O’Reilly Automotive(ORLY) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section covers unaudited interim financial statements and management's analysis of financial condition and operations ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) This section presents unaudited condensed consolidated financial statements and detailed notes for June 30, 2022 Condensed Consolidated Balance Sheets This section provides a snapshot of the Company's assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheets (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $253,904 | $362,113 | | Total current assets | $4,799,872 | $4,504,262 | | Total assets | $12,067,689 | $11,718,707 | | Accounts payable | $5,258,712 | $4,695,312 | | Total current liabilities | $6,413,189 | $5,874,615 | | Long-term debt | $4,669,833 | $3,826,978 | | Total shareholders' deficit | $(1,107,430) | $(66,423) | - Total assets increased by $348,982K from December 31, 2021, to June 30, 2022, primarily driven by an increase in inventory[10] - Long-term debt significantly increased by $842,855K, and total shareholders' deficit widened from $(66,423)K to $(1,107,430)K[10] Condensed Consolidated Statements of Income This section details the Company's revenues, expenses, net income, and earnings per share Condensed Consolidated Statements of Income (in thousands, except per share data) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales | $3,670,737 | $3,465,601 | $6,966,748 | $6,556,500 | | Gross profit | $1,884,718 | $1,826,378 | $3,592,790 | $3,467,173 | | Operating income | $798,550 | $795,583 | $1,468,080 | $1,486,688 | | Net income | $576,760 | $585,451 | $1,058,640 | $1,087,060 | | Earnings per share-basic | $8.86 | $8.41 | $16.08 | $15.53 | | Earnings per share-assuming dilution | $8.78 | $8.33 | $15.94 | $15.39 | - Sales increased by 6% for both the three and six months ended June 30, 2022, compared to the prior year[13] - Net income decreased by 1% for the three months and 3% for the six months ended June 30, 2022, year-over-year, while Diluted EPS increased by 5% and 4% respectively, primarily due to share repurchases[13][92][93] Condensed Consolidated Statements of Comprehensive Income This section presents net income and other comprehensive income items, reflecting total non-owner equity changes Condensed Consolidated Statements of Comprehensive Income (in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $576,760 | $585,451 | $1,058,640 | $1,087,060 | | Foreign currency translation adjustments | $(1,875) | $3,707 | $3,188 | $(436) | | Comprehensive income | $574,885 | $589,158 | $1,061,828 | $1,086,624 | - Comprehensive income for the six months ended June 30, 2022, was $1,061,828K, a slight decrease from $1,086,624K in the prior year[16] - Foreign currency translation adjustments resulted in a loss of $1,875K for the three months ended June 30, 2022, but an income of $3,188K for the six months ended June 30, 2022[16] Condensed Consolidated Statements of Shareholders' Equity (Deficit) This section outlines changes in the Company's shareholders' equity or deficit over the reporting period Changes in Shareholders' Equity (Deficit) for Six Months Ended June 30, 2022 (in thousands) | Item | Shares | Par Value | Additional Paid-In Capital | Retained Deficit | Accumulated Other Comprehensive Loss | Total | | :------------------------------------------------------------------------------------------------ | :----- | :-------- | :------------------------- | :--------------- | :----------------------------------- | :------------ | | Balance at December 31, 2021 | 67,029 | $670 | $1,305,508 | $(1,365,802) | $(6,799) | $(66,423) | | Net income | — | — | — | 1,058,640 | — | 1,058,640 | | Total other comprehensive income | — | — | — | — | 3,188 | 3,188 | | Share repurchases, including fees | (3,386) | (33) | (67,263) | (2,083,946) | — | (2,151,242) | | Balance at June 30, 2022 | 63,753 | $638 | $1,286,651 | $(2,391,108) | $(3,611) | $(1,107,430) | - Total shareholders' deficit significantly increased from $(66,423)K at December 31, 2021, to $(1,107,430)K at June 30, 2022[19] - Share repurchases, including fees, amounted to $2,151,242K for the six months ended June 30, 2022, significantly impacting retained deficit[19] Condensed Consolidated Statements of Cash Flows This section summarizes cash flows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $1,391,973 | $1,712,832 | | Net cash used in investing activities | $(224,865) | $(220,892) | | Net cash used in financing activities | $(1,275,489) | $(1,325,880) | | Net (decrease) increase in cash and cash equivalents | $(108,209) | $165,978 | | Cash and cash equivalents at end of the period | $253,904 | $631,618 | - Net cash provided by operating activities decreased by $320,859K for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to changes in accrued payroll/benefits and inventory investment[22][96] - Net cash used in financing activities decreased by $50,391K, attributable to net proceeds from the issuance of long-term debt, partially offset by increased common stock repurchases[22][98] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the financial statements NOTE 1 – BASIS OF PRESENTATION This note describes the accounting principles and scope for the unaudited interim financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and do not include all footnotes required for complete financial statements[23] - The statements include the accounts of the Company and its wholly-owned subsidiaries, with all inter-company balances and transactions eliminated[24] NOTE 2 – VARIABLE INTEREST ENTITIES This note details investments in unconsolidated tax credit fund entities and associated loss exposure - The Company invests in four unconsolidated tax credit fund entities that are considered Variable Interest Entities (VIEs)[26] - The Company concluded it was not the primary beneficiary of these VIEs and accounts for these investments using the equity method[26] - The maximum exposure to losses associated with these VIEs is generally limited to its net investment, which was $23.6 million as of June 30, 2022[26] NOTE 3 – FAIR VALUE MEASUREMENTS This note explains fair value measurement methodology and disclosures for financial instruments - The Company uses a fair value hierarchy (Level 1, 2, 3) to measure financial instruments, prioritizing quoted prices in active markets (Level 1)[27][29] Estimated Fair Value of Marketable Securities (Level 1, in thousands) | Date | Total | | :--------------- | :------ | | June 30, 2022 | $47,468 | | December 31, 2021 | $52,456 | Carrying Amount and Estimated Fair Value of Senior Notes (Level 2, in thousands) | Date | Carrying Amount | Estimated Fair Value | | :--------------- | :-------------- | :------------------- | | June 30, 2022 | $4,669,833 | $4,501,833 | | December 31, 2021 | $3,826,978 | $4,135,629 | NOTE 4 – LEASES This note provides information on the Company's lease arrangements, costs, and cash payments Total Lease Cost (in thousands) | Period | 2022 | 2021 | | :----------------------- | :------- | :------- | | Three Months Ended June 30 | $115,797 | $110,484 | | Six Months Ended June 30 | $230,595 | $220,382 | - Cash paid for operating leases for the six months ended June 30, 2022, was $180,558K, an increase from $169,864K in the prior year[36] NOTE 5 – FINANCING This note outlines the Company's long-term debt, credit facilities, and debt covenant compliance Long-Term Debt (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :---------------- | | Total principal amount of debt | $4,700,000 | $3,850,000 | | Total long-term debt | $4,669,833 | $3,826,978 | - On June 15, 2022, the Company issued $850 million aggregate principal amount of unsecured 4.700% Senior Notes due 2032[43] - The Company has a $1.8 billion unsecured revolving credit facility, with no outstanding borrowings as of June 30, 2022, and was in compliance with all covenants[38][39][41] NOTE 6 – WARRANTIES This note details changes in the Company's aggregate product warranty liabilities Changes in Aggregate Product Warranty Liabilities (in thousands) | Item | Amount | | :---------------------------------- | :------- | | Warranty liabilities, balance at December 31, 2021 | $77,199 | | Warranty claims | $(69,978) | | Warranty accruals | $74,055 | | Warranty liabilities, balance at June 30, 2022 | $81,285 | - Warranty liabilities increased by $4,086K from December 31, 2021, to June 30, 2022[46] NOTE 7 – SHARE REPURCHASE PROGRAM This note describes share repurchase activities and remaining authorization under the program - The Board of Directors approved an additional $1.5 billion authorization on May 16, 2022, increasing the cumulative authorization to $20.3 billion[47] Share Repurchases (in thousands, except per share data) | Period | Shares Repurchased | Average Price Per Share | Total Investment | | :----------------------- | :----------------- | :---------------------- | :--------------- | | Three Months Ended June 30, 2022 | 2,219 | $620.27 | $1,376,013 | | Six Months Ended June 30, 2022 | 3,386 | $635.40 | $2,151,209 | - As of June 30, 2022, $1.4 billion remained under the share repurchase authorization[48] NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE LOSS This note presents the components and changes in accumulated other comprehensive loss Accumulated Other Comprehensive Loss (in thousands) | Item | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Accumulated other comprehensive loss | $(3,611) | $(6,799) | | Change in accumulated other comprehensive loss (6 months) | $3,188 | $(436) | - Accumulated other comprehensive loss improved from $(6,799)K at December 31, 2021, to $(3,611)K at June 30, 2022, primarily due to foreign currency translation adjustments[49] NOTE 9 – REVENUE This note disaggregates the Company's revenues by major customer type Revenues Disaggregated by Major Customer Type (in thousands) | Customer Type | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Sales to do-it-yourself customers | $3,828,037 | $3,780,567 | | Sales to professional service provider customers | $2,970,540 | $2,623,303 | | Total sales | $6,966,748 | $6,556,500 | - Sales to professional service provider customers increased by $347,237K (13.2%) for the six months ended June 30, 2022, compared to the prior year[51] NOTE 10 – SHARE-BASED COMPENSATION AND BENEFIT PLANS This note provides details on share-based compensation expenses and employee benefit plans Share-Based Compensation Expense (in thousands) | Plan Type | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $10,210 | $10,367 | | Employee Stock Purchase Plan (ESPP) | $1,601 | $1,432 | | Restricted shares awarded | $891 | $776 | | 401(k) matching contributions | $17,800 | $15,900 | | Deferred Compensation Plan matching contributions | $100 | $100 | | Stock appreciation rights (benefit/expense) | $(100) | $400 | - The weighted-average grant-date fair value of stock options granted increased to $216.87 for the six months ended June 30, 2022, from $144.30 in the prior year[56] - The liability for the nonqualified deferred compensation plan was $47.5 million as of June 30, 2022[60] NOTE 11 – EARNINGS PER SHARE This note explains the calculation of basic and diluted earnings per share Earnings Per Share (in thousands, except per share data) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $576,760 | $585,451 | $1,058,640 | $1,087,060 | | Weighted-average common shares outstanding – basic | 65,116 | 69,618 | 65,840 | 69,997 | | Weighted-average common shares outstanding – assuming dilution | 65,686 | 70,264 | 66,434 | 70,640 | | Earnings per share-basic | $8.86 | $8.41 | $16.08 | $15.53 | | Earnings per share-assuming dilution | $8.78 | $8.33 | $15.94 | $15.39 | - Diluted EPS increased by 5% to $8.78 for the three months and 4% to $15.94 for the six months ended June 30, 2022, despite a decrease in net income, due to fewer weighted-average common shares outstanding[62][93] NOTE 12 – LEGAL MATTERS This note discloses litigation involvement and management's assessment of potential financial impact - The Company is involved in litigation incidental to its ordinary business and accrues for probable and estimable losses[65] - Management does not believe these legal matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows[65] NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS This note addresses the impact of recent accounting pronouncements on financial statements - No recent accounting pronouncements or changes have occurred since the Annual Report on Form 10-K for the year ended December 31, 2021, that are of material significance to the Company[66] ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section reviews financial condition, operations, and liquidity, including industry drivers and capital resources FORWARD-LOOKING STATEMENTS This section identifies forward-looking statements and outlines key risks and uncertainties - The report contains forward-looking statements, identified by words such as 'estimate,' 'may,' 'could,' 'will,' 'believe,' 'expect,' and 'anticipate,' which are subject to risks and uncertainties[68] - Key risks include the COVID-19 pandemic, general economic conditions, inflation, product demand, competition, supply chain disruptions, and governmental regulations[68] OVERVIEW This section describes the Company's business, market strategy, store operations, and demand drivers - O'Reilly Automotive is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States and Mexico, employing a 'dual market strategy' serving both DIY and professional service provider customers[69] - As of June 30, 2022, the Company operated 5,873 stores in 47 U.S. states and 27 stores in Mexico[71] - Key drivers of demand include U.S. miles driven (increased 3.8% year-to-date through May 2022), the total number of registered vehicles (279 million by end of 2021), and the average vehicle age (increased to 12.1 years in 2021)[73][74][75][76] - Inflationary cost pressures are impacting the business, but historically the Company has been able to pass along cost increases through higher selling prices[72][77] RESULTS OF OPERATIONS This section analyzes sales, gross profit, operating income, and net income, highlighting performance drivers Key Financial Results (in millions, except per share data) | Item | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Sales | $3,670 | $3,466 | $6,967 | $6,557 | | Comparable store sales growth | 4.3% | 9.9% | 4.5% | 16.5% | | Gross profit | $1,885 | $1,826 | $3,593 | $3,467 | | Gross profit as % of sales | 51.3% | 52.7% | 51.6% | 52.9% | | SG&A expenses | $1,086 | $1,031 | $2,125 | $1,980 | | Operating income | $799 | $796 | $1,468 | $1,487 | | Net income | $577 | $585 | $1,059 | $1,087 | | Diluted EPS | $8.78 | $8.33 | $15.94 | $15.39 | - Sales increased by 6% for both the three and six months ended June 30, 2022, driven by store growth and comparable store sales increases of 4.3% and 4.5%, respectively[81][82] - Gross profit as a percentage of sales decreased due to a strategic professional pricing initiative and a higher mix of professional service provider sales, which carry lower gross margins[87] - Operating income for the six months ended June 30, 2022, decreased 1% to $1.47 billion, and net income decreased 3% to $1.06 billion, primarily due to increased SG&A from payroll, benefits, and fuel costs[88][89][92] LIQUIDITY AND CAPITAL RESOURCES This section discusses cash flows, debt compliance, and strategies for funding operations and growth Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $1,391,973 | $1,712,832 | | Net cash used in investing activities | $(224,865) | $(220,892) | | Net cash used in financing activities | $(1,275,489) | $(1,325,880) | | Free cash flow | $1,153,153 | $1,471,642 | - Net cash provided by operating activities decreased primarily due to a larger decrease in accrued payroll and benefits and a smaller decrease in net inventory investment[96] - The Company's consolidated fixed charge coverage ratio was 6.89x (minimum 2.50x) and consolidated leverage ratio was 1.84x (maximum 3.50x) as of June 30, 2022, indicating compliance with all debt covenants[101][102] - The Company's long-term business strategy requires capital for new stores, acquisitions, distribution expansion, and opportunistic share repurchases, funded by business operations and its unsecured revolving credit facility[94] ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section assesses market risks, including interest rate and foreign currency, with no material changes reported - The Company is subject to interest rate risk from variable-rate borrowings on its unsecured revolving credit facility, but had no outstanding borrowings as of June 30, 2022[109] - Foreign currency exposure arises from Mexican peso-denominated revenues and profits; a 10% change in exchange rates would result in an approximate $15.7 million potential loss in the net assets of Mexican subsidiaries[111][112] - The Company's market risks have not materially changed since those discussed in its Annual Report on Form 10-K for the year ended December 31, 2021[113] ITEM 4 - CONTROLS AND PROCEDURES This section details disclosure controls evaluation and confirms no material changes in internal control EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES This section reports on management's assessment of disclosure controls and procedures effectiveness - Management, under the supervision of the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2022[114] - It was concluded that the disclosure controls and procedures are functioning effectively to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[116] CHANGES IN INTERNAL CONTROLS This section confirms no material changes in internal control over financial reporting during the quarter - There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[117] PART II - OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits ITEM 1 - LEGAL PROCEEDINGS This section discloses ordinary course litigation, with accruals for probable losses and no material adverse effect anticipated - The Company is currently involved in litigation incidental to the ordinary conduct of its business[119] - Accruals are made for litigation losses where an adverse outcome is probable and estimable, and management does not believe these matters will have a material adverse effect[119] ITEM 1A - RISK FACTORS This section states no material changes to risk factors previously disclosed in the Annual Report on Form 10-K - As of June 30, 2022, there have been no material changes to the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[120] ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports no unregistered equity sales and details common stock repurchases - The Company had no sales of unregistered securities during the six months ended June 30, 2022[121] Common Stock Repurchases (in thousands, except per share data) for Three Months Ended June 30, 2022 | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Investment | | :-------------------------------- | :----------------------------- | :--------------------------- | :--------------- | | April 1, 2022, to April 30, 2022 | 166 | $696.61 | $115,737 | | May 1, 2022, to May 31, 2022 | 1,047 | $611.67 | $640,400 | | June 1, 2022, to June 30, 2022 | 1,006 | $616.63 | $619,876 | | Total as of June 30, 2022 | 2,219 | $620.27 | $1,376,013 | ITEM 6 - EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including corporate governance and certifications - Exhibits include the Second Amended and Restated Articles of Incorporation, Fourth Amended and Restated Bylaws, Fourth Supplemental Indenture, and certifications from the Chief Executive Officer and Chief Financial Officer[123] SIGNATURE PAGES This section contains the required signatures for the Form 10-Q, certifying its submission - The report was signed on August 8, 2022, by Gregory D. Johnson, President and Chief Executive Officer, and Jeremy A. Fletcher, Executive Vice President and Chief Financial Officer[127]