Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” or “O’Reilly,” refer to O’Reilly Automotive, Inc. and its subsidiaries.
In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including
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an overview of the key drivers of the automotive aftermarket industry;
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recent developments within our Company;
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our results of operations for the
three and six
months ended
June 30, 2019
and
2018
;
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our liquidity and capital resources;
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any contractual obligations, to which we are committed;
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our critical accounting estimates;
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the inflation and seasonality of our business; and
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recent accounting pronouncements that may affect our Company.
The review of Management’s Discussion and Analysis should be made in conjunction with our condensed consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this quarterly report.
FORWARD-LOOKING STATEMENTS
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “estimate,” “may,” “could,” “will,” “believe,” “expect,” “would,” “consider,” “should,” “anticipate,” “project,” “plan,” “intend” or similar words. In addition, statements contained within this quarterly report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the economy in general, inflation, tariffs, product demand, the market for auto parts, competition, weather, risks associated with the performance of acquired businesses, our ability to hire and retain qualified employees, consumer debt levels, our increased debt levels, credit ratings on public debt, governmental regulations, information security and cyber-attacks, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section of our annual report on Form 10-K for the year ended
December 31, 2018
, and subsequent Securities and Exchange Commission filings for additional factors that could materially affect our financial performance. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
OVERVIEW
We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both do-it-yourself (“DIY”) customers and professional service providers – our “dual market strategy.” Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment. Our extensive product line includes an assortment of products that are differentiated by quality and price for most of the product lines we offer. For many of our product offerings, this quality differentiation reflects “good,” “better,” and “best” alternatives. Our sales and total gross margin dollars are highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point on the value spectrum is a driver of sales and profitability in our industry. Our stores also offer enhanced services and programs to our customers, including used oil, oil filter and battery recycling; battery, wiper and bulb replacement; battery diagnostic testing; electrical and module testing; check engine light code extraction; loaner tool program; drum and rotor resurfacing; custom hydraulic hoses; professional paint shop mixing and related materials; and machine shops.
Our strategy is to open new stores to achieve greater penetration into existing markets and expansion into new, contiguous markets. We typically open new stores either by (i) constructing a new facility or renovating an existing one on property we purchase or lease and stocking the new store with fixtures and inventory; (ii) acquiring an independently owned auto parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store; or (iii) purchasing multi-store chains. We plan to open
200
to
210
net, new stores in
2019
and will net an additional
20
stores, as we merged
13
of the acquired
33
Bennett Auto Supply, Inc. (“Bennett”) stores into existing O’Reilly stores during 2019. We believe our investment in store growth will be funded with the cash
flows expected to be generated by our existing operations and through available borrowings under our existing unsecured revolving credit facility. During the three months ended
June 30, 2019
, we opened
43
stores, merged
five
of the acquired Bennett stores and did not close any stores and, as of that date, operated
5,344
stores in
47
states.
Operating within the retail industry, we are influenced by a number of general macroeconomic factors including, but not limited to, fuel costs, unemployment rates, consumer preferences and spending habits, and competition. We have ongoing initiatives aimed at tailoring our product offering to adjust to customers’ changing preferences, and we also have initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.
We believe the key drivers of current and future demand for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations, average vehicle age and unemployment.
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Number of Miles Driven
– The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately
three trillion
miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation. According to the Department of Transportation, the number of total miles driven in the U.S. increased 0.4%, 1.2% and 2.4% in 2018, 2017 and 2016, respectively, and through
May
of 2019, year-to-date miles driven increased
1.0%
. We would expect to continue to see modest improvements in total miles driven in the U.S., supported by an increasing number of registered vehicles on the road, resulting in continued demand for automotive aftermarket products.
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Number of U.S. Registered Vehicles, New Light Vehicle Registrations and Average Vehicle Age
– The total number of vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the automotive aftermarket industry. As reported by The Auto Care Association, the total number of registered vehicles increased
8.1%
from 2008 to 2018, bringing the number of light vehicles on the road to
272 million
by the end of 2018. For the year ended December 31, 2018, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately
17.5 million
, and for 2019, the SAAR is estimated to be approximately
17.3 million
, contributing to the continued growth in the total number of registered vehicles on the road. In the past decade, vehicle scrappage rates have remained relatively stable, ranging from
4.4%
to
5.7
% annually. As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing
20.6%
, from
9.7
years in 2008 to
11.7
years in 2018. We believe this increase in average age can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains and interiors and exteriors, and the consumer’s willingness to invest in maintaining these higher-mileage, better built vehicles. As the average age of vehicles on the road increases, a larger percentage of miles are being driven by vehicles that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet, will support continued demand for automotive aftermarket products.
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Unemployment
– Unemployment, underemployment, the threat of future joblessness and the uncertainty surrounding the overall economic health of the U.S. have a negative impact on consumer confidence and the level of consumer discretionary spending. Long-term trends of high unemployment have historically impeded the growth of annual miles driven, as well as decrease consumer discretionary spending, both of which negatively impact demand for products sold in the automotive aftermarket industry. The U.S. unemployment rate was
3.9%
as of December 31, 2018, and as of
June 30, 2019
, the U.S. unemployment rate decreased to
3.7%
. We believe total employment should remain at healthy levels supporting the trend of modest growth of total miles driven in the U.S. and the continued demand for automotive aftermarket products.
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We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values of hard work and excellent customer service.
RECENT DEVELOPMENTS
After the close of business on December 31, 2018, we completed an asset purchase of Bennett, a privately held automotive parts supplier operating
33
stores and a warehouse in Florida. Beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, consolidated financial statements and results of operations.
RESULTS OF OPERATIONS
Sales:
Sales for the three months ended
June 30, 2019
, increased
$134 million
or
5%
to
$2.59 billion
from
$2.46 billion
for the same period one year ago. Sales for the
six
months ended
June 30, 2019
, increased
$262 million
or
6%
to
$5.00 billion
from
$4.74 billion
for the same period one year ago. Comparable store sales for stores open at least one year increased
3.4%
and
4.6%
for the three months ended
June 30, 2019
and
2018
, respectively. Comparable store sales for stores open at least one year increased
3.3%
and
4.0%
for the
six
months ended
June 30, 2019
and
2018
, respectively. Comparable store sales are calculated based on the change in sales for stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members. Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation.
The following table presents the components of the increase in sales for the
three and six
months ended
June 30, 2019
(in millions):
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Increase in Sales for the Three Months Ended
June 30, 2019
Compared to the Same Period in 2018
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Increase in Sales for the Six Months Ended
June 30, 2019,
Compared to the Same Period in 2018
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Store sales:
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Comparable store sales
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$
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81
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$
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153
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Non-comparable store sales:
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Sales for stores opened throughout 2018, excluding stores open at least one year that are included in comparable store sales
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28
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69
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Sales for stores opened throughout 2019 and sales from the acquired Bennett stores
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26
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45
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Decline in sales for stores that have closed
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(2
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(6
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)
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Non-store sales:
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Includes sales of machinery and sales to independent parts stores and Team Members
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1
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1
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Total increase in sales
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$
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134
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$
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262
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We believe the increased sales achieved by our stores are the result of store growth, the acquisition of Bennett, the high levels of customer service provided by our well-trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory in our regional distribution centers, enhanced services and programs offered in our stores, a broader selection of product offerings in most stores with a dynamic catalog system to identify and source parts, a targeted promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of our stores, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers.
Our comparable store sales increases for the three and six months ended June 30, 2019, were driven by an increase in average ticket values for both DIY and professional service provider customers, partially offset by flat transaction counts, comprised of negative transaction counts for DIY customers, offset by positive transaction counts for professional service provider customers. The improvements in average ticket values were the result of the increasing complexity and cost of replacement parts necessary to maintain the current population of vehicles and increased selling prices on a SKU-by-SKU basis, as compared to the prior year. The increased complexity and replacement costs are a result of the current population of better-engineered and more technically advanced vehicles that require less frequent repairs, as the component parts are more durable and last for longer periods of time, creating pressure on customer transaction counts; however, when repairs are needed, the cost of replacement parts is, on average, greater, benefiting average ticket values. The increase in selling prices on a SKU-by-SKU basis was driven by increases in acquisition costs of inventory, which were passed on in market prices. Transaction counts for the three and six months ended June 30, 2019, as compared to the same period in the prior year, were negatively impacted by an above average amount of precipitation in many of our markets, which is a headwind to DIY business in particular. Transaction counts for the three months ended June 30, 2019, as compared to the same period in the prior year, were also negatively impacted by cooler than normal temperatures in many of our markets, resulting in fewer high temperature related vehicle repairs.
We opened
43
and
105
net, new stores during the
three and six
months ended
June 30, 2019
, respectively, compared to opening
50
and
128
net, new stores for the
three and six
months ended
June 30, 2018
, respectively. In addition, on January 1, 2019, we began operating
33
acquired Bennett stores, and during the six months ended
June 30, 2019
, we merged of
13
of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining
20
Bennett stores as O’Reilly. As of
June 30, 2019
, we operated
5,344
stores in
47
states compared to
5,147
stores in
47
states at
June 30, 2018
. We anticipate total new store growth to be
200
to
210
net, new store openings in 2019 and will net an additional
20
stores from the Bennett acquisition.
Gross profit:
Gross profit for the three months ended
June 30, 2019
, increased
6%
to
$1.37 billion
(or
52.8%
of sales) from
$1.29 billion
(or
52.5%
of sales) for the same period one year ago. Gross profit for the
six
months ended
June 30, 2019
, increased
6%
to
$2.65 billion
(or
52.9%
of sales) from
$2.49 billion
(or
52.5%
of sales) for the same period one year ago. The increases in gross profit dollars for the three and six months ended June 30, 2019, were primarily the result of new stores, the acquired Bennett stores and the increase in comparable store sales at existing stores. The increases in gross profit as a percentage of sales for the three and six months ended June 30, 2019, were due to mix, related to lower demand of seasonal products, and a benefit from selling through inventory purchased prior to recent industry-wide acquisition cost increases and corresponding selling price increases. Beginning in the last six months of 2018, inventory acquisition costs in our industry increased, as a result of tariffs on products imported from China and increases in supplier input costs for wages and interest; these cost increases were passed through in higher retail and wholesale prices in our industry. We determine inventory cost using the last-in, first-out (“LIFO”) method, but have, over time, seen our LIFO reserve balance exhausted, as a result of cumulative historical acquisition cost decreases. Our policy is to not write up inventory in excess of replacement cost, and accordingly, we are effectively valuing our inventory at replacement cost.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the three months ended
June 30, 2019
, increased
8%
to
$870 million
(or
33.6%
of sales) from
$809 million
(or
33.0%
of sales) for the same period one year ago. SG&A for the
six
months ended
June 30, 2019
, increased
7%
to
$1.70 billion
(or
34.1%
of sales) from
$1.59 billion
(or
33.5%
of sales) for the same period one year ago. The increases in total SG&A dollars for the three and six months ended June 30, 2019, were the result of additional Team Members, facilities and vehicles to support our increased sales and store count. The increases in SG&A as a percentage of sales for the three and six months ended June 30, 2019, were principally due to wage pressure and other variable costs, driven by a low unemployment, inflationary environment.
Operating income:
As a result of the impacts discussed above, operating income for the three months ended
June 30, 2019
, increased
4%
to
$498 million
(or
19.2%
of sales) from
$479 million
(or
19.5%
of sales) for the same period one year ago. As a result of the impacts discussed above, operating income for the
six
months ended
June 30, 2019
, increased
5%
to
$943 million
(or
18.9%
of sales) from
$902 million
(or
19.0%
of sales) for the same period one year ago.
Other income and expense:
Total other expense for the three months ended
June 30, 2019
, increased
13%
to
$33 million
(or
1.3%
of sales) from
$29 million
(or
1.2%
of sales) for the same period one year ago. Total other expense for the
six
months ended
June 30, 2019
, increased
12%
to
$64 million
(or
1.3%
of sales) from
$57 million
(or
1.2%
of sales) for the same period one year ago. The increases in total other expense for the three and six months ended June 30, 2019, were the result of increased interest expense on higher average outstanding borrowings, partially offset by an increase in the value of our trading securities.
Income taxes:
Our provision for income taxes for the three months ended
June 30, 2019
, increased
15%
to
$111 million
(or
4.3%
of sales) from
$97 million
(or
3.9%
of sales) for the same period one year ago. Our provision for income taxes for the
six
months ended
June 30, 2019
, increased
9%
to
$204 million
(or
4.1%
of sales) from
$187 million
(or
4.0%
of sales) for the same period one year ago. Our effective tax rate for the three months ended
June 30, 2019
, was
23.9%
of income before income taxes, compared to
21.5%
for the same period one year ago. Our effective tax rate for the
six
months ended
June 30, 2019
, was
23.2%
of income before income taxes, compared to
22.2%
for the same period one year ago. The increases in our provision for income taxes for the three and six months ended June 30, 2019, were the result of higher taxable income and lower excess tax benefits from share-based compensation. The increases in our effective tax rate for the three and six months ended June 30, 2019, were the result of lower excess tax benefits from share-based compensation.
Net income:
As a result of the impacts discussed above, net income for the three months ended
June 30, 2019
, increased to
$354 million
(or
13.7%
of sales) from
$353 million
(or
14.4%
of sales) for the same period one year ago. As a result of the impacts discussed above, net income for the
six
months ended
June 30, 2019
, increased
3%
to
$675 million
(or
13.5%
of sales) from
$658 million
(or
13.9%
of sales) for the same period one year ago.
Earnings per share:
Our diluted earnings per common share for the three months ended
June 30, 2019
, increased
5%
to
$4.51
on
78 million
shares from
$4.28
on
83 million
shares for the same period one year ago. Our diluted earnings per share for the
six
months ended
June 30, 2019
, increased
8%
to
$8.56
on
79 million
shares from
$7.89
on
83 million
shares for the same period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured revolving credit facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility. We believe that cash expected to be provided by operating activities and availability under our unsecured revolving credit facility will be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future. However, there can be no assurance that we will continue to generate cash flows at or above recent levels.
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the
six
months ended
June 30, 2019
and
2018
(in thousands):
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For the Six Months Ended
June 30,
|
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Liquidity:
|
2019
|
|
2018
|
|
Total cash provided by/(used in):
|
|
|
|
|
Operating activities
|
$
|
847,004
|
|
|
$
|
875,233
|
|
|
Investing activities
|
(293,348
|
)
|
|
(221,605
|
)
|
|
Financing activities
|
(529,162
|
)
|
|
(663,108
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
24,494
|
|
|
$
|
(9,480
|
)
|
|
|
|
|
|
|
Capital expenditures
|
$
|
295,608
|
|
|
$
|
224,117
|
|
|
Free cash flow
(1)
|
$
|
540,674
|
|
|
$
|
631,508
|
|
|
|
|
|
(1)
|
Calculated as net cash provided by operating activities, less capital expenditures and excess tax benefit from share-based compensation payments for the period.
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Operating activities:
The decrease in net cash provided by operating activities during the
six
months ended
June 30, 2019
, compared to the same period in
2018
, was primarily due to a larger increase in accounts receivable and a decrease in income taxes payable, partially offset by an increase in net income and a decrease in our net inventory investment. The larger increase in accounts receivable was the result of an increase in credit card receivables in the current period, due to the timing of period end dates. The cash used for income taxes payable in the current period, as compared to cash provided by income taxes payable in the period, was the result of a prepaid income taxes position at the end of 2017 versus an income taxes payable position at the end of 2018. The decrease in our net inventory investment was the result of a smaller increase in inventory in the current period, as compared to the same period in the prior year, as well as an increase in accounts payable as a percentage of inventory.
Investing activities:
The increase in net cash used in investing activities during the
six
months ended
June 30, 2019
, compared to the same period in
2018
, was the result of an increase in capital expenditures. The increase in capital expenditures was related to our distribution expansion projects, the timing of property acquisitions, closings and construction costs for new stores and technology investments during the current period, as compared to the same period in the prior year.
Financing activities:
The decrease in net cash used in financing activities during the
six
months ended
June 30, 2019
, compared to the same period in
2018
, was attributable to a higher level of net borrowings during the current period, as compared to the same period in the prior year, and a lower level of repurchases of our common stock in the current period, as compared to the same period in the prior year.
Unsecured revolving credit facility:
On
April 5, 2017
, the Company entered into a credit agreement (the “Credit Agreement”). The Credit Agreement provides for a five-year
$1.20 billion
unsecured revolving credit facility (the “Revolving Credit Facility”) arranged by JPMorgan Chase Bank, N.A., which is scheduled to mature in
April 2022
. The Credit Agreement includes a
$200 million
sub-limit for the issuance of letters of credit and a
$75 million
sub-limit for swing line borrowings. As described in the Credit Agreement governing the Revolving Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to
$600 million
, provided that the aggregate amount of the commitments does not exceed
$1.80 billion
at any time.
As of
June 30, 2019
, we had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amount of
$39 million
, reducing the aggregate availability under the Credit Agreement by that amount. As of
June 30, 2019
, we had outstanding borrowings under the Revolving Credit Facility in the amount of
$156 million
.
Senior Notes:
On
May 20, 2019
, we issued
$500 million
aggregate principal amount of unsecured
3.900%
Senior Notes due
2029
(“3.900% Senior Notes due 2029”) at a price to the public of
99.991%
of their face value with U.S. Bank National Association (“U.S. Bank”) as trustee. Interest on the 3.900% Senior Notes due 2029 is payable on June 1 and December 1 of each year, beginning on December 1, 2019, and is computed on the basis of a
360
-day year.
We have issued a cumulative
$3.65 billion
aggregate principal amount of unsecured senior notes, which are due between
2021
and
2029
, with UMB Bank, N.A. and U.S. Bank as trustees. Interest on the senior notes, ranging from
3.550%
to
4.875%
, is payable semi-annually and is computed on the basis of a
360
-day year. None of our subsidiaries is a guarantor under our senior notes.
Debt covenants:
The indentures governing our senior notes contain covenants that limit our ability and the ability of certain of our subsidiaries to, among other things, create certain liens on assets to secure certain debt and enter into certain sale and leaseback transactions, and limit our ability to merge or consolidate with another company or transfer all or substantially all of our property, in each case as set forth in the indentures. These covenants are, however, subject to a number of important limitations and exceptions. As of
June 30, 2019
, we were in compliance with the covenants applicable to our senior notes.
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage ratio of
2.50
:1.00 and a maximum consolidated leverage ratio of
3.50
:1.00. The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, five-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that we should default on any covenant contained within the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from our lenders.
We had a consolidated fixed charge coverage ratio of
5.24
times and
5.50
times as of
June 30, 2019
and
2018
, respectively, and a consolidated leverage ratio of
2.22
times and
2.07
times as of
June 30, 2019
and
2018
, respectively, remaining in compliance with all covenants related to the borrowing arrangements.
The table below outlines the calculations of the consolidated fixed charge coverage ratio and consolidated leverage ratio covenants, as defined in the Credit Agreement governing the Revolving Credit Facility, for the twelve months ended
June 30, 2019
and
2018
(dollars in thousands):
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|
|
|
|
|
|
|
|
|
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For the Twelve Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
GAAP net income
|
$
|
1,341,341
|
|
|
$
|
1,244,028
|
|
|
Add: Interest expense
|
131,879
|
|
|
110,197
|
|
|
Rent expense
(1)
|
328,529
|
|
|
308,566
|
|
|
Provision for income taxes
|
386,590
|
|
|
417,505
|
|
|
Depreciation expense
|
257,579
|
|
|
248,468
|
|
|
Amortization expense
|
2,841
|
|
|
1,210
|
|
|
Non-cash share-based compensation
|
21,039
|
|
|
19,200
|
|
|
Non-GAAP EBITDAR
|
$
|
2,469,798
|
|
|
$
|
2,349,174
|
|
|
|
|
|
|
|
Interest expense
|
$
|
131,879
|
|
|
$
|
110,197
|
|
|
Capitalized interest
|
10,891
|
|
|
8,693
|
|
|
Rent expense
|
328,529
|
|
|
308,566
|
|
|
Total fixed charges
|
$
|
471,299
|
|
|
$
|
427,456
|
|
|
|
|
|
|
|
Consolidated fixed charge coverage ratio
|
5.24
|
|
5.50
|
|
|
|
|
|
|
GAAP debt
|
$
|
3,783,738
|
|
|
$
|
3,253,538
|
|
|
Stand-by letters of credit
|
39,109
|
|
|
36,943
|
|
|
Discount on senior notes
|
3,930
|
|
|
4,700
|
|
|
Debt issuance costs
|
18,332
|
|
|
16,762
|
|
|
Five-times rent expense
|
1,642,645
|
|
|
1,542,830
|
|
|
Non-GAAP adjusted debt
|
$
|
5,487,754
|
|
|
$
|
4,854,773
|
|
|
|
|
|
|
|
Consolidated leverage ratio
|
2.22
|
|
2.07
|
|
|
|
|
(1)
|
The table below outlines the calculation of Rent expense and reconciles Rent expense to Total lease cost, per Accounting Standard Codification 842 (“ASC 842”), adopted and effective January 1, 2019, the most directly comparable GAAP financial measure, for the
six
and twelve months ended
June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
Total lease cost, per ASC 842, for the six months ended June 30, 2019
|
$
|
197,839
|
|
|
Less:
|
Variable non-contract operating lease components, related to property taxes and insurance, for the six months ended June 30, 2019
|
29,433
|
|
|
Rent expense for the six months ended June 30, 2019
|
168,406
|
|
|
Add:
|
Rent expense for the six months ended December 31, 2018, as previously reported prior to the adoption of ASC 842
|
160,123
|
|
|
Rent expense for the twelve months ended June 30, 2019
|
$
|
328,529
|
|
The table below outlines the calculation of Free cash flow and reconciles Free cash flow to Net cash provided by operating activities, the most directly comparable GAAP financial measure, for the
six
months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
Cash provided by operating activities
|
$
|
847,004
|
|
|
$
|
875,233
|
|
|
Less:
|
Capital expenditures
|
295,608
|
|
|
224,117
|
|
|
|
Excess tax benefit from share-based compensation payments
|
10,722
|
|
|
19,608
|
|
|
Free cash flow
|
$
|
540,674
|
|
|
$
|
631,508
|
|
Free cash flow, the consolidated fixed charge coverage ratio and the consolidated leverage ratio discussed and presented in the tables above are not derived in accordance with United States generally accepted accounting principles (“GAAP”). We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. We believe that the presentation of our free cash flow, consolidated fixed charge coverage ratio and consolidated leverage ratio provides meaningful supplemental information to both management and investors and reflects the required covenants under the Credit Agreement. We include these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the tables above, a reconciliation to the most directly comparable GAAP measures.
Share repurchase program:
In January of 2011, our Board of Directors approved a share repurchase program. Under the program, we may, from time to time, repurchase shares of our common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions. Our Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice. As announced on
November 13, 2018
, and
May 31, 2019
, our Board of Directors each time approved a resolution to increase the authorization amount under our share repurchase program by an additional
$1.00 billion
, resulting in a cumulative authorization amount of
$12.75 billion
. Each additional authorization is effective for a
three
-year period, beginning on its respective announcement date.
The following table identifies shares of our common stock that have been repurchased as part of our publicly announced share repurchase program for the
three and six
months ended
June 30, 2019
and
2018
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Shares repurchased
|
1,633
|
|
|
1,575
|
|
|
2,560
|
|
|
3,763
|
|
|
Average price per share
|
$
|
366.76
|
|
|
$
|
264.38
|
|
|
$
|
359.63
|
|
|
$
|
256.64
|
|
|
Total investment
|
$
|
598,846
|
|
|
$
|
416,402
|
|
|
$
|
920,692
|
|
|
$
|
965,830
|
|
As of
June 30, 2019
, we had
$1.08 billion
remaining under our share repurchase program. Subsequent to the end of the
second
quarter and through
August 8, 2019
, we repurchased
0.5 million
additional shares of our common stock under our share repurchase program, at an average price of
$375.47
, for a total investment of
$175 million
. We have repurchased a total of
75.3 million
shares of our common stock under our share repurchase program since the inception of the program in January of 2011 and through
August 8, 2019
, at an average price of
$157.22
, for a total aggregate investment of
$11.84 billion
.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations, to which we are committed, since those discussed in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by management. Management bases its assumptions, estimates, and adjustments on historical experience, current trends and other factors believed to be relevant at the time the condensed consolidated financial statements are prepared. There have been no material changes in the critical accounting estimates since those discussed in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
INFLATION AND SEASONALITY
We have been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition costs increased due to base commodity price increases industry-wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
RECENT ACCOUNTING PRONOUNCEMENTS
In February of 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In July of 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvement” (“ASU 2018-11”), to provide an additional, optional transition method for adopting ASU 2016-02, which allows for an entity to choose to apply the new lease standard at adoption date and recognize a cumulative-effective adjustment to the opening balance of retained earnings in the period of adoption, while comparative periods presented will continue to be in accordance with current U.S. GAAP Topic 840. For public companies, Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this new guidance with our first quarter ending March 31, 2019, using the additional, optional transition method, the package of transitional practical expedients relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842, the transitional practical expedient for the treatment of existing land easements and the practical expedient to make an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components; however, we did not elect the hindsight transitional practical expedient. We made an accounting policy election to not apply recognition requirements of the guidance to short-term leases. Due to the adoption of this new guidance, we recognized right-of-use assets and lease liabilities of
$1.9 billion
each on the accompanying Condensed Consolidated Balance Sheets as of
June 30, 2019
. The difference between the right-of-use assets and lease liabilities on the accompanying Condensed Consolidated Balance Sheet was primarily due to the accrual for straight-line rent expense. We made an adjustment to opening “Retained Deficit” on the accompanying Condensed Consolidated Balance Sheet in the amount of
$1.4 million
, net of the deferred tax impact, related to the adoption of this new guidance. With the adoption of this new guidance, our favorable lease assets and unfavorable lease liabilities, from a previous acquisition, were eliminated through an adjustment to opening “Operating lease, right-of-use assets” on the accompanying Condensed Consolidated Balance Sheet. The adoption of this new guidance did
not
have a material impact on our results of operations, cash flows, liquidity or covenant compliance under our existing credit agreement.
In June of 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Under ASU 2016-13, businesses and other organizations are required to present financial assets, measured at amortized costs basis, at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis, such as trade receivables. The measurement of expected credit loss will be based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. For public companies, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We will adopt this guidance beginning with our first quarter ending March 31, 2020. The application of this new guidance is not expected to have a material impact on our 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. We early adopted this guidance beginning with our first quarter ending March 31, 2019. The application of this new guidance did not have a material impact on our consolidated financial condition, results of operations or cash flows.
INTERNET ADDRESS AND ACCESS TO SEC FILINGS
Our Internet address is
www.OReillyAuto.com
. Interested readers can access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commission’s (“SEC”) website at
www.sec.gov
and searching with our ticker symbol “ORLY.” Such reports are generally available the day they are filed. Upon request, we will furnish interested readers a paper copy of such reports free of charge.