O REILLY AUTOMOTIVE INC (ORLY) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
| Column 1 | Column 2 | Column 3 |
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| ● | an overview of the key drivers and other influences on the automotive aftermarket industry; |
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| ● | our results of operations for the years ended December 31, 2024 and 2023; |
| Column 1 | Column 2 | Column 3 |
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| ● | our liquidity and capital resources; |
| Column 1 | Column 2 | Column 3 |
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| ● | our critical accounting estimates; and |
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| ● | recent accounting pronouncements that may affect our Company. |
The review of Management’s Discussion and Analysis should be made in conjunction with our 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 in the United States, Puerto Rico, Mexico, and Canada. We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both DIY customers and professional service providers – our “dual market strategy.” Our goal is to achieve growth in sales and profitability by capitalizing on our competitive advantages, such as our dual market strategy, superior customer service provided by well-trained and technically proficient Team Members, and strategic distribution and hub store network that provides same day and over-night inventory access for our stores to offer a broad selection of product offerings. The successful execution of our growth strategy includes aggressively opening new stores, growing sales in existing stores, continually enhancing merchandising and store layouts, and implementing our Omnichannel initiatives. As of December 31, 2024, we operated 6,265 stores in 48 U.S. states and Puerto Rico, 87 stores in Mexico, and 26 stores in Canada.
The extensive product line offered in our stores consists 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, generally, 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 enhanced 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; professional paint shop mixing and related materials; and machine shops.
Our business is influenced by a number of general macroeconomic factors that impact both our industry and consumers, including, but not limited to, inflation, including rising consumer staples; fuel and energy costs; unemployment trends; interest rates; and other economic factors. Future changes, such as continued broad-based inflation and rapid fuel cost increases that exceed wage growth, may negatively impact our consumers’ level of disposable income, and we cannot predict the degree these changes, or other future changes, may have on our business or industry.
We believe the key drivers of demand over the long-term for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, annual rate of light vehicle sales, and average vehicle age.
Number of Miles Driven:
The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation. According to the U.S. Department of Transportation, the number of total miles driven in the U.S. increased 0.9% and 2.1% in 2022, and 2023, respectively, and year-to-date through November of 2024, miles driven increased 1.0%. Total miles driven can be impacted by macroeconomic factors, including rapid increases in fuel cost, but we are unable to predict the degree of impact these factors may have on miles driven in the future.
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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 the Auto Care Association, the total number of registered vehicles increased 14.2% from 2013 to 2023, bringing the number of light vehicles on the road to 284 million by the end of 2023. For the year ended December 31, 2024, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 16.8 million vehicles, contributing to the continued growth in the total number of registered vehicles on the road. From 2013 to 2023, 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 the U.S. vehicle population has increased, growing 10.6%, from 11.3 years in 2013 to 12.5 years in 2023. While the annual changes to the vehicle population resulting from new vehicle sales and the fluctuation in vehicle scrappage rates in any given year represent a small percentage of the total light vehicle population and have a muted impact on the total number and average age of vehicles on the road over the short term, we believe our business benefits from the current environment of elevated new and used vehicle prices, as consumers are more willing to continue to invest in their current vehicle.
We believe the increase in average vehicle age over the long term 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, coupled with consumers’ 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.
Inflationary cost pressures impact our business; however, historically we have been successful, in many cases, in reducing the effects of merchandise cost increases, principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases, and selective forward buying. To the extent our acquisition costs increase due to base commodity price increases or other input cost increases affecting the entire industry, we have typically been able to pass along these cost increases through higher selling prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.
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.
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RESULTS OF OPERATIONS
The table below compares the Company’s selected financial data over a ten-year period:
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| Year ended December 31, | 2024 | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||
| (In thousands, except per share, Team Members, stores and ratio data) | |||||||||||||||||||||
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| SELECT INCOME STATEMENT RELATED DATA: | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| Percentage increase in comparable store sales (a)(b) | 2.9 | % | 7.9 | % | 6.4 | % | 13.3 | % | 10.9 | % | 4.0 | % | 3.8 | % | 1.4 | % | 4.8 | % | 7.5 | % | |
| Sales ($) | 16,708,479 | 15,812,250 | 14,409,860 | 13,327,563 | 11,604,493 | 10,149,985 | 9,536,428 | 8,977,726 | 8,593,096 | 7,966,674 | |||||||||||
| Gross profit | 8,554,489 | 8,104,803 | 7,381,706 | 7,019,949 | 6,085,692 | 5,394,691 | 5,039,966 | 4,720,683 | 4,509,011 | 4,162,643 | |||||||||||
| Operating income | 3,251,157 | 3,186,376 | 2,954,491 | 2,917,168 | 2,419,336 | 1,920,726 | 1,815,184 | 1,725,400 | 1,699,206 | 1,514,021 | |||||||||||
| Net income ($) (c)(d) | 2,386,680 | 2,346,581 | 2,172,650 | 2,164,685 | 1,752,302 | 1,391,042 | 1,324,487 | 1,133,804 | 1,037,691 | 931,216 | |||||||||||
| Earnings per share – basic ($) | 40.91 | 38.80 | 33.75 | 31.39 | 23.74 | 18.07 | 16.27 | 12.82 | 10.87 | 9.32 | |||||||||||
| Earnings per share – assuming dilution ($) (c)(d) | 40.66 | 38.47 | 33.44 | 31.10 | 23.53 | 17.88 | 16.10 | 12.67 | 10.73 | 9.17 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| SELECT BALANCE SHEET AND CASH FLOW RELATED DATA: | | | | | | | | | | | | | | | | | | | | | |
| Total assets ($) | 14,893,741 | 13,872,995 | 12,627,979 | 11,718,707 | 11,596,642 | 10,717,160 | 7,980,789 | 7,571,885 | 7,204,189 | 6,676,684 | |||||||||||
| Total debt ($) | | 5,520,932 | 5,570,125 | 4,371,653 | 3,826,978 | 4,123,217 | 3,890,527 | 3,417,122 | 2,978,390 | 1,887,019 | 1,390,018 | ||||||||||
| Shareholders’ (deficit) equity ($) (c) | (1,370,961) | (1,739,278) | (1,060,752) | (66,423) | 140,258 | 397,340 | 353,667 | 653,046 | 1,627,136 | 1,961,314 | |||||||||||
| Inventory turnover (e) | 1.7 | 1.7 | 1.7 | 1.7 | 1.5 | 1.4 | 1.4 | 1.4 | 1.5 | 1.5 | |||||||||||
| Accounts payable to inventory (f) | 128.0 | % | 130.8 | % | 134.9 | % | 127.4 | % | 114.5 | % | 104.4 | % | 105.7 | % | 106.0 | % | 105.7 | % | 99.1 | % | |
| Cash provided by operating activities ($) (g) | 3,049,576 | 3,034,084 | 3,148,250 | 3,207,310 | 2,836,603 | 1,708,479 | 1,727,555 | 1,403,687 | 1,510,713 | 1,345,488 | |||||||||||
| Capital expenditures ($) | 1,023,387 | 1,006,264 | 563,342 | 442,853 | 465,579 | 628,057 | 504,268 | 465,940 | 476,344 | 414,020 | |||||||||||
| Free cash flow ($) (g)(h) | 1,987,808 | 1,987,720 | 2,371,123 | 2,548,922 | 2,189,995 | 1,020,649 | 1,188,584 | 889,059 | 978,375 | 868,390 | |||||||||||
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| SELECT OPERATING DATA: | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| Number of Team Members at year end | 93,176 | 90,189 | 87,377 | 82,852 | 77,654 | 82,484 | 78,882 | 75,552 | 74,580 | 71,621 | |||||||||||
| Total number of stores at year end (i)(j)(k) | 6,378 | 6,157 | 5,971 | 5,784 | 5,616 | 5,460 | 5,219 | 5,019 | 4,829 | 4,571 | |||||||||||
| Number of domestic stores at year end (i) | | 6,265 | 6,095 | 5,929 | 5,759 | 5,594 | 5,439 | 5,219 | 5,019 | 4,829 | 4,571 | ||||||||||
| Number of Mexico stores at year end (j) | | 87 | 62 | 42 | 25 | 22 | 21 | — | — | — | — | ||||||||||
| Number of Canada stores at year end (k) | | 26 | — | — | — | — | — | — | — | — | — | ||||||||||
| Store square footage at year end (a)(l) | | 48,809 | 46,681 | 44,604 | 43,185 | 41,668 | 40,227 | 38,455 | 36,685 | 35,123 | 33,148 | ||||||||||
| Sales per weighted-average store ($) (a)(m) | 2,642 | 2,578 | 2,415 | 2,298 | 2,057 | 1,881 | 1,842 | 1,807 | 1,826 | 1,769 | |||||||||||
| Sales per weighted-average square foot ($) (a)(l)(n) | 342 | 340 | 322 | 307 | 277 | 255 | 251 | 248 | 251 | 244 |
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| (a) | Represents O’Reilly’s U.S. and Puerto Rico operations only. |
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| (b) | Comparable store sales are calculated based on the change in sales of U.S. stores open at least one year and excludes sales of specialty machinery, sales to independent parts stores, sales to Team Members, and sales from Leap Day during the years ended December 31, 2024, 2020, and 2016. Online sales, resulting from ship-to-home orders and pick-up-in-store orders for U.S. stores open at least one year are included in the comparable store sales calculation. |
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| (c) | During the year ended December 31, 2017, the Company adopted a new accounting standard that requires excess tax benefits related to share-based compensation payments to be recorded through the income statement. In compliance with the standard, the Company did not restate prior period amounts to conform to current period presentation. The Company recorded a cumulative effect adjustment to opening retained earnings, due to the adoption of the new accounting standard. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information. |
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| (d) | Following the enactment of the U.S. Tax Cuts and Jobs Act in December of 2017, the Company revalued its deferred income tax liabilities, which resulted in a one-time benefit to the Company’s Consolidated Statement of Income for the years ended December 31, 2018 and 2017. See Note 13 “Income Taxes” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2018, for more information. |
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| (e) | Inventory turnover is calculated as cost of goods sold for the last 12 months divided by average inventory. Average inventory is calculated as the average of inventory for the trailing four quarters used in determining the denominator. |
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| (f) | Accounts payable to inventory is calculated as accounts payable divided by inventory. |
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| Column 1 | Column 2 |
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| (g) | Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard during the first quarter ended March 31, 2017. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information. |
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| (h) | Free cash flow is calculated as net cash provided by operating activities less capital expenditures, excess tax benefit from share-based compensation payments, and (return of)/investment in tax credit equity investments for the period. |
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|---|---|
| (i) | In 2016 and 2018, the Company acquired materially all assets of Bond Auto Parts (“Bond”) and Bennett Auto Supply, Inc. (“Bennett”), respectively. After the close of business on December 31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett, including 33 stores that were not included in the 2018 store count and were not operated by the Company in 2018, but beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, and during the year ended December 31, 2019, the Company merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores. Financial results for these acquired companies have been included in the Company’s consolidated financial statements from the dates of the acquisitions forward. |
| Column 1 | Column 2 |
|---|---|
| (j) | In 2019, the Company acquired Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), which added 21 stores to the O’Reilly store count. Financial results for this acquired company have been included in the Company’s consolidated financial statements beginning from the date of the acquisition. |
| Column 1 | Column 2 |
|---|---|
| (k) | In January of 2024, the Company acquired Groupe Del Vasto (“Vast Auto”), which added 23 stores to the O’Reilly store count. Financial results for this acquired company have been included in the Company’s consolidated financial statements beginning from the date of the acquisition. |
| Column 1 | Column 2 |
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| (l) | Square footage includes normal selling, office, stockroom, and receiving space. |
| Column 1 | Column 2 |
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| (m) | Sales per weighted-average store are weighted to consider the approximate dates of store openings, acquisitions, or closures. |
| Column 1 | Column 2 |
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| (n) | Sales per weighted-average square foot are weighted to consider the approximate dates of domestic store openings, acquisitions, expansions, or closures. |
The following table includes income statement data as a percentage of sales, which is each calculated independently and may not compute to presented totals due to rounding differences, for the years ended December 31, 2024 and 2023:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | For the Year Ended | ||||
| | | December 31, | ||||
| | 2024 | | 2023 | |||
| Sales | 100.0 | % | | 100.0 | % | |
| Cost of goods sold, including warehouse and distribution expenses | 48.8 | | | 48.7 | ||
| Gross profit | 51.2 | | | 51.3 | ||
| Selling, general and administrative expenses | 31.7 | | | 31.1 | ||
| Operating income | 19.5 | | 20.2 | |||
| Interest expense | (1.3) | | | (1.3) | ||
| Interest income | — | | | 0.1 | ||
| Income before income taxes | 18.2 | | | 19.0 | | |
| Provision for income taxes | 3.9 | | | 4.2 | ||
| Net income | 14.3 | % | | 14.8 | % |
2024 Compared to 2023
Sales:
Sales for the year ended December 31, 2024, increased $896 million, or 6%, to $16.71 billion from $15.81 billion for the same period in 2023. Comparable store sales for stores open at least one year increased 2.9% and 7.9% for the year ended December 31, 2024 and 2023, respectively. Comparable store sales are calculated based on changes in sales for U.S. 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 ended December 31, 2024. Online sales, resulting from ship-to-home orders and pickup in-store orders for U.S. stores open at least one year are included in the comparable store sales calculation. We opened 198 and 186 net, new stores during the year ended December 31, 2024 and 2023, respectively. Additionally, we began operating 23 stores in Canada from the Vast Auto acquisition during the year ended December 31, 2024. We anticipate new store growth will be 200 to 210 net, new store openings in 2025.
The increase in sales for the year ended December 31, 2024, was primarily the result of the 2.9% increase in domestic comparable store sales, a $275 million increase in sales from new stores opened in 2023 and 2024 that are not considered comparable stores, sales from the acquired Vast Auto stores, and sales from one additional day due to Leap Day. Our comparable store sales increase for the year ended December 31, 2024, was driven by an increase in average ticket value for both professional service provider and DIY customers and positive transaction counts from professional service provider customers, partially offset by negative transaction counts from DIY customers. Average ticket values benefited from inflationary increases in average selling prices, as compared to the same period in 2023. Average ticket values also continue to be positively impacted by 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. The resulting decrease in repair frequency creates pressure on customer transaction counts; however, when repairs are needed, the cost
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of replacement parts is, on average, greater, which is a benefit to average ticket values. The decrease in DIY customer transaction counts was driven by decrease in repair frequency and pressured consumer spending on discretionary categories.
See Note 2 “Business Combination” to the Consolidated Financial Statements for further information concerning the recent acquisition of Vast Auto. See Note 14 “Revenue” to the Consolidated Financial Statements for further information concerning the Company’s sales.
Gross Profit:
Gross profit for the year ended December 31, 2024, increased 6% to $8.55 billion (or 51.2% of sales) from $8.10 billion (or 51.3% of sales) for the same period in 2023. The increase in gross profit dollars for the year ended December 31, 2024, was primarily the result of increase in comparable store sales at existing stores, sales from new and acquired stores, and one additional day due to Leap Day. The decrease in gross profit as a percentage of sales for the year ended December 31, 2024, was due to the inclusion of the lower gross margin sales from the acquired Vast Auto business and a greater percentage of our total sales mix being generated from professional service provider customers, which carry a lower gross margin than DIY sales, partially offset by improved acquisition costs.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2024, increased 8% to $5.30 billion (or 31.7% of sales) from $4.92 billion (or 31.1% of sales) for the same period in 2023. The increase in total SG&A dollars for the year ended December 31, 2024, was the result of additional Team Members and vehicles to support our increased sales and store count, an additional charge to adjust self-insurance reserves for historical auto liability claims, SG&A associated with the Vast Auto operations, and one additional day due to Leap Day. The increase in SG&A as a percentage of sales for the year ended December 31, 2024, was principally due to the self-insurance reserve adjustment, depreciation costs for accelerated refreshment of store related capital expenditures, and information technology investments.
Operating Income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2024, increased 2% to $3.25 billion (or 19.5% of sales) from $3.19 billion (or 20.2% of sales) for the same period in 2023.
Other Income and Expense:
Total other expense for the year ended December 31, 2024, increased 13% to $206 million (or 1.2% of sales), from $182 million (or 1.1% of sales) for the same period in 2023. The increase in total other expense for the year ended December 31, 2024, was the result of increased interest expense on higher average outstanding borrowings, as compared to a decrease in the same period in 2023. See Note 10 “Financing” to the Consolidated Financial Statements for further information concerning the Company’s borrowings. See Note 4 “Fair Value Measurements” to the Consolidated Financial Statements for further information concerning the Company’s trading securities.
Income Taxes:
Our provision for income taxes for the year ended December 31, 2024, was flat at $658 million compared to the same period in 2023. Our effective tax rate for the year ended December 31, 2024, decreased to 21.6% from 21.9% for the same period in 2023. The decrease in our effective tax rate for the year ended December 31, 2024, was primarily the result of a greater benefit from renewable energy tax credits and higher excess tax benefits from share-based compensation. See Note 18 “Income Taxes” to the Consolidated Financial Statements for further information concerning the Company’s income taxes.
Net Income:
As a result of the impacts discussed above, net income for the year ended December 31, 2024, increased to $2.39 billion (or 14.3% of sales), from $2.35 billion (or 14.8% of sales) for the same period in 2023.
Earnings Per Share:
Our diluted earnings per common share for the year ended December 31, 2024, increased 6% to $40.66 on 59 million shares from $38.47 on 61 million shares for the same period in 2023.
2023 Compared to 2022
A discussion of the changes in our results of operations for the year ended December 31, 2023, as compared to the year ended December 31, 2022, 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 December 31, 2023, filed with
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the Securities and Exchange Commission (the “SEC”) on February 28, 2024, which is available free of charge on the SEC’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.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to maintain and enhance our existing stores, invest to open new stores, fund strategic acquisitions, expand distribution infrastructure, develop enhanced information technology systems and tools, and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. Our material cash requirements necessary to maintain the current operations of our long-term business strategy include, but are not limited to, inventory purchases; human capital obligations, including payroll and benefits; contractual obligations, including debt and interest obligations; capital expenditures; payment of income taxes; and other operational priorities. We expect to fund our short- and long-term cash and capital requirements with our primary sources of liquidity, which include funds generated from the normal course of our business operations, borrowings under our unsecured revolving credit facility and our commercial paper program, and senior note offerings. However, there can be no assurance that we will continue to generate cash flows or maintain liquidity at or above recent levels, as we are unable to predict decreased demand for our products or changes in customer buying patterns. Additionally, these factors could also 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.
Our material contractual cash obligations as of December 31, 2024, included commitments for short and long-term debt arrangements and interest payments related to long-term debt, future minimum payments under non-cancelable lease arrangements, self-insurance reserves, projected obligations related to future payments under the Company’s nonqualified deferred compensation plan, purchase obligations for construction contract commitments, uncertain tax positions and associated estimated interest and penalties, payments for certain deferred income taxes, the obligation to purchase renewable energy tax credits, and payments for the purchase of inventory.
We expect to fund these various commitments and obligations primarily with operating cash flows expected to be generated in the normal course of business or through borrowings under our unsecured revolving credit facility and commercial paper program. See Note 7 “Leases,” Note 15 “Share-Based Compensation and Benefit Plans,” Note 16 “Commitments,” and Note 18 “Income Taxes” to the Consolidated Financial Statements for further information on our leasing arrangements, share-based compensation payments, construction commitments, and uncertain tax positions, respectively, which are not reflected in the table below.
The following table identifies the estimated payments for each of the next five years, and in the aggregate thereafter, of the Company’s debt instruments and related interest payments and self-insurance reserves as of December 31, 2024 (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | | December 31, 2024 | ||||
| | | Long-Term Debt Principal | | Self-Insurance | ||
| | and Interest Payments (1) | Reserves (2) | ||||
| 2025 | | $ | 425,625 | | $ | 149,387 |
| 2026 | | 1,465,775 | | 54,048 | ||
| 2027 | | 912,950 | | 36,387 | ||
| 2028 | | 625,075 | | 21,591 | ||
| 2029 | | | 604,450 | | 10,153 | |
| Thereafter | | | 2,598,500 | | 15,000 | |
| Contractual cash obligations | | $ | 6,632,375 | | $ | 286,566 |
| Column 1 | Column 2 |
|---|---|
| (1) | See Note 10 “Financing” to the Consolidated Financial Statements for further information on our debt instruments and related interest payments. |
| Column 1 | Column 2 |
|---|---|
| (2) | See Note 16 “Commitments” and Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for further information on our self-insurance reserves. |
Due to the absence of scheduled maturities, the nature of the account or the commitment’s cancellation terms, the timing of payments for certain deferred income taxes, uncertain tax positions, and commitments related to future payments under the Company’s nonqualified compensation plan cannot be determined and are therefore excluded from the above table, except for amounts estimated to be payable in 2025, which are included in “Current liabilities” on our Consolidated Balance Sheets.
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. See Note 1 “Summary of Significant Accounting Policies” for more information on our variable interest entities. We issue stand-by letters of credit, for more information see Note 10 “Financing” to the Consolidated Financial Statements for further information on our stand-by letters of credit.
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Other than the commitments discussed in Note 16 “Commitments” to the Consolidated Financial Statements, 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.
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the years ended December 31, 2024, 2023, and 2022 (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended | |||||||
| | | December 31, | |||||||
| Liquidity: | 2024 | 2023 | 2022 | ||||||
| Total cash provided by/(used in): | | | | ||||||
| Operating activities | | $ | 3,049,576 | | $ | 3,034,084 | | $ | 3,148,250 |
| Investing activities | | (1,166,805) | | (995,936) | | (739,985) | |||
| Financing activities | | (2,029,717) | | (1,868,738) | | (2,662,536) | |||
| Effect of exchange rate changes on cash | | | (1,941) | | | 1,139 | | | 741 |
| Net (decrease) increase in cash and cash equivalents | | $ | (148,887) | | $ | 170,549 | | $ | (253,530) |
| | | | | | | | | | |
| Capital expenditures | | $ | 1,023,387 | | $ | 1,006,264 | | $ | 563,342 |
| Free cash flow (1) | | | 1,987,808 | | | 1,987,720 | | 2,371,123 |
| Column 1 | Column 2 |
|---|---|
| (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. See page 37 for the reconciliation of the calculation of free cash flow. |
Cash and cash equivalents balances held outside of the U.S. were $17.2 million and $3.3 million as of December 31, 2024 and 2023, respectively, which was generally utilized to support the liquidity needs of foreign operations in Mexico and Canada.
2024 Compared to 2023
Operating Activities:
The increase in net cash provided by operating activities in 2024 compared to 2023 was primarily due to an increase in operating income, decrease in net inventory, compared to an investment in net inventory in 2023, a decrease in accounts receivable balance, and an increase in accrued benefits, partially offset by the timing of payments for the purchase of transferrable federal renewable energy tax credits.
Investing Activities:
The increase in net cash used in investing activities in 2024 compared to 2023 was primarily the result of the acquisition of Vast Auto and an increase in capital expenditures. The increase in capital expenditures was primarily due to an increase in distribution enhancement and expansion projects, as well as an increase in the number of owned new store openings.
We opened 198 and 186 net, new stores in 2024 and 2023, respectively. We plan to open 200 to 210 net, new stores in 2025. The costs associated with the expected openings of owned store locations in 2025, including the cost of land acquisition, building construction, fixtures, vehicles, net inventory investment, and computer equipment, are estimated to average approximately $3.0 million to $3.3 million per store. However, such costs may be significantly lower where we lease, rather than purchase, the store site and higher where we build a Hub, as they require a larger inventory investment and are generally larger in size.
Financing Activities:
The increase in net cash used in financing activities in 2024 compared to 2023 was primarily attributable to decreased net borrowings in 2024, partially offset by a lower level of repurchases of our common stock in 2024.
2023 Compared to 2022
A discussion of the changes in our operating activities, liquidity activities, and financing activities for the year ended December 31, 2023, as compared to the year ended December 31, 2022, 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 December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2024, which is available free of charge on the SEC’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.
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Debt Instruments:
See Note 10 “Financing” to the Consolidated Financial Statements for information concerning the Company’s credit agreement, unsecured revolving credit facility, outstanding letters of credit, commercial paper program, and unsecured senior notes.
Debt Covenants:
The indentures governing our senior notes contain covenants that limit our ability and the ability of certain of our subsidiaries to, among other things, create certain liens on assets to secure certain debt and enter into certain sale and leaseback transactions, and limit our ability to merge or consolidate with another company or transfer all or substantially all of our property, in each case as set forth in the indentures. These covenants are, however, subject to a number of important limitations and exceptions. As of December 31, 2024, 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, and 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 6.11 times and 6.42 times as of December 31, 2024 and 2023, respectively, and a consolidated leverage ratio of 1.89 times and 1.93 times as of December 31, 2024 and 2023, respectively, remaining in compliance with all covenants related to the borrowing arrangements.
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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 December 31, 2024 and 2023 (dollars in thousands):
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | For the Year Ended | ||||
| | | | December 31, | ||||
| | | 2024 | 2023 | ||||
| GAAP net income | | $ | 2,386,680 | | $ | 2,346,581 | |
| Add: | Interest expense | | 222,548 | | 201,668 | ||
| | Rent expense (1) | | 452,529 | | 424,815 | ||
| | Provision for income taxes | | 658,384 | | 658,169 | ||
| | Depreciation expense | | 457,047 | | 405,603 | ||
| | Amortization expense | | 4,845 | | 3,458 | ||
| | Non-cash share-based compensation | | 28,931 | | 27,511 | ||
| Non-GAAP EBITDAR | | $ | 4,210,964 | | $ | 4,067,805 | |
| | | | | | | | |
| | Interest expense | | $ | 222,548 | | $ | 201,668 |
| | Capitalized interest | | 14,141 | | 7,155 | ||
| | Rent expense (1) | | 452,529 | | 424,815 | ||
| Total fixed charges | | $ | 689,218 | | $ | 633,638 | |
| | | | | | | | |
| Consolidated fixed charge coverage ratio | | 6.11 | | 6.42 | |||
| | | | | | | | |
| GAAP debt | | $ | 5,520,932 | | $ | 5,570,125 | |
| Add: | Stand-by letters of credit | | 127,310 | | 112,163 | ||
| | Unamortized discount and debt issuance costs | | 29,068 | | 30,775 | ||
| | Five-times rent expense | | 2,262,645 | | 2,124,075 | ||
| Non-GAAP adjusted debt | | $ | 7,939,955 | | $ | 7,837,138 | |
| | | | | | | | |
| Consolidated leverage ratio | | 1.89 | | 1.93 |
| Column 1 | Column 2 |
|---|---|
| (1) | The table below outlines the calculation of Rent expense and reconciles Rent expense to Total lease cost, per Accounting Standard Codification 842 (“ASC 842”), the most directly comparable GAAP financial measure, for the years ended December 31, 2024 and 2023 (in thousands): |
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | For the Twelve Months Ended | |||||
| | | December 31, | |||||
| | | 2024 | | 2023 | |||
| Total lease cost, per ASC 842 | $ | 543,495 | | $ | 503,151 | ||
| Less: | Variable non-contract operating lease components, related to property taxes and insurance | | 90,966 | | 78,336 | ||
| Rent expense | | $ | 452,529 | | $ | 424,815 |
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 ended December 31, 2024, 2023, and 2022 (in thousands):
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | | For the Year Ended | |||||||
| | | | December 31, | |||||||
| | | 2024 | 2023 | 2022 | ||||||
| Cash provided by operating activities | | $ | 3,049,576 | | $ | 3,034,084 | | $ | 3,148,250 | |
| Less: | Capital expenditures | | 1,023,387 | | 1,006,264 | | 563,342 | |||
| | Excess tax benefit from share-based compensation payments | | 39,871 | | 35,950 | | 25,503 | |||
| | (Return of) investment in tax credit equity investments | | (1,490) | | 4,150 | | 188,282 | |||
| Free cash flow | | $ | 1,987,808 | | $ | 1,987,720 | | $ | 2,371,123 |
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
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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:
See Note 12 “Share Repurchase Program” to the Consolidated Financial Statements for information on our share repurchase program.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the application of certain estimates and judgments by management. Management bases its assumptions, estimates, and adjustments on historical experience, current trends, and other factors believed to be relevant at the time the 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 estimates and assumptions to ensure that the consolidated financial statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates and such differences could be material.
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. Certain of the self-insurance liabilities are determined at an estimate of their net present value, using the U.S. treasury risk-free rate. Our calculation of self-insurance liabilities requires management to apply a significant amount of subjective judgment to estimate the ultimate cost to resolve reported claims and claims incurred but not yet reported as of the balance sheet date. The application of alternative assumptions could result in a different estimate of these liabilities. Management believes the assumptions developed and used to determine the estimate for our self-insurance reserve are reasonable. 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 that could result in materially different estimates of the net present value of the liabilities.
Our self-insurance reserve estimate included on our Consolidated Balance Sheets increased $54 million from 2023 to 2024, which is primarily due to inflation in claim development costs, as well as our growing operations, increases in healthcare costs, the number of vehicles, and the number of hours worked, partially offset by having resolved and paid out claims throughout 2024. If the underlying assumptions in management’s estimate changed self-insurance reserves by 10% from our estimated reserves at December 31, 2024, the financial impact would have been approximately $27 million or 0.9% of pretax income for the year ended December 31, 2024. See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for further information on our self-insurance reserves.
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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