# O Reilly Automotive Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [O Reilly Automotive Inc](/companies/orly.md) (CIK 898173)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 16:30 ET
- Period: 2023-09-30
- Accession: 0000898173-23-000058
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/898173/000089817323000058/orly-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/898173/000089817323000058/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $4.20bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $11.98bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $2.04bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $5.84bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $2.16bn | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $6.14bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $1.26bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $3.67bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $897.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $2.47bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $196.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $539.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $649.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $1.79bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $10.72 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $29.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $10.82 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $29.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 60,590,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 61,445,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $2.52bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $754.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $2.59bn | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $82.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $5.38bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $13.55bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $7.83bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-09-30 | $5.10bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-09-30 | −$1.76bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,785 characters.

Unless otherwise indicated, “we,” “us,” “our,” and similar terms, as well as references to the “Company” or “O’Reilly,” refer to O’Reilly Automotive, Inc. and its subsidiaries.

In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity, and certain other factors that may affect our future results, including

- an overview of the key drivers and other influences on the automotive aftermarket industry;
- our results of operations for the three and nine months ended September 30, 2023 and 2022;
- our liquidity and capital resources;
- our critical accounting estimates; and
- recent accounting pronouncements that may affect our Company.

The review of Management’s Discussion and Analysis should be made in conjunction with our condensed consolidated financial statements, related notes and other financial information, forward-looking statements, and other risk factors included elsewhere in this quarterly report.

### FORWARD-LOOKING STATEMENTS

We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “estimate,” “may,” “could,” “will,” “believe,” “expect,” “would,” “consider,” “should,” “anticipate,” “project,” “plan,” “intend,” or similar words. In addition, statements contained within this quarterly report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues, and future performance. These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties, and assumptions, including, but not limited to, the economy in general; inflation; consumer debt levels; product demand; a public health crisis; the market for auto parts; competition; weather; tariffs; availability of key products and supply chain disruptions; business interruptions, including terrorist activities, war and the threat of war; failure to protect our brand and reputation; challenges in international markets; volatility of the market price of our common stock; our increased debt levels; credit ratings on public debt; historical growth rate sustainability; our ability to hire and retain qualified employees; risks associated with the performance of acquired businesses; damage, failure or interruption of information technology systems, including information security and cyber-attacks; and governmental regulations. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2022, and subsequent Securities and Exchange Commission filings, for additional factors that could materially affect our financial performance. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

### OVERVIEW

We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States, Puerto Rico, and Mexico. 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 September 30, 2023, we operated 6,063 stores in 48 U.S. states and Puerto Rico and 48 stores in Mexico.

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. decreased 13.2% in 2020, as a result of responses to the coronavirus pandemic, including work from home arrangements and reduced travel. Miles driven improved and increased 11.2% in 2021, and continued to improve and increased 0.9% in 2022, and year-to-date through August of 2023, miles driven have increased 2.4%. 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.

#### 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 13.9% from 2012 to 2022, bringing the number of light vehicles on the road to 283 million by the end of 2022. In 2022, the rate of new vehicle sales was pressured due to supply chain constraints experienced by manufacturers, and the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was below the historical average at approximately 13.3 million vehicles for the year ended December 31, 2022. The degree to which potential supply chain constraints may affect new vehicle production capacity in 2023 is difficult to determine, with the current 2023 outlook for the SAAR estimated to be approximately 15.7 million vehicles, which again remains below the historical average. From 2012 to 2022, 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 9.9%, from 11.1 years in 2012 to 12.2 years in 2022. 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.

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.

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.

### RESULTS OF OPERATIONS

#### Sales:

Sales for the three months ended September 30, 2023, increased $405 million, or 11%, to $4.20 billion from $3.80 billion for the same period one year ago. Sales for the nine months ended September 30, 2023, increased $1.21 billion or 11% to $11.98 billion from $10.77 billion for the same period one year ago. Comparable store sales for stores open at least one year increased 8.7% and 7.6% for the three months ended September 30, 2023 and 2022, respectively. Comparable store sales for stores open at least one year increased 9.4% and 5.6% for the nine months ended September 30, 2023 and 2022, respectively. Comparable store sales are calculated based on the change 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. Online sales for 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 40 and 140 net, new stores during the three and nine months ended September 30, 2023, respectively, compared to opening 38 and 154 net, new stores during the three and nine months ended September 30, 2022, respectively. We anticipate total new store growth to be 180 to 190 net, new store openings in 2023, and 190 to 200 net, new store openings in 2024.

The increase in sales for the three months ended September 30, 2023, was primarily the result of the 8.7% increase in domestic comparable store sales and a $78 million increase in sales from new stores opened in 2022 and 2023 that are not considered comparable stores. The increase in sales for the nine months ended September 30, 2023, was primarily the result of the 9.4% increase in domestic comparable store sales and a $221 million increase in sales from new stores opened in 2022 and 2023 that are not considered comparable stores. Our comparable store sales increase for three months ended September 30, 2023, was driven by an increase in average ticket values for both professional service provider and DIY customers and positive transaction counts from both professional service provider and DIY customers. Our comparable store sales increase for the nine months ended September 30, 2023, 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. Average ticket values benefited from increases in average selling prices, on a same-SKU basis, as compared to the same period in 2022, driven by increases in acquisition costs of inventory, which were passed on in selling prices. 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 of replacement parts is, on average, greater, which is a benefit to average ticket values. The increases in transaction counts were driven by consistently exceptional execution of our strategies surrounding superior service, inventory availability, and competitive pricing, as well as hot weather across many of our markets during the three months ended September 30, 2023.

See Note 10 “Revenue” to the Condensed Consolidated Financial Statements for further information concerning the Company’s sales.

#### Gross profit:

Gross profit for the three months ended September 30, 2023, increased 12% to $2.16 billion (or 51.4% of sales) from $1.93 billion (or 50.9% of sales) for the same period one year ago. Gross profit for the nine months ended September 30, 2023, increased 11% to $6.14 billion (or 51.2% of sales) from $5.53 billion (or 51.3% of sales) for the same period one year ago. The increases in gross profit dollars for the three and nine months ended September 30, 2023, were primarily the result of the increase in comparable store sales at existing stores and sales from new stores. The increase in gross profit as a percentage of sales for the three months ended September 30, 2023, was primarily due to improved acquisition costs, partially offset by a greater percentage of our total sales mix being generated from professional service provider customers, which carry a lower gross margin than DIY sales. The decrease in gross profit as a percentage of sales for the nine months ended September 30, 2023, was primarily due to the impact of the rollout of our professional pricing initiative in the first quarter of 2022, which was a strategic investment aimed at ensuring we are more competitively priced on the professional side of our business, a greater percentage of our total sales mix being generated from professional service provider customers and a benefit in the prior year from selling through inventory purchased prior to more recent acquisition cost increases and corresponding selling price increases, partially offset by improved acquisition costs in the current period.

#### Selling, general and administrative expenses:

Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2023, increased 12% to $1.26 billion (or 30.1% of sales) from $1.13 billion (or 29.8% of sales) for the same period one year ago. SG&A for the nine months ended September 30, 2023, increased 13% to $3.67 billion (or 30.6% of sales) from $3.26 billion (or 30.2% of sales) for the same period one year ago. The increases in total SG&A dollars for the three and nine months ended September 30, 2023, were primarily the result of additional Team Members, facilities, and vehicles to support our increased sales and store count. The increase in SG&A as a percentage of sales for the three months ended September 30, 2023, was principally due to increased store staffing to support superior service levels, depreciation costs on accelerated refreshment of store delivery fleet, investment initiatives aimed at refreshing the image and appearance of our stores, and our transition to enhanced benefit programs for our Team Members. The increase in SG&A as a percentage of sales for the nine months ended September 30, 2023, was primarily the result of the items discussed above, as well as increased expense for the market value performance of the Company’s Deferred Compensation Plan and the costs associated with the resumption of our annual in-person leadership conference. See Note 11 “Share-Based Compensation and Benefit Plans” to the Condensed Consolidated Financial Statements for further information concerning the Company’s Deferred Compensation Plan.

#### Operating income:

As a result of the impacts discussed above, operating income for the three months ended September 30, 2023, increased 12% to $897 million (or 21.3% of sales) from $804 million (or 21.2% of sales) for the same period one year ago. As a result of the impacts discussed above, operating income for the nine months ended September 30, 2023, increased 9% to $2.47 billion (or 20.6% of sales) from $2.27 billion (or 21.1% of sales) for the same period one year ago.

#### Other income and expense:

Total other expense for the three months ended September 30, 2023, increased 19% to $51 million (or 1.2% of sales) from $42 million (or 1.1% of sales) for the same period one year ago. Total other expense for the nine months ended September 30, 2023, increased 12% to $134 million (or 1.1% of sales) from $120 million (or 1.1% of sales) for the same period one year ago. The increase in total other expense for the three months ended September 30, 2023, was the result of increased interest expense on higher average outstanding borrowings. The increase in total other expense for the nine months ended September 30, 2023, was the result of increased interest expense on higher average outstanding borrowings, partially offset by an increase in the value of our trading securities, as compared to a decrease in the same period one year ago. See Note 6 “Financing” to the Condensed Consolidated Financial Statements for further information concerning the Company’s borrowings. See Note 3 “Fair Value Measurements” to the Condensed Consolidated Financial Statements for further information concerning the Company’s trading securities.

#### Income taxes:

Our provision for income taxes for the three months ended September 30, 2023, increased 12% to $197 million (23.2% effective tax rate) from $176 million (23.2% effective tax rate) for the same period one year ago. Our provision for income taxes for the nine months ended September 30, 2023, increased 6% to $539 million (23.1% effective tax rate) from $508 million (23.6% effective tax rate) for the same period one year ago. The increases in our provision for income taxes for the three and nine months ended September 30, 2023, were the result of higher taxable income, partially offset by higher excess tax benefits from share-based compensation in the current periods, as compared to the same periods one year ago. Our effective tax rate for the three months ended September 30, 2023, was flat, as compared to the same period one year ago. The decrease in our effective tax rate for the nine months ended September 30, 2023, was the result of higher excess tax benefits from share-based compensation in the current period, as compared to the same period one year ago.

#### Net income:

As a result of the impacts discussed above, net income for the three months ended September 30, 2023, increased 11% to $650 million (or 15.5% of sales) from $585 million (or 15.4% of sales) for the same period one year ago. As a result of the impacts discussed above, net income for the nine months ended September 30, 2023, increased 9% to $1.79 billion (or 15.0% of sales) from $1.64 billion (or 15.3% of sales) for the same period one year ago.

#### Earnings per share:

Our diluted earnings per common share for the three months ended September 30, 2023, increased 17% to $10.72 on 61 million shares from $9.17 on 64 million shares for the same period one year ago. Our diluted earnings per common share for the nine months ended September 30, 2023, increased 16% to $29.20 on 61 million shares from $25.08 on 66 million shares for the same period one year ago.

### LIQUIDITY AND CAPITAL RESOURCES

Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain our existing stores, 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.

Other than the commitment discussed in Note 12 “Commitments” to the Condensed Consolidated Financial Statements, there have been no material changes to the contractual obligations, to which we are committed, since those discussed in our annual report on Form 10-K for the year ended December 31, 2022.

The following table identifies cash provided by/(used in) our operating, investing and financing activities for the nine months ended September 30, 2023 and 2022 (in thousands):

| ​ ​ ​ Liquidity: Total cash provided by/(used in): | ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 ​ | ​ | ​ ​ 2022 ​ |
| --- | --- | ---: | --- | ---: |
| Operating activities | **​** | **$2,517,655** | ​ | $2,353,020 |
| Investing activities | **​** | **(749,773)** | ​ | (383,701) |
| Financing activities | **​** | **(1,794,694)** | ​ | (2,264,460) |
| Effect of exchange rate changes on cash | **​** | **​** **893** | ​ | ​ 88 |
| Net decrease in cash and cash equivalents | **​** | **$(25,919)** | ​ | $(295,053) |
| ​ | **​** | **​** **​** | ​ | ​ ​ |
| Capital expenditures | **​** | **$753,958** | ​ | $388,820 |
| Free cash flow (1) | **​** | **​** **1,731,695** | ​ | ​ 1,944,638 |

(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 23 for the reconciliation of the calculation of free cash flow.

#### Operating activities:

The increase in net cash provided by operating activities during the nine months ended September 30, 2023, compared to the same period in 2022, was primarily due to an increase in income taxes payable, an increase in net income, and an increase in accrued benefits and withholdings, partially offset by a smaller decrease in net inventory investment, as compared to the same period in 2022. The increase in income taxes payable was primarily attributable to the timing of tax payments in anticipation of benefits from the expected purchase of federal renewable energy tax credits. The increase in accrued benefits and withholdings was due to higher accrued incentive compensation payments in 2023, versus the same period in 2022.

#### Investing activities:

The increase in net cash used in investing activities during the nine months ended September 30, 2023, compared to the same period in 2022, was the result of an increase in capital expenditures. The increase in capital expenditures was primarily due to an increase in store and distribution enhancement and expansion projects, as well as an increase in vehicle fleet upgrade investments, in the current period, as compared to the same period in the prior year.

#### Financing activities:

The decrease in net cash used in financing activities during the nine months ended September 30, 2023, compared to the same period in 2022, was attributable to net proceeds from the commercial paper program in 2023 and a lower level of repurchases of our common stock in the current period, as compared to the same period in the prior year, partially offset by the issuance of $850 million aggregate principal amount of senior notes in the prior year.

#### Debt instruments:

See Note 6 “Financing” to the Condensed 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 September 30, 2023, 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 6.56 times and 6.83 times as of September 30, 2023 and 2022, respectively, and a consolidated leverage ratio of 1.83 times and 1.74 times as of September 30, 2023 and 2022, respectively, remaining in compliance with all covenants related to the borrowing arrangements.

The table below outlines the calculations of the consolidated fixed charge coverage ratio and consolidated leverage ratio covenants, as defined in the Credit Agreement governing the Revolving Credit Facility, for the twelve months ended September 30, 2023 and 2022 (dollars in thousands):

| ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ For the Twelve Months Ended September 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| GAAP net income | **​** | **$2,322,649** | ​ | $2,163,051 |
| Add: Interest expense | **​** | **187,851** | ​ | 150,121 |
| ​ Rent expense (1) | **​** | **417,988** | ​ | 386,409 |
| ​ Provision for income taxes | **​** | **656,817** | ​ | 633,581 |
| ​ Depreciation expense | **​** | **392,354** | ​ | 340,705 |
| ​ Amortization expense | **​** | **4,114** | ​ | 7,906 |
| ​ Non-cash share-based compensation | **​** | **29,493** | ​ | 25,025 |
| Non-GAAP EBITDAR | **​** | **$4,011,266** | ​ | $3,706,798 |
| ​ | **​** | **​** **​** | ​ | ​ ​ |
| ​ Interest expense | **​** | **$187,851** | ​ | $150,121 |
| ​ Capitalized interest | **​** | **6,025** | ​ | 5,902 |
| ​ Rent expense (1) | **​** | **417,988** | ​ | 386,409 |
| Total fixed charges | **​** | **$611,864** | ​ | $542,432 |
| ​ ​ | **​** | **​** **​** | ​ | ​ ​ |
| Consolidated fixed charge coverage ratio | **​** | **6.56** | ​ | 6.83 |
| ​ ​ | **​** | **​** **​** | ​ | ​ ​ |
| GAAP debt | **​** | **$5,102,350** | ​ | $4,370,772 |
| Add: Stand-by letters of credit | **​** | **111,732** | ​ | 101,741 |
| ​ Unamortized discount and debt issuance costs | **​** | **27,650** | ​ | 29,228 |
| ​ Five-times rent expense | **​** | **2,089,940** | ​ | 1,932,045 |
| Non-GAAP adjusted debt | **​** | **$7,331,672** | ​ | $6,433,786 |
| ​ ​ | **​** | **​** **​** | ​ | ​ ​ |
| Consolidated leverage ratio | **​** | **1.83** | ​ | 1.74 |

(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 twelve months ended September 30, 2023 and 2022 (in thousands):

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ For the Twelve Months Ended September 30, 2023 | ​ ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Total lease cost, per ASC 842 |  | $495,360 | ​ | $460,299 |
| Less: Variable non-contract operating lease components, related to property taxes and insurance | ​ | 77,372 | ​ | 73,890 |
| Rent expense | ​ | $417,988 | ​ | $386,409 |

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 nine months ended September 30, 2023 and 2022 (in thousands):

| ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Cash provided by operating activities | **​** | **$2,517,655** | ​ | $2,353,020 |
| Less: Capital expenditures | **​** | **753,958** | ​ | 388,820 |
| ​ Excess tax benefit from share-based compensation payments | **​** | **27,852** | ​ | 14,300 |
| ​ Investment in tax credit equity investments | **​** | **4,150** | ​ | 5,262 |
| Free cash flow | **​** | **$1,731,695** | ​ | $1,944,638 |

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:

See Note 8 “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 condensed consolidated financial statements are prepared. There have been no material changes in the critical accounting estimates since those discussed in our annual report on Form 10-K for the year ended December 31, 2022.

### RECENT ACCOUNTING PRONOUNCEMENTS

See Note 15 “Recent Accounting Pronouncements” to the Condensed Consolidated Financial Statements for information about recent accounting pronouncements.

## Market risk

As filed, 2,884 characters.

#### Interest rate risk:

We are subject to interest rate risk to the extent we borrow against our unsecured revolving credit facility (the “Revolving Credit Facility”) with variable interest rates based on either an Alternative Base Rate or Adjusted Term SOFR Rate, as defined in the credit agreement governing the Revolving Credit Facility. As of September 30, 2023, we had no outstanding borrowings under our Revolving Credit Facility.

We are subject to interest rate risk to the extent we issue short-term, unsecured commercial paper notes under our commercial paper program (the “Program”) with variable interest rates. As of September 30, 2023, we had outstanding borrowings under the Program in the amount of $1.0 billion, at the weighted-average variable interest rate of 5.578%. At this borrowing level, a 10% increase in interest rates would have had an unfavorable annual impact on our pre-tax earnings and cash flows in the amount of $5.8 million.

#### Cash equivalents risk:

We invest certain of our excess cash balances in short-term, highly-liquid instruments with maturities of 90 days or less. We do not expect any material losses from our invested cash balances and we believe that our interest rate exposure is minimal. As of September 30, 2023, our cash and cash equivalents totaled $82.7 million.

#### Foreign currency risk:

Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than our entities’ functional currencies. To minimize our risk, we generally enter into transactions denominated in the respective functional currencies. Our foreign currency exposure arises from Mexican peso-denominated revenues and profits and their translation into U.S. dollars.

We view our investments in Mexican subsidiaries as long-term. The net asset exposure in the Mexican subsidiaries translated into U.S. dollars using the period-end exchange rates was $317.6 million at September 30, 2023. The period-end exchange rate of the Mexican peso, relative to the U.S. dollar, strengthened by approximately 11.9% from December 31, 2022. The potential loss in value of our net assets in the Mexican subsidiaries resulting from a 10% change in quoted foreign currency exchange rates at September 30, 2023, would be approximately $28.9 million. Any changes in our net assets in the Mexican subsidiaries relating to foreign currency exchange rates would be reflected in the financial statements through the foreign currency translation component of accumulated other comprehensive income, unless the Mexican subsidiaries are sold or otherwise disposed. A 10% change in average exchange rates would not have had a material impact on our results of operations.

Our market risks have not materially changed since those discussed in our annual report on Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 1,533 characters.

### EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the management of the Company, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) and as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company, including its consolidated subsidiaries, in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

### CHANGES IN INTERNAL CONTROLS

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 163 characters.

As of September 30, 2023, there have been no material changes to the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2022.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0000898173-23-000058. Last ingested by Listed: Nov 6, 2026, 17:45 ET. No prices; not investment advice.