Notes to Consolidated Financial Statements
NOTE 1
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
O’Reilly Automotive, Inc. and its subsidiaries, collectively, “O’Reilly” or the “Company,” is a specialty retailer and supplier of automotive aftermarket parts. The Company’s stores carry an extensive product line, including new and remanufactured automotive hard parts, maintenance items and various automotive accessories. As of
December 31, 2016
, the Company owned and operated
4,829
stores in
47
states, servicing both do-it-yourself (“DIY”) and the professional service provider customers. The Company’s robust distribution system provides stores with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of other auto parts retailers.
Segment reporting:
The Company is managed and operated by a single management team reporting to the chief operating decision maker. O’Reilly stores have similar characteristics, including the nature of the products and services, the type and class of customers and the methods used to distribute products and provide service to its customers and, as a whole, make up a single operating segment. The Company does not prepare discrete financial information with respect to product lines, types of customers or geographic locations and as such has one reportable segment.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of the consolidated financial statements, in conformity with United States generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Cash equivalents:
Cash equivalents include investments with maturities of 90 days or less on the date of purchase.
Accounts receivable:
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable. Amounts due to the Company from its Team Members are included as a component of accounts receivable. These amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts receivable due from Team Members was approximately
$1.2 million
and
$1.1 million
as of
December 31, 2016
and
2015
, respectively.
The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Concentrations of credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of small customers, spreading the credit risk across a broad base. The Company also controls this credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures. Generally, the Company does not require security when credit is granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and have consistently been within management’s expectations.
Amounts receivable from suppliers:
The Company receives concessions from its suppliers through a variety of programs and arrangements, including allowances for new stores and warranties, volume purchase rebates and co-operative advertising. Co-operative advertising allowances that are incremental to the Company’s advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period, in which the advertising occurred. All other supplier concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also includes 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, 2016
or
2015
.
Inventory:
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Inventory also includes capitalized costs related to procurement, warehousing and distribution centers (“DC”s). Cost has been determined using the last-in, first-out (“LIFO”) method, which more accurately matches costs with related revenues. Over time, as the Company’s merchandise inventory purchases have increased, the Company negotiated improved acquisition costs from its suppliers and the corresponding price deflation exhausted the Company’s LIFO reserve balance. The Company’s policy is to not write up the value of its inventory in excess of its replacement cost, and accordingly, the Company’s merchandise inventory has been effectively recorded at replacement cost since December 31, 2013. The replacement cost of inventory was
$2.78 billion
and
$2.63 billion
as of
December 31, 2016
and
2015
, respectively. LIFO costs exceeded replacement costs by
$132.0 million
and
$85.9 million
at
December 31, 2016
and
2015
, respectively.
Fair value of financial instruments:
The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company uses the income and market approaches to determine the fair value of its assets and liabilities. The three levels of the fair value hierarchy are set forth below:
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•
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Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
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•
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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.
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•
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Level 3 – Unobservable inputs for the asset or liability.
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See Note 2 for further information concerning the Company’s financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis.
Property and equipment:
Property and equipment are carried at cost. Depreciation is calculated using the straight-line method, generally over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated economic life of the assets. The lease term includes renewal options determined by management at lease inception, for which failure to execute renewal options would result in a substantial economic penalty to the Company. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is recognized in the Company’s Consolidated Statements of Income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
Notes receivable:
The Company had notes receivable from suppliers and other third parties in the amount of
$17.3 million
at
December 31, 2015
. The Company regularly reviews its notes receivable for collectability and assesses the need for a reserve for uncollectable amounts based on an evaluation of the Company’s borrowers’ financial positions and corresponding abilities to meet financial obligations. Management did not believe there was a reasonable likelihood that the Company would be unable to collect the notes receivable and the Company did
not
record a reserve for uncollectable notes receivable in the consolidated financial statements as of
December 31, 2015
. During the year ended December 31, 2016, the notes receivable from suppliers and other third parties were dissolved, in connection with new supplier contracts, and during the year ended December 31, 2016, no new notes receivable arrangements have been entered into.
Goodwill and other intangibles:
The accompanying Consolidated Balance Sheets at
December 31, 2016
and
2015
, include goodwill and other intangible assets recorded as the result of acquisitions. The Company reviews goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values, rather than systematically amortizing goodwill against earnings. During
2016
and
2015
, the goodwill impairment test included a quantitative assessment, which compared the fair value of the reporting unit to its carrying amount, including goodwill. The Company operates as a single reporting unit, and the Company determined that its fair value exceeded its carrying value, including goodwill, as of
December 31, 2016
and
2015
; as such,
no
goodwill impairment adjustment was required as of
December 31, 2016
and
2015
. Finite-lived intangibles are carried at cost and amortization is calculated using the straight-line method, generally over the estimated useful lives of the intangibles.
Impairment of long-lived assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than the carrying value of the assets, the Company measures the amount of impairment loss as the amount, by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not historically recorded any material impairment charges to its long-
lived assets and the Company did
not
record a material impairment charge to its long-lived assets during the year ended
December 31, 2016
or
2015
.
Valuation of investments:
The Company has an unsecured obligation to pay, in the future, the value of deferred compensation and a Company match relating to employee participation in the Company’s nonqualified deferred compensation plan (the “Deferred Compensation Plan”). See Note 9 for further information concerning the Company’s benefit plans. The future obligation is adjusted to reflect the performance, whether positive or negative, of selected investment measurement options, chosen by each participant. The Company invests in various marketable securities with the intention of selling these securities to fulfill its future obligations under the Deferred Compensation Plan. The investments in this plan were stated at fair value based on quoted market prices, were accounted for as trading securities and were included as a component of “Other assets, net” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
. See Note 2 for further information concerning the fair value measurements of the Company’s marketable securities.
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure. The Company estimates its self-insurance liabilities by considering a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. Certain of these liabilities were recorded at an estimate of their net present value, using a credit-adjusted discount rate.
The following table identifies the components of the Company’s self-insurance reserves as of
December 31, 2016
and
2015
(in thousands):
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December 31,
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|
2016
|
|
2015
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Self-insurance reserves (undiscounted)
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$
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138,687
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$
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141,173
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Self-insurance reserves (discounted)
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129,437
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131,990
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The current portion of the Company’s discounted self-insurance reserves totaled
$67.9 million
and
$72.7 million
as of
December 31, 2016
and
2015
, respectively, which was included in “Self-insurance reserves” on the accompanying Consolidate Balance Sheets as of
December 31, 2016
and
2015
. The remainder was included was included as a component of “Other liabilities” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
.
Warranties:
The Company offers warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims. For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims. Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales. Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line. The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims. See Note 7 for further information concerning the Company’s aggregate product warranty liabilities.
Litigation reserves:
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s business. The Company records reserves for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable loss. The Company reserves for an estimate of material legal costs to be incurred in pending litigation matters. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and reserves, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period. See Note 14 for further information concerning the Company’s litigation reserves.
Share repurchases:
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.
All shares repurchased under the share repurchase program are retired and recorded under the par value method on the accompanying Consolidated Balance Sheets. See Note 8 for further information concerning the Company’s share repurchase program.
Revenue recognition:
Over-the-counter retail sales are recorded when the customer takes possession of the merchandise. Sales to professional service provider customers, also referred to as “commercial sales,” are recorded upon same-day delivery of the merchandise to the customer, generally at the customer’s place of business. Wholesale sales to other retailers, also referred to as “jobber sales,” are recorded upon shipment of the merchandise from a regional DC with same-day delivery to the jobber customer’s location. Internet retail sales are recorded when the merchandise is shipped or when the merchandise is picked up in a store. All sales are recorded net of estimated returns allowances, discounts and taxes.
The Company maintains a retail loyalty program named O’Reilly O’Rewards, designed to build brand recognition. The program allows a retail customer to enroll at no charge, does not impose a membership fee and provides members with the ability to earn loyalty points by making qualifying purchases at the Company’s stores. Upon reaching established thresholds, the members are automatically issued coupons, which expire 90 days after issuance, have no cash value and may be redeemed for most items in the Company’s stores with a total purchase price equal to or greater than the value of the coupon. Points accrued in a member’s account, which have not been awarded to the member with a coupon, expire 12 months after the date that they were earned. The Company records a deferred revenue liability, based on a breakage adjusted estimated redemption rate, and a corresponding reduction in revenue in periods when loyalty points are earned by members. The Company recognizes revenue and a corresponding reduction to the deferred revenue liability in periods when loyalty program issued coupons are redeemed by members.
As of
December 31, 2016
and
2015
, the Company had recorded a deferred revenue liability of
$4.8 million
and
$7.2 million
, respectively, related to its loyalty program, which were included as a component of “Other liabilities” in the accompanying Consolidated Balance Sheets. During the year ended
December 31, 2016
and
2015
, the Company recognized
$12.7 million
and
$11.2 million
, respectively, of deferred revenue related to its loyalty program.
Cost of goods sold and selling, general and administrative expenses:
The following table illustrates the primary costs classified in each major expense category:
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Cost of goods sold, including warehouse and distribution expenses
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Selling, general and administrative expenses
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Total cost of merchandise sold, including:
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Payroll and benefit costs for store and corporate Team Members
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Freight expenses associated with acquiring merchandise and with moving merchandise inventories from the Company’s distribution centers to the stores
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Occupancy costs of store and corporate facilities
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Defective merchandise and warranty costs
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Depreciation and amortization related to store and corporate assets
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Supplier allowances and incentives, including:
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Vehicle expenses for store delivery services
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Allowances that are not reimbursements for specific, incremental and identifiable costs
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Self-insurance costs
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Cash discounts on payments to suppliers
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Closed store expenses
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Costs associated with the Company’s supply chain, including:
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Other administrative costs, including:
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Payroll and benefit costs
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Accounting, legal and other professional services
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Warehouse occupancy costs
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Bad debt, banking and credit card fees
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Transportation costs
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Supplies
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Depreciation
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Travel
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Inventory shrinkage
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Advertising costs
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Operating leases:
The Company recognizes rent expense on a straight-line basis over the lease terms of its stores, DCs and corporate offices. Generally, the lease term for stores and corporate offices is the base lease term and the lease term for DCs includes the base lease term plus certain renewal option periods, for which renewal is reasonably assured and failure to exercise the renewal option would result in a significant economic penalty. The Company’s policy is to amortize leasehold improvements associated with the Company’s operating leases over the lesser of the lease term or the estimated economic life of those assets. See Note 6 for further information concerning the Company’s operating leases.
Advertising expenses:
Advertising expense consists primarily of expenses related to the Company’s integrated marketing program, which includes television, radio, direct mail and newspaper distribution, in-store and online promotions, and sports and event sponsorships. The Company expenses advertising costs as incurred. The Company also participates in cooperative advertising arrangements with certain of its suppliers. Advertising expense, net of cooperative advertising allowances from suppliers that were incremental to the advertising program, specific to the product or event and identifiable for accounting purposes, total
$83.0 million
,
$79.3 million
and
$79.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, which were included as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
Share-based compensation and benefit plans:
The Company sponsors employee share-based benefit plans and employee and director share-based compensation plans. The Company recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the date of the grant, award or issuance. Share-based plans include stock option awards issued under the Company’s employee incentive plans and director stock plan, stock issued through the Company’s employee stock purchase plan and restricted stock awarded to employees and directors through other compensation plans. See Note 9 for further information concerning the Company’s share-based compensation and plans.
Pre-opening expenses:
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income as incurred. Costs associated with the opening of new distribution centers, which consist primarily of payroll and occupancy costs, are included as a component of “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, 2016
,
2015
and
2014
, were
$7.9 million
,
$7.4 million
and
$11.5 million
, respectively, which were included in “Interest expense” on the accompanying Consolidated Statements of Income.
In conjunction with the issuance or amendment of long-term debt instruments, the Company incurs various costs, including debt registration fees, accounting and legal fees and underwriter and book runner fees. Debt issuance costs related to the Company’s long-term unsecured senior notes are recorded as a reduction of the principal amount of the corresponding unsecured senior notes. Debt issuance costs related to the Company’s unsecured revolving credit facility are recorded as an asset. These debt issuance costs have been deferred and are being amortized over the term of the corresponding debt instrument and the amortization expense is included as a component of “Interest expense” on the accompanying Consolidated Statements of Income. Deferred debt issuance costs totaled
$10.6 million
and
$8.3 million
, net of accumulated amortization, as of
December 31, 2016
and
2015
, respectively, of which
$0.7 million
and
$1.2 million
were included as a component of “Other assets, net” as of
December 31, 2016
and
2015
, respectively, with the remainder included in “Long-term debt” on the accompanying Consolidated Balance Sheets.
The Company issued its long-term unsecured senior notes at a discount. The original issuance discount on the senior notes is recorded as a reduction of the principal amount due for the corresponding senior notes and is accreted over the term of the applicable senior note, with the accretion expense included as a component of “Interest expense” on the accompanying Consolidated Statements of Income. Original issuance discounts, net of accretion, totaled
$3.1 million
and
$2.9 million
as of
December 31, 2016
and
2015
, respectively.
See Note 5 for further information concerning debt issuance costs and original issuance discounts associated with the Company’s issuances of long-term debt instruments.
Income taxes:
The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on differences between the GAAP basis and tax basis of assets and liabilities using enacted tax rules and rates currently scheduled to be in effect for the year, in which the differences are expected to reverse. Tax carry forwards are also recognized in deferred tax assets and liabilities under this method. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date. The Company would record a valuation allowance against deferred tax assets to the extent it is more likely than not the amount will not be realized, based upon evidence available at the time of the determination and any change in the valuation allowance is recorded in the period of a change in such determination.
The Company did
not
establish a valuation allowance for deferred tax assets as of
December 31, 2016
and
2015
, 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. Changes in the Company’s tax liability may occur in the future as its assessments change based on the progress of tax examinations in various jurisdictions and/or changes in tax regulations. In management’s opinion, adequate provisions for income taxes have been made for all years presented. The estimates of the Company’s potential tax liabilities contain uncertainties because management must use judgment to estimate the exposures associated with the Company’s various tax positions and actual results could differ from estimates. See Note 12 for further information concerning the Company’s income taxes.
Earnings per share:
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the fiscal period. Diluted earnings per share is calculated by dividing the weighted-average number of common shares outstanding plus the common stock equivalents associated with the potential impact of dilutive stock options. Certain common stock equivalents that could potentially dilute basic earnings per share in the future were not included in the fully diluted computation because they would have been antidilutive. Generally, stock options are antidilutive and excluded from the earnings per share calculation when the exercise price exceeds the market price of the common shares. See Note 13 for further information concerning the Company’s common stock equivalents.
New accounting pronouncements:
In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity is required to follow a five-step process to determine the amount of revenue to recognize when promised goods or services are transferred to customers. ASU 2014-09 offers specific accounting guidance for costs to obtain or fulfill a contract with a customer. In addition, an entity is required to disclose sufficient information to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August of 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), to defer the effective date of ASU 2014-09 by one year. For public companies, ASU 2015-14 changes ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. These ASUs can be adopted retrospectively or as a cumulative-effective adjustment at the date of adoption, with early adoption allowed, but not before December 15, 2016. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The Company has established a task force, composed of multiple functional groups inside of the Company, that is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on the Company’s recognition of customer related accounts receivable, warranty costs that are not the responsibility of the Company’s suppliers, the application of the Company’s retail O’Rewards loyalty program and all applicable financial statement disclosures required by the new guidance. At this time, the task force has not completed its evaluation of the impact or means of adoption.
In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The Company has established a task force, composed of multiple functional groups inside of the Company, that is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company’s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the new guidance, all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force has not completed its full evaluation; however, the Company believes the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on the Company’s consolidated balance sheets.
In March of 2016, the FASB issued ASU No. 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”). ASU 2016-06 clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to the economic characteristics and risks of the debt hosts and requires entities to solely use the four-step decision sequence, which is already in existence, when assessing the embedded call or put options. For public companies, ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and can be adopted on a modified retrospective basis, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2017. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In March of 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, several aspects of the accounting for share-based payment transactions, including tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, were simplified. For public companies, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. ASU 2016-09 includes various adoption methods, depending on the guidance being adopted; amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method, while the amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively, the amendments requiring recognition of excess tax benefits and deficiencies in the income statement should be applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows should be applied either prospectively or retrospectively. The Company will adopt this guidance beginning with its first quarter ending March 31, 2017. The Company is in the process of evaluating the future impact this new guidance will have on its consolidated financial position, results of operations and cash flows, as well as which method of adoption is most appropriate. At this time, the Company anticipates the adoption of the new guidance will prospectively impact its reported provision for income taxes, net income, weighted-average common shares outstanding - assuming dilution and earnings per share - assuming dilution, as well as retrospectively and prospectively impact the Company’s reported net cash provided by/used in operating activities and net cash provided by/used in financing activities.
In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2020. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In August of 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice for eight specific parts on cash flow statement presentation and classification: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. For public companies, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In January of 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 revises the definition of a business in the Accounting Standards Codification and clarifies the guidance for determining whether the purchase or disposal of an asset or group of assets qualifies as the purchase or disposal of a business. For public companies, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires prospective adoption, with early adoption permitted with certain conditions. The Company will adopt this guidance beginning with its first quarter ending March 31, 2018. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In January of 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step in the previous process for goodwill impairment testing; instead the test is now a one-step process that calls for goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. For public companies, ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires prospective adoption, with early adoption after January 1, 2017. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The application of this new guidance is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
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 the Company’s marketable securities were included as a component of “Other assets, net” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
. The Company recorded an increase in fair value related to its marketable securities in the amount of
$1.9 million
for the
year ended
December 31, 2016
, and a decrease in the amount of
$0.2 million
for the year ended
December 31, 2015
, which were included in “Other income (expense)” on the accompanying Consolidated Statements of Income.
The tables below identify the estimated fair value of the Company’s marketable securities, determined by reference to quoted market prices (Level 1), as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total
|
Marketable securities
|
$
|
20,462
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total
|
Marketable securities
|
$
|
16,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,895
|
|
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, 2016
and
2015
, the Company did
not
have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.
Fair value of financial instruments:
The carrying amounts of the Company’s senior notes are included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
. See Note 5 for further information concerning the Company’s senior notes.
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, 2016
and
2015
, were determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Carrying Amount
|
|
Estimated Fair Value
|
$500 million, 4.875% Senior Notes due 2021
|
$
|
496,758
|
|
|
$
|
538,678
|
|
|
$
|
495,951
|
|
|
$
|
542,078
|
|
$300 million, 4.625% Senior Notes due 2021
|
298,679
|
|
|
321,633
|
|
|
298,396
|
|
|
319,620
|
|
$300 million, 3.800% Senior Notes due 2022
|
297,868
|
|
|
310,802
|
|
|
297,535
|
|
|
303,595
|
|
$300 million, 3.850% Senior Notes due 2023
|
298,355
|
|
|
307,860
|
|
|
$
|
298,136
|
|
|
$
|
302,468
|
|
$500 million, 3.550% Senior Notes due 2026
|
$
|
495,359
|
|
|
$
|
498,537
|
|
|
|
|
|
The accompanying Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts receivable, amounts receivable from suppliers and accounts payable. Due to the short-term nature of these financial instruments, the Company believes that the carrying values of these instruments approximate their fair values.
NOTE 3 – PROPERTY AND EQUIPMENT
The following table identifies the types and balances of property and equipment included in “Property and equipment, at cost” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
, and includes the estimated useful lives for its types of property and equipment (in thousands, except original useful lives):
|
|
|
|
|
|
|
|
|
|
|
|
Original Useful Lives
|
|
December 31, 2016
|
|
December 31, 2015
|
Land
|
|
|
$
|
648,689
|
|
|
$
|
590,244
|
|
Buildings and building improvements
|
15 – 39 years
|
|
1,805,347
|
|
|
1,603,389
|
|
Leasehold improvements
|
3 – 25 years
|
|
593,785
|
|
|
554,198
|
|
Furniture, fixtures and equipment
|
3 – 20 years
|
|
1,215,929
|
|
|
1,108,127
|
|
Vehicles
|
5 – 10 years
|
|
359,362
|
|
|
313,401
|
|
Construction in progress
|
|
|
209,230
|
|
|
202,891
|
|
Total property and equipment
|
|
|
4,832,342
|
|
|
4,372,250
|
|
Less: accumulated depreciation and amortization
|
|
|
1,708,911
|
|
|
1,510,694
|
|
Net property and equipment
|
|
|
$
|
3,123,431
|
|
|
$
|
2,861,556
|
|
The Company recorded depreciation and amortization expense related to property and equipment in the amounts of
$217.0 million
,
$203.4 million
and
$193.4 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, which were primarily included as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
NOTE 4 – GOODWILL AND OTHER INTANGIBLES
Goodwill:
Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if events or changes in business conditions indicate that impairment may exist. Goodwill is not amortizable for financial statement purposes. The Company did
not
record any goodwill impairment during the years ended
December 31, 2016
or
2015
.
The carrying amount of the Company’s goodwill was included in “Goodwill” on the accompanying Consolidate Balance Sheets as of
December 31, 2016
and
2015
. During the year ended
December 31, 2016
and
2015
, the Company recorded an increase in goodwill of
$28.3 million
and
$0.8 million
, respectively, resulting from small acquisitions.
The following table identifies the changes in goodwill for the years ended
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Goodwill, balance at January 1,
|
$
|
757,142
|
|
|
$
|
756,384
|
|
Change in goodwill
|
28,257
|
|
|
758
|
|
Goodwill, balance at December 31,
|
$
|
785,399
|
|
|
$
|
757,142
|
|
As of
December 31, 2016
and
2015
, other than goodwill, the Company did
not
have any other indefinite-lived intangible assets.
Intangibles other than goodwill:
The following table identifies the components of the Company’s amortizable intangibles as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Amortizable
Intangibles
|
|
Accumulated Amortization
(Expense) Benefit
|
|
Net Amortizable Intangibles
|
|
December 31,
2016
|
|
December 31,
2015
|
|
December 31,
2016
|
|
December 31,
2015
|
|
December 31,
2016
|
|
December 31,
2015
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Favorable leases
|
$
|
27,960
|
|
|
$
|
32,070
|
|
|
$
|
(18,104
|
)
|
|
$
|
(19,991
|
)
|
|
$
|
9,856
|
|
|
$
|
12,079
|
|
Non-compete agreements
|
1,887
|
|
|
732
|
|
|
(414
|
)
|
|
(409
|
)
|
|
1,473
|
|
|
323
|
|
Total amortizable intangible assets
|
$
|
29,847
|
|
|
$
|
32,802
|
|
|
$
|
(18,518
|
)
|
|
$
|
(20,400
|
)
|
|
$
|
11,329
|
|
|
$
|
12,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfavorable leases
|
$
|
19,950
|
|
|
$
|
28,580
|
|
|
$
|
15,840
|
|
|
$
|
22,415
|
|
|
$
|
4,110
|
|
|
$
|
6,165
|
|
During the years ended
December 31, 2016
and
2015
, the Company recorded non-compete agreement assets in conjunction with small acquisitions in the amounts of
$1.1 million
and
$0.2 million
, respectively.
The Company recorded favorable lease assets in conjunction with the acquisition of CSK Auto Corporation (“CSK”); these favorable lease assets represent the values of operating leases acquired with favorable terms. These favorable leases had an estimated weighted-average remaining useful life of approximately
9.0
years as of
December 31, 2016
. For the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded amortization expense of
$2.1 million
,
$2.7 million
and
$3.9 million
, respectively, related to its amortizable intangible assets, which were included as a component of “Other assets, net” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
.
The Company recorded unfavorable lease liabilities in conjunction with the acquisition of CSK; these unfavorable lease liabilities represent the values of operating leases acquired with unfavorable terms. These unfavorable leases had an estimated weighted-average remaining useful life of approximately
3.7 years
as of
December 31, 2016
. For the years ended
December 31, 2016
,
2015
and
2014
, the Company recognized an amortized benefit of
$2.1 million
,
$2.8 million
and
$3.7 million
, respectively, related to these unfavorable operating leases, which were included as a component of “Other liabilities” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
.
The following table identifies the estimated amortization expense and benefit of the Company’s intangibles for each of the next five years as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortization Expense
|
|
Amortization Benefit
|
|
Total Amortization Expense
|
2017
|
$
|
(2,072
|
)
|
|
$
|
1,493
|
|
|
$
|
(579
|
)
|
2018
|
(1,599
|
)
|
|
923
|
|
|
(676
|
)
|
2019
|
(1,377
|
)
|
|
712
|
|
|
(665
|
)
|
2020
|
(1,197
|
)
|
|
541
|
|
|
(656
|
)
|
2021
|
(969
|
)
|
|
389
|
|
|
(580
|
)
|
Total
|
$
|
(7,214
|
)
|
|
$
|
4,058
|
|
|
$
|
(3,156
|
)
|
NOTE 5 – FINANCING
The following table identifies the amounts of the Company’s financing facilities, which were included in “Long-term debt” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
$500 million, 4.875% Senior Notes due 2021
(1)
, effective interest rate of 4.959%
|
496,758
|
|
|
495,951
|
|
$300 million, 4.625% Senior Notes due 2021
(2)
, effective interest rate of 4.646%
|
298,679
|
|
|
298,396
|
|
$300 million, 3.800% Senior Notes due 2022
(3)
, effective interest rate of 3.845%
|
297,868
|
|
|
297,535
|
|
$300 million, 3.850% Senior Notes due 2023
(4)
, effective interest rate of 3.851%
|
298,355
|
|
|
$
|
298,136
|
|
$500 million, 3.550% Senior Notes due 2026
(5)
, effective interest rate of 3.570%
|
$
|
495,359
|
|
|
|
|
|
(1)
|
Net of unamortized discount of
$1.4 million
and
$1.8 million
as of
December 31, 2016
and
2015
, respectively, and debt issuance costs of
$1.8 million
and
$2.3 million
as of
December 31, 2016
and
2015
, respectively.
|
|
|
(2)
|
Net of unamortized discount of
$0.2 million
and
$0.3 million
as of
December 31, 2016
and
2015
, respectively, and debt issuance costs of
$1.1 million
and
$1.3 million
as of
December 31, 2016
and
2015
, respectively.
|
|
|
(3)
|
Net of unamortized discount of
$0.7 million
and
$0.8 million
as of
December 31, 2016
and
2015
, respectively, and debt issuance costs of
$1.5 million
and
$1.7 million
as of
December 31, 2016
and
2015
, respectively.
|
|
|
(4)
|
Net of unamortized discount of less than
$0.1 million
as of
December 31, 2016
and
2015
, and debt issuance costs of
$1.6 million
and
$1.8 million
as of
December 31, 2016
and
2015
, respectively.
|
|
|
(5)
|
Net of unamortized discount of
$0.8 million
as of
December 31, 2016
, and debt issuance costs of
$3.9 million
as of
December 31, 2016
.
|
The following table identifies the principal maturities of the Company’s financing facilities as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
Scheduled Maturities
|
2017
|
$
|
—
|
|
2018
|
—
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
|
800,000
|
|
Thereafter
|
1,100,000
|
|
Total
|
$
|
1,900,000
|
|
Unsecured revolving credit facility:
On January 14, 2011, the Company entered into a credit agreement, as amended by Amendment No. 1 dated as of September 9, 2011, as further amended by Amendment No. 2 dated as of July 2, 2013, and as further amended by Amendment No. 3 dated as of June 18, 2015 (the “Credit Agreement”). The Credit Agreement provides for a $600 million unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by Bank of America, N.A., which is scheduled to mature in July 2018. The Credit Agreement includes a $200 million sub-limit for the issuance of letters of credit and a $75 million sub-limit for swing line borrowings under the Revolving Credit Facility. As described in the Credit Agreement governing the Revolving Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $200 million.
As of
December 31, 2016
and
2015
, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amounts of
$38.7 million
and
$37.5 million
, respectively, reducing the aggregate availability under the Revolving Credit Facility by those amounts. As of
December 31, 2016
and
2015
, the Company had
no
outstanding borrowings under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company’s option, at the Base Rate or Eurodollar Rate (both as defined in the Credit Agreement) plus an applicable margin. Swing line loans made under the Revolving Credit Facility bear interest at the Base Rate plus the applicable margin for Base Rate loans. In addition, the Company pays a facility fee on the aggregate amount of the commitments in an amount equal to a percentage of such commitments. The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions. As of
December 31, 2016
, based upon the Company’s credit ratings, its margin for Base Rate loans was
0.000%
, its margin for Eurodollar Rate loans was
0.875%
and its facility fee was
0.125%
.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage ratio of 2.50 times and a maximum consolidated leverage ratio of 3.00 times. 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, six-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Fixed charges include interest expense, capitalized interest and rent expense. In the event that the Company 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 lenders.
As of December 31, 2016, the Company remained in compliance with all covenants under the Credit Agreement.
Senior notes:
On
March 8, 2016
, the Company issued
$500 million
aggregate principal amount of unsecured
3.550%
Senior Notes due 2026 (“3.550% Senior Notes due 2026”) at a price to the public of
99.832%
of their face value under its shelf registration statement with United Missouri Bank, N.A. (“UMB”) as trustee. Interest on the 3.550% Senior Notes due 2026 is payable on March 15 and September 15 of each year, which began with the first interest payment on September 15, 2016, and is computed on the basis of a
360
-day year.
The Company has issued a cumulative $1.9 billion aggregate principal amount of unsecured senior notes, which are due between January 2021 and March 2026 with UMB as trustee. Interest on the senior notes, ranging from 3.550% to 4.875%, is payable semi-annually and is computed on the basis of a 360-day year.
The senior notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries (“Subsidiary Guarantors”) that incurs or guarantees obligations under the Company’s Credit Agreement or under other credit facility or capital markets debt of the Company’s or any of the Company’s Subsidiary Guarantors. The guarantees are joint and several and full and unconditional, subject to certain customary automatic release provisions, including release of the Subsidiary Guarantor’s guarantee under the Company’s Credit Agreement
and certain other debt, or, in certain circumstances, the sale or other disposition of a majority of the voting power of the capital interest in, or of all or substantially all of the property of, the Subsidiary Guarantor. Each of the Subsidiary Guarantors is 100% owned, directly or indirectly, by the Company, and the Company has no independent assets or operations other than those of its subsidiaries. The only direct or indirect subsidiaries of the Company that would not be Subsidiary Guarantors would be minor subsidiaries. Neither the Company, nor any of its Subsidiary Guarantors, is subject to any material or significant restrictions on the Company’s ability to obtain funds from its subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by applicable law.
Each of the senior notes is subject to certain customary covenants, with which the Company complied as of December 31, 2016.
NOTE 6 – LEASING
The following table identifies the future minimum lease payments under all of the Company’s operating leases for each of the next five years and in the aggregate as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Related Parties
|
|
Non-Related Parties
|
|
Total
|
2017
|
$
|
4,634
|
|
|
$
|
271,544
|
|
|
$
|
276,178
|
|
2018
|
4,571
|
|
|
262,056
|
|
|
266,627
|
|
2019
|
3,099
|
|
|
244,564
|
|
|
247,663
|
|
2020
|
2,313
|
|
|
223,528
|
|
|
225,841
|
|
2021
|
1,846
|
|
|
200,411
|
|
|
202,257
|
|
Thereafter
|
5,546
|
|
|
1,032,556
|
|
|
1,038,102
|
|
Total
|
$
|
22,009
|
|
|
$
|
2,234,659
|
|
|
$
|
2,256,668
|
|
See Note 11 for further information concerning the Company’s related party operating leases.
Operating lease commitments:
The Company leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most of these leases include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or incremental step increase provisions.
The future minimum lease payments under the Company’s operating leases, in the table above, do not include potential amounts for percentage rent or other operating lease related costs and have not been reduced by expected future minimum sublease income. Expected future minimum sublease income under non-cancelable subleases is approximately
$20.5 million
at
December 31, 2016
.
The following table summarizes the net rent expense amounts for the years ended
December 31, 2016
,
2015
and
2014
, which were included as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Minimum operating lease expense
|
$
|
273,559
|
|
|
$
|
263,479
|
|
|
$
|
254,565
|
|
Contingent rents
|
892
|
|
|
947
|
|
|
759
|
|
Other lease related occupancy costs
|
13,241
|
|
|
12,852
|
|
|
11,688
|
|
Total rent expense
|
287,692
|
|
|
277,278
|
|
|
267,012
|
|
Less: sublease income
|
4,439
|
|
|
4,019
|
|
|
3,984
|
|
Net rent expense
|
$
|
283,253
|
|
|
$
|
273,259
|
|
|
$
|
263,028
|
|
NOTE 7 – WARRANTIES
The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
. The following table identifies the changes in the Company’s aggregate product warranty liabilities for the years ended
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Warranty liabilities, balance at January 1,
|
$
|
35,223
|
|
|
$
|
34,226
|
|
Warranty claims
|
(73,925
|
)
|
|
(61,819
|
)
|
Warranty accruals
|
75,325
|
|
|
62,816
|
|
Warranty liabilities, balance at December 31,
|
$
|
36,623
|
|
|
$
|
35,223
|
|
NOTE 8 – SHARE REPURCHASE PROGRAM
In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on
February 10, 2016
,
May 27, 2016
, and
November 16, 2016
, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional
$750 million
, resulting in a cumulative authorization amount of
$7.8 billion
. Each additional authorization is effective for a
three
-year period, beginning on its respective announcement date.
The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly announced share repurchase program (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
Shares repurchased
|
5,698
|
|
|
4,901
|
|
Average price per share
|
$
|
264.21
|
|
|
$
|
231.81
|
|
Total investment
|
$
|
1,505,371
|
|
|
$
|
1,136,139
|
|
As of
December 31, 2016
, the Company had
$887.8 million
remaining under its share repurchase program. Subsequent to the end of the year and through
February 28, 2017
, the Company repurchased an additional
1.4 million
shares of its common stock under its share repurchase program, at an average price of
$267.32
, for a total investment of
$387.5 million
. The Company has repurchased a total of
58.4 million
shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through
February 28, 2017
, at an average price of
$124.14
, for a total aggregate investment of
$7.2 billion
.
NOTE 9 – SHARE-BASED COMPENSATION AND BENEFIT PLANS
The Company recognizes share-based compensation expense based on the fair value of the grants, awards or shares at the time of the grant, award or issuance. Share-based compensation includes stock option awards issued under the Company’s employee incentive plans and director stock plan, restricted stock awarded under the Company’s employee incentive plans, performance incentive plan and director stock plan, stock issued through the Company’s employee stock purchase plan and stock awarded to employees through other benefit programs.
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, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Plans
|
|
Total Shares Authorized for Issuance under the Plans
|
|
Shares Available for Future Issuance under the Plans
|
Employee Incentive Plans
|
|
34,000
|
|
|
6,086
|
|
Director Stock Plan
|
|
1,000
|
|
|
263
|
|
Performance Incentive Plan
|
|
650
|
|
|
388
|
|
Employee Stock Purchase Plans
|
|
4,250
|
|
|
710
|
|
Profit Sharing and Savings Plan
|
|
4,200
|
|
|
349
|
|
Stock options:
The Company’s employee incentive plans provide for the granting of stock options for the purchase of common stock of the Company to certain key employees of the Company. Employee stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant.
Employee stock options granted under the plans expire after
ten
years and typically vest
25%
per year, over
four
years. The Company records compensation expense for the grant date fair value of the option awards, adjusted for estimated forfeitures, evenly over the minimum required service period.
The table below identifies the employee stock option activity under these plans during the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-Average Exercise Price
|
|
Average Remaining Contractual Terms
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding at December 31, 2015
|
3,291
|
|
|
$
|
81.04
|
|
|
|
|
|
Granted
|
308
|
|
|
267.00
|
|
|
|
|
|
Exercised
|
(751
|
)
|
|
62.81
|
|
|
|
|
|
Forfeited or expired
|
(59
|
)
|
|
144.91
|
|
|
|
|
|
Outstanding at December 31, 2016
|
2,789
|
|
|
$
|
105.11
|
|
|
5.1 Years
|
|
$
|
483,331
|
|
Vested or expected to vest at December 31, 2016
|
2,744
|
|
|
$
|
103.29
|
|
|
5.0 Years
|
|
$
|
480,582
|
|
Exercisable at December 31, 2016
|
2,027
|
|
|
$
|
65.45
|
|
|
3.9 Years
|
|
$
|
431,637
|
|
The Company’s director stock plan provides for the granting of stock options for the purchase of common stock of the Company to directors of the Company. Director stock options are granted at an exercise price that is equal to the closing market price of the Company’s common stock on the date of the grant.
Director stock options granted under the plans expire after
seven
years and vest fully after
six
months. The Company records compensation expense for the grant date fair value of the option awards evenly over the vesting period.
The table below identifies the director stock option activity under this plan during the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-Average Exercise Price
|
|
Average Remaining Contractual Terms
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding at December 31, 2015
|
17
|
|
|
$
|
45.13
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(6
|
)
|
|
39.99
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2016
|
11
|
|
|
$
|
48.31
|
|
|
0.3 Years
|
|
$
|
2,416
|
|
Vested or expected to vest at December 31, 2016
|
11
|
|
|
$
|
48.31
|
|
|
0.3 Years
|
|
$
|
2,416
|
|
Exercisable at December 31, 2016
|
11
|
|
|
$
|
48.31
|
|
|
0.3 Years
|
|
$
|
2,416
|
|
The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of assumptions, including the risk free rate, expected life, expected volatility and expected dividend yield.
|
|
•
|
Risk-free interest rate
– The United States Treasury rates in effect at the time the options are granted for the options’ expected life.
|
|
|
•
|
Expected life
– Represents the period of time that options granted are expected to be outstanding. The Company uses historical experience to estimate the expected life of options granted.
|
|
|
•
|
Expected volatility
– Measure of the amount, by which the Company’s stock price is expected to fluctuate, based on a historical trend.
|
|
|
•
|
Expected dividend yield
–
The Company has not paid, nor does it have plans in the foreseeable future to pay, any dividends.
|
The table below identifies the weighted-average assumptions used for grants awarded during the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Risk free interest rate
|
1.44
|
%
|
|
1.52
|
%
|
|
1.60
|
%
|
Expected life
|
5.5 Years
|
|
|
5.7 Years
|
|
|
5.3 Years
|
|
Expected volatility
|
22.3
|
%
|
|
22.3
|
%
|
|
24.3
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The Company’s forfeiture rate is the estimated percentage of options awarded that are expected to be forfeited or canceled prior to becoming fully vested. The Company’s estimate is evaluated periodically and is based upon historical experience at the time of evaluation and reduces expense ratably over the vesting period or the minimum required service period.
The following table summarizes activity related to stock options awarded by the Company for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Compensation expense for stock options awarded (in thousands)
|
$
|
15,404
|
|
|
$
|
18,209
|
|
|
$
|
18,705
|
|
Income tax benefit from compensation expense related to stock options (in thousands)
|
5,753
|
|
|
6,811
|
|
|
6,923
|
|
Total intrinsic value of stock options exercised (in thousands)
|
157,115
|
|
|
169,248
|
|
|
147,236
|
|
Cash received from exercise of stock options (in thousands)
|
47,394
|
|
|
105,822
|
|
|
59,594
|
|
Weighted-average grant-date fair value of options awarded
|
$
|
63.42
|
|
|
$
|
51.56
|
|
|
$
|
38.18
|
|
Weighted-average remaining contractual life of exercisable options
|
3.9 Years
|
|
|
4.2 Years
|
|
|
4.6 Years
|
|
At
December 31, 2016
, the remaining unrecognized compensation expense related to unvested stock option awards was
$26.4 million
, and the weighted-average period of time, over which this cost will be recognized, is
2.6 years
.
Restricted stock:
The Company’s performance incentive plans provide for the award of shares of restricted stock to its corporate and senior management that vest evenly over a three-year period and are held in escrow until such vesting has occurred. Generally, unvested shares are forfeited when an employee ceases employment. The fair value of shares awarded under these plans is based on the closing market price of the Company’s common stock on the date of award and compensation expense is recorded over the minimum required service period.
The table below identifies the employee restricted stock activity under these plans during the year ended
December 31, 2016
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested at December 31, 2015
|
7
|
|
|
$
|
128.27
|
|
Granted during the period
|
1
|
|
|
256.34
|
|
Vested during the period
(1)
|
(5
|
)
|
|
140.91
|
|
Forfeited during the period
|
—
|
|
|
150.85
|
|
Non-vested at December 31, 2016
|
3
|
|
|
$
|
204.33
|
|
|
|
(1)
|
Includes
two thousand
shares withheld to cover employees’ taxes upon vesting.
|
The Company’s director stock plan provides for the award of shares of restricted stock to the directors of the Company that vest evenly over a three-year period and are held in escrow until such vesting has occurred. Unvested shares are forfeited when a director ceases their service on the Company’s Board of Directors for reasons other than death or retirement. The fair value of shares awarded under this plan is based on the closing market price of the Company’s common stock on the date of award, and compensation expense is recorded evenly over the vesting period.
The table below identifies the director restricted stock activity under this plan during the year ended
December 31, 2016
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested at December 31, 2015
|
7
|
|
|
$
|
167.73
|
|
Granted during the period
|
2
|
|
|
268.54
|
|
Vested during the period
|
(3
|
)
|
|
149.49
|
|
Forfeited during the period
|
—
|
|
|
—
|
|
Non-vested at December 31, 2016
|
6
|
|
|
$
|
222.77
|
|
The following table summarizes activity related to restricted stock awarded by the Company for the years ended
December 31, 2016
,
2015
and
2014
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Compensation expense for restricted shares awarded
|
$
|
1,293
|
|
|
$
|
1,625
|
|
|
$
|
2,621
|
|
Income tax benefit from compensation expense related to restricted shares
|
$
|
483
|
|
|
$
|
610
|
|
|
$
|
970
|
|
Total fair value of restricted shares at vest date
|
$
|
2,384
|
|
|
$
|
3,284
|
|
|
$
|
3,749
|
|
Shares awarded under the plans
|
4
|
|
|
4
|
|
|
16
|
|
Weighted-average grant-date fair value of shares awarded under the plans
|
$
|
264.24
|
|
|
$
|
208.56
|
|
|
$
|
147.23
|
|
At
December 31, 2016
, the remaining unrecognized compensation expense related to unvested restricted share awards was
$0.9 million
, and the weighted-average period of time, over which this cost will be recognized, is
0.1
years
.
Employee stock purchase plan:
The Company’s employee stock purchase plan (the “ESPP”) permits eligible employees to purchase shares of the Company’s common stock at 85% of the fair market value. Employees may authorize the Company to withhold up to 5% of their annual salary to participate in the plan.
The fair value of shares issued under the ESPP is based on the average of the high and low market prices of the Company’s common stock during the offering periods. Compensation expense is recognized based on the discount between the grant-date fair value and the employee purchase price for the shares sold to employees.
The following table summarizes activity related to the Company’s ESPP for the years ended
December 31, 2016
,
2015
and
2014
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Compensation expense for shares issued under the ESPP
|
$
|
2,162
|
|
|
$
|
2,065
|
|
|
$
|
1,769
|
|
Income tax benefit from compensation expense for shares issued under the ESPP
|
$
|
807
|
|
|
$
|
773
|
|
|
$
|
655
|
|
Shares issued under the ESPP
|
54
|
|
|
60
|
|
|
77
|
|
Weighted-average price of shares issued under the ESPP
|
$
|
227.12
|
|
|
$
|
195.04
|
|
|
$
|
130.12
|
|
Profit sharing and savings plan:
The Company sponsors a contributory profit sharing and savings plan (the “401(k) Plan”) that covers substantially all employees who are at least 21 years of age and have completed one year of service. The Company makes matching contributions equal to 100% of the first 2% of each employee’s wages that are contributed and 25% of the next 4% of each employee’s wages that are contributed.
An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned.
The Company may also make additional discretionary profit sharing contributions to the plan on an annual basis as determined by the Board of Directors. The Company did
not
make any discretionary contributions to the 401(k) Plan during the years ended
December 31, 2016
,
2015
or
2014
. The Company expensed matching contributions under the 401(k) Plan in the amounts of
$20.6 million
,
$18.5 million
and
$16.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, which were included as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
Nonqualified deferred compensation plan:
The Company sponsors a nonqualified deferred compensation plan (the “Deferred Compensation Plan”) for highly compensated employees whose contributions to the 401(k) Plan are limited due to the application of the annual limitations under the Internal Revenue Code. The Deferred Compensation Plan provides these employees with the opportunity to defer the full 6% of matched compensation, including salary and incentive based compensation, that was precluded under the Company’s 401(k) Plan, which is then matched by the Company using the same formula as the 401(k) Plan.
An employee generally must be employed on December 31 to receive that year’s Company matching contribution, with the matching contribution funded annually at the beginning of the subsequent year following the year in which the matching contribution was earned. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The Company has an unsecured obligation to pay, in the future, the value of the deferred compensation and Company match, adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. The liability for compensation deferred under the Deferred Compensation Plan was
$20.5 million
and
$16.9 million
as of
December 31, 2016
and
2015
, respectively, which were included as a component of “Other liabilities” on the Consolidated Balance Sheets. The Company expensed matching contributions under the Deferred Compensation Plan in the amounts of
$0.1 million
,
$0.1 million
and
$0.2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, which were included as a component of “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Income.
NOTE 10 – COMMITMENTS
Construction commitments:
As of
December 31, 2016
, the Company had construction commitments in the amount of
$79.6 million
.
Letters of credit commitments:
As of
December 31, 2016
, the Company had outstanding letters of credit, primarily to satisfy workers’ compensation, general liability and other insurance policies, in the amount of
$38.7 million
. See Note 5 for further information concerning the Company’s letters of credit commitments.
Debt financing commitments:
The Company’s senior notes are redeemable in whole, at any time, or in part, from time to time, at the Company’s option upon not less than
30
nor more than
60
days notice at a redemption price, plus any accrued and unpaid interest to, but not including the redemption date, equal to the greater of (i)
100%
of the principal amount thereof or (ii) the sum of the present value of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semiannual basis at the applicable Treasury Yield plus basis points identified in the indentures governing the notes. In addition, if at any time the Company undergoes a Change of Control Triggering Event, as defined in the indentures governing the notes, the holders may require the Company to repurchase all or a portion of their senior notes at a price equal to
101%
of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, but not including the repurchase date. See Note 5 for further information concerning the Company’s debt financing commitments.
Self-insurance reserves:
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for Team Member health care benefits, workers’ compensation, vehicle liability, general liability and property loss. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, the Company obtains third-party insurance coverage to limit its exposure to this obligation.
NOTE 11 – RELATED PARTIES
The Company leases certain land and buildings related to
75
of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating lease agreements with entities, in which certain of the Company’s affiliated directors, or members of an affiliated director’s immediate family, and an executive officer of the Company are affiliated. Generally, these lease agreements provide for renewal options for an additional five years at the option of the Company and the lease agreements are periodically modified to further extend the lease term for specific stores under the agreements. Lease payments under these operating leases totaled
$4.5 million
,
$4.5 million
and
$4.6 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively. The Company believes that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties. See Note 6 for further information concerning the Company’s operating leases.
NOTE 12 – INCOME TAXES
Deferred income tax assets and liabilities:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.
The following table identifies significant components of the Company’s net deferred tax liabilities included in “Deferred income taxes” on the accompanying Consolidated Balance Sheets as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Allowance for doubtful accounts
|
$
|
2,686
|
|
|
$
|
2,492
|
|
Tax credits
|
9,363
|
|
|
11,747
|
|
Other accruals
|
153,955
|
|
|
151,635
|
|
Net operating losses
|
304
|
|
|
337
|
|
Other
|
19,870
|
|
|
19,051
|
|
Total deferred tax assets
|
186,178
|
|
|
185,262
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Inventories
|
76,694
|
|
|
82,313
|
|
Property and equipment
|
157,228
|
|
|
141,930
|
|
Other
|
42,422
|
|
|
40,791
|
|
Total deferred tax liabilities
|
276,344
|
|
|
265,034
|
|
|
|
|
|
Net deferred tax liabilities
|
$
|
(90,166
|
)
|
|
$
|
(79,772
|
)
|
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, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31, 2016
|
|
Current
|
|
Deferred
|
|
Total
|
Federal income tax expense
|
$
|
540,090
|
|
|
$
|
7,558
|
|
|
$
|
547,648
|
|
State income tax expense
|
49,016
|
|
|
2,836
|
|
|
51,852
|
|
Net income tax expense
|
$
|
589,106
|
|
|
$
|
10,394
|
|
|
$
|
599,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31, 2015
|
|
Current
|
|
Deferred
|
|
Total
|
Federal income tax expense (benefit)
|
$
|
504,558
|
|
|
$
|
(21,973
|
)
|
|
$
|
482,585
|
|
State income tax expense (benefit)
|
47,242
|
|
|
(677
|
)
|
|
46,565
|
|
Net income tax expense (benefit)
|
$
|
551,800
|
|
|
$
|
(22,650
|
)
|
|
$
|
529,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31, 2014
|
|
Current
|
|
Deferred
|
|
Total
|
Federal income tax expense
|
$
|
399,271
|
|
|
$
|
5,987
|
|
|
$
|
405,258
|
|
State income tax expense (benefit)
|
43,242
|
|
|
(4,500
|
)
|
|
38,742
|
|
Net income tax expense
|
$
|
442,513
|
|
|
$
|
1,487
|
|
|
$
|
444,000
|
|
The following table outlines the reconciliation of the “Provision for income taxes” amounts included on the accompanying Consolidated Statements of Income to the amounts computed at the federal statutory rate for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Federal income taxes at statutory rate
|
$
|
573,020
|
|
|
$
|
511,128
|
|
|
$
|
427,764
|
|
State income taxes, net of federal tax benefit
|
35,285
|
|
|
32,137
|
|
|
25,320
|
|
Other items, net
|
(8,805
|
)
|
|
(14,115
|
)
|
|
(9,084
|
)
|
Total provision for income taxes
|
$
|
599,500
|
|
|
$
|
529,150
|
|
|
$
|
444,000
|
|
The excess tax benefit associated with the exercise of non-qualified stock options has been included within “Additional paid-in capital” on the accompanying Consolidated Balance Sheets.
As of
December 31, 2016
, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of
$9.4 million
. As of
December 31, 2016
, the Company had net operating loss carryforwards available for state purposes in the amount of
$9.8 million
. The Company’s state net operating loss carryforwards generally expire in years ranging from
2022
to
2028
, and the Company’s tax credits generally expire in
2024
.
Unrecognized tax benefits:
The following table summarizes the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Unrealized tax benefit, balance at January 1,
|
$
|
36,928
|
|
|
$
|
49,598
|
|
|
$
|
50,459
|
|
Additions based on tax positions related to the current year
|
6,116
|
|
|
5,405
|
|
|
4,665
|
|
Additions based on tax positions related to prior years
|
—
|
|
|
995
|
|
|
—
|
|
Payments related to items settled with taxing authorities
|
(195
|
)
|
|
(4,012
|
)
|
|
(300
|
)
|
Reductions due to the lapse of statute of limitations and settlements
|
(8,051
|
)
|
|
(15,058
|
)
|
|
(5,226
|
)
|
Unrealized tax benefit, balance at December 31,
|
$
|
34,798
|
|
|
$
|
36,928
|
|
|
$
|
49,598
|
|
For the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of
$40.6 million
,
$43.6 million
and
$58.4 million
, respectively. All of the unrecognized tax benefits recorded as of
December 31, 2016
,
2015
and
2014
, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately
$13.8 million
. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of
December 31, 2016
,
2015
and
2014
, the Company had accrued approximately
$5.8 million
,
$6.7 million
and
$8.8 million
, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for interest on state and federal returns. During the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of
$2.4 million
,
$2.8 million
and
$2.8 million
, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during
2017
, the Company expects a reduction of
$7.4 million
of unrecognized tax benefits during the one-year period subsequent to
December 31, 2016
, resulting from settlement or expiration of the statute of limitations.
The Company’s United States federal income tax returns for tax years 2015 and beyond remain subject to examination by the Internal Revenue Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2012 and 2013 federal income tax returns in the second quarter of 2015. The statute of limitations for the Company’s federal income tax returns for tax years 2012 and prior expired on September 15, 2016. The statute of limitations for the Company’s U.S. federal income tax return for 2013 will expire on September 15, 2017, unless otherwise extended. The IRS is currently conducting an examination of the Company’s consolidated returns for tax years 2014 and 2015. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2005 through 2015.
NOTE 13 – EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings per share for the years ended
December 31, 2016
,
2015
and
2014
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator (basic and diluted):
|
|
|
|
|
|
Net income
|
$
|
1,037,691
|
|
|
$
|
931,216
|
|
|
$
|
778,182
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average common shares outstanding – basic
|
95,447
|
|
|
99,965
|
|
|
104,262
|
|
Effect of stock options
(1)
|
1,273
|
|
|
1,549
|
|
|
1,779
|
|
Weighted-average common shares outstanding – assuming dilution
|
96,720
|
|
|
101,514
|
|
|
106,041
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Earnings per share-basic
|
$
|
10.87
|
|
|
$
|
9.32
|
|
|
$
|
7.46
|
|
Earnings per share-assuming dilution
|
$
|
10.73
|
|
|
$
|
9.17
|
|
|
$
|
7.34
|
|
|
|
|
|
|
|
Antidilutive potential common shares not included in the calculation of diluted earnings per share:
|
|
|
|
|
|
Stock options
(1)
|
332
|
|
|
245
|
|
|
363
|
|
Weighted-average exercise price per share of antidilutive stock options
(1)
|
$
|
265.77
|
|
|
$
|
216.29
|
|
|
$
|
151.65
|
|
|
|
(1)
|
See Note 9 for further information concerning the terms of the Company’s share-based compensation plans.
|
Subsequent to the end of the year and through
February 28, 2017
, the Company repurchased
1.4 million
shares of its common stock, at an average price of
$267.32
, for a total investment of
$387.5 million
.
NOTE 14 – LEGAL MATTERS
As previously reported, the Company received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial offices in the state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste. On November 30, 2016, the Company through its affiliates, entered into a Stipulation for Entry of Final Judgment and Permanent Injunction, including certain injunctive and monetary relief within the previously established accruals.
As previously reported, on June 18, 2015, a jury in Greene County, Missouri returned an unfavorable verdict in a litigated contract dispute in the matter
Meridian Creative Alliance
vs. O’Reilly Automotive Stores, Inc. et. al.
in the amount of
$12.5 million
. The Company strongly believes that the verdict was unjust and unsupported by the law and the underlying facts and, further, that there are several potential bases for reversal on appeal. The Company has vigorously challenged the verdict in the Court of Appeals. Following the matter being fully briefed by the parties, oral argument was held in the Court of Appeals on January 12, 2017. The Court currently has the matter under consideration. As of
December 31, 2016
, the Company had reserved
$18.6 million
with respect to this matter.
NOTE 15 – QUARTERLY RESULTS (Unaudited)
The following tables set forth certain quarterly unaudited operating data for the fiscal years ended
December 31, 2016
and
2015
. 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 2016
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Sales
|
$
|
2,096,150
|
|
|
$
|
2,176,689
|
|
|
$
|
2,220,955
|
|
|
$
|
2,099,302
|
|
Gross profit
|
1,097,579
|
|
|
1,127,179
|
|
|
1,170,026
|
|
|
1,114,227
|
|
Operating income
|
418,626
|
|
|
425,061
|
|
|
447,809
|
|
|
407,710
|
|
Net income
|
255,374
|
|
|
257,794
|
|
|
278,493
|
|
|
246,030
|
|
Earnings per share – basic
(1)
|
$
|
2.63
|
|
|
$
|
2.69
|
|
|
$
|
2.93
|
|
|
$
|
2.62
|
|
Earnings per share – assuming dilution
(1)
|
$
|
2.59
|
|
|
$
|
2.65
|
|
|
$
|
2.90
|
|
|
$
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Sales
|
$
|
1,901,903
|
|
|
$
|
2,035,518
|
|
|
$
|
2,080,201
|
|
|
$
|
1,949,052
|
|
Gross profit
|
986,959
|
|
|
1,058,791
|
|
|
1,089,254
|
|
|
1,027,639
|
|
Operating income
|
350,373
|
|
|
385,768
|
|
|
415,260
|
|
|
362,620
|
|
Net income
|
212,864
|
|
|
233,508
|
|
|
266,268
|
|
|
218,576
|
|
Earnings per share – basic
(1)
|
$
|
2.09
|
|
|
$
|
2.32
|
|
|
$
|
2.68
|
|
|
$
|
2.22
|
|
Earnings per share – assuming dilution
(1)
|
$
|
2.06
|
|
|
$
|
2.29
|
|
|
$
|
2.64
|
|
|
$
|
2.19
|
|
|
|
(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.