DC facility in Lebanon, Tennessee. The existing store portion of our Knoxville, Tennessee, DC facility remains a large Hub that will continue to provide same day parts availability in the Knoxville market. Additionally, we opened our new Horn Lake, Mississippi, DC in 2021, and when appropriate, we plan to merge our North Little Rock, Arkansas, DC into our new Horn Lake, Mississippi, DC. At that time, the existing store portion of our North Little Rock, Arkansas, DC facility will remain a large Hub that will continue to provide same day parts availability in the Little Rock market.
Distribution Centers:
As of December 31, 2021, we operated 28 domestic DCs comprised of approximately 12.1 million operating square feet (see the “Properties” table in Item 2 of this annual report on Form 10-K for more information about DC operating square footages). Our DCs stock an average of 158,000 SKUs and most DCs are linked to and have access to multiple other regional DCs’ inventory. Our DCs provide five-night-a-week delivery, primarily via a Company-owned fleet, to substantially all of our stores in the continental United States. In addition, stores within an individual DC’s metropolitan area receive multiple daily deliveries from the DC’s “city counter,” many of which receive this service seven days per week. Our DCs provide service to not only the stores they service via their city counters but also to strategic Hub locations, which redistribute products to surrounding stores. Our national Hub store network provides additional service throughout the week, and on weekends, to surrounding stores.
As part of our continuing efforts to enhance our distribution network in 2022, we plan to
| ● | continue to enhance our distribution network through the engineering, design, expansion or relocation of new or current DCs; |
| ● | continue to utilize routing software to continue to enhance logistics efficiencies; |
| ● | continue to implement labor management software to improve DC productivity and overall operating efficiency; |
| ● | continue to define and implement best practices in all DCs; |
| ● | make proven, return-on-investment based capital enhancements to material handling equipment in DCs, including conveyor systems, picking modules, lift equipment and computer hardware; and |
| ● | continue to augment our robust distribution network, when and where appropriate, through the use of strategically located Hubs and larger Super Hubs. |
Hub Stores:
We currently operate a total of 375 strategically located Hub stores. In addition to serving DIY and professional service provider customers in their markets, Hub stores also provide delivery service to our other stores within the surrounding area and access to an expanded selection of SKUs on a same-day basis. Our Hub store network consists of 281 Hubs that average approximately 10,200 square feet and carry an average of 45,000 SKUs and 94 larger Super Hubs that average approximately 19,300 square feet and carry an average of 80,000 to 92,000 SKUs.
Products and Purchasing
Our stores offer DIY and professional service provider customers a wide selection of products for domestic and imported automobiles, vans and trucks. Our merchandise generally consists of nationally recognized, well-advertised, premium name brand products, such as AC Delco, Armor All, Bosch, Castrol, Dorman, Fel-Pro, Gates Rubber, Lucas Oil, Mobil1, Monroe, Moog, Pennzoil, Prestone, Standard, STP, Turtle Wax, Valvoline, Wagner, and Wix, and a wide selection of quality proprietary private label products, which span the entire good, better and best value spectrum, under our BesTest®, BrakeBest®, Cartek®, Import Direct®, MasterPro®, MicroGard®, Murray®, Omnispark®, O’Reilly Auto Parts®, Precision®, Power Torque®, Super Start®, Syntec®, and Ultima® brands. Our proprietary private label products are produced by respected automotive manufacturers, meet or exceed original equipment manufacturer specifications and consist of house brands and nationally recognized proprietary bands, which we have acquired or developed over time. Our “good” proprietary brands provide a great combination of quality and value, a characteristic important to our DIY customers, while our “better” and “best” proprietary brands offer options for our more heavy-duty DIY customers, as well as our professional service provider customers, who often prefer higher quality products that can be relied upon to support and grow their businesses.
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We have no long-term contracts with material purchase commitments with any of our suppliers, nor have we experienced difficulty in obtaining satisfactory alternative supply sources for automotive parts. We believe that alternative supply sources exist at competitive costs for substantially all of the automotive products that we sell. It is our policy to take advantage of payment and seasonal purchasing discounts offered by our suppliers and to utilize extended dating terms available from suppliers. We have entered into various programs and arrangements with certain suppliers that provided for extended dating and payment terms for inventory purchases. As a whole, we consider our relationships with our suppliers to be very good.
We purchase automotive products in substantial quantities from over 685 suppliers, the five largest of which accounted for approximately 25% of our total purchases in 2021. Our largest supplier in 2021 accounted for approximately 8% of our total purchases and the next four largest suppliers each accounted for approximately 3% to 6% of our total purchases.
Marketing
Retail and Online Marketing:
Our integrated marketing strategy and Omnichannel efforts include national media channels, in-store, digital and social media activation, as well as marketing the O’Reilly brand through automotive event sponsorships and on-site appearances throughout the country. Our O’Rewards loyalty program encourages repeat customers, as they accumulate points from their O’Reilly purchases that are redeemable for rewards at various purchase levels. Our marketing efforts also target the Spanish-speaking market through broadcast media, print and sports marketing, as well as sponsorships of local and regional events.
Professional Marketing:
To develop our continued relationships with professional service providers and installers, we employ Territory Sales Managers in nearly every market to ensure complete sales territory coverage and personalized service for professional customers. Flyers, quick reference guides and catalogs are distributed on a regular basis to all professional service providers, including paint and body shops and fleet maintenance customers to encourage brand and program awareness. In addition, our professional customer program, First Call, also offers a proprietary ordering and other services platform called www.FirstCallOnline.com, dedicated Professional Service Specialists in stores, multiple daily deliveries and access to training opportunities, shop management, maintenance supplies and the Certified Auto Repair program, which offers professional service providers with the business tools they need to profitably grow and market their business.
INDUSTRY ENVIRONMENT
The automotive aftermarket industry includes all products and services purchased for light and heavy-duty vehicles after the original sale. The total size of the automotive aftermarket is estimated to be approximately $325 billion, according to The Auto Care Association. This market is made up of four segments: labor share of professional service provider sales, auto parts share of professional service provider sales, DIY sales and tire sales. We estimate that O’Reilly’s addressable market within this industry is approximately $130 billion to $140 billion, which includes the auto parts share of professional service provider sales at wholesale and DIY sales at retail. We do not sell tires or perform for-fee automotive repairs or installations.
Competition
The sale of automotive aftermarket items is highly competitive in many areas, including customer service, product availability, store location, brand recognition and price. We compete in both the DIY and professional service provider portions of the automotive aftermarket and are one of the largest specialty retailers within that market. We compete primarily with
| ● | national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, CARQUEST, NAPA and the Pep Boys – Manny, Moe and Jack, Inc.); |
| ● | regional retail and wholesale automotive parts chains; |
| ● | wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as NAPA, CARQUEST, Bumper to Bumper and Auto Value); |
| ● | automobile dealers; and |
| ● | mass merchandisers and online retailers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc. and Amazon.com, Inc.). |
We compete on the basis of customer service, which includes merchandise selection and availability, technical proficiency and helpfulness of store personnel, price, store layout, the Omnichannel experience and convenient and accessible store locations. Our dual market strategy requires significant capital, including the capital expenditures required for our distribution and store networks and
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working capital needed to maintain inventory levels necessary for providing products to both the DIY and professional service provider portions of the automotive aftermarket.
Inflation and Seasonality
We have generally been successful in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition costs increased due to price increases industry wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.
To some extent our business is seasonal, primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales, profits and inventory levels have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
Regulations
We are subject to federal, state and local laws and governmental regulations relating to our business, as well as the health and safety of our Team Members and customers, including, but not limited to, those related to the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants and the ownership and operation of real property.
As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous materials onto our property in connection with, for example, our used oil, oil filter and battery recycling programs. We currently provide a recycling program for batteries and the collection of used lubricants at certain stores as a service to our customers pursuant to agreements with third-party suppliers. The batteries and used lubricants are collected by our Team Members, deposited into supplier-provided containers and pallets and then recycled by the third-party suppliers. In general, our agreements with such suppliers contain provisions that are designed to limit our potential liability under applicable environmental regulations for any damage or contamination, which may be caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused by the supplier.
Compliance with any such laws and regulations has not had a material adverse effect on our operations to date. However, we cannot give any assurance that we will not incur significant expenses in the future in order to comply with any such laws or regulations.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Gregory D. Johnson, age 56, President and Chief Executive Officer, has been an O’Reilly Team Member for 39 years, which includes continuous years of service with a company acquired by O’Reilly. Mr. Johnson’s O’Reilly career began as a part-time Distribution Center Team Member and progressed through the roles of Retail Systems Manager, Warehouse Management Systems (WMS) Development Manager, Director of Distribution, Vice President of Distribution Operations, Senior Vice President of Distribution Operations, Executive Vice President of Supply Chain, and Chief Executive Officer and Co-President. Mr. Johnson held the position of Co-President from 2017 until February of 2022. Mr. Johnson has held the position of Chief Executive Officer since 2018. Mr. Johnson became President and Chief Executive Officer in February of 2022.
Brad Beckham, age 43, Executive Vice President and Chief Operating Officer, has been an O’Reilly Team Member for 25 years. Mr. Beckham’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s domestic and international store operations and all customer types of sales. Mr. Beckham’s O’Reilly career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Divisional Vice President, Vice President of Eastern Store Operations and Sales, Senior Vice President of Eastern Store Operations and Sales, Senior Vice President of Central Store Operations, and Executive Vice President of Store Operations and Sales. Mr. Beckham has held the position of Executive Vice President and Chief Operating Officer since January of 2022.
Brent G. Kirby, age 53, Executive Vice President and Chief Supply Chain Officer, has been an O’Reilly Team Member since 2018. Mr. Kirby’s primary areas of responsibility are Distribution, Inventory Management, Purchasing, Merchandise, Pricing, Store Design, Marketing, Advertising, Electronic Catalog, Customer Satisfaction and Digital business areas while working cross functionally to deliver our Omnichannel strategy. Mr. Kirby has 35 years of experience in the retail industry. Prior to joining O’Reilly, Mr. Kirby held the position of Chief Supply Chain Officer for Lowe’s Companies, Inc. (“Lowe’s”), with direct responsibility for leading the global supply chain supporting Lowe’s U.S.-based home improvement business. In this role, Mr. Kirby was responsible for team members across a diverse network of distribution centers, manufacturing facilities, direct-to-consumer parcel operations and last mile delivery operations.
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Mr. Kirby began his retail career as a hardware associate with Lowe’s and progressed through various positions at the store, district and regional levels before being promoted to Senior Vice President of Store Operations and later Chief Omnichannel Officer. In 2018, Mr. Kirby joined O’Reilly as Senior Vice President of Omnichannel and progressed through the role of Executive Vice President of Supply Chain. Mr. Kirby has held the position of Executive Vice President and Chief Supply Chain Officer since January of 2022.
Tom McFall, age 51, Executive Vice President and Chief Financial Officer, has been an O’Reilly Team Member for 15 years. Mr. McFall’s primary areas of responsibility are Finance, Accounting, Information Technology, Legal, Real Estate and Risk Management. Mr. McFall’s career began with Ernst Young LLP in Detroit, Michigan, where he achieved the position of Audit Manager, before accepting a position with Murray’s Discount Auto Stores (“Murray’s”). Mr. McFall served Murray’s for eight years through the roles of Controller, Vice President of Finance, and Chief Financial Officer, with direct responsibility for finance, accounting and distribution and logistics operations. After Murray’s was acquired by CSK Auto Corporation (“CSK”) in 2005, Mr. McFall held the position of Chief Financial Officer of Midwest Operation for CSK. In 2006, Mr. McFall joined O’Reilly as Senior Vice President of Finance and Chief Financial Officer. Mr. McFall has held the position of Executive Vice President and Chief Financial Officer since 2007.
Doug Bragg, age 52, Executive Vice President of Operations and Sales, has been an O’Reilly Team Member for 31 years. Mr. Bragg’s primary areas of responsibility are Store Operations and Sales for O’Reilly U.S. Store Operations. Mr. Bragg’s O’Reilly career began as a Distribution Center Team Member and progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Manager, Divisional Vice President, and Senior Vice President of Central Store Operations and Sales. Mr. Bragg has held the position of Executive Vice President of Store Operations since January of 2022.
Jonathan Andrews, age 54, Senior Vice President of Human Resources and Training, has been an O’Reilly Team Member for nine years. Mr. Andrews’s primary areas of responsibility are Human Resources and Training. Mr. Andrews has 30 years of human resources experience. Mr. Andrews’s career includes human resource positions with Cargill, Inc., Tyson Foods, Inc. and AutoNation, Inc. Mr. Andrews served AutoNation for 10 years as Director of Human Resources and Senior Director of Human Resources. In 2012, Mr. Andrews joined O’Reilly as Vice President of Human Resources and progressed through the role of Vice President of Human Resources and Training. Mr. Andrews has held the position of Senior Vice President of Human Resources and Training since 2019.
Robert Dumas, age 48, Senior Vice President of Eastern Store Operations and Sales, has been an O’Reilly Team Member for 30 years, which includes continuous years of service with a company acquired by O’Reilly. Mr. Dumas’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Eastern Store Operations. Mr. Dumas’s O’Reilly career began as a Parts Specialist and progressed through the roles of Installer Service Specialist, Night Manager, Associate Manager, Store Manager, District Manager, Regional Manager, and Divisional Vice President. Mr. Dumas has held the position of Senior Vice President of Eastern Store Operations and Sales since 2016.
Larry L. Ellis, age 66, Senior Vice President of Distribution Operations, has been an O’Reilly Team Member for 46 years, which includes continuous years of service with a company acquired by O’Reilly. Mr. Ellis’s primary areas of responsibility are Distribution Operations and Logistics. Mr. Ellis’s O’Reilly career began as a Distribution Center Team Member and progressed through the roles of Distribution Center Supervisor, Distribution Center Manager, Director of Distribution Operations, Vice President of Logistics, Vice President of Western Division Distribution Operations, and Vice President of Distribution Operations. Mr. Ellis has held the position of Senior Vice President of Distribution Operations since 2014.
Jeremy Fletcher, age 44, Senior Vice President of Finance and Controller, has been an O’Reilly Team Member for 16 years. Mr. Fletcher’s primary area of responsibility are Finance, Accounting and Treasury. Mr. Fletcher’s O’Reilly career began as the Financial Reporting and Budgeting Manager and progressed through the roles of Director of Finance, and Vice President of Finance and Controller. Prior to joining O’Reilly, Mr. Fletcher worked as a Certified Public Accountant with a public accounting firm and in a financial reporting and planning role for a Fortune 1000 corporation. Mr. Fletcher has held the position of Senior Vice President of Finance and Controller since 2017.
Jeffrey L. Groves, age 56, Senior Vice President of Legal and General Counsel, has been an O’Reilly Team Member for 17 years. Mr. Groves’s primary areas of responsibility are Corporate Governance, Regulatory Matters, and Internal Audit. Mr. Groves’s O’Reilly career began as Director of Legal and Claim Services and progressed through the roles of Director of Legal and Claim Services and General Counsel and Vice President of Legal and Claim Services and General Counsel. Prior to joining O’Reilly, Mr. Groves worked in a private civil defense trial practice. Mr. Groves has held the position of Senior Vice President of Legal and General Counsel since 2016.
Scott Kraus, age 45, Senior Vice President of Real Estate and Expansion, has been an O’Reilly Team Member for 23 years. Mr. Kraus’s primary areas of responsibility are Real Estate Expansion and Acquisitions. Mr. Kraus’s O’Reilly career began as a Parts Specialist and
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progressed through the roles of Store Manager, District Manager, Regional Field Sales Manager, Regional Manager, Divisional Vice President, and Vice President of Real Estate. Mr. Kraus has held the position of Senior Vice President of Real Estate and Expansion since 2016.
Jeffrey A. Lauro, age 55, Senior Vice President of Information Technology, has been an O’Reilly Team Member for six years. Mr. Lauro’s primary area of responsibility is Information Technology. Mr. Lauro has over 30 years of information technology experience primarily in the retail industry. Prior to joining O’Reilly, Mr. Lauro held the position of Chief Information Officer for Payless ShoeSource (“Payless”), with direct responsibility for solution delivery, infrastructure and operations and enterprise architecture. Prior to joining Payless, Mr. Lauro was the Vice President, Global Information Technology Service Delivery Director for The TJX Companies, Inc., with direct responsibility for global information technology service management, operations, implementation and disaster recovery. In 2015, Mr. Lauro joined O’Reilly as Senior Vice President of Information Technology and has held this position since that time.
Chris Mancini, age 44, Senior Vice President of Central Store Operations and Sales, has been an O’Reilly Team Member for 18 years. Mr. Mancini’s primary areas of responsibility are Store Operations and Sales for O’Reilly Central Store Operations. Mr. Mancini’s O’Reilly career began as an Installer Service Specialist and progressed through the roles of Store Manager, District Manager, Regional Director, Mid-Atlantic Division Vice President, and Western Division Vice President. Mr. Mancini has held the position of Senior Vice President of Central Store Operations and Sales since January of 2022.
Chuck Rogers, age 54, Senior Vice President of Professional Sales and Store Operations Support, has been an O’Reilly Team Member for 31 years. Mr. Rogers’s primary areas of responsibility are Professional Sales, Store Operations and Retail Systems, and Ozark Sales. Mr. Rogers’s O’Reilly career began as a Delivery Specialist and progressed through the roles of various store positions, Assistant Computer Sales and Services Coordinator, Installer Systems Manager, National Accounts/Installer Systems Manager, Director of Sales Administration, and Vice President of Professional Sales. Mr. Rogers has held the position of Senior Vice President of Professional Sales and Store Operations Support since January of 2022.
Jason Tarrant, age 41, Senior Vice President of Western Store Operations and Sales, has been an O’Reilly Team Member for 20 years, which includes continuous years of service with a company acquired by O’Reilly. Mr. Tarrant’s primary areas of responsibility are Store Operations and Sales for O’Reilly Western Store Operations. Mr. Tarrant’s O’Reilly career began as a Parts Specialist and progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Field Sales Manager, Regional Manager, and Divisional Vice President. Mr. Tarrant has held the position of Senior Vice President of Western Store Operations and Sales since 2018.
Darin Venosdel, age 51, Senior Vice President of Inventory Management, has been an O’Reilly Team Member for 24 years. Mr. Venosdel’s primary areas of responsibility are Inventory Management, Purchasing and Store Design. Mr. Venosdel’s O’Reilly career began as a Programmer/Analyst and progressed through the roles of Application Development Manager, Director of Application Development, Director of Inventory Management, and Vice President of Inventory Management. Mr. Venosdel has held the position of Senior Vice President of Inventory Management since 2018.
David Wilbanks, age 50, Senior Vice President of Merchandise, has been an O’Reilly Team Member for nine years. Mr. Wilbanks’s primary areas of responsibility are Merchandise and Pricing. Mr. Wilbanks has over 30 years of experience in the automotive aftermarket industry. Mr. Wilbanks’s career began as a counter technician for an independent jobber and progressed to becoming an ASE Certified Master Technician for an automotive dealership, before accepting a position with AutoZone, Inc. (“AutoZone”). Mr. Wilbanks served AutoZone for twelve years as a financial analyst, Category Manager, and Director of Merchandise. In 2012, Mr. Wilbanks joined O’Reilly as Vice President of Merchandise and has held the position of Senior Vice President of Merchandise since 2016.
SERVICE MARKS AND TRADEMARKS
We have registered, acquired and/or been assigned the following service marks and trademarks in the United States: BENNETT AUTO SUPPLY®; BESTEST®; BETTER PARTS. BETTER PRICES.®; BETTER PARTS, BETTER PRICES....EVERYDAY!®; BOND AUTO PARTS®; BRAKEBEST®; BRAKEBEST HD®; BRAKEBEST SELECT®; CARTEK®; CARTEK PRO®; CERTIFIED AUTO REPAIR®; CHECKER AUTO PARTS®; CSK PROSHOP®; CUSTOMIZE YOUR RIDE®; DEPENDABILITY YOU CAN COUNT ON®; DO IT RIGHT DEALS®; DO IT RIGHT REBATE®; EARN POINTS EVERY WAY YOU SHOP®; FIRST CALL®; FLEET HEAVY DUTY PROFESSIONAL PARTS PEOPLE®; FORMULATED FOR TODAY’S ENGINES®; FRIENDLIEST PARTS STORE IN TOWN®; FROM OUR STORE TO YOUR DOOR®; IMPORT DIRECT®; IMPORT DIRECT REPLACEMENT PARTS®; KRAGEN AUTO PARTS®; MASTER PRO®; MASTER PRO REFINISHING®; MASTERPRO SELECT®; MASTERPRO UNDERCAR®; MICROGARD®; MICROGARD HEPA®; MURRAY®; MURRAY CLIMATE CONTROL®;
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MURRAY TEMPERATURE CONTROL®; MURRAY’S MASCOT® (Design only); MURRAY PLUS®; MURRAY ULTRA®; MURRAY’S AUTO PARTS®; O LOW PRICE GUARANTEE! ®; O® (Shamrock inside of “O”); OMNISPARK®; O’REILLY®; O’REILLY AUTO COLOR PROFESSIONAL PAINT PEOPLE®; O’REILLY AUTO PARTS®; O’REILLY AUTO PARTS PROFESSIONAL PARTS PEOPLE®; O’REILLY AUTOMOTIVE®; O’REILLY O’REWARDS®; O’REILLY SELECT®; O’REWARDS®; PARTNERSHIP NETWORK®; PARTS CITY®; PARTS CITY AUTO COLOR PROFESSIONAL PAINT PEOPLE®; PARTS CITY AUTO PARTS®; PARTS FOR YOUR CAR WHEREVER YOU ARE®; PARTS PAYOFF®; POWER TORQUE®; PRECISION®; PRECISION HUB ASSEMBLIES®; PROTECTION YOU CAN TRUST®; QUIETECH®; REAL WORLD TRAINING®; ¡SIGUE ADELANTE CON O’REILLY!®; SCHUCK’S AUTO SUPPLY®; SUPER START®; SYNTEC®; TOOLBOX®; ULTIMA®; ULTIMA SELECT®; ULTIMA SELECT MOTOR PRODUCTS®; WORK AT THE O®; AND X® (design mark associated with PRECISION). Some of the service marks and trademarks listed above may also have a design associated therewith. Each of the service marks and trademarks are in duration for as long as we continue to use and seek renewal of such marks. The above list includes only the trademarks and service marks that are currently and validly registered with the United States Patent and Trademark Office. It does not include trademarks or service marks which may also be in use, but are not yet registered or trademarks or service marks used and/or registered in other countries. Except for the trademarks and service marks listed or referred to in this Item 1, we believe that our business is not dependent upon any patent, trademark, service mark or copyright.
Solely for convenience, our service marks and trademarks may appear in this report without the ® or ™ symbol, which is not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights or the right to these service marks and trademarks.
AVAILABLE INFORMATION
Our Internet address is www.OReillyAuto.com. Interested readers can access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commission website at www.sec.gov and searching with our ticker symbol “ORLY.” Such reports are generally available the day they are filed. Upon request, we will furnish interested readers a paper copy of such reports free of charge by contacting Mark Merz, Vice President of Investor Relations, Financial Reporting and Planning, at 233 South Patterson Avenue, Springfield, Missouri, 65802.
Item 1A. Risk Factors
Our future performance is subject to a variety of risks and uncertainties. Although the risks described below are the risks that we believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the information available to us that later may prove to be material. Interested parties should be aware that the occurrence of the events described in these risk factors, elsewhere in this Form 10-K and in our other filings with the Securities and Exchange Commission could have a material adverse effect on our business, operating results and financial condition. Actual results, therefore, may materially differ from anticipated results described in our forward-looking statements.
RISKS RELATED TO THE COVID-19 PANDEMIC
The ongoing occurrence of COVID-19, or any other such widespread public health crisis, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The COVID-19 pandemic continues to have a significant impact on the U.S. and world economies. The public health concerns resulting from the pandemic have created significant uncertainty, economic disruption and volatility, all of which have impacted and may continue to impact our business. We may be required to take significant actions to mitigate any adverse impact of the COVID-19 pandemic, including, but not limited to incurring increased expenses. We are unable to predict the ongoing short-term and long-term impact of the COVID-19 pandemic on our customers, Team Members, supply chain, business, overall industry demand, results of operations, financial condition and cash flows due to several factors beyond our control, including, but not limited to:
| ● | the severity and duration of the pandemic, including additional outbreaks, new strands or variants of the virus and availability and public acceptance of effective medical treatments and vaccines for COVID-19; |
| ● | the continued response of both governmental and nongovernmental authorities, including, but not limited to, complex and changing regulations and guidance regarding the safety of employees and customers, inconsistent application of COVID-19 orders and regulations, government stimulus payments and enhanced unemployment benefits; |
| ● | the impact of the pandemic on consumer confidence and macroeconomic factors such as unemployment and work force availability, as well as industry specific demand drivers such as the number of U.S. miles driven, which could impact demand for our product; |
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| ● | temporary or long-term disruption in our supply network from local and international suppliers and/or delays in the delivery of our inventory; |
| ● | volatility in the U.S. and global financial markets, including global debt and equity markets; |
| ● | the impact of regulatory and legislative changes in liability for workers’ compensation; and |
| ● | the impact of litigation, investigations or claims from customers, Team Members, suppliers, regulators or other third parties relating to the COVID-19 pandemic or our actions in response thereto, including any reputational harm. |
The above factors and uncertainties, in addition to others we are not currently aware of, may result in adverse impacts to our business, results of operations, financial condition and cash flows.
RISKS SPECIFIC TO OUR BUSINESS AND INDUSTRY
Deteriorating economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others, with which we do business, to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Although demand for many of our products is primarily non-discretionary in nature and tend to be purchased by consumers out of necessity, our sales are impacted by constraints on the economic health of our customers. The economic health of our customers is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, fuel prices, unemployment levels and other matters that influence consumer confidence and spending, such as a prolonged public health crisis or pandemic, like the COVID-19 pandemic. Many of these factors are outside of our control. Our customers’ purchases, including purchases of our products, could decline during periods when income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions or political uncertainty. If any of these events occur, or if unfavorable economic conditions challenge the consumer environment, our business, results of operations, financial condition and cash flows could be adversely affected.
Overall demand for products sold in the automotive aftermarket is dependent upon many factors including the total number of vehicle miles driven in the U.S., the total number of registered vehicles in the U.S., the age and quality of these registered vehicles and the level of unemployment in the U.S. Changes in vehicle technology used by the original equipment manufacturers (“OEM”) on future vehicles, including but not limited to electric, hybrid and internal combustion engines, may result in less frequent repairs, parts lasting longer or elimination of certain repairs. In addition, restrictions on access to telematics, diagnostic tools and repair information imposed by the OEMs or by governmental regulations may force vehicle owners to rely on dealers to perform maintenance and repairs. Adverse changes in these factors could lead to a decreased level of demand for our products, which could negatively impact our business, results of operations, financial condition and cash flows.
In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial institutions that are counterparties to our credit facilities. Furthermore, the ability of these third parties to overcome these difficulties may worsen. If third parties, on whom we rely for merchandise, are unable to overcome difficulties resulting from the deterioration in economic conditions, the cause of which could include a prolonged public health crisis or pandemic, such as the COVID-19 pandemic, and provide us with the merchandise we need, or if counterparties to our credit facilities do not perform their obligations, our business, results of operations, financial condition and cash flows could be adversely affected.
The automotive aftermarket business is highly competitive, and we may have to risk our capital to remain competitive, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Both the DIY and professional service provider portions of our business are highly competitive, particularly in the more densely populated areas that we serve. Some of our competitors are larger than we are and have greater financial resources. In addition, some of our competitors are smaller than we are, but have a greater presence than we do in a particular market. Online and mobile platforms may allow customers to quickly compare prices and product assortments between us and a range of competitors, which could result in pricing pressure. Some online competitors may have a lower cost structure than we do, as a result of our strategy of providing an exceptional in-store experience and superior parts availability supported by our extensive store network and robust, regional distribution footprint, which could also create pricing pressure. We may have to expend more resources and risk additional capital to remain competitive and our results of operations, financial condition and cash flows could be adversely affected. For a list of our principal competitors, see the “Competition” section of Item 1 of this annual report on Form 10-K.
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We are sensitive to regional economic and weather conditions that could impact our costs and sales.
Our business is sensitive to national and regional economic and weather conditions and natural disasters. Unusually inclement weather, such as significant rain, snow, sleet, freezing rain, flooding, seismic activity and hurricanes, has historically discouraged our customers from visiting our stores during the affected period and reduced our sales, particularly to DIY customers. Extreme weather conditions, such as extreme heat and extreme cold temperatures, may enhance demand for our products due to increased failure rates of our customers’ automotive parts, while temperate weather conditions may have a lesser impact on failure rates of automotive parts. In addition, our stores and DCs located in coastal regions may be subject to increased unrecoverable losses resulting from regional weather conditions and our results of operations, financial condition and cash flows could be adversely affected.
A change in the relationship with any of our key suppliers, the limited supply or unavailability of key products, supply chain disruptions or changes in trade policies could affect our financial health.
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability or willingness to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. For example, financial or operational difficulties that our suppliers may face could increase the cost of the products we purchase from them or our ability to source products from them. In addition, the trend toward consolidation among automotive parts suppliers, as well as the off-shoring of manufacturing capacity to foreign countries, may disrupt or end our relationship with some suppliers and could lead to less competition and result in higher prices. We could also be negatively impacted when our suppliers or our supply chain experiences work stoppages; labor strikes; a prolonged public health crisis or pandemic, such as the COVID-19 pandemic; shipping and transportation disruptions or increased costs; currency fluctuations or inflation; or other interruptions to, or difficulties in, the manufacture or supply of the products we purchase. Changes in U.S. trade policies, sanctions, practices, tariffs or taxes, import limitations and other factors relating to foreign trade and port agreements could affect our ability to source products and our suppliers’ ability to source materials or provide products at current volumes and/or prices. These and other factors affecting our suppliers and our access to products could adversely affect our results of operations, financial condition and cash flows.
Business interruptions in our distribution centers or other facilities may affect our store hours, stability of our computer systems, and/or availability and distribution of merchandise, which may affect our business.
Weather, terrorist activities, war or other disasters, or the threat of them, may result in the closure of one or more of our DCs or other facilities, or may adversely affect our ability to deliver inventory to our stores on a nightly basis. This may affect our ability to timely provide products to our customers, resulting in lost sales or a potential loss of customer loyalty. Some of our merchandise is imported from other countries and these goods could become difficult or impossible to bring into the United States, and we may not be able to obtain such merchandise from other sources at similar prices. Such a disruption in revenue could potentially have a negative impact on our results of operations, financial condition and cash flows.
We rely extensively on our computer systems to manage inventory, process transactions and timely provide products to our customers. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, security breaches or other catastrophic events. If our systems are damaged or fail to function properly, we may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions. Such a disruption of our systems could negatively impact revenue and potentially have a negative impact on our results of operations, financial condition and cash flows.
Failure to protect our brand and reputation could have a material adverse effect on our brand name, business, results of operations, financial condition and cash flows.
We believe our Company has built an excellent reputation as a leading retailer in the automotive aftermarket industry. We believe our continued success depends, in part, on our ability to preserve, grow and leverage the value of our brand. Our reputation is based, in part, on perceptions of subjective qualities; negative publicity involving the Company, our merchandise or our industry in general that erode customer trust or confidence could adversely affect our reputation and business. Failure to comply with ethical, social, product, labor, health and safety, accounting or environmental standards, or existing or future laws or regulations could also jeopardize our reputation and potentially lead to various adverse actions from consumer or environmental groups, employees or regulatory bodies, which could require us to incur substantial legal fees and costs. In addition, negative claims or publicity, including the availability of information and opinions on social media, as its impact is immediate, could adversely affect our reputation. The opportunity for the rapid dissemination of information, including inaccurate and inflammatory information and opinions, is virtually limitless and easily accessible. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have an adverse effect on our business, results of operations, financial condition or cash flows, as well as require additional resources to rebuild our reputation.
Risks associated with international operations could result in additional costs and inefficiencies.
In addition to many of the risks we face in our U.S. operations, international operations present a unique set of risks and challenges, including local laws and customs, U.S. laws applicable to foreign operations and political and socio-economic conditions. Our ability
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to operate effectively and grow in international markets could be impacted by these risks resulting in legal liabilities, additional costs and the distraction of management’s attention. Compliance with the Foreign Corrupt Practices Act and protection of intellectual property rights surrounding items such as tradenames and trademarks in foreign jurisdictions can pose significant challenges.
In addition, our operations in international markets are conducted primarily in the local currency of those countries. Given that our Consolidated Financial Statements are denominated in U.S. dollars, amounts of assets, liabilities, net sales and other revenues and expenses denominated in local currencies must be translated into U.S. dollars using exchange rates for the current period. As a result, foreign currency exchange rates and fluctuations in those rates may adversely impact our financial performance.
RISKS RELATED TO OUR COMMON STOCK
Risks related to us and unanticipated fluctuations in our quarterly operating results could affect our stock price.
We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating results and should not be relied on as an indication of future performance. If our quarterly operating results fail to meet the expectations of analysts, the trading price of our common stock could be negatively affected. We cannot be certain that our growth plans and business strategies will be successful or that they will successfully meet the expectations of these analysts. If we fail to adequately address any of these risks or difficulties, our stock price would likely suffer.
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions and potentially being targeted through the selling and buying of our common stock by a group of individuals, whose interests and reasoning behind such actions may not align with an average market participant. The market price of our common stock may also be affected by our ability to meet analysts’ expectations and failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock.
In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common stock to decline. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against such companies. If similar litigation were initiated against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCING
Our debt levels could adversely affect our cash flow and prevent us from fulfilling our obligations.
We have an unsecured revolving credit facility and unsecured senior notes, which could have important consequences for our financial health. For example, our level of indebtedness could, among other things,
| ● | make it more difficult to satisfy our financial obligations, including those relating to the senior unsecured notes and our credit facility; |
| ● | increase our vulnerability to adverse economic and industry conditions; |
| ● | limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage; |
| ● | require us to dedicate a substantial portion of our cash flows to service the principal and interest on our debt, reducing the funds available for other business purposes, such as working capital, capital expenditures or other cash requirements; |
| ● | limit our ability to incur additional debt with acceptable terms, if at all; and |
| ● | expose us to fluctuations in interest rates, including changes that may result from the implementation of new benchmark rates that replace LIBOR. |
In addition, the terms of our financing obligations include restrictions, such as affirmative, negative and financial covenants, conditions on borrowing and subsidiary guarantees. A failure to comply with these restrictions could result in a default under our financing obligations or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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A downgrade in our credit rating would impact our cost of capital and could impact the market value of our unsecured senior notes, as well as limit our access to attractive supplier financing programs.
Credit ratings are an important component of our cost of capital. These ratings are based upon, among other factors, our financial strength. Our current credit ratings provide us with the ability to borrow funds at favorable rates. A downgrade in our current credit rating from either rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed funds under our unsecured revolving credit facility and a higher facility fee on commitments under our unsecured revolving credit facility. A downgrade in our current credit rating could also adversely affect the market price and/or liquidity of our unsecured senior notes, preventing a holder from selling the unsecured senior notes at a favorable price, as well as adversely affect our ability to issue new notes in the future. In addition, a downgrade in our current credit rating could limit the financial institutions willing to commit funds to our supplier financing programs at attractive rates. Decreased participation in our supplier financing programs would lead to an increase in working capital needed to operate the business, adversely affecting our cash flows.
GENERAL RISKS
We cannot assure future growth will be achieved.
We believe that our ability to open additional, profitable stores at a high growth rate will be a significant factor in achieving our growth objectives for the future. Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel and general business and economic conditions. We cannot be sure that our growth plans for 2022 and beyond will be achieved. Failure to achieve our growth objectives may negatively impact the trading price of our common stock. For a discussion of our growth strategies, see the “Growth Strategy” section of Item 1 of this annual report on Form 10-K.
In order to be successful, we will need to attract, retain and motivate key employees.
Our success has been largely dependent on the efforts of certain key personnel. In order to be successful, we will need to attract, retain and motivate executives and other key employees. Experienced management and technical personnel are in high demand and competition for their talents is intense. We must also continue to motivate employees and keep them focused on our strategies and goals. Our business, results of operations and cash flows could be materially adversely affected by the unexpected loss of the services of one or more of our key employees. We cannot be sure that we will be able to continue to attract qualified personnel, which could cause us to be less efficient and, as a result, may adversely impact our sales and profitability. For a discussion of our management, see the “Business” section of Item 1 of this annual report on Form 10-K.
Risks associated with future acquisitions may not lead to expected growth and could result in increased costs and inefficiencies.
We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth and profitability to differ from our expectations. Examples of such risks include the following:
| ● | We may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or on other favorable terms. |
| ● | Our management’s attention may be distracted. |
| ● | We may fail to retain key personnel from acquired businesses. |
| ● | We may assume unanticipated legal liabilities and other problems. |
| ● | We may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize economic, operational and other benefits. |
We may fail, or be unable to, discover liabilities of businesses that we acquire for which we or the subsequent owner or operator may be liable.
A breach of customer, supplier, Team Member or Company information could damage our reputation or result in substantial additional costs or possible litigation.
Our business involves the receiving, storage and transmitting of certain personally identifiable or confidential information about our customers, suppliers, Team Members and the Company, some of which is entrusted to third-party service providers and vendors. We and our third-party service providers and vendors have taken significant and appropriate steps to protect this information, including maintaining compliance with payment card industry and National Clearing House standards and a security program that includes updating technology and security policies, employee training and monitoring and routine testing of our systems. However, these security measures are costly and require constant, ongoing attention and may not prevent a security breach due to cyber-attacks, computer malware viruses, exploitation of hardware or software vulnerabilities, Team Member error, malfeasance, system compromises, fraud, hacking, trickery or other intentional or unintentional acts, which could result in unauthorized parties gaining access to such information.
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A compromise of our security measures or those of a third-party party we entrust could result in information related to our customers, suppliers, Team Members or the Company being obtained or misused by unauthorized persons, adverse operational effects or interruptions or costs to the Company to address the breach, all of which could have a material adverse impact on our results of operations, financial condition and cash flows. The methods used to obtain unauthorized access are constantly evolving and may be difficult to anticipate or detect for long periods of time. If we experience a significant data security breach, we could be exposed to damage to our reputation, additional costs, lost sales, litigation or possible regulatory action. In addition, the regulatory environment related to information security and privacy is constantly evolving and may increase our responsibility and liability in relation to personal data that we process, which may require the investment of additional mechanisms to ensure compliance with privacy laws and regulations. The cost of complying with stricter and more complex data privacy, data collection and information security laws and standards could be significant to us. There is no guarantee that the procedures that we and our third-party service providers and vendors have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches, and such a breach could potentially have a negative impact on our results of operations, financial condition and cash flows.
Litigation, governmental proceedings, environmental legislation and regulations and employment legislation and regulations may affect our business, financial condition, results of operations and cash flows.
We are, and in the future may become, involved in lawsuits, regulatory inquiries and governmental and other legal proceedings, arising out of the ordinary course of our business. The damages sought against us in some of these litigation proceedings may be material and may adversely affect our business, results of operations, financial condition and cash flows.
Environmental legislation and regulations, like the initiatives to limit greenhouse gas emissions and bills related to climate change, could adversely impact all industries. While it is uncertain whether these initiatives will become law, new or more stringent climate change-related mandates, laws or regulations, or stricter interpretations of existing mandates, laws or regulations could potentially be forthcoming. These matters, if enacted, could adversely impact our costs, by, among other things, increasing fuel prices or requiring additional expenditures by us or our suppliers to comply, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our business is subject to employment legislation and regulations, including requirements related to minimum wage. Our success depends, in part, on our ability to manage operating costs and identify opportunities to reduce costs. Our ability to meet labor needs, while controlling costs is subject to external factors, such as minimum wage legislation. A violation of, or change in, employment legislation and/or regulations could hinder our ability to control costs, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Stores, distribution centers and other properties:
Of the 5,784 stores we operated at December 31, 2021, 2,395 stores were owned, 3,318 stores were leased from unaffiliated parties, 24 of which were located in Mexico, and 71 stores were leased from entities that include one or more of our affiliated directors or members of their immediate family. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses and an original term of, at a minimum, 10 years, subject to one or more renewals at our option. We have entered into separate master lease agreements with each of the affiliated entities for the occupancy of the stores covered thereby. Such master lease agreements with two of the five affiliated entities have been modified to extend the term of the lease agreement for specific stores. The master lease agreements or modifications thereto expire on dates ranging from December 31, 2022, to December 31, 2029. We believe that the lease agreements with the affiliated entities are on terms comparable to those of third parties.
The following table provides information regarding our U.S. domestic regional DCs in operation as of December 31, 2021:
| Operating Square Footage (1) | |||||
Principal Use | Nature of Occupancy | Number of Locations | (in thousands) | |||
Distribution center | Owned | 21 |
| 9,599 | ||
Distribution center | Leased (2) | 7 |
| 2,483 | ||
Total | 28 |
| 12,082 |
| (1) | DC operating square footage includes floor and mezzanine operating square footage and excludes subleased square footage. |
| (2) | Terms expiring on dates ranging from December 31, 2022, to June 30, 2035. |
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In addition, we operate six small distribution centers in Mexico; these distribution centers do not serve U.S. stores and are immaterial in the aggregate. In 2021, the distribution operations of our Knoxville, Tennessee, DC finished merging into our Lebanon, Tennessee, DC and the existing store portion of our Knoxville, Tennessee, DC facility remains a large Hub that continues to provide same day parts availability in the Knoxville market. Additionally, we opened our new Horn Lake, Mississippi, DC in 2021, and when appropriate, we plan to merge our North Little Rock, Arkansas, DC into our new Horn Lake, Mississippi, DC. At that time, the existing store portion of our North Little Rock, Arkansas, DC facility will remain a large Hub that will continue to provide same day parts availability in the Little Rock market.
We believe that our present facilities are in good condition, are sufficiently insured and are adequate for the conduct of our current operations. The store servicing capability of our 28 existing U.S. DCs is approximately 6,075 stores, providing a growth capacity of 300 to 450 U.S. stores. We believe the growth capacity in our DCs will provide us with the DC infrastructure needed for near-term expansion. However, as we expand our geographic footprint, we will continue to evaluate our existing distribution system infrastructure and will adjust our distribution system capacity as needed to support our future growth.
Our corporate office operations occur primarily in Springfield, Missouri, and as of December 31, 2021, the total square footage was 0.6 million square feet, substantially all of which was owned.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common stock:
Shares of the Company’s common stock are traded on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “ORLY.” The Company’s common stock began trading on April 22, 1993; no cash dividends have been declared since that time, and the Company does not anticipate paying any cash dividends in the foreseeable future.
As of February 17, 2022, the Company had approximately 552,000 shareholders of common stock based on the number of holders of record and an estimate of individual participants represented by security position listings.
Sales of unregistered securities:
There were no sales of unregistered securities during the year ended December 31, 2021.
Issuer purchases of equity securities:
The following table identifies all repurchases during the fourth quarter ended December 31, 2021, of any of the Company’s securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, by or on behalf of the Company or any affiliated purchaser (in thousands, except per share price data):
|
|
| Total Number of |
| Maximum Dollar Value | |||||
Total | Average | Shares Purchased as | of Shares that May Yet | |||||||
Number of | Price Paid | Part of Publicly | Be Purchased Under the | |||||||
Period | Shares Purchased | per Share | Announced Programs | Programs (1) | ||||||
October 1, 2021, to October 31, 2021 |
| 322 | $ | 617.35 |
| 322 | $ | 776,033 | ||
November 1, 2021, to November 30, 2021 |
| 194 |
| 635.96 |
| 194 |
| 2,152,491 | ||
December 1, 2021, to December 31, 2021 |
| 220 |
| 667.08 |
| 220 | $ | 2,005,536 | ||
Total as of December 31, 2021 |
| 736 | $ | 637.15 |
| 736 |
|
| ||
| (1) | The authorizations under the share repurchase program that currently have capacity are scheduled to expire on May 27, 2024 and November 17, 2024. No other share repurchase programs existed during the twelve months ended December 31, 2021. See Note 9 “Share Repurchase Program” to the Consolidated Financial Statements for further information on our share repurchases. |
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Stock performance graph:
The graph below shows the cumulative total shareholder return assuming the investment of $100, on December 31, 2016, and the reinvestment of dividends thereafter, if any, in the Company’s common stock versus the Standard and Poor’s SP 500 Retail Index (“SP 500 Retail Index”) and the Standard and Poor’s SP 500 Index (“SP 500”).
December 31, | ||||||||||||||||||
Company/Index |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 | ||||||
O’Reilly Automotive, Inc. | $ | 100 | $ | 86 | $ | 124 | $ | 157 | $ | 163 | $ | 254 | ||||||
SP 500 Retail Index |
| 100 |
| 129 |
| 145 |
| 182 |
| 265 |
| 316 | ||||||
SP 500 | $ | 100 | $ | 119 | $ | 112 | $ | 144 | $ | 168 | $ | 213 | ||||||
Item 6. [Reserved]
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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 to of the automotive aftermarket industry; |
| ● | key events and recent developments within our Company; |
| ● | our results of operations for the years ended December 31, 2021 and 2020; |
| ● | 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, 2021, we operated 5,759 stores in 47 U.S. states and 25 stores in Mexico.
We are influenced by a number of general macroeconomic factors that impact both our industry and our consumers, including, but not limited to, fuel costs, unemployment trends, interest rates and other economic factors. Macroeconomic factors, such as total U.S. unemployment, and demand drivers specific to the automotive aftermarket, such as U.S. miles driven, have been pressured as a result of responses to the COVID-19 pandemic, including stay at home orders, work from home arrangements and reduced travel. However, government stimulus and additional unemployment benefits, the ongoing gradual reopening processes across markets we operate in and increased miles driven have positively impacted our performance. Due to the nature of these macroeconomic factors, we are unable to determine how long current conditions, including the pandemic, will persist and the degree of impact future changes may have on our business, industry or broader economic conditions.
We believe the key drivers of current and future long-term demand for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations and average vehicle age.
Number of Miles Driven
The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation. According to the 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 COVID-19 pandemic, however for 2021, miles driven improved and increased 11.2%. Government measures or consumer and business behavior in response to the COVID-19 pandemic could again have a negative impact on miles driven, but we are unable to predict the duration and severity of the impact to our business.
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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 12.7% from 2010 to 2020, bringing the number of light vehicles on the road to 281 million by the end of 2020. Although the rate of new vehicle sales has been pressured due to supply chain constraints experienced by manufacturers, the outlook for the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 12.4 million for the year ended December 31, 2021. 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. From 2010 to 2020, 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 12.3%, from 10.6 years in 2010 to 11.9 years in 2020.
We believe the increase in average vehicle age can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains, interiors and exteriors, and the consumer’s willingness to invest in maintaining these higher-mileage, better built vehicles. The increase in average vehicle age also benefits from an environment of a new vehicle scarcity and higher than typical used vehicle prices, as consumers are more willing to continue to invest in their current vehicle. As the average age of vehicles on the road increases, a larger percentage of miles are being driven by vehicles that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet, will support continued demand for automotive aftermarket products.
We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values of hard work and excellent customer service.
KEY EVENTS AND RECENT DEVELOPMENTS
A key event that has had a significant impact on our operations is the COVID-19 pandemic. As we navigate the ongoing challenges resulting from the COVID-19 pandemic, we continue to place additional emphasis on the safety and wellness of our Team Members and our customers. During the year ended December 31, 2021, the increased level of vaccinations, the ongoing reopening processes across markets we operate in, government stimulus payments and enhanced unemployment benefits positively impacted demand for the products we sell. We continue to keep our stores open and operating to meet our customers’ critical needs, while also ensuring the safety of our Team Members and customers through strict adherence to safety protocols. However, we cannot predict how long the current crisis will last or the extent of its future impacts on our customers, our Team Members, our supply chain and overall industry demand.
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RESULTS OF OPERATIONS
The table below compares the Company’s selected financial data over a ten-year period:
Year ended December 31, |
| 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||
(In thousands, except per share, Team Members, stores and ratio data) |
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SELECT INCOME STATEMENT RELATED DATA: |
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Percentage increase in comparable store sales (a)(b) |
| 13.3 | % | 10.9 | % | 4.0 | % | 3.8 | % | 1.4 | % | 4.8 | % | 7.5 | % | 6.0 | % | 4.6 | % | 3.5 | % |
Sales ($) |
| 13,327,563 | 11,604,493 | 10,149,985 | 9,536,428 | 8,977,726 | 8,593,096 | 7,966,674 | 7,216,081 | 6,649,237 | 6,182,184 | ||||||||||
Gross profit |
| 7,019,949 | 6,085,692 | 5,394,691 | 5,039,966 | 4,720,683 | 4,509,011 | 4,162,643 | 3,708,901 | 3,369,001 | 3,097,418 | ||||||||||
Operating income |
| 2,917,168 | 2,419,336 | 1,920,726 | 1,815,184 | 1,725,400 | 1,699,206 | 1,514,021 | 1,270,374 | 1,103,485 | 977,393 | ||||||||||
Net income ($) (c)(d) |
| 2,164,685 | 1,752,302 | 1,391,042 | 1,324,487 | 1,133,804 | 1,037,691 | 931,216 | 778,182 | 670,292 | 585,746 | ||||||||||
Earnings per share – basic ($) |
| 31.39 | 23.74 | 18.07 | 16.27 | 12.82 | 10.87 | 9.32 | 7.46 | 6.14 | 4.83 | ||||||||||
Earnings per share – assuming dilution ($) (c)(d) |
| 31.10 | 23.53 | 17.88 | 16.10 | 12.67 | 10.73 | 9.17 | 7.34 | 6.03 | 4.75 | ||||||||||
SELECT BALANCE SHEET AND CASH FLOW RELATED DATA: | |||||||||||||||||||||
Total assets ($) (e) |
| 11,718,707 | 11,596,642 | 10,717,160 | 7,980,789 | 7,571,885 | 7,204,189 | 6,676,684 | 6,532,083 | 6,057,895 | 5,741,241 | ||||||||||
Total debt ($) (e) | 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 | 1,088,011 | |||||||||||
Shareholders’ equity ($) (c) |
| (66,423) | 140,258 | 397,340 | 353,667 | 653,046 | 1,627,136 | 1,961,314 | 2,018,418 | 1,966,321 | 2,108,307 | ||||||||||
Inventory turnover (f) |
| 1.7 | 1.5 | 1.4 | 1.4 | 1.4 | 1.5 | 1.5 | 1.4 | 1.4 | 1.4 | ||||||||||
Accounts payable to inventory (g) |
| 127.4 | % | 114.5 | % | 104.4 | % | 105.7 | % | 106.0 | % | 105.7 | % | 99.1 | % | 94.6 | % | 86.6 | % | 84.7 | % |
Cash provided by operating activities ($) (h) |
| 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 | 1,251,555 | ||||||||||
Capital expenditures ($) |
| 442,853 | 465,579 | 628,057 | 504,268 | 465,940 | 476,344 | 414,020 | 429,987 | 395,881 | 300,719 | ||||||||||
Free cash flow ($) (h)(i) |
| 2,548,922 | 2,189,995 | 1,020,649 | 1,188,584 | 889,059 | 978,375 | 868,390 | 760,443 | 512,145 | 950,836 | ||||||||||
SELECT OPERATING DATA: |
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Number of Team Members at year end |
| 82,852 | 77,654 | 82,484 | 78,882 | 75,552 | 74,580 | 71,621 | 67,569 | 61,909 | 53,063 | ||||||||||
Total number of stores at year end (j)(k) |
| 5,784 | 5,616 | 5,460 | 5,219 | 5,019 | 4,829 | 4,571 | 4,366 | 4,166 | 3,976 | ||||||||||
Number of U.S. stores at year end (j) | 5,759 | 5,594 | 5,439 | 5,219 | 5,019 | 4,829 | 4,571 | 4,366 | 4,166 | 3,976 | |||||||||||
Number of Mexico stores at year end (k) | 25 | 22 | 21 | — | — | — | — | — | — | — | |||||||||||
Store square footage at year end (a)(l) | 43,185 | 41,668 | 40,227 | 38,455 | 36,685 | 35,123 | 33,148 | 31,591 | 30,077 | 28,628 | |||||||||||
Sales per weighted-average store ($) (a)(m) |
| 2,298 | 2,057 | 1,881 | 1,842 | 1,807 | 1,826 | 1,769 | 1,678 | 1,614 | 1,590 | ||||||||||
Sales per weighted-average square foot ($) (a)(l)(n) |
| 307 | 277 | 255 | 251 | 248 | 251 | 244 | 232 | 224 | 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, sales from Leap Day during the years ended December 31, 2020, 2016 and 2012. 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. |
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(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 2012, 2016 and 2018, the Company acquired materially all assets of VIP Parts, Tires Service (“VIP”), Bond Auto Parts (“Bond”) and Bennett Auto Supply, Inc. (“Bennett”), respectively. The 2012 VIP acquisition added 56 stores, and the 2016 Bond acquisition added 48 stores to the O’Reilly store count. 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 computed independently and may not compute to presented totals due to rounding differences, for the years ended December 31, 2021 and 2020:
For the Year Ended | ||||||
December 31, | ||||||
| 2021 | 2020 | ||||
Sales |
| 100.0 | % | 100.0 | % | |
Cost of goods sold, including warehouse and distribution expenses |
| 47.3 | 47.6 |
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Gross profit |
| 52.7 | 52.4 |
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Selling, general and administrative expenses |
| 30.8 | 31.6 |
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Operating income |
| 21.9 |
| 20.8 |
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Interest expense |
| (1.1) | (1.4) |
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Interest income |
| 0.1 | 0.1 |
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Income before income taxes |
| 20.9 | 19.5 | |||
Provision for income taxes |
| 4.6 | 4.4 |
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Net income (1) |
| 16.2 | % | 15.1 | % | |
(1) Each percentage of sales amount is computed independently and may not compute to presented totals.
2021 Compared to 2020
Sales:
Sales for the year ended December 31, 2021, increased $1.72 billion, or 15%, to $13.33 billion from $11.60 billion for the same period in 2020. Comparable store sales for stores open at least one year increased 13.3% and 10.9% for the years ended December 31, 2021 and 2020, respectively. Comparable store sales are calculated based on changes in sales for U.S. domestic stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members, as well as sales from Leap Day in the year ended December 31, 2020. Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation.
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The following table presents the components of the increase in sales for the year ended December 31, 2021 (in millions):
| Increase in Sales for the Year Ended | ||
December 31, 2021, | |||
Compared to the Same Period in 2020 | |||
Store sales: |
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Comparable store sales | $ | 1,496 | |
Non-comparable store sales: |
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Sales for stores opened throughout 2020, excluding stores open at least one year that are included in comparable store sales, and Mexico store sales |
| 81 | |
Sales for stores opened throughout 2021 |
| 140 | |
Sales from Leap Day | (34) | ||
Sales for stores that have closed, including temporarily closed stores |
| (2) | |
Non-store sales: |
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Includes sales of machinery and sales to independent parts stores and Team Members |
| 42 | |
Total increase in sales | $ | 1,723 | |
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, 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. The government stimulus payments, enhanced unemployment benefits, and general economic recovery, including lifting of stay at home orders and associated ongoing market reopenings, when combined with positive industry dynamics, such as consumers investing in existing vehicles and favorable weather, contributed to strong demand in the year ended December 31, 2021. In addition, despite the global supply chain disruptions that created inventory availability challenges for our industry during the year ended December 31, 2021, 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, 2021, was driven by increases in average ticket and transaction counts for both professional service provider and DIY customers. Average ticket values 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. Average ticket values continue to benefit from consumers spending additional time and money repairing and maintaining their vehicles in response to the COVID-19 pandemic, the economic environment and the new and used vehicle scarcity. Average ticket values also benefited from increases in average selling prices, on a same-SKU basis, as compared to the same period in 2020, driven by increases in acquisition costs of inventory, which were passed on in market prices. 2021 transaction counts improved due to prior year headwinds to traffic from the initial COVID-19 stay at home orders in 2020 and business restrictions, which resulted in immediate pressure to transaction counts for both DIY and professional service provider customers, combined with continued market reopening and recovery activity, ongoing government stimulus, favorable winter and spring weather conditions and a benefit from new and used vehicle scarcity positively impacting our customers’ willingness to perform or invest in maintenance on their vehicles.
We opened 165 net, new U.S. stores and three new stores in Mexico during the year ended December 31, 2021, compared to opening 155 net, new U.S. stores and one new store in Mexico during the year ended December 31, 2020. As of December 31, 2021, we operated 5,759 stores in 47 U.S. states and 25 stores in Mexico compared to 5,594 U.S. stores in 47 states and 22 stores in Mexico at December 31, 2020. We anticipate new store growth will be 175 to 185 net, new store openings in 2022.
Gross profit:
Gross profit for the year ended December 31, 2021, increased 15% to $7.02 billion (or 52.7% of sales) from $6.09 billion (or 52.4% of sales) for the same period in 2020. The increase in gross profit dollars for the year ended December 31, 2021, was primarily the result of new store sales and the increase in comparable store sales at existing stores, partially offset by prior year gross profit dollars generated from one additional day due to Leap Day. The increase in gross profit as a percentage of sales for the year ended December 31, 2021, was due to a benefit from selling through inventory purchased prior to recent acquisition cost increases and corresponding selling price increases, partially offset by increased distribution costs. We determine inventory cost using the last-in, first-out (“LIFO”) method but had, over time, seen our LIFO reserve balance exhausted, resulting in a LIFO inventory value above replacement cost prior to the third
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quarter ended September 30, 2021. Our policy is to not write up inventory in excess of replacement cost, and accordingly, we had effectively valued our inventory at replacement cost, resulting in a benefit when selling prices increase as we sold through this lower cost inventory. During 2021, our LIFO reserve reverted back to a more typical credit balance due to recent, significant inflation in acquisition costs; as a result, we anticipate a diminishing benefit moving forward from the final sell through of inventory valued at older, lower replacement cost. Increased distribution system costs were driven by the significant increase in volumes over the past year, challenging labor markets and ongoing global logistical supply chain pressures.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SGA”) for the year ended December 31, 2021, increased 12% to $4.10 billion (or 30.8% of sales) from $3.67 billion (or 31.6% of sales) for the same period in 2020. The increase in total SGA dollars for the year ended December 31, 2021, was the result of additional Team Members, facilities and vehicles to support our increased sales and store count, increased incentive compensation for Team Members resulting from our increased sales and operating profits and prior year strict expense control measures in response to the onset of the pandemic environment. The decrease in SGA as a percentage of sales for the year ended December 31, 2021, was principally due to strong leverage of fixed store operating costs on strong comparable store sales growth and higher average store sales volumes.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2021, increased 21% to $2.92 billion (or 21.9% of sales) from $2.42 billion (or 20.8% of sales) for the same period in 2020.
Other income and expense:
Total other expense for the year ended December 31, 2021, decreased 12% to $135 million (or 1.0% of sales), from $153 million (or 1.3% of sales) for the same period in 2020. The decrease in total other expense for the year ended December 31, 2021, was the result of decreased interest expense on lower average outstanding borrowings and lower average cost of borrowings.
Income taxes:
Our provision for income taxes for the year ended December 31, 2021, increased 20% to $617 million (22.2% effective tax rate) from $514 million (22.7% effective tax rate) for the same period in 2020. The increase in our provision for income taxes for the year ended December 31, 2021, was the result of higher taxable income, partially offset by higher excess tax benefits from share-based compensation and a greater benefit from tax credit equity investments. The decrease in our effective tax rate for the year ended December 31, 2021, was the result of the higher excess tax benefits from share-based compensation and a greater benefit from tax credit equity investments.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2021, increased 24% to $2.16 billion (or 16.2% of sales), from $1.75 billion (or 15.1% of sales) for the same period in 2020.
Earnings per share:
Our diluted earnings per common share for the year ended December 31, 2021, increased 32% to $31.10 on 70 million shares from $23.53 on 74 million shares for the same period in 2020.
2020 Compared to 2019
A discussion of the changes in our results of operations for the year ended December 31, 2020, as compared to the year ended December 31, 2019, 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, 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021, 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 open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain our existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. 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,
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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 and borrowings under our unsecured revolving credit facility. 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, changes in customer buying patterns or the impact of the uncertainty and disruption cause by the COVID-19 pandemic. 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, 2021, 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, all of which are included on our Consolidated Balance Sheets. 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, 2021 (in thousands):
December 31, 2021 | ||||||
Long-Term Debt Principal | Self-Insurance | |||||
| and Interest Payments (1) |
| Reserves (2) | |||
2022 | $ | 440,183 | $ | 128,794 | ||
2023 |
| 423,485 |
| 40,051 | ||
2024 |
| 117,550 |
| 26,152 | ||
2025 |
| 117,550 |
| 15,816 | ||
2026 | 607,355 |
| 9,427 | |||
Thereafter | 2,968,890 |
| 12,945 | |||
Contractual cash obligations | $ | 4,675,013 | $ | 233,185 | ||
(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 2022, 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 $5.7 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.
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The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31, 2021, 2020 and 2019 (in thousands):
For the Year Ended | |||||||||
December 31, | |||||||||
Liquidity: |
| 2021 |
| 2020 |
| 2019 | |||
Total cash provided by/(used in): |
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Operating activities | $ | 3,207,310 | $ | 2,836,603 | $ | 1,708,479 | |||
Investing activities |
| (615,620) |
| (614,895) |
| (796,746) | |||
Financing activities |
| (2,694,858) |
| (1,796,577) |
| (902,811) | |||
Effect of exchange rate changes on cash | (359) | 103 | 169 | ||||||
Net (decrease) increase in cash and cash equivalents | $ | (103,527) | $ | 425,234 | $ | 9,091 | |||
Capital expenditures | $ | 442,853 | $ | 465,579 | $ | 628,057 | |||
Free cash flow (1) | 2,548,922 | 2,189,995 |
| 1,020,649 | |||||
| (1) | Calculated as net cash provided by operating activities, less capital expenditures, excess tax benefit from share-based compensation payments and investment in tax credit equity investments for the period. |
Cash and cash equivalents balances held outside of the U.S. were $7.5 million and $11.5 million as of December 31, 2021 and 2020, respectively, which was generally utilized to support the liquidity needs of foreign operations in Mexico.
Operating activities:
The increase in net cash provided by operating activities in 2021 compared to 2020 was primarily due to an increase in net income and a larger decrease in net inventory investment, partially offset by a decrease in accrued benefits and withholdings. The larger decrease in net inventory investment in 2021, as compared to 2020, was primarily attributable to the strong comparable store sales growth and the resulting benefit to inventory turns. The decrease in accrued benefits and withholdings is primarily due to the deferral of payroll tax payments under the CARES Act in 2020.
Investing activities:
Cash used in investing activities in 2021 compared to 2020 was relatively flat, with the slight change due primarily to entering into more renewable energy tax credit investments in 2021, as compared to 2020, primarily for the purpose of receiving renewable energy tax credits.
We opened 168 and 155 net, new stores in 2021 and 2020, respectively. We plan to open 175 to 185 net, new stores in 2022. The current costs associated with the opening of a new store, including the cost of land acquisition, building improvements, fixtures, vehicles, net inventory investment and computer equipment, are estimated to average approximately $1.5 million to $1.8 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.
Financing activities:
The increase in net cash used in financing activities in 2021 compared to 2020 was primarily attributable to debt repayments of $300 million in 2021, compared to net, borrowings of $236 million in 2020, and an increase in repurchases of our common stock.
2020 Compared to 2019:
A discussion of the changes in our operating activities, liquidity activities and financing activities for the year ended December 31, 2020, as compared to the year ended December 31, 2019, 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, 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021, 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
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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, 2021, 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 6.97 times and 5.93 times as of December 31, 2021 and 2020, respectively, and a consolidated leverage ratio of 1.59 times and 1.92 times as of December 31, 2021 and 2020, respectively, remaining in compliance with all covenants related to the borrowing arrangements.
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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, 2021 and 2020 (dollars in thousands):
For the Year Ended | |||||||
December 31, | |||||||
| 2021 |
| 2020 | ||||
GAAP net income | $ | 2,164,685 | $ | 1,752,302 | |||
Add: | Interest expense |
| 144,768 |
| 161,126 | ||
Rent expense (1) |
| 372,022 |
| 354,316 | |||
Provision for income taxes |
| 617,229 |
| 514,103 | |||
Depreciation expense |
| 320,352 |
| 305,566 | |||
Amortization expense |
| 7,865 |
| 9,069 | |||
Non-cash share-based compensation |
| 24,656 |
| 22,747 | |||
Non-GAAP EBITDAR | $ | 3,651,577 | $ | 3,119,229 | |||
Interest expense | $ | 144,768 | $ | 161,126 | |||
Capitalized interest |
| 7,001 |
| 10,180 | |||
Rent expense (1) |
| 372,022 |
| 354,316 | |||
Total fixed charges | $ | 523,791 | $ | 525,622 | |||
Consolidated fixed charge coverage ratio |
| 6.97 |
| 5.93 | |||
GAAP debt | $ | 3,826,978 | $ | 4,123,217 | |||
Add: | Stand-by letters of credit |
| 83,985 |
| 66,427 | ||
Discount on senior notes |
| 4,360 |
| 5,071 | |||
Debt issuance costs |
| 18,662 |
| 21,712 | |||
Five-times rent expense |
| 1,860,110 |
| 1,771,580 | |||
Non-GAAP adjusted debt | $ | 5,794,095 | $ | 5,988,007 | |||
Consolidated leverage ratio |
| 1.59 |
| 1.92 | |||
(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, 2021 and 2020 (in thousands): |
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 | ||
Total lease cost, per ASC 842, for the year ended December 31, 2020 | $ | 420,365 | ||
Less: | Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2020 | 66,049 | ||
Rent expense for the year ended December 31, 2020 | $ | 354,316 | ||
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, 2021, 2020 and 2019 (in thousands):
For the Year Ended | ||||||||||
December 31, | ||||||||||
| 2021 |
| 2020 |
| 2019 | |||||
Cash provided by operating activities | $ | 3,207,310 | $ | 2,836,603 | $ | 1,708,479 | ||||
Less: | Capital expenditures |
| 442,853 |
| 465,579 |
| 628,057 | |||
Excess tax benefit from share-based compensation payments |
| 35,202 |
| 16,918 |
| 25,992 | ||||
Investment in tax credit equity investments |
| 180,333 |
| 164,111 |
| 33,781 | ||||
Free cash flow | $ | 2,548,922 | $ | 2,189,995 | $ | 1,020,649 | ||||
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
35
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 a credit-adjusted discount rate. Our calculation of self-insurance liabilities requires management to apply a significant amount of subjective judgment to estimate the ultimate cost to settle 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 $19.8 million from 2020 to 2021, which is primarily due to our growing operations, including 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, 2021, the financial impact would have been approximately $22 million or 0.8% of pretax income for the year ended December 31, 2021. 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
36
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, 2021. 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.
37
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, 2021, we had no outstanding borrowings under our Revolving Credit Facility.
We had outstanding fixed rate debt of $3.9 billion and $4.2 billion as of December 31, 2021 and 2020, respectively. The fair value of our fixed rate debt was estimated at $4.1 billion and $4.6 billion as of December 31, 2021 and 2020, 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, 2021, our cash and cash equivalents totaled $362.1 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 $152.6 million at December 31, 2021. The year ended December 31, 2021, exchange rates of the Mexican peso, relative to the U.S. dollar, weakened by approximately 3.0% from December 31, 2020. 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, 2021, would be approximately $13.9 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.
38
Item 8. Financial Statements and Supplementary Data
Index
39
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, 2021. 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, 2021, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst Young LLP, Independent Registered Public Accounting Firm, has audited the Company’s consolidated financial statements and has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, as stated in their report, which is included herein.
/s/ | Gregory D. Johnson | /s/ | Thomas McFall | |
Gregory D. Johnson | Thomas McFall | |||
President and | Executive Vice President and | |||
Chief Executive Officer | Chief Financial Officer | |||
February 28, 2022 | February 28, 2022 | |||
40
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, 2021, 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, 2021, 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, 2021 and 2020, 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, 2021, and the related notes, and our report dated February 28, 2022 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, 2022
41
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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2022 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, 2021, the Company’s self-insurance reserve was $222 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 |
42
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/
We have served as the Company’s auditor since 1992.
February 28, 2022
43
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, | ||||||
2021 | 2020 | |||||
Assets |
|
|
|
| ||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, less allowance for doubtful accounts $ |
| |
| | ||
Amounts receivable from suppliers |
| |
| | ||
Inventory |
| |
| | ||
Other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment, at cost |
| |
| | ||
Less: accumulated depreciation and amortization |
| |
| | ||
Net property and equipment |
| |
| | ||
Operating lease, right-of-use assets | | | ||||
Goodwill |
| |
| | ||
Other assets, net |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and shareholders’ equity (deficit) |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Self-insurance reserves |
| |
| | ||
Accrued payroll |
| |
| | ||
Accrued benefits and withholdings |
| |
| | ||
Income taxes payable |
| |
| | ||
Current portion of operating lease liabilities | | | ||||
Other current liabilities |
| |
| | ||
Total current liabilities |
| |
| | ||
Long-term debt |
| |
| | ||
Operating lease liabilities, less current portion | | | ||||
Deferred income taxes |
| |
| | ||
Other liabilities |
| |
| | ||
Shareholders’ equity (deficit): |
|
|
|
| ||
Preferred stock, $ |
| |||||
Authorized shares – | ||||||
Issued and outstanding shares – | |
| | |||
Common stock, $ |
| |||||
Authorized shares – | ||||||
and shares – | ||||||
|
| | ||||
Additional paid-in capital |
| |
| | ||
Retained deficit |
| ( |
| ( | ||
Accumulated other comprehensive loss | ( | ( | ||||
Total shareholders’ (deficit) equity |
| ( |
| | ||
Total liabilities and shareholders’ equity (deficit) | $ | | $ | | ||
See accompanying Notes to consolidated financial statements.
44
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Sales | $ | | $ | | $ | | |||
Cost of goods sold, including warehouse and distribution expenses |
| |
| |
| | |||
Gross profit |
| |
| |
| | |||
| |||||||||
Selling, general and administrative expenses |
| |
| |
| | |||
Operating income |
| |
| |
| | |||
Other income (expense): |
|
|
|
|
|
| |||
Interest expense |
| ( |
| ( |
| ( | |||
Interest income |
| |
| |
| | |||
Other, net |
| |
| |
| | |||
Total other expense |
| ( |
| ( |
| ( | |||
Income before income taxes |
| |
| |
| | |||
Provision for income taxes |
| |
| |
| | |||
Net income | $ | | $ | | $ | | |||
Earnings per share-basic: |
|
|
|
|
|
| |||
Earnings per share | $ | | $ | | $ | | |||
Weighted-average common shares outstanding – basic |
| |
| |
| | |||
Earnings per share-assuming dilution: |
|
|
|
|
|
| |||
Earnings per share | $ | | $ | | $ | | |||
Weighted-average common shares outstanding – assuming dilution |
| |
| |
| | |||
See accompanying Notes to consolidated financial statements.
45
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Net income | $ | | $ | | $ | | |||
Other comprehensive income (loss): | |||||||||
Foreign currency translation adjustments |
| ( |
| ( |
| | |||
Total other comprehensive (loss) income | ( | ( | | ||||||
Comprehensive income | $ | | $ | | $ | | |||
See accompanying Notes to consolidated financial statements.
46
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
|
|
| Accumulated |
| |||||||||||||
Additional | Retained | Other | |||||||||||||||
Common Stock | Paid-In | Earnings | Comprehensive | ||||||||||||||
| Shares |
| Par Value |
| Capital |
| (Deficit) | Income |
| Total | |||||||
Balance at December 31, 2018 |
| | $ | | $ | | $ | ( | $ | | $ | | |||||
Cumulative effective adjustment from adoption of ASU 2016-02 | — | — | — | ( | — | ( | |||||||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income | — | — | — | — | | | |||||||||||
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes |
| |
| — |
| |
| — |
| — |
| | |||||
Net issuance of common stock upon exercise of stock options |
| |
| |
| |
| — |
| — |
| | |||||
Share based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Share repurchases, including fees |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | |||||
Balance at December 31, 2019 |
| | $ | | $ | | $ | ( | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income | — | — | — | — | ( | ( | |||||||||||
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes |
| |
| — |
| |
| — |
| — |
| | |||||
Net issuance of common stock upon exercise of stock options |
| |
| |
| |
| — |
| — |
| | |||||
Share based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Share repurchases, including fees |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | |||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income | — | — | — | — | ( | ( | |||||||||||
Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes |
| |
| — |
| |
| — |
| — |
| | |||||
Net issuance of common stock upon exercise of stock options |
| |
| |
| |
| — |
| — |
| | |||||
Share based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Share repurchases, including fees |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | |||||
Balance at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | |||||
See accompanying Notes to consolidated financial statements.
47
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Operating activities: |
|
|
|
|
|
| |||
Net income | $ | | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| |||
Depreciation and amortization of property, equipment and intangibles |
| |
| |
| | |||
Amortization of debt discount and issuance costs |
| |
| |
| | |||
Deferred income taxes |
| |
| |
| | |||
Share-based compensation programs |
| |
| |
| | |||
Other |
| |
| |
| | |||
Changes in operating assets and liabilities: |
|
|
|
| |||||
Accounts receivable |
| ( |
| ( |
| ( | |||
Inventory |
| ( |
| ( |
| ( | |||
Accounts payable |
| |
| |
| | |||
Income taxes payable |
| |
| |
| ( | |||
Accrued payroll |
| |
| ( |
| | |||
Accrued benefits and withholdings |
| |
| |
| | |||
Other |
| |
| ( |
| | |||
Net cash provided by operating activities |
| |
| |
| | |||
Investing activities: |
|
|
|
|
|
| |||
Purchases of property and equipment |
| ( |
| ( |
| ( | |||
Proceeds from sale of property and equipment |
| |
| |
| | |||
Investment in tax credit equity investments | ( | ( | ( | ||||||
Other |
| ( |
| ( |
| ( | |||
Net cash used in investing activities |
| ( |
| ( |
| ( | |||
Financing activities: |
|
|
|
|
|
| |||
Proceeds from borrowings on revolving credit facility |
| |
| |
| | |||
Payments on revolving credit facility |
| |
| ( |
| ( | |||
Proceeds from the issuance of long-term debt |
| |
| |
| | |||
Principal payments on long-term debt | ( | ( | | ||||||
Payment of debt issuance costs |
| ( |
| ( |
| ( | |||
Repurchases of common stock |
| ( |
| ( |
| ( | |||
Net proceeds from issuance of common stock |
| |
| |
| | |||
Other |
| ( |
| ( |
| ( | |||
Net cash used in financing activities |
| ( |
| ( |
| ( | |||
Effect of exchange rate changes on cash | ( | | | ||||||
Net (decrease) increase in cash and cash equivalents |
| ( |
| |
| | |||
Cash and cash equivalents at beginning of the period |
| |
| |
| | |||
Cash and cash equivalents at end of the period | $ | | $ | | $ | | |||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
| |||
Income taxes paid | $ | | $ | | $ | | |||
Interest paid, net of capitalized interest |
| |
| |
| | |||
See accompanying Notes to consolidated financial statements.
48
O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
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, 2021, the Company owned and operated
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 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.
49
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 $
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, 2021 or 2020.
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. Over time, as the Company’s merchandise inventory purchases increased, the Company negotiated improved acquisition costs from its suppliers and the corresponding price deflation exhausted the Company’s credit LIFO reserve balance, resulting in a LIFO inventory value above replacement cost from December 31, 2013, to June 30, 2021. The Company’s policy is to not write up the value of its inventory in excess of its replacement cost, and accordingly, the Company’s merchandise inventory was effectively valued at replacement cost. During the year ended December 31, 2021, the Company’s LIFO reserve reverted back to a more typical credit balance. The replacement cost of inventory was $
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, 2021 and 2020, 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
50
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, 2021 and 2020. As such,
Leases:
The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases. Lease components are not accounted for separately from nonlease components. Leases generally include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or incremental step increase provisions. The exercise of renewal options is typically at the Company’s sole discretion and all operating lease expense is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain surplus real estate to third parties. Right-of-use assets and corresponding operating lease liabilities are recognized for all leases with an initial term greater than 12 months. See Note 5 for further information concerning the Company’s operating leases.
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. During the year ended December 31, 2021 and 2019, the Company recorded a charge of $
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, 2021 and 2020. 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 determined its investment in these tax credit funds was an investment in a variable interest entity (“VIE”). 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 VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. As of December 31, 2021, the Company had invested in four 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 accounted for these investments using the equity method. The Company’s maximum exposure to losses associated with these VIEs is limited to its net investment, which was $
51
as a component of the change in Income taxes payable on the accompanying Consolidated Statements of Cash Flows for the respective years.
During the second quarter ended June 30, 2021, the Company entered into an agreement to make certain additional capital contributions to one of its tax credit funds, which promotes renewable energy through the development of solar or wind energy farms, for the primary purpose of receiving renewable energy tax credits. Per the terms of the agreement, the Company is required to make capital contributions totaling approximately $
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure. The Company estimates its self-insurance liabilities by considering a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value, using a credit-adjusted discount rate.
The following table identifies the components of the Company’s self-insurance reserves as of December 31, 2021 and 2020 (in thousands):
December 31, | |||||||
| 2021 |
| 2020 | ||||
Self-insurance reserves (undiscounted) | $ | | $ | | |||
Self-insurance reserves (discounted) |
| |
| | |||
The current portion of the Company’s discounted self-insurance reserves totaled $
Warranties:
The Company offers warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. See Note 8 for further information concerning the Company’s aggregate product warranty liabilities.
Litigation accruals:
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:
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.
52
All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying Consolidated Balance Sheets. See Note 9 for further information concerning the Company’s share repurchase program.
Revenue recognition:
The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts and merchandise to its customers. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, in an amount representing the consideration the Company expects to receive in exchange for transferring goods to the customer. Generally, the Company’s performance obligations are satisfied when the customer takes possession of the merchandise, which normally occurs immediately at the point of sale or through same day delivery of the merchandise. All sales are recorded net of estimated returns allowances, discounts and taxes. The Company does not recognize revenue related to product warranties, as these are considered assurance warranty obligations.
Over-the-counter retail sales to DIY customers are recorded when the customer takes possession of the merchandise. Internet retail sales, included in sales to DIY customers, are recorded when the merchandise is shipped or when the customer picks up the merchandise at a store. Sales to professional service provider customers, also referred to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at the customer’s place of business. Other sales and sales adjustments primarily includes sales to Team Members, wholesale sales to other retailers (“jobber sales”), equipment sales, discounts, rebates, deferred revenue adjustments relating to the Company’s retail loyalty program and adjustments to estimated sales returns allowances. Sales to Team Members are recorded when the Team Member takes possession of the merchandise. Jobber sales are recorded upon shipment of the merchandise from a regional distribution center with same-day delivery to the jobber customer’s location.
The Company maintains a retail loyalty program named O’Reilly O’Rewards, which represents a performance obligation. The Company records a deferred revenue liability, based on a breakage adjusted, estimated redemption rate and a corresponding reduction in revenue in periods when loyalty points are earned by members. The Company recognizes revenue and a corresponding reduction to the deferred revenue liability in periods when loyalty program issued coupons are redeemed by members, generally within a period of
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
53
incremental to the advertising program, specific to the product or event and identifiable for accounting purposes, total $
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, 2021, 2020 and 2019, were $
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 $
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 $
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, 2021 and 2020, 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
54
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:
No recent accounting pronouncements or changes in accounting pronouncements have occurred since those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, that are of a material significance, or have potential material significance, to the Company.
NOTE 2 – FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis:
The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Consolidated Balance Sheets as of December 31, 2021 and 2020. The Company recorded increases in fair value related to its marketable securities in the amounts of $
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, 2021 and 2020 (in thousands):
December 31, 2021 | ||||||||||||
Quoted Priced in Active Markets | Significant Other | Significant | ||||||||||
for Identical Instruments | Observable Inputs | Unobservable Inputs | ||||||||||
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | |||||
Marketable securities | $ | | $ | — | $ | — | $ | | ||||
December 31, 2020 | ||||||||||||
Quoted Prices in Active Markets | Significant Other | Significant | ||||||||||
for Identical Instruments | Observable Inputs | Unobservable Inputs | ||||||||||
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | |||||
Marketable securities | $ | | $ | — | $ | — | $ | | ||||
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, 2021 and 2020, 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, 2021 and 2020.
55
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, 2021 and 2020, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):
December 31, 2021 | December 31, 2020 | |||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||
Senior Notes | $ | | $ | | $ | | $ | | ||||
The carrying amount of the Company’s unsecured revolving credit facility approximates fair value, as borrowings under the facility bear variable interest at current market rates. See Note 7 for further information concerning the Company’s senior notes and unsecured revolving credit facility.
The accompanying Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts receivable, amounts receivable from suppliers and accounts payable. Due to the short-term nature of these financial instruments, the Company believes that the carrying values of these instruments approximate their fair values.
NOTE 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, 2021 and 2020 (in thousands):
2021 | 2020 | |||||
Allowance for doubtful accounts, balance at January 1 | $ | | $ | | ||
Reserve accruals |
| |
| | ||
Uncollectable accounts written-off | ( | ( | ||||
Foreign currency translation |
| ( |
| ( | ||
Allowance for doubtful accounts, balance at December 31, | $ | | $ | | ||
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, 2021 and 2020, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):
| Original Useful |
| ||||||
Lives | December 31, 2021 | December 31, 2020 | ||||||
Land | $ | |
| $ | | |||
Buildings and building improvements |
| |
| | ||||
Leasehold improvements |
| |
| | ||||
Furniture, fixtures and equipment |
| |
| | ||||
Vehicles |
| |
| | ||||
Construction in progress |
| |
| | ||||
Total property and equipment |
| |
| | ||||
Less: accumulated depreciation and amortization |
| |
| | ||||
Net property and equipment | $ | | $ | | ||||
The Company recorded depreciation and amortization expense related to property and equipment in the amounts of $
The Company recorded charges of $
56
NOTE 5 – LEASES
Operating lease commitments:
The following table summarizes Total lease cost for the years ended December 31, 2021, 2020 and 2019, which was primarily included in “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in thousands):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 | 2020 | 2019 | ||||||
Operating lease cost | $ | | $ | | $ | | |||
Short-term operating lease cost |
| |
| |
| | |||
Variable operating lease cost |
| |
| |
| | |||
Sublease income |
| ( |
| ( |
| ( | |||
Total lease cost | $ | | $ | | $ | | |||
The following table summarizes other lease related information for the years ended December 31, 2021 and 2020 (in thousands):
| For the Year Ended | ||||||
December 31, | |||||||
2021 | 2020 | ||||||
Cash paid for amounts included in the measurement of operating lease liabilities: |
|
| |||||
Operating cash flows from operating leases | $ | | $ | | |||
Right-of-use assets obtained in exchange for new operating lease liabilities | | | |||||
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, 2021 (in thousands):
December 31, 2021 | |||||||||
| Related Parties |
| Non-Related Parties |
| Total | ||||
2022 | $ | | $ | | $ | | |||
2023 | | | | ||||||
2024 |
| |
| |
| | |||
2025 |
| |
| |
| | |||
2026 |
| |
| |
| | |||
Thereafter |
| |
| |
| | |||
Total operating lease payments |
| |
| |
| | |||
Less: present value discount |
| |
| |
| | |||
Total operating lease liabilities |
| |
| |
| | |||
Less: current portion of operating lease liabilities |
| |
| |
| | |||
Operating lease liabilities, less current portion | $ | | $ | | $ | | |||
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 $
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.
57
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, 2021, 2020 or 2019.
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, 2021 and 2020 (in thousands):
| 2021 |
| 2020 | |||
Goodwill, balance at January 1, | $ | | $ | | ||
Change in goodwill related to small acquisitions |
| |
| | ||
Foreign currency translation | ( | ( | ||||
Final purchase price allocation of intangibles related to Mayasa acquisition | | ( | ||||
Goodwill, balance at December 31, | $ | | $ | | ||
During the year ended December 31, 2020, as result of the final purchase price allocation of the Mayasa acquisition, $
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, 2021 and 2020 (in thousands):
December 31, 2021 | December 31, 2020 | |||||||||||||||||
| Cost of |
| Accumulated | Net | Cost of |
| Accumulated |
| Net | |||||||||
Intangibles | Amortization | Intangibles | Intangibles | Amortization | Intangibles | |||||||||||||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
| ||||||||
Trade names (1) | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
Non-compete agreements (2) | | ( | | | ( | | ||||||||||||
Other intangible assets (3) | | ( | | | ( | | ||||||||||||
Total finite-lived intangible assets | | ( | | | ( | | ||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||
Trade names | | — | | | — | | ||||||||||||
Total intangible assets | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
(1) | Weighted-average remaining useful life of approximately |
(2) | Weighted-average remaining useful life of approximately |
(3) | Includes internally-developed software and customer relationships and has an estimated weighted-average remaining useful life of approximately |
During the year ended December 31, 2020, the Company recorded finite-lived and indefinite-lived intangible assets, related to trade names from the Mayasa acquisition, in the amounts of $
For the years ended December 31, 2021, 2020 and 2019, the Company recorded aggregate amortization expense related to its intangible assets in the amounts of $
58
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, 2021 (in thousands):
December 31, 2021 | |||
| Amortization Expense | ||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter | | ||
Total net, finite-lived intangible assets | $ | | |
NOTE 7 – FINANCING
The following table identifies the amounts of the Company’s financing facilities, which were included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of December 31, 2021 and 2020 (in thousands):
December 31, | ||||||
2021 | 2020 | |||||
$ | — | $ | | |||
| |
| | |||
| |
| | |||
| |
| | |||
| |
| | |||
| |
| | |||
| | |||||
| | |||||
| | |||||
Total principal amount of debt | | | ||||
Less: Unamortized discount and debt issuance costs | | | ||||
Total long-term debt | $ | | $ | | ||
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, 2021 (in thousands):
| December 31, 2021 | ||
Scheduled Maturities | |||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total principal amount of debt | $ | | |
Unsecured revolving credit facility:
The Company is party to a new credit agreement dated
59
In conjunction with the closing of the Credit Agreement, the Company’s previous credit agreement, which was originally entered into on April 5, 2017, was terminated (the “Terminated Credit Agreement”), and all outstanding loans and commitments under the Terminated Credit Agreement were terminated and replaced by the loans and commitments under the Credit Agreement.
As of December 31, 2021 and 2020, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amounts of $
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
The Credit Agreement contains certain covenants, including limitations on subsidiary indebtedness, a minimum consolidated fixed charge coverage ratio of
Senior notes:
On June 15, 2021, the Company redeemed its $
As of December 31, 2021, the Company has issued and has outstanding a cumulative $
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, 2021 and 2020. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended December 31, 2021 and 2020 (in thousands):
| 2021 |
| 2020 | |||
Warranty liabilities, balance at January 1, | $ | | $ | | ||
Warranty claims |
| ( |
| ( | ||
Warranty accruals |
| |
| | ||
Foreign currency translation | ( | ( | ||||
Warranty liabilities, balance at December 31, | $ | | $ | | ||
60
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 February 10, 2021, May 27, 2021, and November 17, 2021, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $
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, 2021 and 2020 (in thousands, except per share data):
For the Year Ended | ||||||
December 31, | ||||||
| 2021 |
| 2020 | |||
Shares repurchased |
| | | |||
Average price per share | $ | | $ | | ||
Total investment | $ | | $ | | ||
As of December 31, 2021, the Company had $
NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income includes adjustments for foreign currency translations. The table below summarizes activity for changes in accumulated other comprehensive income included in “Accumulated other comprehensive (loss) income” on the accompanying Consolidated Balance Sheets as of December 31, 2021 and 2020 (in thousands):
Foreign | Total Accumulated Other | |||||
Currency (1) | Comprehensive Income (Loss) | |||||
Accumulated other comprehensive income, balance at December 31, 2019 | $ | | $ | | ||
Change in accumulated other comprehensive loss | ( | ( | ||||
Accumulated other comprehensive loss, balance at December 31, 2020 | $ | ( | $ | ( | ||
Change in accumulated other comprehensive loss | ( | ( | ||||
Accumulated other comprehensive loss, balance at December 31, 2021 | $ | ( | $ | ( | ||
| (1) | Foreign currency is not shown net of additional U.S. tax, as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested. |
NOTE 11 – REVENUE
The table below identifies the Company’s revenues disaggregated by major customer type for the years ended December 31, 2021, 2020 and 2019 (in thousands):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Sales to do-it-yourself customers | $ | | $ | | $ | | |||
Sales to professional service provider customers |
| |
| |
| | |||
Other sales and sales adjustments |
| |
| |
| | |||
Total sales | $ | | $ | | $ | | |||
As of December 31, 2021 and 2020, the Company had recorded a deferred revenue liability of $
61
Sheets. During the years ended December 31, 2021, 2020 and 2019, the Company recognized $
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, 2021 (in thousands):
December 31, 2021 | ||||
| Total Shares Authorized for |
| Shares Available for Future | |
Plans | Issuance under the Plans | Issuance under the Plans | ||
Incentive Plans |
| |
| |
Employee Stock Purchase Plan |
| |
| |
Profit Sharing and Savings Plan |
| |
| |
Stock options:
The Company’s incentive plans provide for the granting of stock options for the purchase of common stock of the Company to certain key employees of the Company. Employee stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant. Employee stock options granted under the plans expire after
The table below identifies the employee stock option activity under these plans during the year ended December 31, 2021:
|
|
| Average |
| Aggregate | ||||||
Shares | Weighted- Average | Remaining | Intrinsic Value | ||||||||
(in thousands) | Exercise Price | Contractual Terms | (in thousands) | ||||||||
Outstanding at December 31, 2020 |
| | $ | |
|
|
|
| |||
Granted |
| |
| |
|
|
|
| |||
Exercised |
| ( |
| |
|
|
|
| |||
Forfeited or expired |
| ( |
| |
|
|
|
| |||
Outstanding at December 31, 2021 |
| | $ | |
| Years | $ | | |||
Vested or expected to vest at December 31, 2021 |
| | $ | |
| Years | $ | | |||
Exercisable at December 31, 2021 |
| | $ | |
| Years | $ | | |||
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. |
62
The table below identifies the weighted-average assumptions used for stock options awarded by the Company during the years ended December 31, 2021, 2020 and 2019:
December 31, | |||||||||
| 2021 | 2020 | 2019 | ||||||
Risk free interest rate |
| | % | | % | | % | ||
Expected life |
| Years | Years | Years | |||||
Expected volatility |
| | % | | % | | % | ||
Expected dividend yield |
| | % | | % | | % | ||
The following table summarizes activity related to stock options awarded by the Company for the years ended December 31, 2021, 2020 and 2019:
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 | 2020 | 2019 | ||||||
Compensation expense for stock options awarded (in thousands) | $ | | $ | | $ | | |||
Income tax benefit from compensation expense related to stock options (in thousands) |
| |
| |
| | |||
Total intrinsic value of stock options exercised (in thousands) |
| |
| |
| | |||
Cash received from exercise of stock options (in thousands) |
| |
| |
| | |||
Weighted-average grant-date fair value of options awarded | $ | | $ | | $ | | |||
Weighted-average remaining contractual life of exercisable options (in years) |
|
|
| ||||||
At December 31, 2021, the remaining unrecognized compensation expense related to unvested stock option awards was $
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
The table below identifies employee restricted stock activity under these plans during the year ended December 31, 2021 (in thousands, except per share data):
Weighted-Average Grant-Date | |||||
| Shares |
| Fair Value | ||
Non-vested at December 31, 2020 |
| | $ | | |
Granted during the period |
| |
| | |
Vested during the period (1) |
| ( |
| | |
Forfeited during the period |
| |
| | |
Non-vested at December 31, 2021 |
| | $ | | |
| (1) | Includes less than |
The Company’s incentive plans provide for the awarding of shares of restricted stock to the non-employee directors of the Company that vest over a
63
The table below identifies non-employee director restricted stock activity under these plans during the year ended December 31, 2021 (in thousands, except per share data):
Weighted-Average Grant-Date | |||||
| Shares |
| Fair Value | ||
Non-vested at December 31, 2020 |
| | $ | | |
Granted during the period |
| |
| | |
Vested during the period |
| ( |
| | |
Forfeited during the period |
| |
| | |
Non-vested at December 31, 2021 |
| | $ | | |
The following table summarizes activity related to restricted stock awarded by the Company for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share data):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Compensation expense for restricted shares awarded | $ | | $ | | $ | | |||
Income tax benefit from compensation expense related to restricted shares | $ | | $ | | $ | | |||
Total fair value of restricted shares at vest date | $ | | $ | | $ | | |||
Shares awarded under the plans |
| |
| |
| | |||
Weighted-average grant-date fair value of shares awarded under the plans | $ | | $ | | $ | | |||
At December 31, 2021, the remaining unrecognized compensation expense related to unvested restricted share awards was $
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
The table below summarizes activity related to the Company’s ESPP for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share data):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Compensation expense for shares issued under the ESPP | $ | | $ | | $ | | |||
Income tax benefit from compensation expense related to shares issued under the ESPP | $ | | $ | | $ | | |||
Shares issued under the ESPP |
| |
| |
| | |||
Weighted-average price of shares issued under the ESPP | $ | | $ | | $ | | |||
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
64
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 $
Stock appreciation rights:
The Company’s incentive plans provide for the granting of stock appreciation rights, which expire after
NOTE 13 – COMMITMENTS
Construction commitments:
As of December 31, 2021, the Company had purchase obligations for construction contract commitments in the amount of $
Letters of credit commitments:
As of December 31, 2021, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of $
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
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.
65
Renewable energy tax credit equity investments:
The Company has entered into an agreement to make capital contributions to certain tax credit equity investments for the purpose of receiving renewable energy tax credits. As of December 31, 2021, the Company is required to make capital contributions totaling $
NOTE 14 – RELATED PARTIES
The Company leases certain land and buildings related to
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, 2021, 2020 and 2019 (in thousands):
For the Year Ended | |||||||||
December 31, | |||||||||
2021 | 2020 | 2019 | |||||||
Domestic | $ | | $ | | $ | | |||
International | | | | ||||||
Income before income taxes | $ | | $ | | $ | | |||
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, 2021, 2020 and 2019 (in thousands):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Current: | |||||||||
Federal income tax expense | $ | | $ | | $ | | |||
State income tax expense |
| |
| |
| | |||
International income tax expense | | | | ||||||
Total current | | | | ||||||
Deferred: | |||||||||
Federal income tax expense | | | | ||||||
State income tax (benefit) expense | | ( | | ||||||
International income tax benefit | ( | ( | ( | ||||||
Total deferred | | | | ||||||
Net income tax expense | $ | | $ | | $ | | |||
66
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, 2021, 2020 and 2019 (in thousands):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Federal income taxes at statutory rate | $ | | $ | | $ | | |||
State income taxes, net of federal tax benefit |
| |
| |
| | |||
Excess tax benefit from share-based compensation |
| ( |
| ( |
| ( | |||
Benefit from investment in renewable energy tax credits | ( | ( | ( | ||||||
Other items, net |
| ( |
| ( |
| ( | |||
Total provision for income taxes | $ | | $ | | $ | | |||
The Company has invested in tax credit equity investments for the purposes of receiving renewable energy tax credits. During the years ended December 31, 2021, 2020 and 2019, the Company recognized investment tax credits in the amount of $
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, 2021 and 2020 (in thousands):
December 31, | ||||||
| 2021 |
| 2020 | |||
Deferred tax assets: |
|
|
|
| ||
Allowance for doubtful accounts | $ | | $ | | ||
Tax credits |
| |
| | ||
Other accruals |
| |
| | ||
Operating lease liability | | | ||||
Other |
| |
| | ||
Total deferred tax assets |
| |
| | ||
Deferred tax liabilities: |
|
|
|
| ||
Inventories |
| |
| | ||
Property and equipment |
| |
| | ||
Operating lease asset | | | ||||
Other |
| |
| | ||
Total deferred tax liabilities |
| |
| | ||
Net deferred tax liabilities | $ | ( | $ | ( | ||
As of December 31, 2021, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $
67
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, 2021, 2020 and 2019 (in thousands):
| 2021 |
| 2020 |
| 2019 | ||||
Unrealized tax benefit, balance at January 1, | $ | | $ | | $ | | |||
Additions based on tax positions related to the current year |
| |
| |
| | |||
Payments related to items settled with taxing authorities |
| ( |
| |
| ( | |||
Reductions due to the lapse of statute of limitations and settlements |
| ( |
| ( |
| ( | |||
Unrealized tax benefit, balance at December 31, | $ | | $ | | $ | | |||
For the years ended December 31, 2021, 2020 and 2019, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $
The Company’s United States federal income tax returns for tax years
NOTE 16 – EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings per share for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share data):
For the Year Ended | |||||||||
December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Numerator (basic and diluted): |
|
|
|
|
|
| |||
Net income | $ | | $ | | $ | | |||
Denominator: |
|
|
|
|
|
| |||
Weighted-average common shares outstanding – basic |
| |
| |
| | |||
Effect of stock options (1) |
| |
| |
| | |||
Weighted-average common shares outstanding – assuming dilution |
| |
| |
| | |||
Earnings per share: |
|
|
|
|
|
| |||
Earnings per share-basic | $ | | $ | | $ | | |||
Earnings per share-assuming dilution | $ | | $ | | $ | | |||
Antidilutive potential common shares not included in the calculation of diluted earnings per share: |
|
|
|
|
|
| |||
Stock options (1) |
| |
| |
| | |||
Weighted-average exercise price per share of antidilutive stock options (1) | $ | | $ | | $ | | |||
| (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.
68
NOTE 17 – QUARTERLY RESULTS (Unaudited)
The following tables set forth certain quarterly unaudited operating data for the fiscal years ended December 31, 2021 and 2020. 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 2021 | ||||||||||||
| First |
| Second |
| Third |
| Fourth | |||||
Quarter | Quarter | Quarter | Quarter | |||||||||
Sales | $ | | $ | | $ | | $ | | ||||
Gross profit |
| |
| |
| |
| | ||||
Operating income |
| |
| |
| |
| | ||||
Net income |
| |
| |
| |
| | ||||
Earnings per share – basic (1) | $ | | $ | | $ | | $ | | ||||
Earnings per share – assuming dilution (1) | $ | | $ | | $ | | $ | | ||||
Fiscal 2020 | ||||||||||||
| First |
| Second |
| Third |
| Fourth | |||||
Quarter | Quarter | Quarter | Quarter | |||||||||
Sales | $ | | $ | | $ | | $ | | ||||
Gross profit |
| |
| |
| |
| | ||||
Operating income |
| |
| |
| |
| | ||||
Net income |
| |
| |
| |
| | ||||
Earnings per share – basic (1) | $ | | $ | | $ | | $ | | ||||
Earnings per share – assuming dilution (1) | $ | | $ | | $ | | $ | | ||||
| (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.
69
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) and as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company, including its consolidated subsidiaries, in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of 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 Exchange Act. 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, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013 framework). Based on this assessment, management believes that as of December 31, 2021, the Company’s internal control over financial reporting was 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, which is included in Item 8 of this annual report on Form 10-K.
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Item 9B. Other Information
Not Applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by Part III is incorporated by reference from the Company’s Proxy Statement on Schedule 14A for the 2022 Annual Meeting of Shareholders (“Proxy Statement”), which will be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of the end of the Company’s most recent fiscal year. Except for those portions specifically incorporated in this Annual Report on Form 10-K by reference to the Company’s Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this Annual Report on Form 10-K.
Directors and Officers:
The information regarding the directors of the Company will be included in the Company’s Proxy Statement under the caption “Proposal 1 - Election of Directors” and “Information Concerning the Board of Directors” and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days of the end of the Company’s most recent fiscal year. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form 10-K, for the Company’s executive officers who are not also directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended:
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), required by Item 405 of Regulation S-K, will be included in the Company’s Proxy Statement under the caption “Delinquent Section 16(a) Reports,” if applicable, and is incorporated herein by reference.
Code of Ethics:
The Company’s Board of Directors has adopted a code of ethics that applies to all of its directors, officers (including its chief executive officer, chief operating officer, chief financial officer, chief accounting officer, controller and any person performing similar functions) and Team Members. The Company’s Code of Ethics is available on its website at www.OReillyAuto.com, under the “Corporate Home” caption. The information on the Company’s website is not a part of this Annual Report on Form 10-K and is not incorporated by reference in this report or any of the Company’s other filings with the SEC.
Corporate Governance:
The Corporate Governance/Nominating Committee of the Board of Directors does not have a written policy on the consideration of Director candidates recommended by shareholders. It is the view of the Board of Directors that all candidates, whether recommended by a shareholder or the Corporate Governance/Nominating Committee, shall be evaluated based on the same established criteria for persons to be nominated for election to the Board of Directors and its committees.
The Board of Directors has established an Audit Committee pursuant to Section 3(a)(58)(A) of the Exchange Act. The Audit Committee currently consists of Jay D. Burchfield, Thomas T. Hendrickson, John R. Murphy, Dana M. Perlman, Maria A. Sastre, Andrea M. Weiss and Fred Whitfield, each an independent director in accordance with The Nasdaq Stock Market Marketplace Rule 5605(a)(2), the standards of Rule 10A-3 of the Exchange Act and the requirements of The Nasdaq Stock Market Marketplace Rule 5605(c)(2). In addition, our Board of Directors has determined that Mr. Hendrickson, Chairperson of the Audit Committee, qualifies as an audit committee financial expert under Item 407(d)(5) of Regulation S-K.
Item 11. Executive Compensation
Director and Officer Compensation:
The information required by Item 402 of Regulation S-K will be included in the Company’s Proxy Statement under the captions “Compensation of Executive Officers” and “Compensation of Directors” and is incorporated herein by reference.
Human Capital and Compensation Committee:
The information required by Item 407(e)(4) and (e)(5) of Regulation S-K will be included in the Company’s Proxy Statement under the captions “Human Capital and Compensation Committee Interlocks and Insider Participation” and “Human Capital and Compensation Committee Report” and is incorporated herein by reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 201(d) of Regulation S-K will be included in the Company’s Proxy Statement under the caption “Equity Compensation Plans” and is incorporated herein by reference.
The information required by Item 403 of Regulation S-K will be included in the Company’s Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Directors and Management” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 404 of Regulation S-K will be included in the Company’s Proxy Statement under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference.
The information required by Item 407(a) of Regulation S-K will be included in the Company’s Proxy Statement under the caption “Director Independence” and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A will be included in the Company’s Proxy Statement under the caption “Fees Paid to Independent Registered Public Accounting Firm” and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this Annual Report on Form 10-K: |
| 1. | Financial Statements - O’Reilly Automotive, Inc. and Subsidiaries |
The following consolidated financial statements of O’Reilly Automotive, Inc. and Subsidiaries included in the Annual Shareholders’ Report of the registrant for the year ended December 31, 2021, are filed with this Annual Report in Part II, Item 8:
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Financial Statements
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements for the years ended December 31, 2021, 2020 and 2019
| 2. | Financial Statement Schedules - O’Reilly Automotive, Inc. and Subsidiaries |
Any schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.
| 3. | Exhibits |
Exhibit No. |
| Description |
|---|---|---|
3.1 | ||
3.2 | ||
4.1 | Form of Stock Certificate for Common Stock, filed as Exhibit 4.1 to the Registration Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference. | |
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 |
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Exhibit No. |
| Description |
|---|---|---|
4.8 | ||
4.9 | ||
4.10 | ||
4.11 | ||
4.12 | ||
4.13 | ||
4.14 | ||
4.15 | ||
4.16 | ||
4.17 | ||
4.18 | ||
4.19 | ||
4.20 | ||
10.1 (a) | Form of Employment Agreement between the Registrant and David E. O’Reilly, filed as Exhibit 10.1 to the Registration Statement of the Registrant on Form S-1, File No. 33-58948, is incorporated herein by this reference. | |
10.2 (a) | O’Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as Exhibit 4.1 to the Registration Statement of the Registrant on Form S-8, File No. 33-73892, is incorporated herein by this reference. | |
10.3 (a) | ||
10.4 (a) | ||
10.5 (a) |
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Exhibit No. |
| Description |
|---|---|---|
10.6 (a) | ||
10.7 (a) | ||
10.8 (a) | ||
10.9 (a) | ||
10.10 (a) | ||
10.11 (a) | ||
10.12 (a) | ||
10.13 (a) | ||
10.14 (a) | ||
10.15 (a) | ||
10.16 (a) | ||
10.17 (a) | ||
10.18 (a) | ||
10.19 | ||
10.20 (a) | ||
10.21 (a) | ||
10.22 (a) |
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Exhibit No. |
| Description |
|---|---|---|
10.23 (a) | ||
10.24 (a) | ||
21.1 | ||
23.1 | Consent of Ernst Young LLP, independent registered public accounting firm, filed herewith. | |
31.1 | ||
31.2 | ||
32.1 * | ||
32.2 * | ||
101.INS | iXBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | iXBRL Taxonomy Extension Schema. | |
101.CAL | iXBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | iXBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | iXBRL Taxonomy Extension Label Linkbase. | |
101.PRE | iXBRL Taxonomy Extension Presentation Linkbase. | |
104 | Cover Page Interactive Data File, formatted as Inline XBRL, contained in Exhibit 101 attachments. | |
(a) | Management contract or compensatory plan or arrangement. | |
* | Furnished (and not filed) herewith pursuant to Item 601 (b)(32)(ii) of Regulation S-K. |
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
O’REILLY AUTOMOTIVE, INC. | ||||
(Registrant) | ||||
Date: | February 28, 2022 | |||
By: | /s/ | Gregory D. Johnson | ||
Gregory D. Johnson | ||||
President and | ||||
Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Date: | February 28, 2022 | ||||
/s/ | Greg Henslee | /s/ | David O’Reilly | ||
Greg Henslee | David O’Reilly | ||||
Director and Executive Chairman of the Board | Director and Executive Vice Chairman of the Board | ||||
/s/ | Larry O’Reilly | /s/ | Jay D. Burchfield | ||
Larry O’Reilly | Jay D. Burchfield | ||||
Director and Vice Chairman of the Board | Director | ||||
/s/ | Thomas T. Hendrickson | /s/ | John R. Murphy | ||
Thomas T. Hendrickson | John R. Murphy | ||||
Director | Director | ||||
/s/ | Dana M. Perlman | /s/ | Maria A. Sastre | ||
Dana M. Perlman | Maria A. Sastre | ||||
Director | Director | ||||
/s/ | Andrea M. Weiss | /s/ | Fred Whitfield | ||
Andrea M. Weiss | Fred Whitfield | ||||
Director | Director | ||||
/s/ | Gregory D. Johnson | /s/ | Thomas McFall | ||
Gregory D. Johnson | Thomas McFall | ||||
President and | Executive Vice President and | ||||
Chief Executive Officer | Chief Financial Officer | ||||
(Principal Executive Officer) | (Principal Financial and Accounting Officer) | ||||
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