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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

O’REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

Missouri

    

000-21318

    

27-4358837

(State or other jurisdiction of

Commission file number

(I.R.S. Employer Identification No.)

incorporation or organization)

233 South Patterson Avenue

Springfield, Missouri 65802

(Address of principal executive offices, Zip code)

(417) 862-6708

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol(s)

    

Name of Each Exchange on which Registered

Common Stock

$0.01 par value

ORLY

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Emerging growth company

Non-accelerated filer

Smaller reporting company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:  Common stock, $0.01 par value - 74,064,777 shares outstanding as of August 3, 2020.  

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2020

TABLE OF CONTENTS

    

Page

PART I - FINANCIAL INFORMATION

2

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Income

3

Condensed Consolidated Statements of Comprehensive Income

4

Condensed Consolidated Statements of Shareholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

ITEM 4 - CONTROLS AND PROCEDURES

26

PART II - OTHER INFORMATION

28

ITEM 1 - LEGAL PROCEEDINGS

28

ITEM 1A - RISK FACTORS

28

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

28

ITEM 6 - EXHIBITS

29

SIGNATURE PAGES

30

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

    

June 30, 2020

    

December 31, 2019

(Unaudited)

(Note)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

872,423

$

40,406

Accounts receivable, net

 

243,660

 

214,915

Amounts receivable from suppliers

 

86,513

 

79,492

Inventory

 

3,528,683

 

3,454,092

Other current assets

 

53,206

 

44,757

Total current assets

 

4,784,485

 

3,833,662

Property and equipment, at cost

 

6,403,936

 

6,191,427

Less: accumulated depreciation and amortization

 

2,365,453

 

2,243,224

Net property and equipment

 

4,038,483

 

3,948,203

Operating lease, right-of-use assets

1,926,270

1,928,369

Goodwill

 

872,997

 

936,814

Other assets, net

 

106,300

 

70,112

Total assets

$

11,728,535

$

10,717,160

Liabilities and shareholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

3,936,400

$

3,604,722

Self-insurance reserves

 

90,890

 

79,079

Accrued payroll

 

107,116

 

100,816

Accrued benefits and withholdings

 

140,446

 

98,539

Income taxes payable

 

91,797

 

Current portion of operating lease liabilities

318,601

316,061

Other current liabilities

 

336,886

 

270,210

Total current liabilities

 

5,022,136

 

4,469,427

Long-term debt

 

4,127,397

 

3,890,527

Operating lease liabilities, less current portion

1,652,284

1,655,297

Deferred income taxes

 

155,530

 

133,280

Other liabilities

 

182,088

 

171,289

Shareholders’ equity:

 

  

 

  

Common stock, $0.01 par value:

 

Authorized shares – 245,000,000

Issued and outstanding shares –

74,097,706 as of June 30, 2020, and

75,618,659 as of December 31, 2019

741

 

756

Additional paid-in capital

 

1,289,976

 

1,280,760

Retained deficit

 

(679,506)

 

(889,066)

Accumulated other comprehensive (loss) income

(22,111)

4,890

Total shareholders’ equity

 

589,100

 

397,340

Total liabilities and shareholders’ equity

$

11,728,535

$

10,717,160

Note:  The balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

See accompanying Notes to condensed consolidated financial statements.

2

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Sales

$

3,091,595

$

2,589,874

$

5,568,082

$

5,000,482

Cost of goods sold, including warehouse and distribution expenses

 

1,454,415

 

1,221,587

 

2,634,996

 

2,352,905

Gross profit

 

1,637,180

 

1,368,287

 

2,933,086

 

2,647,577

Selling, general and administrative expenses

 

900,690

 

870,213

 

1,773,035

 

1,704,717

Operating income

 

736,490

 

498,074

 

1,160,051

 

942,860

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(41,723)

 

(34,538)

 

(81,109)

 

(68,829)

Interest income

 

635

 

603

 

1,310

 

1,157

Other, net

 

5,008

 

832

 

(182)

 

3,935

Total other expense

 

(36,080)

 

(33,103)

 

(79,981)

 

(63,737)

Income before income taxes

 

700,410

 

464,971

 

1,080,070

 

879,123

Provision for income taxes

 

168,743

 

111,290

 

247,965

 

204,290

Net income

$

531,667

$

353,681

$

832,105

$

674,833

Earnings per share-basic:

 

  

 

  

 

  

 

  

Earnings per share

$

7.16

$

4.56

$

11.15

$

8.65

Weighted-average common shares outstanding – basic

 

74,205

 

77,613

 

74,611

 

78,047

Earnings per share-assuming dilution:

 

  

 

  

 

  

 

  

Earnings per share

$

7.10

$

4.51

$

11.06

$

8.56

Weighted-average common shares outstanding – assuming dilution

 

74,833

 

78,412

 

75,246

 

78,854

See accompanying Notes to condensed consolidated financial statements.

3

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Net income

$

531,667

$

353,681

$

832,105

$

674,833

Other comprehensive income (loss):

Foreign currency translation adjustments

 

3,645

 

 

(27,001)

 

Total other comprehensive income (loss)

3,645

(27,001)

 

Comprehensive income

$

535,312

$

353,681

$

805,104

$

674,833

See accompanying Notes to condensed consolidated financial statements.

4

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)

For the Three Months Ended June 30, 2020

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income (Loss)

    

Total

Balance at March 31, 2020

 

74,199

$

742

$

1,271,250

$

(1,137,392)

$

(25,756)

$

108,844

Net income

 

 

 

 

531,667

 

531,667

Total other comprehensive income

 

 

3,645

3,645

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

15

 

 

4,818

 

 

4,818

Net issuance of common stock upon exercise of stock options

 

69

 

1

 

11,846

 

 

11,847

Share based compensation

 

 

 

5,254

 

 

5,254

Share repurchases, including fees

 

(185)

 

(2)

 

(3,192)

 

(73,781)

 

(76,975)

Balance at June 30, 2020

 

74,098

$

741

$

1,289,976

$

(679,506)

$

(22,111)

$

589,100

For the Six Months Ended June 30, 2020

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income (Loss)

    

Total

Balance at December 31, 2019

 

75,619

$

756

$

1,280,760

$

(889,066)

$

4,890

$

397,340

Net income

 

 

 

 

832,105

 

832,105

Total other comprehensive loss

(27,001)

(27,001)

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

27

 

 

8,922

 

 

8,922

Net issuance of common stock upon exercise of stock options

 

121

 

2

 

17,981

 

 

17,983

Share-based compensation

 

 

 

10,778

 

 

10,778

Share repurchases, including fees

 

(1,669)

 

(17)

 

(28,465)

 

(622,545)

 

(651,027)

Balance at June 30, 2020

 

74,098

$

741

$

1,289,976

$

(679,506)

$

(22,111)

$

589,100

For the Three Months Ended June 30, 2019

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income

    

Total

Balance at March 31, 2019

 

78,262

$

783

$

1,268,032

$

(896,450)

$

$

372,365

Net income

 

 

 

 

353,681

 

353,681

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

13

 

 

4,281

 

 

4,281

Net issuance of common stock upon exercise of stock options

 

48

 

 

7,973

 

 

7,973

Share based compensation

 

 

 

5,243

 

 

5,243

Share repurchases, including fees

 

(1,633)

 

(16)

 

(26,599)

 

(572,246)

 

(598,861)

Balance at June 30, 2019

 

76,690

$

767

$

1,258,930

$

(1,115,015)

$

$

144,682

For the Six Months Ended June 30, 2019

 

 

 

Accumulated

 

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

    

Shares

    

Par Value

    

Capital

    

Deficit

Income

    

Total

Balance at December 31, 2018

 

79,044

$

790

$

1,262,063

$

(909,186)

$

$

353,667

Cumulative effective adjustment from adoption of ASU 2016-02

(1,410)

(1,410)

Net income

 

 

 

 

674,833

 

674,833

Issuance of common stock under employee benefit plans, net of forfeitures and shares withheld to cover taxes

 

25

 

 

8,053

 

 

8,053

Net issuance of common stock upon exercise of stock options

 

181

 

2

 

19,926

 

 

19,928

Share-based compensation

 

 

 

10,328

 

 

10,328

Share repurchases, including fees

 

(2,560)

 

(25)

 

(41,440)

 

(879,252)

 

(920,717)

Balance at June 30, 2019

 

76,690

$

767

$

1,258,930

$

(1,115,015)

$

$

144,682

See accompanying Notes to condensed consolidated financial statements.

5

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

For the Six Months Ended

June 30, 

    

2020

    

2019

(Note)

Operating activities:

 

  

 

  

Net income

$

832,105

$

674,833

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization of property, equipment and intangibles

 

151,873

 

132,275

Amortization of debt discount and issuance costs

 

2,152

 

1,887

Deferred income taxes

 

14,987

 

8,364

Share-based compensation programs

 

11,480

 

11,015

Other

 

1,906

 

4,277

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(34,966)

 

(74,978)

Inventory

 

(78,086)

 

(69,103)

Accounts payable

 

334,503

 

138,522

Income taxes payable

 

210,855

 

(833)

Other

 

112,269

 

20,745

Net cash provided by operating activities

 

1,559,078

 

847,004

Investing activities:

 

  

 

  

Purchases of property and equipment

 

(244,471)

 

(295,608)

Proceeds from sale of property and equipment

 

4,846

 

3,138

Investment in tax credit equity investments

(95,292)

(1,717)

Other

 

(311)

 

839

Net cash used in investing activities

 

(335,228)

 

(293,348)

Financing activities:

 

  

 

  

Proceeds from borrowings on revolving credit facility

 

1,162,000

 

1,629,000

Payments on revolving credit facility

 

(1,423,000)

 

(1,760,000)

Proceeds from the issuance of long-term debt

 

499,795

 

499,955

Payment of debt issuance costs

 

(3,840)

 

(3,988)

Repurchases of common stock

 

(651,027)

 

(920,717)

Net proceeds from issuance of common stock

 

25,593

 

26,778

Other

 

(253)

 

(190)

Net cash used in financing activities

 

(390,732)

 

(529,162)

Effect of exchange rate changes on cash

(1,101)

Net increase in cash and cash equivalents

 

832,017

 

24,494

Cash and cash equivalents at beginning of the period

 

40,406

 

31,315

Cash and cash equivalents at end of the period

$

872,423

$

55,809

Supplemental disclosures of cash flow information:

 

  

 

  

Income taxes paid

$

20,187

$

194,503

Interest paid, net of capitalized interest

 

73,091

 

64,201

Note: Certain prior period amounts have been reclassified to conform to current period presentation.

See accompanying Notes to condensed consolidated financial statements.

6

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2020

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of O’Reilly Automotive, Inc. and its subsidiaries (the “Company” or “O’Reilly”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six months ended June 30, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications had no effect on reported totals for assets, liabilities, shareholders’ equity, cash flows or net income.

Principles of consolidation:

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company balances and transactions have been eliminated in consolidation.

Variable Interest Entities:

The Company invests in certain tax credit funds that promote renewable energy.  These investments generate a return primarily through the realization of federal tax credits and other tax benefits.  The Company accounts for the tax attributes of its renewable energy investments using the deferral method.  Under this method, realized investment tax credits and other tax benefits are recognized as a reduction of the renewable energy investments.

The Company determined its investment in these tax credit funds was an investment in a variable interest entity (“VIE”).  The Company analyzes any investments in VIEs at inception and again if certain triggering events are identified to determine if it is the primary beneficiary.  The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities.  As of June 30, 2020, the Company invested in two unconsolidated tax credit fund entities that were considered to be VIEs and concluded it was not the primary beneficiary of either entity, as it did not have the power to control the activities that most significantly impact the entities, and has accounted for these investments using the equity method.  The Company’s maximum exposure to losses associated with these VIEs is limited to its net investment, which was $14.3 million as of June 30, 2020, and was included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets.

NOTE 2 – BUSINESS COMBINATION

After the close of business on November 29, 2019, the Company completed the acquisition of Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), a specialty retailer of automotive aftermarket parts headquartered in Guadalajara, Jalisco, Mexico pursuant to a stock purchase agreement.  The results of Mayasa’s operations have been included in the Company’s condensed consolidated financial statements beginning from the date of acquisition.  Pro forma results of operations related to the acquisition of Mayasa are not presented as Mayasa’s results are not material to the Company’s results of operations.

The Company’s preliminary assessment resulted in the initial recognition of $128.1 million of goodwill and intangible assets included in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets as of December 31, 2019.

The purchase price allocation process, consisting of collecting data and information to enable the Company to value the identified assets acquired and liabilities assumed as a result of the business combination, remains preliminary.  During the second quarter of 2020, the Company updated the purchase price assessment to make preliminary allocations for certain separately identifiable intangible assets.  Separately identifiable intangible assets, arising as a result of the business combination, include $36.0 million of indefinite lived trade names and trademarks and $22.3 million of finite lived intangible assets, primarily consisting of other trade names and trademarks, non-compete agreements, customer relationships and internal use software.  Residual goodwill of $75.6 million was recorded as of the acquisition date, as a result of the updated purchase price allocation.  Goodwill generated from this acquisition is not amortizable for tax purposes.  

7

NOTE 3 – FAIR VALUE MEASUREMENTS

The Company uses the fair value hierarchy, which prioritizes the inputs used to measure the fair value of certain of its financial instruments.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  The Company uses the income and market approaches to determine the fair value of its assets and liabilities.  The three levels of the fair value hierarchy are set forth below:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 – Inputs other than quoted prices in active markets included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability.

Financial assets and liabilities measured at fair value on a recurring basis:

The Company invests in various marketable securities with the intention of selling these securities to fulfill its future unsecured obligation under the Company’s nonqualified deferred compensation plan.  See Note 11 for further information concerning the Company’s benefit plans.

The Company’s marketable securities were accounted for as trading securities and the carrying amount of its marketable securities were included in “Other assets, net” on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019.  The Company recorded an increase in fair value related to its marketable securities in the amount of $4.5 million and $1.0 million for the three months ended June 30, 2020 and 2019, which were included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income.  The Company recorded a decrease in fair value related to its marketable securities in the amount of $0.7 million for the six months ended June 30, 2020, and an increase in fair value related to its marketable securities in the amount of $3.7 million for the six months ended June 30, 2019, which were included in “Other income (expense)” on the accompanying Condensed Consolidated Statements of Income.  

The tables below identify the estimated fair value of the Company’s marketable securities, determined by reference to quoted market prices (Level 1), as of June 30, 2020, and December 31, 2019 (in thousands):

June 30, 2020

Quoted Priced in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

33,250

$

$

$

33,250

December 31, 2019

Quoted Prices in Active Markets

Significant Other

Significant

for Identical Instruments

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Marketable securities

$

32,201

$

$

$

32,201

Non-financial assets and liabilities measured at fair value on a nonrecurring basis:

Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain circumstances, including when there is evidence of impairment.  These non-financial assets and liabilities may include assets acquired in a business combination or property and equipment that are determined to be impaired.  As of June 30, 2020, and December 31, 2019, the Company did not have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.

Fair value of financial instruments:

The carrying amounts of the Company’s senior notes and unsecured revolving credit facility borrowings are included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019.  See Note 6 for further information concerning the Company’s senior notes and unsecured revolving credit facility.

8

The table below identifies the estimated fair value of the Company’s senior notes, using the market approach.  The fair value as of June 30, 2020, and December 31, 2019, was determined by reference to quoted market prices of the same or similar instruments (Level 2) (in thousands):

June 30, 2020

December 31, 2019

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Senior Notes

$

4,127,397

$

4,605,743

$

3,629,527

$

3,881,925

The carrying amount of the Company’s unsecured revolving credit facility approximates fair value (Level 2), as borrowings under the facility bear variable interest at current market rates.

The accompanying Condensed Consolidated Balance Sheets include other financial instruments, including cash and cash equivalents, accounts receivable, amounts receivable from suppliers and accounts payable.  Due to the short-term nature of these financial instruments, the Company believes that the carrying values of these instruments approximate their fair values.

NOTE 4 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments.  The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current expectations of future economic and industry trends, changes in customer payment terms and management’s expectations.  Allowances for doubtful accounts are determined based on historical experience and an evaluation of the current composition of accounts receivable.  The Company grants credit to certain professional service provider and jobber customers who meet the Company’s pre-established credit requirements.  Concentrations of credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of small customers, spreading the credit risk across a broad base regarded as a single class of financing receivable by the Company.  The Company also controls this credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures.  Generally, the Company does not require security when credit is granted to customers.  Credit is granted to customers on a short-term basis, consisting primarily of daily, weekly or monthly accounts.  Credit losses are provided for in the Company’s condensed consolidated financial statements and have consistently been within management’s expectations.

The Company’s allowance for doubtful accounts are included in “Accounts receivable, net” on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019.  The following table identifies the changes in the Company’s allowance for doubtful accounts for the six months ended June 30, 2020 (in thousands):

Allowance for doubtful accounts, balance at December 31, 2019

$

14,417

Reserve accruals

 

2,889

Uncollectable accounts written-off

(3,703)

Foreign currency translation

 

(128)

Allowance for doubtful accounts, balance at June 30, 2020

$

13,475

The Company receives concessions from its suppliers through a variety of programs and arrangements, including allowances for new stores and warranties, volume purchase rebates and co-operative advertising.  Co-operative advertising allowances that are incremental to the Company’s advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred.  All other supplier concessions are recognized as a reduction to the cost of sales.  Amounts receivable from suppliers also include amounts due to the Company for changeover merchandise and product returns.  The Company regularly reviews supplier receivables for collectability and assesses the need for a reserve for uncollectable amounts based on an evaluation of the Company’s suppliers’ financial positions and corresponding abilities to meet financial obligations.  Management does not believe there is a reasonable likelihood that the Company will be unable to collect the aggregate amounts receivable from suppliers and the Company did not record a reserve for uncollectable amounts from suppliers in the condensed consolidated financial statements as of June 30, 2020, and December 31, 2019.

See Note 14 for further information concerning the Company’s adoption of Accounting Standard Codification 326 – Financial Instruments – Credit Losses.

9

NOTE 5 – LEASES

The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases.  The following table summarizes Total lease cost for the three and six months ended June 30, 2020 and 2019, which were primarily included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income (in thousands):

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2020

2019

    

2020

2019

Operating lease cost

$

83,461

$

80,091

$

166,656

$

158,905

Short-term operating lease cost

 

941

 

1,546

 

2,725

 

3,604

Variable operating lease cost

 

20,776

 

18,885

 

41,109

 

37,263

Sublease income

 

(1,187)

 

(976)

 

(2,362)

 

(1,933)

Total lease cost

$

103,991

$

99,546

$

208,128

$

197,839

The following table summarizes other lease related information for the six months ended June 30, 2020:

    

For the Six Months Ended

June 30, 

2020

2019

Cash paid for amounts included in the measurement of operating lease liabilities:

 

  

Operating cash flows from operating leases

$

165,665

$

157,372

Right-of-use assets obtained in exchange for new operating lease liabilities

125,160

79,018

NOTE 6 – FINANCING

The following table identifies the amounts included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019 (in thousands):

    

June 30, 2020

    

December 31, 2019

Revolving Credit Facility

$

$

261,000

4.875% Senior Notes due 2021, effective interest rate of 4.947%

 

500,000

 

500,000

4.625% Senior Notes due 2021, effective interest rate of 4.643%

 

300,000

 

300,000

3.800% Senior Notes due 2022, effective interest rate of 3.845%

 

300,000

 

300,000

3.850% Senior Notes due 2023, effective interest rate of 3.851%

 

300,000

 

300,000

3.550% Senior Notes due 2026, effective interest rate of 3.570%

 

500,000

 

500,000

3.600% Senior Notes due 2027, effective interest rate of 3.619%

 

750,000

 

750,000

4.350% Senior Notes due 2028, effective interest rate of 4.383%

 

500,000

 

500,000

3.900% Senior Notes due 2029, effective interest rate of 3.901%

500,000

500,000

4.200% Senior Notes due 2030, effective interest rate of 4.205%

500,000

Principal amount of long-term debt

4,150,000

3,911,000

Less: Unamortized discount and debt issuance costs

22,603

20,473

Long-term debt

$

4,127,397

$

3,890,527

Unsecured revolving credit facility:

On April 5, 2017, the Company entered into a credit agreement (the “Credit Agreement”).  The Credit Agreement provides for a $1.2 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 under the Revolving Credit Facility.  As described in the Credit Agreement governing the Revolving Credit Facility, the Company may, from time to time, subject to certain conditions, increase the aggregate commitments under the Revolving Credit Facility by up to $600 million, provided that the aggregate amount of the commitments does not exceed $1.8 billion at any time.

As of June 30, 2020, and December 31, 2019, the Company had outstanding letters of credit, primarily to support obligations related to workers’ compensation, general liability and other insurance policies, in the amounts of $51.6 million and $38.9 million, respectively, reducing the aggregate availability under the Credit Agreement by those amounts.

10

Borrowings under the Revolving Credit Facility (other than swing line loans) bear interest, at the Company’s option, at either an Alternate Base Rate or an Adjusted LIBO Rate (both as defined in the Credit Agreement) plus an applicable margin.  Swing line loans made under the Revolving Credit Facility bear interest at an Alternate Base Rate plus the applicable margin for Alternate Base Rate loans.  In addition, the Company pays a facility fee on the aggregate amount of the commitments under the Credit Agreement in an amount equal to a percentage of such commitments.  The interest rate margins and facility fee are based upon the better of the ratings assigned to the Company’s debt by Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, subject to limited exceptions.  As of June 30, 2020, based upon the Company’s current credit ratings, its margin for Alternate Base Rate loans was 0.000%, its margin for Eurodollar Revolving Loans was 0.900% and its facility fee was 0.100%.

The Credit Agreement contains certain covenants, including limitations on subsidiary 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 the Company should default on any covenant (subject to customary grace periods, cure rights and materiality thresholds) contained in the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from lenders.  As of June 30, 2020, the Company remained in compliance with all covenants under the Credit Agreement.

Senior notes:

On March 25, 2020, the Company 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 with U.S. Bank National Association (“U.S. Bank”) as trustee. Interest on the 4.200% Senior Notes due 2030 is payable on April 1 and October 1 of each year, beginning on October 1, 2020, and is computed on the basis of a 360-day year.

The Company has issued a cumulative $4.2 billion aggregate principal amount of unsecured senior notes, which are due between 2021 and 2030, 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 the Company’s subsidiaries is a guarantor under the senior notes.  Each of the senior notes is subject to certain customary covenants, with which the Company complied as of June 30, 2020.

NOTE 7 – WARRANTIES

The Company provides warranties on certain merchandise it sells with warranty periods ranging from 30 days to limited lifetime warranties. The risk of loss arising from warranty claims is typically the obligation of the Company’s suppliers. Certain suppliers provide upfront allowances to the Company in lieu of accepting the obligation for warranty claims.  For this merchandise, when sold, the Company bears the risk of loss associated with the cost of warranty claims.  Differences between supplier allowances received by the Company, in lieu of warranty obligations and estimated warranty expense, are recorded as an adjustment to cost of sales.  Estimated warranty costs, which are recorded as obligations at the time of sale, are based on the historical failure rate of each individual product line.  The Company’s historical experience has been that failure rates are relatively consistent over time and that the ultimate cost of warranty claims to the Company has been driven by volume of units sold as opposed to fluctuations in failure rates or the variation of the cost of individual claims.

The Company’s product warranty liabilities are included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019; the following table identifies the changes in the Company’s aggregate product warranty liabilities for the six months ended June 30, 2020 (in thousands):

Warranty liabilities, balance at December 31, 2019

$

61,069

Warranty claims

 

(50,598)

Warranty accruals

 

60,522

Warranty liabilities, balance at June 30, 2020

$

70,993

NOTE 8 – SHARE REPURCHASE PROGRAM

In January of 2011, the Company’s Board of Directors approved a share repurchase program. Under the program, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions.  The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any

11

time, without prior notice.  As announced on February 5, 2020, the Company’s Board of Directors approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a cumulative authorization amount of $13.8 billion.  The additional authorization is effective for three years, beginning on its respective announcement date.  In order to conserve liquidity in response to the novel coronavirus (“COVID-19”) pandemic, the Company suspended its share repurchase program on March 16, 2020.  The Company continued to evaluate business conditions and its liquidity and, as a result of this evaluation, resumed its share repurchase program on May 29, 2020.

The following table identifies shares of the Company’s common stock that have been repurchased as part of the Company’s publicly announced share repurchase program for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share data):

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Shares repurchased

 

185

 

1,633

 

1,669

 

2,560

Average price per share

$

417.79

$

366.76

$

390.14

$

359.63

Total investment

$

76,974

$

598,846

$

651,011

$

920,692

As of June 30, 2020, the Company had $917.7 million remaining under its share repurchase program.  Subsequent to the end of the second quarter and through August 7, 2020, the Company repurchased 0.1 million additional shares of its common stock under its share repurchase program, at an average price of $423.09, for a total investment of $35.8 million.  The Company has repurchased a total of 77.9 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through August 7, 2020, at an average price of $165.10, for a total aggregate investment of $12.9 billion.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes adjustments for foreign currency translations. The tables below summarize activity for changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2020 (in thousands):

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Loss

Accumulated other comprehensive loss, balance at March 31, 2020

$

(25,756)

$

(25,756)

Change in accumulated other comprehensive loss

3,645

3,645

Accumulated other comprehensive loss, balance at June 30, 2020

$

(22,111)

$

(22,111)

Foreign

Total Accumulated Other

Currency (1)

Comprehensive Income (Loss)

Accumulated other comprehensive income, balance at December 31, 2019

$

4,890

$

4,890

Change in accumulated other comprehensive income

(27,001)

(27,001)

Accumulated other comprehensive loss, balance at June 30, 2020

$

(22,111)

$

(22,111)

(1)Foreign currency translation is not shown net of additional U.S. tax, as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested.

NOTE 10 – REVENUE

The table below identifies the Company’s revenues disaggregated by major customer type for the three and six months ended June 30, 2020 and 2019 (in thousands):

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Sales to do-it-yourself customers

$

1,853,115

$

1,434,146

$

3,198,597

$

2,771,175

Sales to professional service provider customers