O'REILLY AUTOMOTIVE, INC In Management's Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including ? an overview of the key drivers of the automotive aftermarket industry;
? key events and recent developments within our Company;
? our results of operations for the years ended
? our liquidity and capital resources;
? any contractual obligations, to which we are committed;
? any off-balance sheet arrangements we utilize;
? our critical accounting estimates;
? the inflation and seasonality of our business; and
? recent accounting pronouncements that may affect our Company.
The review of Management's Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this annual report. OVERVIEW We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories inthe United States andMexico . We are one of the largestU.S. automotive aftermarket specialty retailers, selling our products to both DIY customers and professional service providers - our "dual market strategy." Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment.
Our extensive product line includes an assortment of products that are differentiated by quality and price for most of the product lines we offer.
For
many of our product offerings, this quality differentiation reflects "good," "better," and "best" alternatives. Our sales and total gross profit dollars are 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. We have ongoing initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as "purchasing up" on the value spectrum. Our stores also offer enhanced services and programs to our customers, including used oil, oil filter and battery recycling; battery, wiper and bulb replacement; battery diagnostic testing; electrical and module testing; check engine light code extraction; loaner tool program; drum and rotor resurfacing; custom hydraulic hoses; and professional paint shop mixing and related materials. As ofDecember 31, 2020 , we operated 5,594 stores in 47 U.S. states and 22 stores inMexico .
We are influenced by a number of general macroeconomic factors that impact both our industry and our consumers, including, but not limited to, fuel costs, unemployment trends, interest rates and other economic factors. Due to the nature of these macroeconomic factors, we are unable to determine how long current conditions will persist and the degree of impact future changes may have on our business. Macroeconomic factors, such as increases in theU.S. unemployment rate, and demand drivers specific to the automotive aftermarket, such asU.S. miles driven, have been pressured as a result of responses to the COVID-19 pandemic, such as stay at home orders, work from home arrangements and reduced travel. Gradual reopening processes across many markets positively impacted our performance beginning in the second quarter and continuing into our third and fourth quarters; however, we are unable to predict the ongoing and future impact of the pandemic on broader economic conditions or our industry. We believe the key drivers of current and future long-term demand for the products sold within the automotive aftermarket include the number ofU.S. miles driven, number ofU.S. registered vehicles, new light vehicle registrations
and average vehicle age. Number of Miles Driven The number of total miles driven in theU.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in theU.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 theDepartment of Transportation , the number of total miles driven in theU.S. increased 0.9% and 0.4% in 2019 and 2018, respectively, and through February of 2020, year-to-date miles driven increased 2.1%. Miles driven dramatically declined beginning in March of 2020, and throughDecember 2020 , year-to-date miles driven decreased 13.2%, as a result of the measures taken by state and local 26
governments in response to COVID-19 and the impact to economic activity as consumers responded to COVID-19. Further government measures or consumer and business behavior could continue to have a negative impact on miles driven, but we are unable to predict the duration and severity of the impact to our business.
Size and Age of the Vehicle Fleet
The total number of vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the automotive aftermarket industry. As reported by TheAuto Care Association , the total number of registered vehicles increased 10.4% from 2009 to 2019, bringing the number of light vehicles on the road to 278 million by the end of 2019. For the year endedDecember 31, 2020 , the seasonally adjusted annual rate of light vehicle sales in theU.S. ("SAAR") was approximately 16.3 million. In the past decade, vehicle scrappage rates have remained relatively stable, ranging from 4.1% to 5.7% annually. As a result, over the past decade, the average age of theU.S. vehicle population has increased, growing 18.0%, from 10.0 years in 2009 to 11.8 years in 2019. 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, 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. We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O'Reilly values of hard work and excellent customer service.
KEY EVENTS AND RECENT DEVELOPMENTS
Several key events have had or may have a significant impact on our operations and are identified below:
After the close of business onNovember 29, 2019 , we completed the acquisition of Mayasa, a specialty retailer of automotive aftermarket parts headquartered inGuadalajara, Jalisco, Mexico pursuant to a stock purchase agreement. At the time of the acquisition, Mayasa operated six distribution centers, 21 Orma Autopartes stores and served over 2,000 independent jobber locations in 28 Mexican states. The results of Mayasa's operations have been included in the Company's consolidated financial statements and results of operations beginning from the date of acquisition. The COVID-19 pandemic has caused significant disruption to the economy, placing pressure on our business beginning inmid-March 2020 , as stay at home orders and/or business restrictions were put in place in most cities, counties and states. This pressure continued until mid-April when our customers began to receive Economic Impact Payments under the CARES Act. We believe these government stimulus payments and enhanced unemployment benefits, along with the easing of stay at home orders and the associated market reopenings beginning in May and June and favorable industry dynamics, such as consumers investing in existing vehicles, led to strong demand for our products beginning in April and continuing through the remainder of 2020. We have been deemed an essential service provider in the communities we serve, and have taken many steps to promote the health and safety of our customers and Team Members, while keeping our stores open and operating to meet our customers' critical needs during the COVID-19 crisis. In addition, when our business was pressured at the end of the first quarter, we took steps to strengthen our liquidity and mitigate the expected ongoing impact on our operations and financial performance.
These actions include, but are not limited to:
Implementing social distancing standards throughout the Company, providing our
Team Members with personal protective equipment and modifying store procedures,
? including the implementation of curbside pickup for Buy Online, Pick Up
In-Store orders, enhanced cleaning protocols, health screening, contact tracing
and mandatory masking for all Team Members;
Putting in place programs to relax attendance policies, as well as advance sick
? time to assist Team Members who are place in quarantine or need time away to
support family members effective by COVID-19;
Temporarily deferring certain capital investments, many of which have now
? resumed, and prudently managing our cost structure in response to sales
volatility;
27
Successfully issuing
? Senior Notes due 2030, and drawing a precautionary
revolving credit facility, however during the second quarter of 2020, this
additional draw was repaid;
Temporarily suspending our share repurchase program on
? the program resumed on
and outlook; and
Utilizing relief efforts as part of the Coronavirus Aid, Relief, and Economic
? Security Act (CARES Act) signed into law on
bonus depreciation on eligible property, deferral of employer portion of social
security taxes and deferral of certain tax payments. While we continue to make adjustments as we navigate the current environment, we are unable to predict how long the current crisis will last or the extent of the impact on our customers and our business. RESULTS OF OPERATIONS The following table includes income statement data as a percentage of sales, which is computed independently and may not compute to presented totals due to rounding differences, for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, 2020 2019 Sales 100.0 % 100.0 % Cost of goods sold, including warehouse and distribution expenses 47.6
46.9
Gross profit 52.4
53.1
Selling, general and administrative expenses 31.6
34.2 Operating income 20.8 18.9 Interest expense (1.4) (1.4) Interest income 0.1 0.1 Income before income taxes 19.5 17.6 Provision for income taxes 4.4 3.9 Net income 15.1 % 13.7 % 2020 Compared to 2019 Sales: Sales for the year endedDecember 31, 2020 , increased$1.45 billion , or 14%, to$11.60 billion from$10.15 billion for the same period in 2019. Comparable store sales for stores open at least one year increased 10.9% and 4.0% for the years endedDecember 31, 2020 and 2019, respectively. Comparable store sales are calculated based on changes in sales forU.S. domestic stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members, as well as sales from Leap Day in the year endedDecember 31, 2020 . Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation. 28
The following table presents the components of the increase in sales for
the year ended
Increase in Sales for the Year Ended
December 31, 2020,
Compared to the Same Period in 2019
Store sales:
Comparable store sales $ 1,082Non-comparable store sales: Sales for stores opened throughout 2019, excluding stores open at least one year that are included in comparable store sales, and sales from the acquired Mayasa stores
120
Sales for stores opened throughout 2020 123
Sales from Leap Day 34
Decline in sales for stores that have closed (9)
Non-store sales:
Includes sales of machinery and sales to
independent parts stores and Team Members
105
Total increase in sales $ 1,455
We believe the increased sales are the result of store growth, the acquisition
of Mayasa, sales from one additional day due to Leap Day for the year ended
December 31, 2020 , 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. The Company incurred significant sales headwinds beginning
in the middle of March and through the middle of April, as a result of COVID-19;
however, the government stimulus payments, enhanced unemployment benefits,
easing of stay at home orders and the associated market reopenings beginning in
May and June, when combined with favorable industry dynamics, such as consumers
investing in existing vehicles, led to strong demand for our products over the
remainder of the second quarter and continuing through the remainder of 2020.
Our comparable store sales increase for the year ended December 31, 2020 , was
driven by increases in average ticket and transaction counts for both DIY and
professional service provider customers. Beginning in April of 2020, average
ticket values, primarily for DIY customers, benefited from consumers spending
additional time and money repairing and maintaining their vehicles in response
to the COVID-19 and economic environment. In addition, the improvement in
average ticket values was the result of the increasing complexity and cost of
replacement parts necessary to maintain the current population of
better-engineered and more technically advanced vehicles. These
better-engineered, more technically advanced vehicles require less frequent
repairs, as the component parts are more durable and last for longer periods of
time. This decrease in repair frequency creates pressure on customer
transaction counts; however, when repairs are needed, the cost of replacement
parts is, on average, greater, which is a benefit to average ticket values.Average ticket values also benefited from increased selling prices on a SKU-by-SKU basis, as compared to the same period in 2019, driven by increases in acquisition cost of inventory, which were passed on in market prices.
As the COVID-19 stay at home orders and business restrictions took effect in our markets in the middle ofMarch 2020 , transaction counts for both DIY and professional service provider customers turned sharply negative, with a larger impact realized on the professional side of the business, as we believe a larger segment of the demographic served by our professional service provider customers is more likely to accommodate working from home than a typical DIY customer.
However, in the middle of
Improved transaction counts continued throughDecember 2020 , as states implemented reopening plans and many individuals returned to work. We cannot predict what continued impact the COVID-19 pandemic will have to our business in the future given the high degree of uncertainty as to the duration and severity of the pandemic, the potential future changes to economic reopening plans and the mitigating impact of government stimulus for consumers. We opened 155 net, newU.S. stores and one new store inMexico during the year endedDecember 31, 2020 , compared to opening 200 net, newU.S. stores during the year endedDecember 31, 2019 . In addition, onJanuary 1, 2019 , we began operating 33 acquired Bennett stores, and during the year endedDecember 31, 2019 , we merged 13 of these acquired Bennett stores into existing O'Reilly locations and rebranded the remaining 20 Bennett stores as O'Reilly stores. After the close of business onNovember 29, 2019 , we acquired 21 stores from Mayasa. As ofDecember 31, 2020 , we operated 5,594 stores in 47 U.S. states and 22 stores inMexico compared to 5,439U.S. stores in 47 states and 21 stores inMexico atDecember 31, 2019 . We anticipate new store growth will be 165 to 175 net, new store openings in 2021. 29 Gross profit: Gross profit for the year endedDecember 31, 2020 , increased 13% to$6.09 billion (or 52.4% of sales) from$5.39 billion (or 53.1% of sales) for the same period in 2019. The increase in gross profit dollars for the year endedDecember 31, 2020 , was primarily the result of sales from new stores, the increase in comparable store sales at existing stores, sales from the acquired Mayasa stores and one additional day due to Leap Day. The decrease in gross profit as a percentage of sales for the year endedDecember 31, 2020 , was due to the comparable period in the prior year receiving a benefit from selling through inventory purchased prior to tariff related, industry-wide acquisition cost increases, and corresponding selling price increases, and the lower gross margin sales from the acquired Mayasa stores, due to their large independent jobber customer base, partially offset by a greater percentage of total sales generated from DIY customers, which carry a higher gross margin than professional service provider sales and acquisition cost reductions. 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 year ended
December 31, 2020 , increased 6% to $3.67 billion (or 31.6% of sales) from $3.47
billion (or 34.2% of sales) for the same period in 2019. The increase in total
SG&A dollars for the year ended December 31, 2020 , was the result of facilities
and vehicles to support our increased sales and store count, expense from the
acquired Mayasa stores and one additional day due to Leap Day. The decrease in
SG&A as a percentage of sales for the year ended December 31, 2020 , was
principally due to leverage of store operating costs on strong comparable store
sales growth combined with our cautionary approach and strict expense control
measures in response to the onset of the COVID-19 environment.
Operating income:
As a result of the impacts discussed above, operating income for the year endedDecember 31, 2020 , increased 26% to$2.42 billion (or 20.8% of sales) from$1.92 billion (or 18.9% of sales) for the same period in 2019.
Other income and expense:
Total other expense for the year endedDecember 31, 2020 , increased 17% to$153 million (or 1.3% of sales), from$130 million (or 1.3% of sales) for the same period in 2019. The increase in total other expense for the year endedDecember 31, 2020 , was the result of increased interest expense on higher average outstanding borrowings.
Income taxes:
Our provision for income taxes for the year endedDecember 31, 2020 , increased 29% to$514 million (22.7% effective tax rate) from$399 million (22.3% effective tax rate) for the same period in 2019. The increase in our provision for income taxes for the year endedDecember 31, 2020 , was the result of higher taxable income and lower excess tax benefits from share-based compensation, partially offset by a greater benefit from tax credit equity investments in 2020, as compared to the same period in 2019. The increase in our effective tax rate for the year endedDecember 31, 2020 , was the result of the lower excess tax benefits from share-based compensation, partially offset by a greater benefit from tax credit equity investments in 2020, as compared to the same
period in 2019. Net income:
As a result of the impacts discussed above, net income for the year ended
Earnings per share:
Our diluted earnings per common share for the year ended
2019 Compared to 2018
A discussion of the changes in our results of operations for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , has been omitted from this Form 10-K but may be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the annual report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission (the "SEC") onFebruary 28, 2020 , which is available free of charge on theSEC's website at www.sec.gov by searching with our ticker symbol "ORLY" or at our internet address, www.OReillyAuto.com, by clicking "Investor Relations" located at the bottom of the page. 30
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain our existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. 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. As we operated amid uncertainty and disruption caused by the COVID-19 pandemic, we have demonstrated our ability to take prudent steps to support the future stability and financial flexibility of our Company. At the onset of disruption caused by the COVID-19 pandemic, our Teams took decisive action to reduce costs and conserve cash, which included delaying capital investments, reducing operating costs and temporarily suspending our share repurchase program fromMarch 16, 2020 , throughMay 28, 2020 . As we are unable to determine the duration or potential increase in severity of this crisis, we cannot predict its future impacts on our ability to generate funds from operations or maintain liquidity, and accordingly, we will continue to make adjustments as we navigate the current and expected environment.
Liquidity and related ratios:
The following table highlights our liquidity and related ratios as of
December 31, Percentage
Liquidity and Related Ratios 2020 2019 Change
Current assets $ 4,500 $ 3,834 17.4 %
Current liabilities 5,262 4,469 17.7 %
Working capital (1) (763) (636) (20.0) %
Total debt 4,123 3,891 6.0 %
Total equity $ 140 $ 397 (64.7) %
Debt to equity (2) 29.40:1 9.79:1 200.2 %
(1) Working capital is calculated as current assets less current liabilities.
(2) Debt to equity is calculated as total debt divided by total equity.
Current assets increased 17%, current liabilities increased 18%, total debt increased 6% and total equity decreased 65% from 2019 to 2020. The increase in current assets was primarily due to the increase in cash, resulting from our strong sales in 2020, and inventory, resulting from our distribution expansion projects and the opening of 156 net, new stores in 2020. The increase in current liabilities was primarily due to an increase in accounts payable, which was the result of higher inventory turns on strong sales, and accrued benefits and withholdings, which was the result of deferred payroll tax payments under the CARES Act and Team member incentive payments. Our accounts payable to inventory ratio was 114.5% as ofDecember 31, 2020 , as compared to 104.4% for the same period in 2019. The increase in total debt was attributable to the issuance of$500 million of 4.200% Senior Notes due 2030 and$500 million of 1.750% Senior Notes due 2031, partially offset by the redemption of$500 million aggregate principal amount of unsecured 4.875% Senior Notes due 2021 and no borrowings on our revolving credit facility atDecember 31, 2020 . The decrease in total equity was due to an increase in retained deficit, resulting from a greater impact of share repurchase activity under our share repurchase program, partially offset by net income for the year endedDecember 31, 2020 . 31 The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years endedDecember 31, 2020 and 2019 (in thousands): For the Year Ended December 31, Liquidity: 2020 2019 Total cash provided by/(used in): Operating activities$ 2,836,603 $ 1,708,479 Investing activities (614,895) (796,746) Financing activities (1,796,577) (902,811)
Effect of exchange rate changes on cash 103
169
Net increase (decrease) in cash and cash equivalents
9,091 Capital expenditures$ 465,579 $ 628,057 Free cash flow (1) 2,189,995 1,020,649
(1) Calculated as net cash provided by operating activities, less capital
expenditures, excess tax benefit from share-based compensation payments and
investment in tax credit equity investments for the period.
Cash and cash equivalents balances held outside of the
Operating activities: The increase in net cash provided by operating activities in 2020 compared to 2019 was primarily due to a decrease in net inventory investment, a larger increase in net income, an increase in income taxes payable and an increase in accrued benefits and withholdings. The larger decrease in net inventory investment in 2020, as compared to 2019, was primarily attributable to the strong comparable store sales growth and the resulting benefit to inventory turns. The increase in income taxes payable in 2020, compared to the decrease in income taxes payable in 2019, was primarily the result of the realization of credits from renewable energy tax credit investments and an income taxes payable position at the end of 2020, versus a prepaid income taxes position at the end of 2019. The increase in accrued benefits and withholdings is primarily due to the deferral of payroll tax payments under the CARES Act and the timing of Team Member incentive payments.
Investing activities:
The decrease in net cash used in investing activities in 2020 compared to 2019 was primarily the result of a decrease in capital expenditures and a decrease in other investing activities, partially offset by an increase in investments in tax credit equity investments. Total capital expenditures were$466 million in 2020 versus$628 million in 2019, and the decrease was primarily related to lower new store project development spending in 2020, as compared to 2019, and the level of distribution expansion projects in 2020, as compared to 2019. The decrease in other investment activities was due to the acquisition of Mayasa in 2019. The increase in investments in tax credit equity investments was the result of entering into more renewable energy tax credit investments in 2020, as compared to 2019, primarily for the purpose of receiving renewable energy tax credits. We opened 156 and 200 net, new stores in 2020 and 2019, respectively. In addition, onJanuary 1, 2019 , we began operating 33 acquired Bennett stores, and during the year endedDecember 31, 2019 , we merged 13 of these acquired Bennett stores into existing O'Reilly locations and rebranded the remaining 20 Bennett stores as O'Reilly stores. After the close of business onNovember 29, 2019 , we acquired 21 stores from Mayasa. We plan to open 165 to 175 net, new stores in 2021. The current costs associated with the opening of a new store, including the cost of land acquisition, building improvements, fixtures, vehicles, net inventory investment and computer equipment, are estimated to average approximately$1.5 million to$1.8 million ; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.
Financing activities:
The increase in net cash used in financing activities in 2020 compared to 2019 was primarily attributable to an increase in repurchases of our common stock during 2020, compared to 2019, the redemption of$500 million aggregate principal amount of unsecured 4.875% Senior Notes due 2021 and no borrowings on our revolving credit facility atDecember 31, 2020 , partially offset by higher proceeds from the issuance of long-term debt in 2020, compared to 2019.
2019 Compared to 2018:
A discussion of the changes in our operating activities, liquidity activities and financing activities for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , has been omitted from this Form 10-K but may be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the annual report on Form 10-K for the year ended 32December 31, 2019 , filed with theSecurities and Exchange Commission (the "SEC") onFebruary 28, 2020 , which is available free of charge on theSEC's website at www.sec.gov by searching with our ticker symbol "ORLY" or at our internet address, www.OReillyAuto.com, by clicking "Investor Relations" located at the bottom of the page.
Unsecured revolving credit facility:
OnApril 5, 2017 , the Company entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides for a five-year$1.2 billion unsecured revolving credit facility (the "Revolving Credit Facility") arranged byJPMorgan Chase Bank, N.A ., which is scheduled to mature inApril 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$1.8 billion at any time.
As of
Senior Notes:
OnMarch 27, 2020 , we issued$500 million aggregate principal amount of unsecured 4.200% Senior Notes due 2030 ("4.200% Senior Notes due 2030") at a price to the public of 99.959% of their face value withU.S. Bank National Association ("U.S. Bank ") as trustee. Interest on the 4.200% Senior Notes due 2030 is payable onApril 1 andOctober 1 of each year, which began onOctober 1, 2020 , and is computed on the basis of a 360-day year.
On
Interest on the 1.750% Senior Notes due 2031 is payable on
OnOctober 14, 2020 , we redeemed our$500 million aggregate principal amount of unsecured 4.875% Senior Notes due 2021 at a redemption price of$500 million , plus accrued and unpaid interest to, but not including, the date of redemption. As ofDecember 31, 2020 , we have issued and have outstanding a cumulative$4.2 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2031, withUMB Bank, N.A . andU.S. Bank as trustees. Interest on the senior notes, ranging from 1.750% to 4.625%, 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 ofDecember 31, 2020 , 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 5.93 times and 5.21 times
as of
33
The table below outlines the calculations of the consolidated fixed charge
coverage ratio and consolidated leverage ratio covenants, as defined in the
Credit Agreement governing the Revolving Credit Facility, for the years ended
For the Year Ended
December 31,
2020 2019
GAAP net income $ 1,752,302 $ 1,391,042
Add: Interest expense 161,126 139,975
Rent expense (1) 354,316 338,697
Provision for income taxes 514,103 399,287
Depreciation expense 305,566 270,076
Amortization expense 9,069 799
Non-cash share-based compensation 22,747 21,921
Non-GAAP EBITDAR $ 3,119,229 $ 2,561,797
Interest expense $ 161,126 $ 139,975
Capitalized interest 10,180 12,998
Rent expense (1) 354,316 338,697
Total fixed charges $ 525,622 $ 491,670
Consolidated fixed charge coverage ratio 5.93 5.21
GAAP debt $ 4,123,217 $ 3,890,527
Add: Stand-by letters of credit 66,427 38,870
Discount on senior notes 5,071 3,515
Debt issuance costs 21,712 16,958
Five-times rent expense 1,771,580 1,693,485
Non-GAAP adjusted debt $ 5,988,007 $ 5,643,355
Consolidated leverage ratio 1.92 2.20
The table below outlines the calculation of Rent expense and reconciles Rent
expense to Total lease cost, per Accounting Standard Codification 842 ("
GAAP financial measure, for the twelve months ended
2019 (in thousands):
Total lease cost, per ASC 842, for the year ended December 31, 2020 $ 420,365
Less: Variable non-contract operating lease components, related
to property taxes and insurance, for the year ended
December 31, 2020 66,049Rent expense for the year endedDecember 31, 2020
Total lease cost, per ASC 842, for the year ended December 31, 2019$ 398,294 Less: Variable non-contract operating lease components, related to property taxes and insurance, for the year ended December 31, 2019 59,597
Rent expense for the year endedDecember 31, 2019
$ 338,697 The table below outlines the calculation of Free cash flow and reconciles Free cash flow to Net cash provided by operating activities, the most directly comparable GAAP financial measure, for the years endedDecember 31, 2020 and 2019 (in thousands): For the Year EndedDecember 31, 2020 2019
Cash provided by operating activities$ 2,836,603 $
1,708,479
Less: Capital expenditures 465,579
628,057
Excess tax benefit from share-based compensation
payments 16,918 25,992
Investment in tax credit equity investments 164,111 33,781
Free cash flow $ 2,189,995 $ 1,020,649
34
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 onFebruary 5, 2020 ,October 28, 2020 , andFebruary 10, 2021 , our Board of Directors each time approved a resolution to increase the authorization amount under our share repurchase program by an additional$1.0 billion , resulting in a cumulative authorization amount of$15.8 billion . Each additional authorization is effective for a three-year period, beginning on its respective announcement date. In order to conserve liquidity in response to COVID-19, we suspended our share repurchase program onMarch 16, 2020 . We continued to evaluate business conditions and our liquidity and, as a result of this evaluation, resumed our share repurchase program onMay 29, 2020 . The following table identifies shares of our common stock that have been repurchased as part of our publicly announced share repurchase program for the year endedDecember 31, 2020 and 2019 (in thousands, except per share data): For the Year Ended December 31, 2020 2019 Shares repurchased 4,832 3,877 Average price per share$ 431.93 $ 369.55 Total investment$ 2,087,146 $ 1,432,752 As ofDecember 31, 2020 , we had$481.5 million remaining under our share repurchase program. Subsequent to the end of the year and throughFebruary 26, 2021 , we repurchased an additional 1.1 million shares of our common stock under our share repurchase program, at an average price of$447.49 , for a total investment of$478.4 million . We have repurchased a total of 82.1 million shares of our common stock under our share repurchase program since the inception of the program in January of 2011 and throughFebruary 26, 2021 , at an average price of$179.65 for a total aggregate investment of$14.7 billion .
As
of
CONTRACTUAL OBLIGATIONS Our contractual obligations as ofDecember 31, 2020 , included commitments for short and long-term debt arrangements, interest payments related to long-term debt, future payments under non-cancelable lease arrangements, self-insurance reserves, purchase obligations for construction contract commitments and other long-term liabilities, which are identified in the table below and are fully disclosed in Note 6 "Leases," Note 13 "Share-Based Compensation and Benefit Plans" and Note 14 "Commitments" to the Consolidated Financial Statements. We expect to fund these commitments primarily with operating cash flows expected to be generated in the normal course of business or through borrowings under our Revolving Credit Facility. Deferred income taxes, as well as commitments with various suppliers for the purchase of inventory, are not reflected in the table below due to the absence of scheduled maturities, the nature of the account or the commitment's cancellation terms. Due to the absence of scheduled maturities, the timing of certain of these payments cannot be determined, except for amounts estimated to be payable in 2021, which are included in "Current liabilities" on our Consolidated Balance Sheets. We record a reserve for potential liabilities related to uncertain tax positions, including estimated interest and penalties, which are fully disclosed in Note 16 "Income Taxes" to the Consolidated Financial Statements. These estimates are not included in the table below because the timing related to the ultimate resolution or settlement of these positions cannot be determined. As ofDecember 31, 2020 , we recorded a net liability of$35.9 million related to these uncertain tax positions on our Consolidated Balance Sheets, all of which was included in "Other liabilities." 35
We record a reserve for the projected obligation related to future payments under the Company's nonqualified deferred compensation plan, which is fully disclosed in Note 13 "Share-Based Compensation and Benefit Plans" to the Consolidated Financial Statements. This estimate is not included in the table below because the timing related to the ultimate payment cannot be determined.
As ofDecember 31, 2020 , we recorded a liability of$40.4 million related to this uncertain liability on our Consolidated Balance Sheets, all of which was included in "Other liabilities."
The following table identifies the estimated payments of the Company's
contractual obligations as of
Payments Due By Period
Before Years Years Years 5
Contractual Obligations Total 1 Year 1 and 2 3 and 4 and Over
Long-term debt principal and interest
payments (1) $ 5,121,911 $ 453,410 $ 861,581 $ 231,500 $ 3,575,420
Future minimum lease payments under
operating leases (2) 2,415,508 322,477 589,425 457,298 1,046,308
Self-insurance reserves (3) 213,332 109,199 65,489 25,233 13,411
Construction commitments 38,268 38,268 - - -
Total contractual cash obligations $ 7,789,019 $ 923,354 $
1,516,495
(1) Our Revolving Credit Facility, which has a maximum aggregate commitment of
line loans), at our option, at either the Alternate Base Rate or Adjusted
LIBO Rate (both as defined in the Credit Agreement) plus a margin, that will
vary from 0.000% to 0.250% in the case of loans bearing interest at the
Alternate Base Rate and 0.680% to 1.250% in the case of loans bearing
interest at the Adjusted LIBO Rate, in each case based upon the better of the
ratings assigned to our debt by
Poor's Rating Services, subject to limited exceptions. Swing line loans made
under the Revolving Credit Facility bear interest at the Alternate Base Rate
plus the applicable margin described above. In addition, we pay a facility
fee on the aggregate amount of the commitments in an amount equal to
a percentage of such commitments, varying from 0.070% to 0.250% per annum
based upon the better of the ratings assigned to our debt by Moody's Investor
exceptions. Based on our current credit ratings, our margin for Alternate
Base Rate loans was 0.000%, our margin for Eurodollar Revolving Loans was
0.900% and our facility fee was 0.100%. As of
outstanding borrowings under our Revolving Credit Facility.
(2) The minimum lease payments above do not include potential amounts for
percentage rent and other variable operating lease related costs, which are
also required contractual obligations under our operating leases but are
generally not fixed and can fluctuate from year to year. See Note 6 "Leases"
to the Consolidated Financial Statements for further information on our
operating leases.
(3) We use various self-insurance mechanisms to provide for potential liabilities
from workers' compensation, vehicle and general liability and employee health
care benefits. The self-insurance reserves above are at the undiscounted
obligation amount. The self-insurance reserves liabilities are recorded on
our Consolidated Balance Sheets at our estimate of their net present value
and do not have scheduled maturities; however, we can estimate the timing of
future payments based upon historical patterns. See Note 14 "Commitments" to
the Consolidated Financial Statements for further information on our
self-insurance reserves.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity, for which we have an obligation to the entity that is not recorded in our consolidated financial statements. We historically utilized various off-balance sheet financial instruments, including sale-leaseback and synthetic lease transactions, but we have not entered into any such transactions for over 10 years and do not plan to utilize off-balance sheet arrangements in the future to fund our working capital requirements, operations or growth plans. We issue stand-by letters of credit provided by a$200 million sub-limit under the Revolving Credit Facility that reduce our available borrowings under the Revolving Credit Facility. Those letters of credit are issued primarily to satisfy the requirements of workers' compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term from the date of issuance. Letters of credit totaling$66.4 million and$38.9 million were outstanding atDecember 31, 2020 and 2019, respectively. We do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by management. Management bases its assumptions, estimates and adjustments on historical experience, current trends and other factors believed to be relevant at the time the consolidated financial statements are prepared. Management believes that the following policies are critical due to the inherent uncertainty of these matters and the complex and subjective judgments required in establishing these estimates.
Management continues to review these critical accounting policies and estimates to ensure that the consolidated financial
36
statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates and such differences could be material.
Supplier Concessions: We receive concessions from our suppliers through a variety of programs and arrangements, including co-operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising allowances that are incremental to our 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 material supplier concessions are recognized as a reduction to the cost of sales. Amounts receivable from suppliers also include amounts due to us relating to supplier purchases and product returns. Management regularly reviews amounts receivable from suppliers and assesses the need for a reserve for uncollectible amounts based on our evaluation of our suppliers' financial position and corresponding ability to meet their financial obligations. Based on our historical results and current assessment, we have not recorded a reserve for uncollectible amounts in our consolidated financial statements, and we do not believe there is a reasonable likelihood that our ability to collect these amounts will differ from our expectations. The eventual ability of our suppliers to pay us the obliged amounts could differ from our assumptions and estimates, and we may be exposed to losses or gains that could be material.
Valuation of Long-Lived Assets:
We evaluate the carrying value of finite and indefinite long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. As a component of the finite long-lived assets evaluation, we review performance at the store level to identify any stores with current period operating losses that should be considered for impairment. A potential impairment has occurred if the projected future undiscounted cash flows realized from the best possible use of the asset are less than the carrying value of the asset. The estimate of cash flows includes management's assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. As a component of the indefinite long-lived assets evaluation, we perform a qualitative assessment to determine if events or circumstances that could affect the inputs used to determine the fair value of the intangible asset have occurred, as well as if they continue to support an indefinite useful life. Areas evaluated include changes in cost factors such as raw materials or labor, financial performance including declining revenues or cash flows, the legal, regulatory and political environment, and other industry and market considerations, including the competitive environment and changes in product demand. If events or market conditions exist that would more likely than not indicate that impairment may be necessary, a detailed quantitative assessment would be performed. Based on our qualitative assessment, we do not believe there has been a change of events or circumstances that would indicate that a calculation of fair value of indefinite long-lived assets is required as ofDecember 31, 2020 . Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual results could differ from these estimates, which could materially impact our impairment assessment. Self-Insurance Reserves:
We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities from workers' compensation, general liability, vehicle liability, property loss and Team Member health care benefits. With the exception of certain Team Member health care benefit liabilities, employment related claims and litigation, certain commercial litigation and certain regulatory matters, we obtain third-party insurance coverage to limit our exposure for any individual workers' compensation, general liability, vehicle liability or property loss claim. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and trend-lines, projected medical and legal inflation, growth patterns and exposure forecasts. The assumptions made by management as they relate to each of these factors represent our judgment as to the most probable cumulative impact of each factor to our future obligations. Our calculation of self-insurance liabilities requires management to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date, and the application of alternative assumptions could result in a different estimate of these liabilities. Actual claim activity or development may vary from our assumptions and estimates, which may result in material losses or gains. As we obtain additional information that affects the assumptions and estimates we used to recognize liabilities for claims incurred in prior accounting periods, we adjust our self-insurance liabilities to reflect the revised estimates based on this additional information. These liabilities are recorded at our estimate of their net present value. These liabilities do not have scheduled maturities, but we can estimate the timing of future payments based upon historical patterns. We could apply alternative assumptions regarding the timing of payments or the applicable discount rate that could result in materially different estimates of the net present value of the liabilities. If self-insurance reserves were changed 10% from our estimated reserves atDecember 31, 2020 , the financial impact would have been approximately$20 million or 0.9% of pretax income for the year endedDecember 31, 2020 . 37 INFLATION AND SEASONALITY We have generally been successful in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition cost increased due to price increases industry-wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations. To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales 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
See Note 1 "Summary of Significant Accounting Policies" to the Consolidated Financial Statements for information about recent accounting pronouncements.
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