UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | September 30, 2017July 1, 2023 |
or
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from | | to | |
Commission file number 000-23314
TRACTOR SUPPLY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
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Delaware | | 13-3139732 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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Delaware | | 13-3139732 |
(State or Other Jurisdiction of | | (I.R.S. Employer Identification No.) | | | |
Incorporation or Organization) | | | | |
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5401 Virginia Way, Brentwood, Tennessee | | 37027 |
(Address of Principal Executive Offices) | | (Zip Code) |
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Not Applicable | | (615) 440-4000 |
(Former name, former address and former fiscal year, if changed since last report) | | |
5401 Virginia Way, Brentwood, Tennessee 37027
(Address of Principal Executive Offices and Zip Code)
(615) 440-4000
(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, $0.008 par value | | TSCO | | 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 þ NO oYes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO oYes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | þ☑ | Accelerated filer | o☐ |
| Non-accelerated filer | o (Do not check if a smaller reporting company) ☐ | Smaller reporting company | o☐ |
| | | Emerging growth company | o☐ |
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. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
YES o NO þYes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. | | | | | | | | |
Class | | Outstanding at July 29, 2023 |
Common Stock, $0.008 par value | | 108,807,868 |
TRACTOR SUPPLY COMPANY
INDEX
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| | Page No. |
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Class | | Outstanding at October 28, 2017 |
Common Stock, $.008 par value | | 125,564,364 |
TRACTOR SUPPLY COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited) | | | | | | | | | | | | | | | | | |
| July 1, | | December 31, | | June 25, |
| 2023 | | 2022 | | 2022 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 620,031 | | | $ | 202,502 | | | $ | 530,822 | |
| | | | | |
Inventories | 2,660,052 | | | 2,709,597 | | | 2,485,138 | |
Prepaid expenses and other current assets | 297,191 | | | 245,676 | | | 214,436 | |
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Total current assets | 3,577,274 | | | 3,157,775 | | | 3,230,396 | |
Property and equipment, net | 2,185,476 | | | 2,083,616 | | | 1,744,556 | |
Operating lease right-of-use assets | 2,957,792 | | | 2,953,801 | | | 2,760,148 | |
Goodwill and other intangible assets | 267,088 | | | 253,262 | | | 55,520 | |
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Other assets | 45,193 | | | 41,536 | | | 78,574 | |
Total assets | $ | 9,032,823 | | | $ | 8,489,990 | | | $ | 7,869,194 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 1,272,232 | | | $ | 1,398,288 | | | $ | 1,280,518 | |
Accrued employee compensation | 66,181 | | | 120,302 | | | 42,474 | |
Other accrued expenses | 464,267 | | | 498,575 | | | 470,082 | |
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Current portion of finance lease liabilities | 2,860 | | | 3,179 | | | 3,502 | |
Current portion of operating lease liabilities | 317,730 | | | 346,397 | | | 364,643 | |
Income taxes payable | 114,194 | | | 9,471 | | | 80,959 | |
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Total current liabilities | 2,237,464 | | | 2,376,212 | | | 2,242,178 | |
Long-term debt | 1,727,504 | | | 1,164,056 | | | 987,411 | |
Finance lease liabilities, less current portion | 32,999 | | | 34,651 | | | 35,859 | |
Operating lease liabilities, less current portion | 2,762,877 | | | 2,721,877 | | | 2,543,133 | |
Deferred income taxes | 59,157 | | | 30,775 | | | 36,256 | |
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Other long-term liabilities | 125,670 | | | 120,003 | | | 110,490 | |
Total liabilities | 6,945,671 | | | 6,447,574 | | | 5,955,327 | |
Stockholders’ equity: | | | | | |
Preferred stock | — | | | — | | | — | |
Common stock | 1,418 | | | 1,415 | | | 1,414 | |
Additional paid-in capital | 1,283,589 | | | 1,261,283 | | | 1,220,682 | |
Treasury stock | (5,210,524) | | | (4,855,909) | | | (4,640,236) | |
Accumulated other comprehensive income | 10,216 | | | 11,275 | | | 9,148 | |
Retained earnings | 6,002,453 | | | 5,624,352 | | | 5,322,859 | |
Total stockholders’ equity | 2,087,152 | | | 2,042,416 | | | 1,913,867 | |
Total liabilities and stockholders’ equity | $ | 9,032,823 | | | $ | 8,489,990 | | | $ | 7,869,194 | |
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| September 30, 2017 | | December 31, 2016 | | September 24, 2016 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 70,046 |
| | $ | 53,916 |
| | $ | 55,507 |
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Inventories | 1,591,555 |
| | 1,369,656 |
| | 1,489,934 |
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Prepaid expenses and other current assets | 75,618 |
| | 90,557 |
| | 67,980 |
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Income taxes receivable | 4,776 |
| | 3,680 |
| | 16,335 |
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Total current assets | 1,741,995 |
| | 1,517,809 |
| | 1,629,756 |
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Property and equipment: | |
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Land | 99,323 |
| | 94,940 |
| | 94,362 |
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Buildings and improvements | 1,013,937 |
| | 965,582 |
| | 906,624 |
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Furniture, fixtures and equipment | 593,329 |
| | 567,653 |
| | 556,276 |
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Computer software and hardware | 259,508 |
| | 224,370 |
| | 209,218 |
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Construction in progress | 56,006 |
| | 21,320 |
| | 50,173 |
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Property and equipment, gross | 2,022,103 |
| | 1,873,865 |
| | 1,816,653 |
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Accumulated depreciation and amortization | (1,025,266 | ) | | (911,557 | ) | | (893,488 | ) |
Property and equipment, net | 996,837 |
| | 962,308 |
| | 923,165 |
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Goodwill and other intangible assets | 124,492 |
| | 125,717 |
| | 10,258 |
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Deferred income taxes | 40,592 |
| | 45,218 |
| | 53,192 |
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Other assets | 24,435 |
| | 23,890 |
| | 19,362 |
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Total assets | $ | 2,928,351 |
| | $ | 2,674,942 |
| | $ | 2,635,733 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | |
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Current liabilities: | |
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Accounts payable | $ | 609,883 |
| | $ | 519,522 |
| | $ | 484,014 |
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Accrued employee compensation | 34,497 |
| | 25,246 |
| | 17,625 |
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Other accrued expenses | 186,037 |
| | 215,650 |
| | 199,327 |
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Current portion of long-term debt | 22,500 |
| | 10,000 |
| | 10,000 |
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Current portion of capital lease obligations | 3,545 |
| | 1,294 |
| | 1,294 |
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Income taxes payable | 15,732 |
| | 5,482 |
| | — |
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Total current liabilities | 872,194 |
| | 777,194 |
| | 712,260 |
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Long-term debt | 487,228 |
| | 263,850 |
| | 283,781 |
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Capital lease obligations, less current maturities | 33,509 |
| | 25,919 |
| | 26,246 |
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Deferred rent | 104,617 |
| | 100,078 |
| | 91,681 |
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Other long-term liabilities | 59,402 |
| | 54,683 |
| | 57,025 |
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Total liabilities | 1,556,950 |
| | 1,221,724 |
| | 1,170,993 |
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Stockholders’ equity: | |
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Preferred stock, $1.00 par value; 40 shares authorized; no shares issued | — |
| | — |
| | — |
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Common stock, $0.008 par value; 400,000 shares authorized at September 30, 2017, December 31, 2016 and September 24, 2016; 170,232, 169,943 and 169,859 shares issued; 125,853, 130,795 and 132,428 shares outstanding at September 30, 2017, December 31, 2016 and September 24, 2016, respectively | 1,362 |
| | 1,360 |
| | 1,359 |
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Additional paid-in capital | 703,292 |
| | 671,515 |
| | 661,665 |
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Treasury stock – at cost, 44,379, 39,148 and 37,431 shares at September 30, 2017, December 31, 2016 and September 24, 2016, respectively | (2,088,145 | ) | | (1,761,498 | ) | | (1,645,482 | ) |
Accumulated other comprehensive income (loss) | 1,557 |
| | 1,392 |
| | (1,111 | ) |
Retained earnings | 2,753,335 |
| | 2,540,449 |
| | 2,448,309 |
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Total stockholders’ equity | 1,371,401 |
| | 1,453,218 |
| | 1,464,740 |
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Total liabilities and stockholders’ equity | $ | 2,928,351 |
| | $ | 2,674,942 |
| | $ | 2,635,733 |
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Preferred Stock (shares in thousands): $1.00 par value; 40 shares authorized; no shares were issued or outstanding during any period presented.
Common Stock (shares in thousands): $0.008 par value; 400,000 shares authorized for all periods presented. 177,241, 176,876, and 176,743 shares issued; 109,058, 110,251, and 111,197 shares outstanding at July 1, 2023, December 31, 2022, and June 25, 2022, respectively.
Treasury Stock (at cost, shares in thousands): 68,183, 66,625, and 65,546 shares at July 1, 2023, December 31, 2022, and June 25, 2022, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
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| For the Fiscal Three | | For the Fiscal Six |
| Months Ended | | Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net sales | $ | 4,184,695 | | | $ | 3,903,406 | | | $ | 7,483,920 | | | $ | 6,927,538 | |
Cost of merchandise sold | 2,669,926 | | | 2,517,151 | | | 4,799,243 | | | 4,484,774 | |
Gross profit | 1,514,769 | | | 1,386,255 | | | 2,684,677 | | | 2,442,764 | |
Selling, general and administrative expenses | 853,158 | | | 777,860 | | | 1,681,393 | | | 1,512,437 | |
Depreciation and amortization | 102,279 | | | 83,360 | | | 199,512 | | | 161,006 | |
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Operating income | 559,332 | | | 525,035 | | | 803,772 | | | 769,321 | |
Interest expense, net | 12,343 | | | 7,097 | | | 25,023 | | | 14,166 | |
Income before income taxes | 546,989 | | | 517,938 | | | 778,749 | | | 755,155 | |
Income tax expense | 125,755 | | | 121,460 | | | 174,427 | | | 171,450 | |
Net income | $ | 421,234 | | | $ | 396,478 | | | $ | 604,322 | | | $ | 583,705 | |
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Net income per share – basic | $ | 3.85 | | | $ | 3.55 | | | $ | 5.51 | | | $ | 5.21 | |
Net income per share – diluted | $ | 3.83 | | | $ | 3.53 | | | $ | 5.47 | | | $ | 5.17 | |
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Weighted average shares outstanding: | | | | | | | |
Basic | 109,426 | | | 111,590 | | | 109,735 | | | 112,060 | |
Diluted | 110,041 | | | 112,318 | | | 110,411 | | | 112,911 | |
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Dividends declared per common share outstanding | $ | 1.03 | | | $ | 0.92 | | | $ | 2.06 | | | $ | 1.84 | |
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| For the Fiscal Three Months Ended | | For the Fiscal Nine Months Ended |
| September 30, 2017 | | September 24, 2016 | | September 30, 2017 | | September 24, 2016 |
Net sales | $ | 1,721,704 |
| | $ | 1,542,706 |
| | $ | 5,303,544 |
| | $ | 4,863,037 |
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Cost of merchandise sold | 1,121,248 |
| | 1,007,432 |
| | 3,480,177 |
| | 3,184,097 |
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Gross profit | 600,456 |
| | 535,274 |
| | 1,823,367 |
| | 1,678,940 |
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Selling, general and administrative expenses | 410,276 |
| | 357,592 |
| | 1,198,126 |
| | 1,076,180 |
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Depreciation and amortization | 41,927 |
| | 35,662 |
| | 122,701 |
| | 103,296 |
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Operating income | 148,253 |
| | 142,020 |
| | 502,540 |
| | 499,464 |
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Interest expense, net | 3,752 |
| | 1,110 |
| | 9,621 |
| | 4,145 |
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Income before income taxes | 144,501 |
| | 140,910 |
| | 492,919 |
| | 495,319 |
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Income tax expense | 52,605 |
| | 51,466 |
| | 180,063 |
| | 181,782 |
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Net income | $ | 91,896 |
| | $ | 89,444 |
| | $ | 312,856 |
| | $ | 313,537 |
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Net income per share – basic | $ | 0.73 |
| | $ | 0.67 |
| | $ | 2.44 |
| | $ | 2.35 |
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Net income per share – diluted | $ | 0.72 |
| | $ | 0.67 |
| | $ | 2.43 |
| | $ | 2.33 |
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Weighted average shares outstanding: | |
| | |
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Basic | 126,416 |
| | 133,392 |
| | 128,293 |
| | 133,529 |
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Diluted | 126,919 |
| | 134,256 |
| | 128,910 |
| | 134,509 |
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Dividends declared per common share outstanding | $ | 0.27 |
| | $ | 0.24 |
| | $ | 0.78 |
| | $ | 0.68 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
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| For the Fiscal Three | | For the Fiscal Six |
| Months Ended | | Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net income | $ | 421,234 | | | $ | 396,478 | | | $ | 604,322 | | | $ | 583,705 | |
Other comprehensive income / (loss): | | | | | | | |
Change in fair value of interest rate swaps, net of taxes | 778 | | | 1,810 | | | (1,059) | | | 7,803 | |
Total other comprehensive income / (loss) | 778 | | | 1,810 | | | (1,059) | | | 7,803 | |
Total comprehensive income | $ | 422,012 | | | $ | 398,288 | | | $ | 603,263 | | | $ | 591,508 | |
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| For the Fiscal Three Months Ended | | For the Fiscal Nine Months Ended |
| September 30, 2017 | | September 24, 2016 | | September 30, 2017 | | September 24, 2016 |
Net income | $ | 91,896 |
| | $ | 89,444 |
| | $ | 312,856 |
| | $ | 313,537 |
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Other comprehensive income (loss): | | | | | | | |
Change in fair value of interest rate swaps, net of taxes | 36 |
| | 251 |
| | 165 |
| | (1,111 | ) |
Total other comprehensive income (loss) | 36 |
| | 251 |
| | 165 |
| | (1,111 | ) |
Total comprehensive income | $ | 91,932 |
| | $ | 89,695 |
| | $ | 313,021 |
| | $ | 312,426 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accum. Other Comp. Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
Shares | | Dollars |
Stockholders’ equity at December 31, 2022 | 110,251 | | | $ | 1,415 | | | $ | 1,261,283 | | | $ | (4,855,909) | | | $ | 11,275 | | | $ | 5,624,352 | | | $ | 2,042,416 | |
Common stock issuance under stock award plans & ESPP | 275 | | | 2 | | | 8,621 | | | | | | | | | 8,623 | |
Share-based compensation expense | | | | | 14,514 | | | | | | | | | 14,514 | |
Repurchase of shares to satisfy tax obligations | | | | | (21,643) | | | | | | | | | (21,643) | |
Repurchase of common stock | (866) | | | | | | | (197,168) | | | | | | | (197,168) | |
Cash dividends paid to stockholders | | | | | | | | | | | (113,447) | | | (113,447) | |
Change in fair value of interest rate swaps, net of taxes | | | | | | | | | (1,837) | | | | | (1,837) | |
Net income | | | | | | | | | | | 183,088 | | | 183,088 | |
Stockholders’ equity at April 1, 2023 | 109,660 | | | $ | 1,417 | | | $ | 1,262,775 | | | $ | (5,053,077) | | | $ | 9,438 | | | $ | 5,693,993 | | | $ | 1,914,546 | |
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Common stock issuance under stock award plans & ESPP | 90 | | | 1 | | | 6,628 | | | | | | | | | 6,629 | |
Share-based compensation expense | | | | | 15,665 | | | | | | | | | 15,665 | |
Repurchase of shares to satisfy tax obligations | | | | | (1,479) | | | | | | | | | (1,479) | |
Repurchase of common stock | (692) | | | | | | | (157,447) | | | | | | | (157,447) | |
Cash dividends paid to stockholders | | | | | | | | | | | (112,774) | | | (112,774) | |
Change in fair value of interest rate swaps, net of taxes | | | | | | | | | 778 | | | | | 778 | |
Net income | | | | | | | | | | | 421,234 | | | 421,234 | |
Stockholders’ equity at July 1, 2023 | 109,058 | | | $ | 1,418 | | | $ | 1,283,589 | | | $ | (5,210,524) | | | $ | 10,216 | | | $ | 6,002,453 | | | $ | 2,087,152 | |
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| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accum. Other Comp. Income | | Retained Earnings | | Total Stockholders’ Equity |
Shares | | Dollars |
Stockholders’ equity at December 25, 2021 | 113,125 | | | $ | 1,411 | | | $ | 1,210,512 | | | $ | (4,155,846) | | | $ | 1,345 | | | $ | 4,945,243 | | | $ | 2,002,665 | |
Common stock issuance under stock award plans & ESPP | 308 | | | 2 | | | 7,908 | | | | | | | | | 7,910 | |
Share-based compensation expense | | | | | 12,316 | | | | | | | | | 12,316 | |
Repurchase of shares to satisfy tax obligations | | | | | (26,442) | | | | | | | | | (26,442) | |
Repurchase of common stock | (1,358) | | | | | | | (296,180) | | | | | | | (296,180) | |
Cash dividends paid to stockholders | | | | | | | | | | | (103,467) | | | (103,467) | |
Change in fair value of interest rate swaps, net of taxes | | | | | | | | | 5,993 | | | | | 5,993 | |
Net income | | | | | | | | | | | 187,227 | | | 187,227 | |
Stockholders’ equity at March 26, 2022 | 112,075 | | | $ | 1,413 | | | $ | 1,204,294 | | | $ | (4,452,026) | | | $ | 7,338 | | | $ | 5,029,003 | | | $ | 1,790,022 | |
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Common stock issuance under stock award plans & ESPP | 64 | | | 1 | | | 5,084 | | | | | | | | | 5,085 | |
Share-based compensation expense | | | | | 12,534 | | | | | | | | | 12,534 | |
Repurchase of shares to satisfy tax obligations | | | | | (1,230) | | | | | | | | | (1,230) | |
Repurchase of common stock | (942) | | | | | | | (188,210) | | | | | | | (188,210) | |
Cash dividends paid to stockholders | | | | | | | | | | | (102,622) | | | (102,622) | |
Change in fair value of interest rate swaps, net of taxes | | | | | | | | | 1,810 | | | | | 1,810 | |
Net income | | | | | | | | | | | 396,478 | | | 396,478 | |
Stockholders’ equity at June 25, 2022 | 111,197 | | | $ | 1,414 | | | $ | 1,220,682 | | | $ | (4,640,236) | | | $ | 9,148 | | | $ | 5,322,859 | | | $ | 1,913,867 | |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) | | | | | | | | | | | |
| For the Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 |
Cash flows from operating activities: | | | |
Net income | $ | 604,322 | | | $ | 583,705 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 199,512 | | | 161,006 | |
(Gain)/loss on disposition of property and equipment | (474) | | | 594 | |
Share-based compensation expense | 30,179 | | | 24,850 | |
Deferred income taxes | 30,916 | | | 38,693 | |
Change in assets and liabilities: | | | |
Inventories | 34,626 | | | (293,946) | |
Prepaid expenses and other current assets | (22,439) | | | (50,318) | |
Accounts payable | (126,400) | | | 124,888 | |
Accrued employee compensation | (56,795) | | | (67,144) | |
Other accrued expenses | (26,994) | | | (22,896) | |
Income taxes | 104,723 | | | 98,059 | |
Other | 11,145 | | | 28,114 | |
Net cash provided by operating activities | 782,321 | | | 625,605 | |
Cash flows from investing activities: | | | |
Capital expenditures | (349,586) | | | (265,308) | |
Proceeds from sale of property and equipment | 761 | | | 178 | |
Proceeds from Orscheln acquisition net working capital settlement | 4,310 | | | — | |
Net cash used in investing activities | (344,515) | | | (265,130) | |
Cash flows from financing activities: | | | |
Borrowings under debt facilities | 1,767,000 | | | — | |
Repayments under debt facilities | (1,195,000) | | | — | |
Debt discounts and issuance costs | (9,729) | | | — | |
| | | |
Principal payments under finance lease liabilities | (2,805) | | | (2,527) | |
Repurchase of shares to satisfy tax obligations | (23,121) | | | (27,672) | |
Repurchase of common stock | (345,653) | | | (484,390) | |
Net proceeds from issuance of common stock | 15,252 | | | 12,995 | |
Cash dividends paid to stockholders | (226,221) | | | (206,089) | |
Net cash used in financing activities | (20,277) | | | (707,683) | |
Net increase/(decrease) in cash and cash equivalents | 417,529 | | | (347,208) | |
Cash and cash equivalents at beginning of period | 202,502 | | | 878,030 | |
Cash and cash equivalents at end of period | $ | 620,031 | | | $ | 530,822 | |
| | | |
Supplemental disclosures of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest, net of amounts capitalized | $ | 20,462 | | | $ | 11,673 | |
Income taxes | 36,226 | | | 36,820 | |
| | | |
Supplemental disclosures of non-cash activities: | | | |
Non-cash accruals for property and equipment | $ | 27,031 | | | $ | 42,974 | |
Increase of operating lease assets and liabilities from new or modified leases | 260,268 | | | 135,858 | |
Increase of finance lease assets and liabilities from new or modified leases | 450 | | | 5,143 | |
| | | |
|
| | | | | | | |
| For the Fiscal Nine Months Ended |
| September 30, 2017 | | September 24, 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 312,856 |
| | $ | 313,537 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 122,701 |
| | 103,296 |
|
Loss on disposition of property and equipment | 509 |
| | 219 |
|
Share-based compensation expense | 22,931 |
| | 17,326 |
|
Deferred income taxes | 4,626 |
| | 2,002 |
|
Change in assets and liabilities: | |
| | |
|
Inventories | (221,899 | ) | | (205,559 | ) |
Prepaid expenses and other current assets | 14,939 |
| | 19,530 |
|
Accounts payable | 90,361 |
| | 56,765 |
|
Accrued employee compensation | 9,251 |
| | (25,059 | ) |
Other accrued expenses | (33,259 | ) | | 2,626 |
|
Income taxes | 9,154 |
| | (6,384 | ) |
Other | 8,792 |
| | 7,336 |
|
Net cash provided by operating activities | 340,962 |
| | 285,635 |
|
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (152,040 | ) | | (167,161 | ) |
Proceeds from sale of property and equipment | 10,880 |
| | 366 |
|
Net cash used in investing activities | (141,160 | ) | | (166,795 | ) |
Cash flows from financing activities: | |
| | |
|
Borrowings under debt facilities | 1,010,000 |
| | 695,000 |
|
Repayments under debt facilities | (773,750 | ) | | (550,000 | ) |
Debt issuance costs | (599 | ) | | (1,380 | ) |
Principal payments under capital lease obligations | (1,554 | ) | | (823 | ) |
Repurchase of shares to satisfy tax obligations | (771 | ) | | (843 | ) |
Repurchase of common stock | (326,647 | ) | | (215,692 | ) |
Net proceeds from issuance of common stock | 9,619 |
| | 37,421 |
|
Cash dividends paid to stockholders | (99,970 | ) | | (90,829 | ) |
Net cash used in financing activities | (183,672 | ) | | (127,146 | ) |
Net change in cash and cash equivalents | 16,130 |
| | (8,306 | ) |
Cash and cash equivalents at beginning of period | 53,916 |
| | 63,813 |
|
Cash and cash equivalents at end of period | $ | 70,046 |
| | $ | 55,507 |
|
| | | |
Supplemental disclosures of cash flow information: | |
| | |
|
Cash paid during the period for: | |
| | |
|
Interest | $ | 8,010 |
| | $ | 3,445 |
|
Income taxes | 166,027 |
| | 184,817 |
|
Supplemental disclosures of non-cash activities: | | | |
Property and equipment acquired through capital lease | $ | 11,395 |
| | $ | 10,493 |
|
Non-cash accruals for construction in progress | 15,949 |
| | 17,727 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
TRACTOR SUPPLY COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – General:
Nature of Business
Founded in 1938, Tractor Supply Company (the “Company,” “Tractor Supply,” “we,” “our,” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers, ranchers, and all those who enjoy living the rural lifestyle (which we refer to as the “Out Here” lifestyle). The Company's stores are located primarily in towns outlying major metropolitan markets and in rural communities. The Company also owns and operates Petsense, LLC (“Petsense by Tractor Supply”), a small-box pet specialty supply retailer focused on meeting the needs of pet owners, primarily in small and mid-sized communities, and offering a variety of pet products and services. On October 12, 2022, the Company completed the acquisition of Orscheln Farm and Home, LLC (“Orscheln” or “Orscheln Farm and Home”) and will convert the 81 acquired Orscheln stores to Tractor Supply stores by the end of fiscal 2023. At July 1, 2023, the Company operated a total of 2,373 retail stores in 49 states (2,181 Tractor Supply and Orscheln retail stores and 192 Petsense by Tractor Supply retail stores) and also offered an expanded assortment of products through the Tractor Supply mobile application and online at TractorSupply.comand Petsense.com.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission.Commission (the “SEC”). Accordingly, they do not include all of the information and notes 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. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022. The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.
Recently Adopted Accounting Pronouncements
In September 2022, the first quarterFinancial Accounting Standard Board issued Accounting Standards Update (“ASU”) 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”. The ASU requires disclosure about an entity’s use of supplier finance programs, including the key terms of the program, amount of obligations outstanding at the end of the reporting period, and a rollforward of activity within the program during the period. The Company adopted this ASU in fiscal 2017, Tractor Supply Company (the “Company”) adopted accounting guidance2023, except for the disclosure of rollforward activity, which affected the presentationis effective on a prospective basis beginning in the statement of cash flows of excess tax benefits or deficiencies from the exercise of stock options as discussed in Note 13. fiscal 2024.
Supplier Finance Program
The Company has electedan agreement with a third-party financial institution that allows certain participating suppliers the ability to applyfinance payment obligations from the amendments using a retrospective transition methodCompany. The third-party financial institution has separate arrangements with the Company’s suppliers and provides them with the option to request early payment for all periods presentedinvoices confirmed by the Company. The Company does not determine the terms or conditions of the arrangement between the third-party and thereforeits suppliers and receives no compensation from the presentation of previously reported excess tax benefitsthird-party financial institution. The Company’s obligation to its suppliers, including amounts due and scheduled payment dates, are not impacted by the suppliers’ decisions to finance amounts under the arrangement. The Company’s outstanding payment obligations under the supplier finance program, which are included in accounts payable on the unaudited condensed consolidated statements of cash flows has been changed to conform to the presentation used in the current period. As a result, $11.6Company’s Consolidated Balance Sheets, were $31.1 million, of excess tax benefits related to share-based awards which were previously classified as cash flows from financing activities in the fiscal nine months ended September 24, 2016 have been reclassified as cash flows from operating activities.$24.2 million, and $27.2 million at July 1, 2023, December 31, 2022, and June 25, 2022, respectively.
The Company is the largest operator of rural lifestyle retail stores in the United States. The Company is focused on supplying the needs of recreational farmers and ranchers and those who enjoy the rural lifestyle, as well as tradesmen and small businesses. Stores are located in towns outlying major metropolitan markets and in rural communities. At September 30, 2017, the Company operated a total of 1,827 retail stores in 49 states (1,665 Tractor Supply and Del’s retail stores and 162 Petsense retail stores) and also offered an expanded assortment of products online at TractorSupply.com.
Note 2 – Fair Value of Financial Instruments:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•Level 1 - defined as observable inputs such as quoted prices in active markets;
•Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
•Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments consist of cash and cash equivalents, short-term credit card receivables, trade payables, debt instruments, and interest rate swaps. Due to their short-term nature, the carrying values of cash and cash equivalents, short-term credit card receivables, and trade payables approximate current fair value at each balance sheet date. The
As described in further detail in Note 6 to the Condensed Consolidated Financial Statements, the Company had $511.3 million$1.75 billion, $1.18 billion and $1.00 billion in borrowings under its debt facilities (as discussed in Note 6) at September 30, 2017, $275.0 million in borrowings atJuly 1, 2023, December 31, 2016,2022 and $295.0June 25, 2022, respectively. The fair value of the Company’s $150 million in3.70% Senior Notes due 2029 (the “3.70% Senior Notes”) and the borrowings at September 24, 2016. Basedunder the Company’s revolving credit facility (the “Revolving Credit Facility”) were determined based on market interest rates (Level 2 inputs), the. The carrying value of borrowings in our debt facilitiesthe 3.70% Senior Notes and the Revolving Credit Facility approximate fair value for each period reported.
The fair value of the Company’s $650 million 1.750% Senior Notes due 2030 (the “1.75% Senior Notes”) and $750 million 5.250% Senior Notes due 2033 (the “5.25% Senior Notes”) are determined based on quoted prices in active markets, which are considered Level 1 inputs. The carrying value and the fair value of the 1.75% Senior Notes and the 5.25% Senior Notes, net of discounts, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 1, 2023 | | December 31, 2022 | | June 25, 2022 |
| | Carrying Value | Fair Value | | Carrying Value | Fair Value | | Carrying Value | Fair Value |
1.75% Senior Notes | | $ | 639,908 | | $ | 514,007 | | | $ | 639,220 | | $ | 500,065 | | | $ | 638,532 | | $ | 509,717 | |
5.25% Senior Notes | | $ | 740,384 | | $ | 740,453 | | | $ | — | | $ | — | | | $ | — | | $ | — | |
The Company's interest rate swapsswap is carried at fair value, which is determined based on the present value of expected future cash flows using forward rate curves, (awhich is considered a Level 2 input). As describedinput. In accordance with hedge accounting, the gains and losses on interest rate swaps that are designated and qualify as cash flow hedges are recorded as a component of Other Comprehensive Income, net of related income taxes, and reclassified into earnings in further detailthe same income statement line and period in Note 7,which the hedged transactions affect earnings. The fair value of the interest rate swaps,swap, excluding accrued interest, was a $3.1 million asset at September 30, 2017, a $2.8 million asset at December 31, 2016 and a $1.8 million liability at September 24, 2016.as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at |
| | July 1, 2023 | | December 31, 2022 | | June 25, 2022 |
Interest rate swap assets (Level 2) | | $ | 13,717 | | | $ | 15,146 | | | $ | 12,302 | |
| | | | | | |
| | | | | | |
Note 3 – Share-Based Compensation:
Share-based compensation includes stock option andoptions, restricted stock unit awardsunits, performance-based restricted share units, and certain transactions under ourthe Company's Employee Stock Purchase Plan (the “ESPP”). Share-based compensation expense is recognized based on grant date fair value of all stock options, and restricted stock unit awards plus aunits, and performance-based restricted share units. Share-based compensation expense is also recognized for the value of the 15% discount on shares purchased by employees as a part of the ESPP. The discount under the ESPP represents the difference between the market value on the first day of the purchase period or the market value on the purchase date, whichever is lower, and the employee’s purchase price.
There were no significant modifications to the Company’s share-based compensation plans during the fiscal ninesix months ended September 30, 2017.July 1, 2023.
For the third quarters of fiscal 2017 and 2016, share-basedShare-based compensation expense was $7.9$15.7 million and $6.1$12.5 million for the second quarter of fiscal 2023 and 2022, respectively, and $22.9$30.2 million and $17.3$24.9 million for the first ninesix months of fiscal 20172023 and 2016,2022, respectively.
Stock Options
The following table summarizes information concerning stock option grants during the first ninesix months of fiscal 2017 and 2016:2023:
|
| | | | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 |
Stock options granted | 1,619,280 |
| | 1,134,121 |
|
Weighted average exercise price | $ | 72.16 |
| | $ | 86.41 |
|
Weighted average fair value per option | $ | 14.57 |
| | $ | 19.62 |
|
| | | | | |
| Fiscal Six Months Ended |
| July 1, 2023 |
Stock options granted | 120,751 | |
Weighted average exercise price | $ | 232.81 | |
Weighted average grant date fair value per option | $ | 60.92 | |
As of September 30, 2017,July 1, 2023, total unrecognized compensation expense related to non-vested stock options was approximately $25.0$11.4 million with a remaining weighted average expense recognition period of 2.02.1 years.
Restricted Stock Units and Performance-Based Restricted Share Units
The following table summarizes information concerning restricted stock unit and performance-based restricted share unit grants during the first ninesix months of fiscal 20172023:
| | | | | |
| Fiscal Six Months Ended |
| July 1, 2023 |
Restricted Stock Unit Activity | |
Awards granted | 206,398 | |
Weighted average grant date fair value per share | $ | 225.29 | |
Performance-Based Restricted Share Unit Activity | |
Awards granted (a) | 52,641 | |
Weighted average grant date fair value per share - awards granted | $ | 237.86 | |
Performance adjustment (b) | 50,411 | |
Weighted average grant date fair value per share - performance adjustment | $ | 85.82 | |
(a) Assumes 100% target level achievement of the relative performance targets.
(b) Shares adjusted for performance-based restricted share unit awards settled during the first three months of fiscal 2023 based on actual achievement of performance targets.
In the first six months of fiscal 2023, the Company granted performance-based restricted share unit awards that are subject to the achievement of specified performance goals. The performance metrics for the units are growth in net sales and 2016:growth in earnings per diluted share and also include a relative total shareholder return modifier. The number of performance-based restricted share units presented in the foregoing table represent the shares that can be achieved at the performance metric target value. The actual number of shares that will be issued under the performance-based restricted share unit awards, which may be higher or lower than the target, will be determined by the level of achievement of the performance goals and the relative total shareholder return modifier. If the performance targets are achieved, the units will be issued based on the achievement level, inclusive of the relative total shareholder return modifier, and the grant date fair value and will cliff vest in full on the third anniversary of the date of the grant, subject to continued employment.
|
| | | | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 |
Restricted stock units granted | 85,049 |
| | 59,019 |
|
Weighted average fair value per share | $ | 66.34 |
| | $ | 84.25 |
|
As of September 30, 2017,July 1, 2023, total unrecognized compensation expense related to non-vested restricted stock units and non-vested performance-based restricted share units was approximately $5.6$90.7 million with a remaining weighted average expense recognition period of 1.72.1 years.
Note 4 –- Acquisition of Petsense:Orscheln Farm and Home, LLC and Related Divestitures
On September 29, 2016,October 12, 2022, the Company completed theits acquisition of Petsense. HeadquarteredOrscheln, which expands the Company's footprint in Scottsdale, Arizona, Petsense is a small-box pet specialty supply retailer focused on meeting the needsMidwest part of pet owners, primarily in small and mid-size communities, and offering a variety of pet products and services.the United States. Pursuant to the agreement governing the transaction,acquisition, the Company acquired all100% of the outstanding equity interestsinterest in Petsense for an all-cashOrscheln, inclusive of 166 Orscheln stores, the Orscheln corporate headquarters, and the Orscheln distribution
center. The total purchase price whichconsideration was $393.4 million, exclusive of cash acquired. The acquisition was financed with cash on-handcash-on-hand and revolverRevolving Credit Facility borrowings under the 20162022 Senior Credit Facility (as defined in Note 6)below).
In order to obtain regulatory approval for the Orscheln acquisition, the Federal Trade Commission required the Company to divest of 85 stores, which were sold to two buyers, Bomgaars Supply, Inc. (“Bomgaars”) (73 stores) and Buchheit Enterprises, Inc. (12 stores), on October 12, 2022, concurrently with the closing of the acquisition. Net proceeds from the store divestitures were $69.4 million. In addition, the Company has agreed to sell the Orscheln corporate headquarters and distribution center to Bomgaars for $10 million within 15 months after the closing of the acquisition.
The totalpurchase consideration transferred in connectionand preliminary estimated fair value of Orscheln’s net assets acquired on October 12, 2022 are shown below and remain subject to revisions as additional information is obtained about the facts and circumstances that existed at the valuation date. The assets and liabilities of the 85 divested stores, along with the Petsense acquisition has been allocated toOrscheln corporate headquarters and the Orscheln distribution center, are shown as held for sale in the fair value of assets acquired and liabilities assumed based upon their respective fair values. assumed.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Amounts Recognized as of Acquisition Date | | Measurement Period Adjustments | | Amounts Recognized as of July 1, 2023 |
Fair value of assets acquired | | | | | | |
Cash and cash equivalents | | $ | 6,935 | | | $ | — | | | $ | 6,935 | |
Accounts receivable | | 277 | | | — | | | 277 | |
Inventories | | 168,663 | | | (14,919) | | | 153,744 | |
Prepaid expenses and other current assets | | 7,222 | | | 524 | | | 7,746 | |
Property and equipment | | 13,328 | | | (810) | | | 12,518 | |
Lease right of use assets | | 82,755 | | | — | | | 82,755 | |
Deferred income taxes | | 18,481 | | | 2,534 | | | 21,015 | |
Assets held for sale | | 173,554 | | | — | | | 173,554 | |
Other assets | | 160 | | | (13) | | | 147 | |
Less: liabilities assumed | | | | | | |
Accounts payable | | 80,323 | | | 344 | | | 80,667 | |
Accrued liabilities | | 20,291 | | | 5,108 | | | 25,399 | |
Short-term lease liabilities | | 5,986 | | | — | | | 5,986 | |
Long-term lease liabilities | | 70,626 | | | — | | | 70,626 | |
Liabilities held for sale | | 94,190 | | | — | | | 94,190 | |
Goodwill | | 197,742 | | | 13,826 | | | 211,568 | |
Total fair value of considerations transferred | | $ | 397,700 | | | $ | (4,310) | | | $ | 393,391 | |
Note: Amounts may not sum to totals due to rounding.
The fair value$211.6 million goodwill shown above represents the expected synergies from combining the operations of Orscheln with Tractor Supply stores and the expanded footprint that Orscheln brings in the Midwest part of the assets acquired and liabilities assumedUnited States. Approximately $130.3 million of this goodwill is estimated based on either one or a combination of the following methodologies: the income approach, the cost approach or the market approach as determined based on the nature of the asset or liability and the level of inputs available. With respect to assets and liabilities, the determination of fair value requires management to make subjective judgments as to projections of future operating performance, the appropriate discount rate to apply, long-term growth rates, etc. (i.e. unobservable inputs classified as Level 3 inputs under the fair value hierarchy) which affect the amounts recorded in the purchase price allocation. The excess of the consideration transferred over the fair value of the identifiable assets, net of liabilities, is recorded as goodwill, which is indicative of the expected continued growth and development of the pet specialty retail business acquired.
The table below summarizes the consideration transferred and allocation of the purchase price for the Petsense acquisition (in thousands):
|
| | | |
Consideration transferred | $ | 144,476 |
|
Assets acquired: | |
Current assets | $ | 21,875 |
|
Property and equipment | 25,519 |
|
Other intangible assets - tradename | 31,300 |
|
Other assets | 428 |
|
Liabilities assumed: | |
Current liabilities | (12,091 | ) |
Long-term liabilities | (5,489 | ) |
Total identifiable net assets acquired | 61,542 |
|
Excess of consideration transferred over identifiable net assets acquired (goodwill) | $ | 82,934 |
|
In September 2017, the Company finalized the working capital settlement pursuant to the agreement governing the transaction. As a result, the values of the consideration transferred, assets acquired and liabilities assumed as reflected in the table above are considered final. The working capital settlement reduced both the consideration transferred and goodwill by $1.2 million from the preliminary values. As of September 30, 2017, this settlement amount is an outstanding receivable, and is recorded in the consolidated balance sheet in prepaid expenses and other current assets.
The resulting goodwill of $82.9 million and tradename of $31.3 million are amortizeddeductible for income tax purposes.
The results of operations of Petsense have been included in the Consolidated Financial Statements since the date of acquisition.
Note 5 – Net Income Per Share:
The Company presents both basic and diluted net income per share on the faceCondensed Consolidated Statements of the unaudited condensed consolidated statements of income.Income. Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average diluted shares outstanding.outstanding during the period. Dilutive shares are computed using the treasury stock method for stock options andshare-based awards. Performance-based restricted stock units.share units are included in diluted shares only if the related performance conditions are considered satisfied as of the end of the reporting period. Net income per share is calculated as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended |
| July 1, 2023 | | June 25, 2022 |
| Income | | Shares | | Per Share Amount | | Income | | Shares | | Per Share Amount |
Basic net income per share: | $ | 421,234 | | | 109,426 | | | $ | 3.85 | | | $ | 396,478 | | | 111,590 | | | $ | 3.55 | |
Dilutive effect of share-based awards | — | | | 615 | | | (0.02) | | | — | | | 728 | | | (0.02) | |
Diluted net income per share: | $ | 421,234 | | | 110,041 | | | $ | 3.83 | | | $ | 396,478 | | | 112,318 | | | $ | 3.53 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal three months ended | | Fiscal three months ended |
| September 30, 2017 | | September 24, 2016 |
| Income | | Shares | | Per Share Amount | | Income | | Shares | | Per Share Amount |
Basic net income per share: | $ | 91,896 |
| | 126,416 |
| | $ | 0.73 |
| | $ | 89,444 |
| | 133,392 |
| | $ | 0.67 |
|
Dilutive stock options and restricted stock units outstanding | — |
| | 503 |
| | (0.01 | ) | | — |
| | 864 |
| | — |
|
Diluted net income per share: | $ | 91,896 |
| | 126,919 |
| | $ | 0.72 |
| | $ | 89,444 |
| | 134,256 |
| | $ | 0.67 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 |
| Income | | Shares | | Per Share Amount | | Income | | Shares | | Per Share Amount |
Basic net income per share: | $ | 604,322 | | | 109,735 | | | $ | 5.51 | | | $ | 583,705 | | | 112,060 | | | $ | 5.21 | |
Dilutive effect of share-based awards | — | | | 676 | | | (0.04) | | | — | | | 851 | | | (0.04) | |
Diluted net income per share: | $ | 604,322 | | | 110,411 | | | $ | 5.47 | | | $ | 583,705 | | | 112,911 | | | $ | 5.17 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal nine months ended | | Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 |
| Income | | Shares | | Per Share Amount | | Income | | Shares | | Per Share Amount |
Basic net income per share: | $ | 312,856 |
| | 128,293 |
| | $ | 2.44 |
| | $ | 313,537 |
| | 133,529 |
| | $ | 2.35 |
|
Dilutive stock options and restricted stock units outstanding | — |
| | 617 |
| | (0.01 | ) | | — |
| | 980 |
| | (0.02 | ) |
Diluted net income per share: | $ | 312,856 |
| | 128,910 |
| | $ | 2.43 |
| | $ | 313,537 |
| | 134,509 |
| | $ | 2.33 |
|
Anti-dilutive stock optionsawards excluded from the above calculations totaled approximately 4.1 million and 1.80.2 million shares for each of the fiscal three months ended September 30, 2017July 1, 2023 and September 24, 2016, respectively,June 25, 2022. Anti-dilutive stock awards excluded from the above calculations totaled approximately 0.2 million share for the fiscal six months ended July 1, 2023 and 3.9 million and 1.6approximately 0.1 million shares for the fiscal ninesix months ended September 30, 2017 and September 24, 2016, respectively.June 25, 2022.
Note 6 – Debt:
The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | July 1, 2023 | | December 31, 2022 | | June 25, 2022 |
5.25% Senior Notes | | $ | 750.0 | | | $ | — | | | $ | — | |
1.75% Senior Notes | | 650.0 | | | 650.0 | | | 650.0 | |
3.70% Senior Notes (a) | | 150.0 | | | 150.0 | | | 150.0 | |
Senior credit facilities: | | | | | | |
November 2020 Term Loan | | — | | | — | | | 200.0 | |
Revolving Credit Facility (b) | | 200.0 | | | 378.0 | | | — | |
Total outstanding borrowings | | 1,750.0 | | | 1,178.0 | | | 1,000.0 | |
Less: unamortized debt discounts and issuance costs | | (22.5) | | | (13.9) | | | (12.6) | |
Total debt | | 1,727.5 | | | 1,164.1 | | | 987.4 | |
Less: current portion of long-term debt | | — | | | — | | | — | |
Long-term debt | | $ | 1,727.5 | | | $ | 1,164.1 | | | $ | 987.4 | |
| | | | | | |
Outstanding letters of credit | | $ | 60.2 | | | $ | 52.6 | | | $ | 57.6 | |
|
| | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 24, 2016 |
Senior Notes | | $ | 150.0 |
| | $ | — |
| | $ | — |
|
Senior Credit Facility: | | | | | | |
February 2016 Term Loan | | 182.5 |
| | 190.0 |
| | 195.0 |
|
June 2017 Term Loan | | 98.8 |
| | — |
| | — |
|
Revolving credit loans | | 80.0 |
| | 85.0 |
| | 100.0 |
|
Total outstanding borrowings | | 511.3 |
| | 275.0 |
| | 295.0 |
|
Less: unamortized debt issuance costs | | (1.6 | ) | | (1.1 | ) | | (1.2 | ) |
Total debt | | 509.7 |
| | 273.9 |
| | 293.8 |
|
Less: current portion of long-term debt | | (22.5 | ) | | (10.0 | ) | | (10.0 | ) |
Long-term debt | | $ | 487.2 |
| | $ | 263.9 |
| | $ | 283.8 |
|
| | | | | | |
Outstanding letters of credit | | $ | 41.6 |
| | $ | 44.3 |
| | $ | 44.4 |
|
Senior Notes
On August 14, 2017,(a) Also referred to herein as the Company entered into a note purchase and private shelf agreement (the “Note Purchase Agreement”), pursuant to which the Company agreed to sell $150 million aggregate principal amount of senior unsecured notes due August 14, 2029 (the “2029 Notes”) in a private placement. The 2029 Notes bear interest at 3.70% per annum with interest payable semi-annually in arrears on each annual and semi-annual anniversary of the issuance date. The obligations under the Note Purchase Agreement are unsecured, but guaranteed by each of the Company’s material subsidiaries.
The Company may from time to time issue and sell additional senior unsecured notes (the “Shelf Notes”) pursuantFacility,” referring to the Note Purchase and Private Shelf Agreement in an aggregate principal amountdated as of up to $150 million. The Shelf Notes will have a maturity date of no more than 12 years after the date of original issuance and may be issued through August 14, 2020, unless earlier terminated in accordance with the terms of the Note Purchase Agreement.
Pursuant to the Note Purchase Agreement, the 2029 Notes2017 by and any Shelf Notes (collectively, the "Notes") are redeemable byamong the Company, in whole at any time or in part from time to time, at 100%PGIM, Inc. and the noteholders party thereto, as amended through November 2, 2022, under which the notes were purchased.
(b) Outstanding balances as of the principal amount of the Notes being redeemed, together with accruedJuly 1, 2023 and unpaid interest thereon and a make whole amount calculated by discounting all remaining scheduled payments onDecember 31, 2022 represent amounts drawn under the Notes by the yield on the U.S. Treasury security with a maturity equal to the remaining average life of the Notes plus 0.50%.
Senior Credit Facility
On February 19, 2016, the Company entered into a senior credit facility (the “2016“2022 Senior Credit Facility”) consisting of a $200 million term loan (the “February 2016 Term Loan”) and a $500 million revolving credit facility (the “Revolver”) with a sublimit of $50 million for swingline loans. This agreement is unsecured and matures on February 19, 2021.
On June 15, 2017, pursuant to an accordion feature available under the 2016 Senior Credit Facility, the Company entered into an incremental term loan agreement (the “June 2017 Term Loan”) which increased the term loan capacity under the 2016 Senior Credit Facility by $100 million. This agreement is unsecured and matures on June 15,September 30, 2022.
The February 2016 Term Loan of $200 million requires quarterly payments totaling $10 million per year in years one and two and $20 million per year in years three through five, with the remaining balance due in full on the maturity date of February 19, 2021. The June 2017 Term Loan of $100 million requires quarterly payments totaling $5 million per year in years one and two and $10 million per year in years three through five, with the remaining balance due in full on the maturity date of June 15, 2022.
The 2016 Senior Credit Facility also contains a $500 million revolving credit facility with a sublimit of $50 million for swingline loans.
Borrowings under the February 2016 Term Loan and Revolver bearCompany’s Revolving Credit Facility bore interest either at either the bank’s base rate (4.250%(8.250% at September 30, 2017) or the London Inter-Bank Offer Rate (“LIBOR”) (1.232% at September 30, 2017)July 1, 2023) plus an additional amount ranging from 0.500%0.000% to 1.125% per annum (0.750%0.250% (0.000% at September 30, 2017)July 1, 2023) or at adjusted Secured Overnight Financing Rate (5.141% at July 1, 2023) plus an additional amount ranging from 0.750% to 1.250% (1.000% at July 1, 2023), adjusted quarterly based on our leverage ratio.the Company’s public credit ratings. The Company iswas also required to pay, quarterly in arrears, a commitment fee forrelated to unused capacity on the Revolving Credit Facility ranging from 0.075%0.080% to 0.200%0.150% per annum (0.125%(0.100% at September 30, 2017)July 1, 2023), adjusted quarterly based on the Company’s leverage ratio. Borrowings under the June 2017 Term Loan bear interest at either the bank’s base rate (4.250% at September 30, 2017) or LIBOR (1.232% at September 30, 2017) plus an additional 1.000% per annum. As further described in Note 7, thepublic credit ratings.
The Company has entered into an interest rate swap agreementsagreement in order to hedge ourits exposure to variable rate interest payments associated with eachits debt. The interest rate swap agreement will mature on March 18, 2025, and the notional amount of the term loansagreement is fixed at $200.0 million.
5.25% Senior Notes
On May 5, 2023, the Company completed the sale of $750 million aggregate principal amount of its 5.25% Senior Notes. The entire principal amount of the 5.25% Senior Notes is due in full on May 15, 2033. Interest is payable semi-annually in arrears on each May 15 and November 15. The terms of the 5.25% Senior Notes are governed by an indenture dated as of October 30, 2020 between the Company and Regions Bank, as trustee, as amended and supplemented by a second supplemental indenture dated as of May 5, 2023 (the “Second Supplemental Indenture”) between the Company and Regions Bank, as trustee.
The 5.25% Senior Notes are senior unsecured debt obligations of the Company and rank equally with the Company’s other senior unsecured liabilities and senior to any future subordinated indebtedness of the Company. The 5.25% Senior Notes are subject to customary covenants restricting the Company’s ability, subject to certain exceptions, to incur debt secured by liens, to enter into sale and leaseback transactions or to merge or consolidate with another entity or sell substantially all of its assets to another person.
At any time prior to February 15, 2033 (three months prior to the maturity date of the 5.25% Senior Notes), the Company has the right, at its option, to redeem the 5.25% Senior Notes, in whole or in part, at any time and from time to time, by paying the greater of 100% of the principal amount of the 5.25% Senior Notes to be redeemed, or the sum of the present values of the remaining scheduled payments of principal and interest through the par call date, plus, in each case, accrued and unpaid interest to, but not including, the date of redemption. In addition, on or after February 15, 2033, the Company has the right, at its option, to redeem the 5.25% Senior Notes, in whole or in part, at any time and from time to time, at a redemption price equal to 100% of the principal amount of the 5.25% Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the date of redemption.
If a Change of Control Triggering Event (as defined in the Second Supplemental Indenture) occurs, unless the Company has exercised its right to redeem the 5.25% Senior Notes, holders of the 5.25% Senior Notes may require the Company to repurchase all or any part of such holder’s 5.25% Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, on such 5.25% Senior Notes to, but not including, the purchase date. Upon the occurrence of an event of default with respect to the 5.25% Senior Notes, which includes payment defaults, defaults in the performance of certain covenants, cross defaults, and bankruptcy and insolvency related defaults, the Company’s obligations under the 20165.25% Senior Credit Facility.
Proceeds from the 2016 Senior Credit FacilityNotes may be used for working capital, capital expenditures, dividends, share repurchasesaccelerated, in which case the entire principal amount of the 5.25% Senior Notes would be due and other matters. There are no compensating balance requirements associated with the 2016 Senior Credit Facility.payable immediately.
During the period of October 24, 2011 through February 19, 2016, the Company was party to a senior credit facility (the “2011 Senior Credit Facility”), which provided for borrowings up to $400 million with a sublimit of $30 million for swingline loans.
Covenants and Default Provisions of the Debt Agreements
The 2016As of July 1, 2023, the 2022 Senior Credit Facility and the Note Purchase AgreementFacility (collectively, the “Debt Agreements”) requirerequired quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. Both ratios are calculated on a trailing twelve-month basis at the end of each fiscal quarter. The fixed charge coverage ratio compares earnings before interest, taxes, depreciation, amortization, share-based compensation, and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding any straight-line rent adjustments). The fixed charge coverage ratio shallwas required to be greater than or equal to 2.00 to 1.01.00 as of the last day of each fiscal quarter. The leverage ratio compares rental expense (excluding any straight-line rent adjustments) multiplied by a factor of six plus total funded debt to consolidated EBITDAR. The leverage ratio shallwas required to be less than or equal to 4.00 to 1.01.00 as of the last day of each fiscal quarter. The Debt Agreements also contain certain other restrictions regarding additional subsidiary indebtedness, capital expenditures, business operations, subsidiary guarantees, investments, mergers, consolidations and sales of assets, prepayment of debts, transactions with subsidiaries or affiliates, and liens. As of September 30, 2017,July 1, 2023, the Company was in compliance with all debt covenants.
The Debt Agreements contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, and invalidity of loan documents. Upon certain changes of control, paymentamounts outstanding under the Debt Agreements could become due and payable. In addition, under the Note Purchase Agreement,Facility, upon an event of default or change of control, the makea whole payment described above may become due and payable.
The Note Purchase AgreementFacility also requires that, in the event the Company amends its 20162022 Senior Credit Facility, or any subsequent credit facility of $100 million or greater, such that it contains covenant or default provisions that are not provided in the Note Purchase AgreementFacility or that are similar to those contained in the Note Purchase AgreementFacility but which contain percentages, amounts, formulas, or grace periods that are more restrictive than those set forth in the Note Purchase AgreementFacility or are otherwise more beneficial to the lenders thereunder, the Note Purchase AgreementFacility shall be automatically amended to include such additional or amended covenants and/or default provisions.
Note 7 – Interest Rate Swaps:Capital Stock and Dividends:
Capital Stock
The Company entered into an interest rate swap agreement which became effective on March 31, 2016, with a maturity date of February 19, 2021. The notional amount of this swap agreement began at $197.5 million (the principal amountauthorized capital stock of the February 2016 Term Loan borrowings asCompany consists of March 31, 2016)common stock and will amortize at the same time and in the same amount as the February 2016 Term Loan borrowings as described in Note 6. As of September 30, 2017, the notional amount of the interest rate swap was $182.5 million.
preferred stock. The Company entered into a second interest rate swap agreement which became effective on June 30, 2017, with a maturity dateis authorized to issue 400 million shares of June 15, 2022. The notional amount of this swap agreement began at $100 million (the principal amount of the June 2017 Term Loan borrowings as of June 30, 2017) and will amortize at the same time and in the same amount as the June 2017 Term Loan borrowings as described in Note 6. As of September 30, 2017, the notional amount of the interest rate swap was $98.8 million.
The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. Both interest rate swap agreements entitle the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement, without exchange of the underlying notional amount.
common stock. The Company has designated its interest rate swap agreementsis also authorized to issue 40 thousand shares of preferred stock, with such designations, rights and preferences as may be determined from time to time by the Company's Board of Directors.
Dividends
During the first six months of fiscal 2023 and fiscal 2022, the Company's Board of Directors declared the following cash flow hedges and accounts for the underlying activity in accordance with hedge accounting. The interest rate swaps are presented within the consolidated balance sheets at fair value. In accordance with hedge accounting, the effective portion of gains and losses on interest rate swaps that are designated and qualify as cash flow hedges are recorded as a component of Other Comprehensive Income (Loss) (“OCI” or “OCL”, respectively) and reclassified into earnings in the period during which the hedged transactions affect earnings. The ineffective portion of gains and losses on interest rate swaps, if any, are recognized in current earnings.dividends:
| | | | | | | | | | | | | | | | | | | | |
Date Declared | | Dividend Amount Per Share of Common Stock | | Record Date | | Date Paid |
| | | | | | |
| | | | | | |
May 10, 2023 | | $ | 1.03 | | | May 30, 2023 | | June 13, 2023 |
February 8, 2023 | | $ | 1.03 | | | February 27, 2023 | | March 14, 2023 |
| | | | | | |
| | | | | | |
May 10, 2022 | | $ | 0.92 | | | May 25, 2022 | | June 8, 2022 |
January 26, 2022 | | $ | 0.92 | | | February 21, 2022 | | March 8, 2022 |
The assets and liabilities measured at fair value related to the Company’s interest rate swaps, excluding accrued interest, were as follows (in thousands):
|
| | | | | | | | | | | | | |
| Balance Sheet Location | | September 30, 2017 | | December 31, 2016 | | September 24, 2016 |
Interest rate swaps (short-term portion) | Other current assets / (Other accrued expenses) | | $ | 194 |
| | $ | (398 | ) | | $ | (887 | ) |
Interest rate swaps (long-term portion) | Other assets / (Other long-term liabilities) | | 2,940 |
| | 3,215 |
| | (935 | ) |
Total net assets (liabilities) | | | $ | 3,134 |
| | $ | 2,817 |
| | $ | (1,822 | ) |
The offset toIt is the interest rate swap asset or liability is recorded as a component of equity, net of deferred taxes, in Accumulated Other Comprehensive Income (Loss) (“AOCI” or “AOCL”, respectively), and will be reclassified into earnings over the term of the underlying debt as interest payments are made.
The following table summarizes the changes in AOCI/AOCL, net of tax, related to the Company’s interest rate swaps (in thousands):
|
| | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 24, 2016 |
Beginning fiscal year AOCI balance | | $ | 1,392 |
| | $ | — |
| | $ | — |
|
| | | | | | |
Current fiscal period gain (loss) recognized in OCI (OCL) | | 165 |
| | 1,392 |
| | (1,111 | ) |
Amounts reclassified from AOCI (AOCL) into current fiscal period earnings | | — |
| | — |
| | — |
|
Other comprehensive gain (loss), net of tax | | 165 |
| | 1,392 |
| | (1,111 | ) |
Ending fiscal period AOCI (AOCL) balance | | $ | 1,557 |
| | $ | 1,392 |
| | $ | (1,111 | ) |
As of September 30, 2017, the estimated pre-tax portion of AOCI that is expected to be reclassified into earnings over the next twelve months is $0.2 million. Cash flows related to the interest rate swaps are included in operating activities on the condensed consolidated statements of cash flows.
The following table summarizes the impact of pre-tax gains and losses derived from the Company’s interest rate swaps (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | Fiscal three months ended | | Fiscal nine months ended |
| Financial Statement Location | | September 30, 2017 | | September 24, 2016 | | September 30, 2017 | | September 24, 2016 |
Effective portion of gains (losses) recognized in OCI (OCL) during the period | Other comprehensive income (loss) | | $ | 59 |
| | $ | 412 |
| | $ | 270 |
| | $ | (1,822 | ) |
Amounts reclassified from AOCI (AOCL) into earnings | Interest expense, net | | — |
| | — |
| | — |
| | — |
|
Ineffective portion of gains recognized in earnings during the period | Interest expense, net | | 25 |
| | 306 |
| | 46 |
| | — |
|
The following table summarizes the impact of taxes affecting AOCI/AOCL as a resultpresent intention of the Company’s interest rate swaps (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Fiscal three months ended | | Fiscal nine months ended |
| | September 30, 2017 | | September 24, 2016 | | September 30, 2017 | | September 24, 2016 |
Income tax (benefit) expense of interest rate swaps on AOCI (AOCL) | | $ | 23 |
| | $ | 161 |
| | $ | 105 |
| | $ | (711 | ) |
Credit-risk-related contingent features
In accordance withBoard of Directors to continue to pay a quarterly cash dividend; however, the underlying interest rate swap agreements,declaration and payment of future dividends will be determined by the Company’s Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company, could be declared in default on its interest rate swap obligations if repayment of the underlying indebtedness (i.e.along with any other factors that the Company’s term loans) is accelerated by the lender due to the Company's default on such indebtedness.Board of Directors deem relevant.
If the Company had breached any of the provisions in the underlying agreements at September 30, 2017, it could have been required to post full collateral or settle its obligations underOn August 9, 2023, the Company’s interest rate swap agreements. However, asBoard of September 30, 2017, the Company had not breached anyDirectors declared a quarterly cash dividend of these provisions or posted any collateral related to the underlying interest rate swap agreements. Further, as of September 30, 2017, the net balance of each$1.03 per share of the Company’s interest rate swaps were in a net asset position and thereforeoutstanding common stock. The dividend will be paid on September 12, 2023, to stockholders of record as of the Company would have no obligation upon default.close of business on August 28, 2023.
Note 8 – Treasury Stock:
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program upwhich was announced in February 2007. The total authorized amount of the program, which has been increased from time to $3.0time, is currently $6.50 billion,, exclusive of any fees, commissions, or other expenses related to such repurchases through December 31, 2020.repurchases. The share repurchase program does not have an expiration date. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares are accounted for at cost and will be held in treasury for future issuance. The program may be limited, temporarily paused, or terminated at any time without prior notice.
The Company repurchased approximately 1.4 million shares of common stock under the share repurchase program during the third quarters of both fiscal 2017 and 2016, for a total cost of $78.5 million and $108.8 million, respectively. During the first nine months of fiscal 2017 and fiscal 2016, the Company repurchased 5.2 million and 2.7 million shares under the share repurchase program for a total cost of $326.6 million and $215.7 million, respectively. As of September 30, 2017,July 1, 2023, the Company had remaining authorization under the share repurchase program of $0.9$1.29 billion, exclusive of any fees, commissions, or other expenses.
The following table provides the number of shares repurchased, average price paid per share, and total amount paid for share repurchases during the fiscal three months and fiscal six months ended July 1, 2023 and June 25, 2022, respectively (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended | | Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Total number of shares repurchased | 692 | | | 942 | | | 1,558 | | | 2,300 | |
Average price paid per share | $ | 222.42 | | | $ | 199.88 | | | $ | 225.34 | | | $ | 210.62 | |
Total cost of share repurchases (a) | $ | 157,448 | | | $ | 188,210 | | | $ | 354,616 | | | $ | 484,390 | |
(a) Effective January 1, 2023, the Company’s share repurchases are subject to a 1% excise tax as a result of the Inflation Reduction Act of 2022. Excise taxes incurred on share repurchases represent direct costs of the repurchase and are recorded as a part of the cost basis of the shares within treasury stock. The cost of shares repurchased may differ from the repurchases of common stock amounts in the consolidated statements of cash flows due to unsettled share repurchases at the end of a period and excise taxes incurred on share repurchases.
Note 9 – Capital Stock and Dividends:
Capital Stock
The authorized capital stock of the Company consists of common stock and preferred stock. The Company is authorized to issue 400 million shares of common stock. The Company is also authorized to issue 40,000 shares of preferred stock, with such designations, rights and preferences as may be determined from time to time by the Board of Directors.
Dividends
During the first nine months of fiscal 2017 and 2016, the Board of Directors declared the following cash dividends:
|
| | | | | | | | |
Date Declared | | Dividend Amount Per Share | | Record Date | | Date Paid |
August 7, 2017 | | $ | 0.27 |
| | August 21, 2017 | | September 6, 2017 |
May 8, 2017 | | $ | 0.27 |
| | May 22, 2017 | | June 6, 2017 |
February 8, 2017 | | $ | 0.24 |
| | February 27, 2017 | | March 14, 2017 |
| |
|
| |
| |
|
August 1, 2016 | | $ | 0.24 |
| | August 15, 2016 | | August 30, 2016 |
May 2, 2016 | | $ | 0.24 |
| | May 16, 2016 | | June 1, 2016 |
February 3, 2016 | | $ | 0.20 |
| | February 22, 2016 | | March 8, 2016 |
It is the present intention of the Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company, along with other factors which the Board of Directors deems relevant.
On November 6, 2017, the Company’s Board of Directors declared a quarterly cash dividend of $0.27 per share of the Company’s outstanding common stock. The dividend will be paid on December 5, 2017 to stockholders of record as of the close of business on November 20, 2017.
Note 10 – Income Taxes:
The Company’s effective income tax rate decreased to 36.4%was 23.0% in the thirdsecond quarter of fiscal 20172023 compared to 36.5% for23.5% in the thirdsecond quarter of fiscal 2016.2022. The decrease for the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016 is primarily due to lower state effective tax rates resulting from our income mix, offset in part by fewer state credits recognized this year as compared to last year.
For the first nine months of fiscal 2017, the Company’s effective income tax rate decreased to 36.5% compared to 36.7% forwas 22.4% in the first ninesix months of fiscal 2016.2023 compared to 22.7% in the first six months of fiscal 2022. The decrease in the effective income tax rate was primarily driven by net excess tax benefits associated within the settlementfirst three and six months of share-based payment awards duefiscal 2023 compared to the adoption of ASU 2016-09 (as discussedcorresponding periods in Note 13), along with an increasefiscal 2022 was driven primarily by a decrease in federal work opportunity tax credits recognized, partially offset by an increase in nondeductible expenses. state income taxes.
Note 1110 – Commitments and Contingencies:
Construction and Real Estate Commitments
At September 30, 2017,As of July 1, 2023, the Company had contractual commitments of approximately $30$76.0 million related to the ongoing construction and onboarding of its new distribution center in Frankfort, New York, which is expected to be operational by the end of fiscal 2018. There were no material commitments related to construction projects extending greater than twelve months.centers.
Letters of Credit
At September 30, 2017, there were $41.6July 1, 2023, the Company had $60.2 million ofin outstanding letters of credit under the 2016 Senior Credit Facility.credit.
Litigation
Item 103In March 2023, U.S. Customs and Border Protection (“U.S. Customs”) sent the Company a notice that proposed to classify certain of SEC Regulation S-K requires disclosure of certain environmental legal proceedings ifour imports from China as subject to anti-dumping and countervailing (“AD/CV”) duties. We have responded to U.S. Customs outlining the proceeding reasonably involves potential monetary sanctions of $100,000 or more. We periodically receive information requests and notices of potential noncompliance with environmental laws and regulations from governmental agencies, whichreasons for our position that these imports are addressed on a case-by-case basis with the relevant agency.not subject to AD/CV duties. The Company received a subpoena from the District Attorney of Yolo County, California, requesting records and information regarding its hazardous waste management and disposal practices in California. The Company and the Office of the District Attorney of Yolo County engaged in settlement discussions which resulted in the settlement of the matter. A consent decree reflecting the terms of settlement was filed with the Yolo County Superior Court on June 23, 2017. Under the settlement, the Company has agreed to pay a civil penalty and fund supplemental environmental projects furthering consumer protection and environmental enforcement in California. The civil penalty did not differ materially from the amount accrued. The
cost of the settlement and the compliance with the consent decreecurrently expects this matter will not have abe resolved without material adverse effect on ourits consolidated financial position, results of operations or cash flows. However, this matter is subject to inherent uncertainties and management’s view of this matter may change in the future.
The Company is also involved in various litigation matters arising in the ordinary course of business. The Company believes that, based upon information currently available, any estimated loss related to such matters has been adequately provided for in accrued liabilities to the extent probable and reasonably estimable. Accordingly, the Company currently expects these matters will be resolved without material adverse effect on its consolidated financial position, results of operations, or cash flows. However, litigation and other legal matters involve an element of uncertainty. Future developments in such matters, including adverse decisions or settlements or resulting required changes to the Company's business operations, could affect our consolidated operating results when resolved in future periods or could result in liability or other amounts material to the Company's Condensed Consolidated Financial Statements.
Note 1211 – Segment Reporting:
The Company has one reportable segment which is the retail sale of products that support the rural lifestyle. The following table indicates the percentage of net sales represented by each of our major product categorycategories during the fiscal three months and ninesix months ended September 30, 2017July 1, 2023 and September 24, 2016:June 25, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended | | Fiscal Six Months Ended |
Product Category | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Livestock, Equine & Agriculture (a) | 29 | % | | 30 | % | | 29 | % | | 29 | % |
Seasonal & Recreation (b) | 25 | | | 26 | | | 23 | | | 24 | |
Companion Animal (c) | 22 | | | 20 | | | 25 | | | 22 | |
Truck, Tool & Hardware (d) | 16 | | | 16 | | | 15 | | | 16 | |
Clothing, Gift & Décor (e) | 8 | | | 8 | | | 8 | | | 9 | |
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | |
| Fiscal three months ended | | Fiscal nine months ended |
Product Category: | September 30, 2017 | | September 24, 2016 | | September 30, 2017 | | September 24, 2016 |
Livestock and Pet | 48 | % | | 48 | % | | 48 | % | | 47 | % |
Hardware, Tools and Truck | 24 |
| | 23 |
| | 22 |
| | 22 |
|
Seasonal, Gift and Toy Products | 17 |
| | 18 |
| | 19 |
| | 20 |
|
Clothing and Footwear | 6 |
| | 6 |
| | 6 |
| | 6 |
|
Agriculture | 5 |
| | 5 |
| | 5 |
| | 5 |
|
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Note 13 – New Accounting Pronouncements:
New Accounting Pronouncements Recently Adopted
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory.” This update requires an entity that determines the cost of inventoryNote:Net sales by methods other than last-in, first-out and the retail inventory methodmajor product categories for prior periods have been reclassified to measure inventory at the lower of cost and net realizable value. The Company adopted this guidance in the first quarter of fiscal 2017 using a prospective application. The adoption of this guidance did not have a material impact to our Consolidated Financial Statements and related disclosures.
In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.” This update requires that liabilities relatedconform to the sale of prepaid stored-value products (gift cards) be adjusted periodically to reflect breakage. The Company adopted this guidance in the first quarter of fiscal 2017. The Company was recording gift card breakage prior to the adoption of this guidance; therefore, the adoption of this guidance did not have a material impact to our Consolidated Financial Statementscurrent year presentation.
(a) Includes livestock and related disclosures.equine feed & equipment, poultry, fencing, and sprayer & chemicals.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts on the statement of cash flows. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards is dependent on our stock price at the date the awards are exercised or settled. The Company adopted this guidance in the first quarter of fiscal 2017, which did not have a material impact to our Consolidated Financial Statements and related disclosures. The Company has elected to continue estimating forfeitures of share-based awards. The Company has elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using a retrospective transition method, and as a result, excess tax benefits related to share-based awards which had been previously classified as cash flows from financing activities will be reclassified as cash flows from operating activities.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by U.S. GAAP and thereby reduces the current and potential future diversity in practice. The Company adopted this guidance in the first quarter of fiscal 2017. The adoption of this guidance did not impact the classification of any of the
Company’s cash flow activity and therefore did not have a material impact to our Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies the measurement of goodwill by eliminating the second step from the goodwill impairment test, which requires the comparison of the implied fair value of goodwill with the current carrying amount of goodwill. Instead, under the amendments in this guidance, an entity shall perform a goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount and an impairment charge is to be recorded for the amount, if any, in which the carrying value exceeds the reporting unit’s fair value. The Company adopted this guidance in the first quarter of fiscal 2017 using a prospective application. The adoption of this guidance did not have a material impact to our Consolidated Financial Statements and related disclosures.
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which implemented a one-year deferral of ASU 2014-09. As a result of the deferral, the amendments in ASU 2014-09 are effective for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which further clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which provides implementation guidance in regards to (a) assessing the collectability criterion, (b) the presentation of taxes collected from customers, (c) noncash consideration, (d) contract modification at transition, (e) completed contracts at transition and (f) other technical corrections. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to clarify the codification and to correct unintended application of guidance pertaining to Topic 606Includes tractor & rider, lawn & garden, bird feeding, power equipment, and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposalsrecreational products.
(c) Includes food, treats and to expedite improvements to ASU 2014-09. The effective dateequipment for dogs, cats, and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12other small animals as well as dog wellness.
(d) Includes truck accessories, trailers, generators, lubricants, batteries, and ASU 2016-20 are the same as the effective datehardware and transition requirements of ASU 2014-09. Entities that transition to these standards may either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at the date of adoption. The Company will adopt this guidance in the first quarter of fiscal 2018. Based on an evaluation of the standard as a whole, the Company has identified customer incentivestools.
(e) Includes clothing, footwear, toys, snacks, and principal versus agent considerations as the areas that will most likely be affected by the new revenue recognition guidance. The Company continues to evaluate the adoption of this standard, including the transition method; however, adoption is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update requires a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The Company is currently assessing the impact that adoption of this guidance will have on its Consolidated Financial Statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless (a) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (b) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified or (c) the classification of the modified award as an equity instrument or a liability instrumentdecorative merchandise.
is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU 2017-09 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not been issued. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company plans to adopt this guidance in the first quarter of fiscal 2018. The adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. This update expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments in ASU 2017-12 provide new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2017-12 require that an entity with cash flow or net investment hedges existing at the date of adoption apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness to the opening balance of retained earnings as of the beginning of the fiscal year that the entity adopts this guidance. The amended presentation and disclosure guidance is adopted prospectively. The adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022 (the “2022 Form 10-K”) and subsequent Quarterly Reports on Form 10-Q. This Quarterly Report on Form 10-Q also contains forward-looking statements and information. The forward-looking statements included herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”“PSLRA”). All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including sales and earnings growth, new store growth, estimated results of operations in future periods (including, but not limited to, sales, comparable store sales, operating margins, net income, and earnings per diluted share), the declaration and payment of dividends, the timing and amount of share repurchases, future capital expenditures (including their timing, amount and nature), sale-leasebacks, acquisitions, business strategy, strategic initiatives, expansion and growth of our business operations, and other such matters are forward-looking statements. Forward-looking statements are usually identified by or are associated with such words as “will,” “plans,” “intend,” “expect,” “believe,” “anticipate,” “optimistic,” “forecasted” and similar terminology. These forward-looking statements may be affected by certain risks and uncertainties, any one, or a combination of which, could materially affect the results of our operations. To take advantage of the safe harbor provided by the Act,PSLRA, we are identifyinghave identified certain factors, that couldin Item 1A. “Risk Factors” in our 2022 Form 10-K, which may cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written.
As with any business, many aspects ofstatements. These “Risk Factors” may be updated from time to time in our operations are subject to influences outside our control. These factors include, without limitation, national, regional and local economic conditions affecting consumer spending, the timing and acceptance of new products in the stores, the timing and mix of goods sold, purchase price volatility (including inflationary and deflationary pressures), the ability to increase sales at existing stores, the ability to manage growth and identify suitable locations, failure of an acquisition to produce anticipated results, the ability to successfully manage expenses and execute our key gross margin enhancing initiatives, the availability of favorable credit sources, capital market conditions in general, the ability to open new stores in the manner and number currently contemplated, the impact of new stores on our business, competition including that from online competitors, weather conditions, the seasonal nature of our business, effective merchandising initiatives and marketing emphasis, the ability to retain vendors, reliance on foreign suppliers, the ability to attract, train and retain qualified employees, product liability and other claims, changes in federal, state or local regulations, potential judgments, fines, legal fees and other costs, breach of information systems or theft of employee or customer data, ongoing and potential future legal or regulatory proceedings, management of our information systems, failure to develop and implement new technologies, the failure of customer-facing technology systems, business disruption including from the implementation of supply chain technologies, effective tax rate changes and results of examination by taxing authorities, the ability to maintain an effective system of internal control over financial reporting, and changes in accounting standards, assumptions and estimates. We discuss in greater detail risk factors relating to our business in Item 1A of our Annual Reportquarterly reports on Form 10-K for10-Q or other subsequent filings with the fiscal year ended December 31, 2016. SEC.
Forward-looking statements made by or on behalf of the Company are based on our knowledge of our business and the environment in which we operate, but because of the factors listed above or other factors, actual results could differ materially from those reflected by any forward-looking statements. Consequently, all of the forward-looking statements made are qualified by these cautionary statements and therethose contained in the Company’s 2022 Form 10-K and other filings with the Securities and Exchange Commission (the “SEC”). There can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or our business and operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake noany obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.events, except as required by law.
Seasonality and Weather
Our business is seasonal. Historically, our sales and profits are the highest in the second and fourth fiscal quarters due to the sale of seasonal products. We usually experience our highest inventory and accounts payable balances during our first fiscal quarter for purchases of seasonal products to support the higher sales volume of the spring selling season, and again during our third fiscal quarter to support the higher sales volume of the cold-weathercold weather selling season. We believe that our business can be more accurately assessed by focusing on the performance of the halves, not the quarters, due to the fact that different weather patterns from year-to-year can shift the timing of sales and profits between quarters, particularly between the first and second fiscal quarters and the third and fourth fiscal quarters.
Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have unfavorably affected the timing and volume of our sales and results of operations. In addition, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain, and droughts have impacted operating results both negatively and positively, depending on the severity and length of these conditions. Our strategy is to manage product flow and adjust merchandise assortments and depth of inventory to capitalize on seasonal demand trends.
Performance Metrics
Comparable Store SalesMetrics
Comparable store salesmetrics are a key performance indicator used in the retail industry and by the Company to measure the performance of the underlying business. Our comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales and exclude certain adjustments to net sales. Stores closed during either of the years being compared are removed from our comparable store sales metrics calculations. Stores relocated during either of the years being compared are not removed from our comparable store sales metrics calculations. If the effect of relocated stores on our comparable store sales metrics calculations became material, we would remove relocated stores from the calculations. An Orscheln store will be considered a comparable store one year after its point-of-sale system conversion. Fiscal 2023 includes 52 weeks and fiscal 2022 includes 53 weeks. For our calculation of comparable store sales in fiscal 2023, we compare weeks 1 through 52 in fiscal 2023 against weeks 2 through 53 in fiscal 2022. Comparable store sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with U.S. GAAP.
Transaction Count and Transaction Value
Transaction count and transaction value metrics are used by the Company to measure sales performance. Transaction count represents the number of customer transactions during a given period. Transaction value represents the average amount paid per transaction and is calculated as net sales divided by the total number of customer transactions during a given period.
Results of Operations
Fiscal Three Months (Third(Second Quarter) Ended September 30, 2017July 1, 2023 and September 24, 2016June 25, 2022
Net sales for the thirdsecond quarter of fiscal 20172023 increased 11.6%7.2% to $1.72$4.18 billion from $1.54$3.90 billion infor the thirdsecond quarter of fiscal 2016.2022. The increase in net sales was driven by contributions from the acquisition of Orscheln Farm and Home, new store openings and growth in comparable store sales. Comparable store sales for the thirdsecond quarter of fiscal 2017 were $1.62 billion, a 6.6% increase as compared to2023 increased 2.5%. In the thirdsecond quarter of fiscal 2016. Comparable store2022, net sales decreased 0.6% for the third quarter of fiscal 2016. Each quarter of fiscal 2017 starts one week later than the same quarter of fiscal 2016 due to the Company’s 2016 fiscal year having 53 weeks versus the normal 52 weeks. Adjusting for the week shift, last year’s third quarterincreased 8.4% and comparable store sales decrease would have been 1.1%increased 5.5%.
The comparable store sales results infor the thirdsecond quarter of fiscal 20172023 included an increase in both traffic and ticket, with comparable storeaverage transaction count increasing 5.0%of 1.8% and an increase in comparable average ticket increasing 1.5% compared to prior year’s third quarter.transaction value of 0.6%. Comparable store sales were positive across all geographic regions and major product categories, including solid performance in year-round products,growth reflects continued strength in core year-round merchandise, including consumable, usable and edible (“C.U.E.”) products which significantly outpaced the chain average. This performance offset softness in demand for seasonal products from an extended springgoods and summer selling season as well as a benefit fromdeclines in big-ticket items.
In addition to comparable store sales growth for the second quarter of emergency response products related to hurricanes in the quarter.
Salesfiscal 2023, sales from stores open less than one year, including stores from the Orscheln acquisition, were $99.3$199.1 million infor the thirdsecond quarter of fiscal 2017,2023, which represented a 6.4%5.1 percentage points of the 7.2% increase over thirdsecond quarter fiscal 20162022 net sales. For the thirdsecond quarter of fiscal 2016,2022, sales from stores open less than one year were $81.6$86.9 million, which represented a 5.5%2.4 percentage points of the 8.4% increase over thirdsecond quarter fiscal 20152021 net sales.
The following table summarizes our store growth for the fiscal three months ended September 30, 2017July 1, 2023 and September 24, 2016:June 25, 2022:
| | | | | | | Fiscal Three Months Ended |
| Fiscal three months ended | |
| September 30, 2017 | | September 24, 2016 (a) | |
Tractor Supply | | | | |
Store count, beginning of period | 1,630 |
| | 1,542 |
| |
Store Count Information: | | Store Count Information: | July 1, 2023 | | June 25, 2022 |
Tractor Supply (including Orscheln Farm and Home stores) | | Tractor Supply (including Orscheln Farm and Home stores) | | | |
Beginning of period | | Beginning of period | 2,164 | | | 2,003 | |
New stores opened | 36 |
| | 34 |
| New stores opened | 17 | | | 13 | |
Stores closed | (1 | ) | | (1 | ) | Stores closed | — | | | — | |
Store count, end of period | 1,665 |
| | 1,575 |
| |
Petsense | | | | |
Store count, beginning of period | 160 |
| | — |
| |
End of period | | End of period | 2,181 | | | 2,016 | |
Petsense by Tractor Supply | | Petsense by Tractor Supply | | | |
Beginning of period | | Beginning of period | 189 | | | 178 | |
New stores opened | 2 |
| | — |
| New stores opened | 3 | | | — | |
Stores closed | — |
| | — |
| Stores closed | — | | | — | |
Store count, end of period | 162 |
| | — |
| |
End of period | | End of period | 192 | | | 178 | |
Consolidated end of period | 1,827 |
| | 1,575 |
| Consolidated end of period | 2,373 | | | 2,194 | |
| | | | |
Stores relocated | 1 |
| | 1 |
| Stores relocated | 1 | | | 3 | |
(a) As Petsense was acquired by the Company on September 29, 2016, there is no store count information for the prior period.
The following table indicates the percentage of net sales represented by each of our major product categories for the fiscal three months ended September 30, 2017July 1, 2023 and September 24, 2016:June 25, 2022:
|
| | | | | |
| Fiscal three months ended |
Product Category: | September 30, 2017 | | September 24, 2016 |
Livestock and Pet | 48 | % | | 48 | % |
Hardware, Tools and Truck | 24 |
| | 23 |
|
Seasonal, Gift and Toy Products | 17 |
| | 18 |
|
Clothing and Footwear | 6 |
| | 6 |
|
Agriculture | 5 |
| | 5 |
|
Total | 100 | % | | 100 | % |
| | | | | | | | | | | |
| Percent of Net Sales |
| Fiscal Three Months Ended |
|
Product Category: | July 1, 2023 | | June 25, 2022 |
Livestock, Equine & Agriculture | 29 | % | | 30 | % |
Seasonal & Recreation | 25 | | | 26 | |
Companion Animal | 22 | | | 20 | |
Truck, Tool & Hardware | 16 | | | 16 | |
Clothing, Gift & Décor | 8 | | | 8 | |
Total | 100 | % | | 100 | % |
Note:Net sales by major product categories for prior periods have been reclassified to conform to the current year presentation.
Gross profit increased 12.2%9.3% to $600.5 million$1.51 billion for the thirdsecond quarter of fiscal 20172023 from $535.3 million$1.39 billion for the thirdsecond quarter of fiscal 2016.2022. As a percent of net sales, gross margin in the second quarter of fiscal 2023 increased 2069 basis points to 34.9% for36.2% from 35.5% in the thirdsecond quarter of fiscal 20172022. Gross margin continued to benefit from 34.7% for the third quarterCompany’s ongoing execution of fiscal 2016. Favorable seasonal conditions, strong sell through ratesan everyday low price strategy to manage the impact of year-over-year product cost inflation. The gross margin rate increase was primarily attributable to lower transportation costs driven by improvement in the global supply chain and solid inventory management benefited gross margin. These benefits were partiallyefficiencies from a new distribution center, modestly offset by a greater mix of freight intensive categories and higher average fuel costs.negative product mix.
Selling, general and administrative (“SG&A”) expenses, including depreciation and amortization, increased 15.0%10.9% to $452.2$955.4 million for the thirdsecond quarter of fiscal 20172023 from $393.3$861.2 million infor the thirdsecond quarter of fiscal 2016.2022. As a percent of net sales, SG&A expenses increased 8077 basis points to 26.3%22.8% from 22.1% in the thirdsecond quarter of fiscal 2017 from 25.5% in the third quarter of fiscal 2016.2022. The increase in SG&A as a percent of net sales was primarily attributable to the Company’s planned growth investments which included higher incentive compensation from the strong year-over-year growth in comparable store sales, higher store payroll from our continued effort to enhance customer servicedepreciation and amortization and the integrationonboarding of Petsense expenses.a new distribution center. Additionally, we have made investments in infrastructure and technologyhigher medical claims contributed to support our strategic long-term growth initiatives. These SG&A increases were partially offset by leverage in occupancy and other areas of the business from the increase in comparable store sales and cost savings initiatives.SG&A as a percent of net sales.
Operating income for the second quarter of fiscal 2023 increased 6.5% to $559.3 million from $525.0 million in the second quarter of fiscal 2022.
The effective income tax rate decreased to 36.4%was 23.0% in the thirdsecond quarter of fiscal 20172023 compared to 36.5% for23.5% in the thirdsecond quarter of fiscal 2016.2022. The decrease forin the thirdeffective income tax rate in the second quarter of fiscal 20172023 compared to the thirdsecond quarter of fiscal 2016 is2022 was driven primarily due to lowerby a decrease in state effective tax rates resulting from our income mix, offset in part by fewer state credits recognized this year as compared to last year. The Company expects the full fiscal year 2017 effective tax rate will be approximately 36.6%.taxes.
As a result of the foregoing factors, net
Net income for the thirdsecond quarter of fiscal 20172023 increased 2.7%6.2% to $91.9$421.2 million, or $0.72$3.83 per diluted share, as compared to net income of $89.4$396.5 million, or $0.67$3.53 per diluted share, for the thirdsecond quarter of fiscal 2016.2022.
During the second quarter of fiscal 2023, we repurchased approximately 0.7 million shares of the Company’s common stock at a total cost of $153.9 million, excluding the 1% excise tax, as part of our share repurchase program and paid quarterly cash dividends totaling $112.8 million, returning $266.7 million to our stockholders.
Fiscal NineSix Months Ended September 30, 2017July 1, 2023 and September 24, 2016June 25, 2022
Net sales for the first six months of fiscal 2023 increased 9.1%8.0% to $5.30$7.48 billion from $6.93 billion for the first ninesix months of fiscal 20172022. The increase in net sales was driven by contributions from $4.86 billion for the first nine monthsacquisition of fiscal 2016.Orscheln Farm and Home, new store openings and growth in comparable store sales. Comparable store sales for the first ninesix months of fiscal 2017 were $4.99 billion, a 2.2% increase over2023 increased 2.3%. In the first ninesix months of fiscal 2016. This compares to a 1.1% comparable store2022, net sales increase for the first nine months of fiscal 2016. Fiscal 2017 started one week later than fiscal 2016 due to the Company’s 2016 fiscal year having 53 weeks versus the normal 52 weeks. Adjusting for the week shift, last year’s comparable store sales increase for the first nine months of the year would have been 0.8%. The first nine months of fiscal 2017 had one less sales day compared to the first nine months of fiscal 2016, which negatively impacted comparable store sales by approximately 20 basis points for the first nine months of fiscal 2017.
For the first nine months of fiscal 2017, the comparable store sales increase was driven by continued demand for key consumable, usable and edible (“C.U.E.”) products, primarily animal and pet related merchandise, offset by softness in seasonal categories, principally in the first quarter. Warmer than normal weather early in the first quarter negatively impacted winter seasonal items and winter storms in March had an unfavorable impact on the start to the spring selling season. Weather patterns normalized in the second quarterincreased 8.3% and comparable store sales were broad basedincreased 5.4%.
The comparable store sales results for the first six months of fiscal 2023 included an increase in comparable average transaction value of 1.6% and positivean increase in all geographic regionscomparable average transaction count of the country, driven by0.7%. Comparable store sales growth reflects continued strength in sales ofcore year-round products. The broad-based sales growth continuedmerchandise, including C.U.E. products which significantly outpaced the chain average. This performance offset softness in the third quarter, benefiting from an extended springdemand for seasonal goods and summer selling season and strong sales of emergency response products related to hurricanes during the quarter.big-ticket items.
In addition to comparable store sales growth infor the first ninesix months of fiscal 2017,2023, sales from stores open less than one year, including stores from the Orscheln acquisition, were $339.6 million for the first six months of fiscal 2023, which represented 4.9 percentage points of the 8.0% increase over the first six months of fiscal 2022 net sales. For the first six months of fiscal 2022, sales from stores open less than one year were $321.7$164.6 million, which represented a 6.6%2.6 percentage points of the 8.3% increase over the first ninesix months of fiscal 2016 net sales. Sales from stores open less than one year were $255.0 million for the first nine months of fiscal 2016, which represented a 5.6% increase over the first nine months of fiscal 20152021 net sales.
The following table summarizes our store growth for the fiscal ninesix months ended September 30, 2017July 1, 2023 and September 24, 2016:June 25, 2022:
| | | | | | | | | | | |
| Fiscal Six Months Ended |
Store Count Information: | July 1, 2023 | | June 25, 2022 |
Tractor Supply (including Orscheln Farm and Home stores) | | | |
Beginning of period | 2,147 | | | 2,003 | |
New stores opened | 34 | | | 13 | |
Stores closed | — | | | — | |
End of period | 2,181 | | | 2,016 | |
Petsense by Tractor Supply | | | |
Beginning of period | 186 | | | 178 | |
New stores opened | 6 | | | 1 | |
Stores closed | — | | | (1) | |
End of period | 192 | | | 178 | |
Consolidated end of period | 2,373 | | | 2,194 | |
Stores relocated | 4 | | | 4 | |
|
| | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 (a) |
Tractor Supply | | | |
Store count, beginning of period | 1,595 |
| | 1,488 |
|
New stores opened | 74 |
| | 92 |
|
Stores closed | (4 | ) | | (5 | ) |
Store count, end of period | 1,665 |
| | 1,575 |
|
Petsense | | | |
Store count, beginning of period | 143 |
| | — |
|
New stores opened | 19 |
| | — |
|
Stores closed | — |
| | — |
|
Store count, end of period | 162 |
| | — |
|
Consolidated end of period | 1,827 |
| | 1,575 |
|
| | | |
Stores relocated | 2 |
| | 2 |
|
(a) As Petsense was acquired by the Company on September 29, 2016, there is no store count information for the prior period.
The following table indicates the percentage of net sales represented by each of our major product categories for the fiscal ninesix months ended September 30, 2017July 1, 2023 and September 24, 2016:June 25, 2022:
|
| | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 |
Product Category: | | | |
Livestock and Pet | 48 | % | | 47 | % |
Hardware, Tools and Truck | 22 |
| | 22 |
|
Seasonal, Gift and Toy Products | 19 |
| | 20 |
|
Clothing and Footwear | 6 |
| | 6 |
|
Agriculture | 5 |
| | 5 |
|
Total | 100 | % | | 100 | % |
| | | | | | | | | | | |
| Percent of Net Sales |
| Fiscal Six Months Ended |
|
Product Category: | July 1, 2023 | | June 25, 2022 |
Livestock, Equine & Agriculture | 29 | % | | 29 | % |
Seasonal & Recreation | 23 | | | 24 | |
Companion Animal | 25 | | | 22 | |
Truck, Tool & Hardware | 15 | | | 16 | |
Clothing, Gift & Décor | 8 | | | 9 | |
Total | 100 | % | | 100 | % |
Note:Net sales by major product categories for prior periods have been reclassified to conform to the current year presentation.
Gross profit increased 8.6%9.9% to $1.82$2.68 billion for the first ninesix months of fiscal 20172023 from $1.68$2.44 billion infor the first ninesix months of fiscal 2016.2022. As a percent of net sales, gross margin decreased 10in the first six months of fiscal 2023 increased 61 basis points to 34.4% for35.9% from 35.3% in the first ninesix months of fiscal 2017 compared to 34.5% for the comparable period in fiscal 2016.2022. The decline in gross margin rate increase was driven by higher markdowns on cold weather merchandiseprimarily attributable to the Company’s consistent execution of an everyday low price strategy, lower transportation costs and targeted promotional activity inother margin-driving initiatives that were able to more than offset the first quarter as well as a higher freight expense throughout the first nine months of the year due to a shift inimpact from product cost inflation pressures and product mix towards more freight intensive products and higher average fuel costs. These declines were partially offset by strong sell through rates and solid inventory management infrom the third quarter.robust growth of C.U.E. products.
Total SG&A expenses, including depreciation and amortization, increased 12.0%12.4% to $1.32$1.88 billion infor the first ninesix months of fiscal 20172023 from $1.18$1.67 billion infor the first ninesix months of fiscal 2016.2022. As a percent of net sales, SG&A expenses increased 6097 basis points to 24.9%25.1% from 24.2% in the first ninesix months of fiscal 2017 from 24.3%2022. The increase in SG&A as a percent of net sales was primarily attributable to the Company’s planned growth investments which included higher depreciation and amortization and the onboarding of a new distribution center. Additionally, higher medical claims contributed to the increase in SG&A as a percent of net sales.
Operating income for the first ninesix months of fiscal 2016. SG&A expenses2023 increased as a percentage of net sales due principally4.5% to higher store payroll to support strong customer service, investments$803.8 million from $769.3 million in infrastructure and technology to drive growth and an improved customer experience, as well as the integration of Petsense, which operates at a higher SG&A rate.
For the first ninesix months of fiscal 2017, the2022.
The effective income tax rate decreased to 36.5%was 22.4% in the first six months of fiscal 2023 compared to 36.7% for22.7% in the first ninesix months of fiscal 2016. 2022. The decrease in the effective income tax rate was primarily driven by net excess tax benefits associated within the settlementfirst six months of share-based payment awards duefiscal 2023 compared to the adoption first six months of ASU 2016-09 (as discussedfiscal 2022 was driven primarily by a decrease in Note 13 to the unaudited condensed consolidated financial statements), along with an increase in federal work opportunity tax credits recognized, partially offset by an increase in nondeductible expenses. The Company expects the full year 2017 effective tax rate will be approximately 36.6%.state income taxes.
As a result of the foregoing factors, netNet income for the first ninesix months of fiscal 2017 decreased 0.2%2023 increased 3.5% to $312.9$604.3 million, or $5.47 per diluted share, as compared to $313.5net income of $583.7 million, in the first nine months of fiscal 2016. Net incomeor $5.17 per diluted share, for the first ninesix months of fiscal 2017 increased to $2.43 from $2.33 in2022.
During the first ninesix months of fiscal 2016.2023, we repurchased approximately 1.6 million shares of the Company’s common stock at a total cost of $351.1 million, excluding the 1% excise tax, as part of our share repurchase program and paid quarterly cash dividends totaling $226.2 million, returning $577.3 million to our stockholders.
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, existing store remodeling and relocation programs,improvements, store relocations, distribution centerfacility capacity and improvements, information technology, inventory purchases, repayment of existing borrowings under our debt facilities, share repurchases, cash dividends, and selective acquisitions as opportunities arise.
Our primary ongoing sources of liquidity are existing cash balances, cash provided from operations, remaining funds available under our debt facilities, capitaloperating and operatingfinance leases, and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters to support the higher sales volume of the spring and cold-weather selling seasons, respectively.
The Company believesWe believe that itsour existing cash balances, expected cash flow from future operations, funds available under itsour debt facilities, operating and capitalfinance leases, and normal trade credit, and access to the long-term debt capital markets will be sufficient to fund its our
operations and itsour capital expenditure needs, including new store openings, existing store acquisitions,remodeling and improvements, store relocations, distribution facility capacity and renovationsimprovements, and distribution center capacity, throughinformation technology improvements, for the end of fiscal 2017.foreseeable future.
Working Capital
At September 30, 2017,July 1, 2023, the Company had working capital of $869.8 million,$1.34 billion, which increased $129.2$558.3 million from December 31, 2016,2022, and decreased $47.7increased $351.7 million from September 24, 2016.June 25, 2022. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 | | Variance | | June 25, 2022 | | Variance |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 620.0 | | | $ | 202.5 | | | $ | 417.5 | | | $ | 530.8 | | | $ | 89.2 | |
Inventories | 2,660.1 | | | 2,709.6 | | | (49.5) | | | 2,485.1 | | | 175.0 | |
Prepaid expenses and other current assets | 297.2 | | | 245.7 | | | 51.5 | | | 214.4 | | | 82.8 | |
| | | | | | | | | |
Total current assets | $ | 3,577.3 | | | $ | 3,157.8 | | | $ | 419.5 | | | $ | 3,230.4 | | | $ | 347.0 | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 1,272.2 | | | $ | 1,398.3 | | | $ | (126.1) | | | $ | 1,280.5 | | | $ | (8.3) | |
Accrued employee compensation | 66.2 | | | 120.3 | | | (54.1) | | | 42.5 | | | 23.7 | |
Other accrued expenses | 464.3 | | | 498.6 | | | (34.3) | | | 470.1 | | | (5.8) | |
| | | | | | | | | |
Current portion of finance lease liabilities | 2.9 | | | 3.2 | | | (0.3) | | | 3.5 | | | (0.6) | |
Current portion of operating lease liabilities | 317.7 | | | 346.4 | | | (28.7) | | | 364.6 | | | (46.9) | |
Income taxes payable | 114.2 | | | 9.5 | | | 104.7 | | | 81.0 | | | 33.2 | |
| | | | | | | | | |
Total current liabilities | $ | 2,237.5 | | | $ | 2,376.2 | | | $ | (138.8) | | | $ | 2,242.2 | | | $ | (4.7) | |
Working capital | $ | 1,339.8 | | | $ | 781.6 | | | $ | 558.3 | | | $ | 988.2 | | | $ | 351.7 | |
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Variance | | September 24, 2016 | | Variance |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 70.0 |
| | $ | 53.9 |
| | $ | 16.1 |
| | $ | 55.5 |
| | $ | 14.5 |
|
Inventories | 1,591.6 |
| | 1,369.7 |
| | 221.9 |
| | 1,489.9 |
| | 101.7 |
|
Prepaid expenses and other current assets | 75.6 |
| | 90.6 |
| | (15.0 | ) | | 68.0 |
| | 7.6 |
|
Income taxes receivable | 4.8 |
| | 3.6 |
| | 1.2 |
| | 16.3 |
| | (11.5 | ) |
Total current assets | 1,742.0 |
| | 1,517.8 |
| | 224.2 |
| | 1,629.7 |
| | 112.3 |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
|
Accounts payable | 609.9 |
| | 519.5 |
| | 90.4 |
| | 484.0 |
| | 125.9 |
|
Accrued employee compensation | 34.5 |
| | 25.2 |
| | 9.3 |
| | 17.6 |
| | 16.9 |
|
Other accrued expenses | 186.0 |
| | 215.7 |
| | (29.7 | ) | | 199.3 |
| | (13.3 | ) |
Current portion of long-term debt | 22.5 |
| | 10.0 |
| | 12.5 |
| | 10.0 |
| | 12.5 |
|
Current portion of capital lease obligation | 3.6 |
| | 1.3 |
| | 2.3 |
| | 1.3 |
| | 2.3 |
|
Income taxes payable | 15.7 |
| | 5.5 |
| | 10.2 |
| | — |
| | 15.7 |
|
Total current liabilities | 872.2 |
| | 777.2 |
| | 95.0 |
| | 712.2 |
| | 160.0 |
|
Working capital | $ | 869.8 |
| | $ | 740.6 |
| | $ | 129.2 |
| | $ | 917.5 |
| | $ | (47.7 | ) |
Note: Amounts may not sum to totals due to rounding.
In comparison to December 31, 2016,2022, working capital as of September 30, 2017,July 1, 2023 was impacted most significantly by changesthe following:
•The increase in ourcash was primarily due to the additional cash generated from operations and an increase in net borrowings, partially offset by share repurchases, investments in capital expenditures to support strategic growth, and dividends paid to stockholders.
•The decrease in inventories was primarily due to a decline in average inventory per store associated with inventory management in response to softening seasonal and discretionary sales trends as well as some liquidation of Orscheln inventory as those stores convert to Tractor Supply stores. The decrease in accounts payable was primarily attributed to the timing of payments.
•The increase in prepaid expenses and other current assets was primarily due to the timing of payments and the increase in assets held for sale resulted from the Company’s anticipated sale-leaseback transactions for ten existing stores.
•The decrease in accrued expenses.employee compensation and other accrued expenses was primarily due to the timing of payments and accruals.
•The increase in income taxes payable was primarily due to the timing of payments.
In comparison to June 25, 2022, working capital as of July 1, 2023 was impacted most significantly by the following:
•The increase in cash and cash equivalents was primarily driven by the additional cash generated from operations and an increase in net borrowings, partially offset by capital expenditures to support strategic growth, share repurchases, dividends paid to stockholders and the acquisition of Orscheln Farm and Home.
•The increase in inventories and accounts payable resultedwas primarily from the purchase ofdue to additional inventoryinventories purchased to support new store growth and the Orscheln acquisition. Average inventory per store decreased slightly as a result of inventory management in response to softening seasonal and discretionary sales trends. Accounts payable did not fluctuate in line with the increase in inventory primarily due to slower inventory turns as well as normal seasonal patterns.the timing of payments.
•The decreaseincrease in prepaid expenses and other accrued expenses iscurrent assets was primarily due to the timing of payments.
In comparison to September 24, 2016, working capital as of September 30, 2017 was impacted most significantly by changes in inventoriespayments and accounts payable.
Thethe increase in inventoriesheld for sale resulted primarily from the purchaseCompany’s anticipated sale-leaseback transactions for ten existing stores and the anticipated sale of additional inventory to support new store growth, partially offset by athe Orscheln corporate headquarters and distribution center.
•The decrease in average inventory per store at Tractor Supply stores due to the strong sell through from an extended spring and summer selling season in the third quartercurrent portion of fiscal 2017.
Accounts payable increased principally due to additional inventory for new store growth and the timing of payments.
Operating Activities
Operating activities provided net cash of $341.0 million and $285.6 million in the first nine months of fiscal 2017 and fiscal 2016, respectively. The $55.4 million increase in net cash from operating activities in the first nine months of fiscal 2017 compared to the first nine months of fiscal 2016 is due to changes in the following operating activities (in millions):
|
| | | | | | | | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 (a) | | Variance |
Net income | $ | 312.9 |
| | $ | 313.5 |
| | $ | (0.6 | ) |
Depreciation and amortization | 122.7 |
| | 103.3 |
| | 19.4 |
|
Share-based compensation expense | 22.9 |
| | 17.3 |
| | 5.6 |
|
Deferred income taxes | 4.6 |
| | 2.0 |
| | 2.6 |
|
Inventories and accounts payable | (131.5 | ) | | (148.8 | ) | | 17.3 |
|
Prepaid expenses and other current assets | 14.9 |
| | 19.5 |
| | (4.6 | ) |
Accrued expenses | (24.0 | ) | | (22.4 | ) | | (1.6 | ) |
Income taxes | 9.2 |
| | (6.4 | ) | | 15.6 |
|
Other, net | 9.3 |
| | 7.6 |
| | 1.7 |
|
Net cash provided by operating activities | $ | 341.0 |
| | $ | 285.6 |
| | $ | 55.4 |
|
(a) As a result of the adoption of ASU 2016-09 (discussed in Note 13 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.
The $55.4 million increase in net cash from operating activities in the first nine months of fiscal 2017 compared with the first nine months of fiscal 2016 resulted primarily from increased depreciation and amortization due to new store growth and investments in information technology and infrastructure, lower cash requirementslease liabilities was due to the timing of inventory receipts and related payments and the timing of income taxrent payments.
Investing Activities
Investing activities used cash of $141.2 million and $166.8 million in the first nine months of fiscal 2017 and fiscal 2016, respectively. The decrease in cash used for investing activities reflects a decrease in capital expenditures and the impact of cash proceeds from the sale of property and equipment of $10.9 million in the first nine months of fiscal 2017. Capital expenditures for the first nine months of fiscal 2017 and fiscal 2016 were as follows (in millions):
|
| | | | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 |
New and relocated stores and stores not yet opened | $ | 59.5 |
| | $ | 88.0 |
|
Information technology | 49.1 |
| | 30.7 |
|
Existing stores | 30.7 |
| | 37.4 |
|
Distribution center capacity and improvements | 12.6 |
| | 10.9 |
|
Corporate and other | 0.1 |
| | 0.2 |
|
Total capital expenditures | $ | 152.0 |
| | $ | 167.2 |
|
We expect to open approximately 100 new Tractor Supply stores during fiscal 2017 compared to 113 new Tractor Supply stores in fiscal 2016. We also expect to open approximately 25 new Petsense stores during fiscal 2017. In the first nine months of fiscal 2017, the Company opened 74 new Tractor Supply stores, converted its two Hometown Pet stores to Petsense stores and closed
two stores, both Del’s stores, compared to 92 new Tractor Supply stores and five store closures, all of which were Del’s stores, during the first nine months of fiscal 2016. The Company also opened 19 new Petsense stores (including the conversion of the Hometown Pet stores) and had no Petsense store closures during the first nine months of fiscal 2017. In addition to fewer Tractor Supply store openings, the decrease in store spending in the first nine months of fiscal 2017 compared to the first nine months of fiscal 2016 also reflects a higher percentage of new prototype stores, which are less capital intensive, and fewer retrofit stores.
The increase in spending on information technology represents continued support of our store growth and our omni-channel platform as well as improvements in security and compliance, enhancements to our customer relationship management program and other strategic initiatives.
Additionally, the Company began construction of a new northeast distribution center in Frankfort, New York in the third quarter of fiscal 2017. The facility is expected to be operational by the end of fiscal 2018.
Financing Activities
Financing activities used net cash of $183.7 million and $127.1 million in the first nine months of fiscal 2017 and fiscal 2016, respectively. The $56.6 million change in net cash from financing activities in the first nine months of fiscal 2017 compared to the first nine months of fiscal 2016 is due to changes in the following financing activities (in millions):
|
| | | | | | | | | | | |
| Fiscal nine months ended |
| September 30, 2017 | | September 24, 2016 (a) | | Variance |
Net borrowings and repayments under debt facilities | $ | 236.3 |
| | $ | 145.0 |
| | $ | 91.3 |
|
Repurchase of common stock | (326.7 | ) | | (215.7 | ) | | (111.0 | ) |
Net proceeds from issuance of common stock | 9.6 |
| | 37.4 |
| | (27.8 | ) |
Cash dividends paid to stockholders | (100.0 | ) | | (90.8 | ) | | (9.2 | ) |
Other, net | (2.9 | ) | | (3.0 | ) | | 0.1 |
|
Net cash used in financing activities | $ | (183.7 | ) | | $ | (127.1 | ) | | $ | (56.6 | ) |
(a) As a result of the adoption of ASU 2016-09 (discussed in Note 13 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.
The $56.6 million change in net cash from financing activities in the first nine months of fiscal 2017 compared with the first nine months of fiscal 2016 is due to an increase in repurchases of common stock and a reduction in proceeds from the issuance of common stock, partially offset by an increase in borrowings, net of repayments, under our debt facilities.
Debt
The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | July 1, 2023 | | December 31, 2022 | | June 25, 2022 |
5.25% Senior Notes | | $ | 750.0 | | | $ | — | | | $ | — | |
1.75% Senior Notes | | 650.0 | | | 650.0 | | | 650.0 | |
3.70% Senior Notes (a) | | 150.0 | | | 150.0 | | | 150.0 | |
Senior credit facilities: | | | | | | |
November 2020 Term Loan | | — | | | — | | | 200.0 | |
Revolving Credit Facility (b) | | 200.0 | | | 378.0 | | | — | |
Total outstanding borrowings | | 1,750.0 | | | 1,178.0 | | | 1,000.0 | |
Less: unamortized debt discounts and issuance costs | | (22.5) | | | (13.9) | | | (12.6) | |
Total debt | | 1,727.5 | | | 1,164.1 | | | 987.4 | |
Less: current portion of long-term debt | | — | | | — | | | — | |
Long-term debt | | $ | 1,727.5 | | | $ | 1,164.1 | | | $ | 987.4 | |
| | | | | | |
Outstanding letters of credit | | $ | 60.2 | | | $ | 52.6 | | | $ | 57.6 | |
|
| | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 24, 2016 |
Senior Notes | | $ | 150.0 |
| | $ | — |
| | $ | — |
|
Senior Credit Facility: | | | | | | |
February 2016 Term Loan | | 182.5 |
| | 190.0 |
| | 195.0 |
|
June 2017 Term Loan | | 98.8 |
| | — |
| | — |
|
Revolving credit loans | | 80.0 |
| | 85.0 |
| | 100.0 |
|
Total outstanding borrowings | | 511.3 |
| | 275.0 |
| | 295.0 |
|
Less: unamortized debt issuance costs | | (1.6 | ) | | (1.1 | ) | | (1.2 | ) |
Total debt | | 509.7 |
| | 273.9 |
| | 293.8 |
|
Less: current portion of long-term debt | | (22.5 | ) | | (10.0 | ) | | (10.0 | ) |
Long-term debt | | $ | 487.2 |
| | $ | 263.9 |
| | $ | 283.8 |
|
| | | | | | |
Outstanding letters of credit | | $ | 41.6 |
| | $ | 44.3 |
| | $ | 44.4 |
|
Senior Notes
On(a) Also referred to herein as the “Note Purchase Facility,” referring to the Note Purchase and Private Shelf Agreement dated as of August 14, 2017 by and among the Company, entered into a note purchasePGIM, Inc. and private shelf agreement (the “Note Purchase Agreement”), pursuant tothe noteholders party thereto, as amended through November 2, 2022, under which the notes were purchased.
(b) Outstanding balances as of July 1, 2023 and December 31, 2022 represent amounts drawn under the 2022 Senior Credit Facility.
On May 5, 2023, the Company agreed to sell $150completed the sale of $750 million aggregate principal amount of senior unsecured notesits 5.25% Senior Notes. The entire principal amount of the 5.25% Senior Notes is due August 14, 2029 (the “2029 Notes”) in a private placement. The 2029 Notes bear interest at 3.70% per annum with interestfull on May 15, 2033. Interest is payable semi-annually in arrears on each annualMay 15 and semi-annual anniversaryNovember 15. The terms of the issuance date.5.25% Senior Notes are governed by the Base Indenture, as amended and supplemented by the Second Supplemental Indenture between the Company and Regions Bank, as trustee.
For additional information about the 5.25% Senior Notes and the Company’s other debt and credit facilities, refer to Note 6 to the Condensed Consolidated Financial Statements.
Operating Activities
Operating activities provided net cash of $782.3 million and $625.6 million in the first six months of fiscal 2023 and fiscal 2022, respectively. The obligations$156.7 million increase in net cash provided by operating activities in the first six months of fiscal 2023 compared to the first six months of fiscal 2022 is due to changes in the following operating activities (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | Variance |
Net income | $ | 604.3 | | | $ | 583.7 | | | $ | 20.6 | |
Depreciation and amortization | 199.5 | | | 161.0 | | | 38.5 | |
Share-based compensation expense | 30.2 | | | 24.9 | | | 5.3 | |
Deferred income taxes | 30.9 | | | 38.7 | | | (7.8) | |
Inventories and accounts payable | (91.8) | | | (169.1) | | | 77.3 | |
Prepaid expenses and other current assets | (22.4) | | | (50.3) | | | 27.9 | |
Accrued expenses | (83.8) | | | (90.0) | | | 6.2 | |
Income taxes | 104.7 | | | 98.1 | | | 6.6 | |
Other, net | 10.7 | | | 28.6 | | | (17.9) | |
Net cash provided by operating activities | $ | 782.3 | | | $ | 625.6 | | | $ | 156.7 | |
Note: Amounts may not sum to totals due to rounding.
The $156.7 million increase in net cash provided by operating activities in the first six months of fiscal 2023 compared to the first six months of fiscal 2022 primarily resulted from changes in inventories and accounts payable.
Investing Activities
Investing activities used net cash of $344.5 million and $265.1 million in the first six months of fiscal 2023 and fiscal 2022, respectively. The $79.4 million increase in net cash used in investing activities primarily reflects an increase in capital expenditures, primarily related to new store growth, the onboarding and construction of new distribution centers, and remodeling of existing stores, in the first six months of fiscal 2023 compared to fiscal 2022.
Investing activities, including capital expenditures, for the first six months of fiscal 2023 and fiscal 2022 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | Variance |
Existing stores | $ | (162.1) | | | $ | (136.5) | | | $ | (25.6) | |
Distribution center capacity and improvements | (73.7) | | | (46.2) | | | (27.5) | |
New and relocated stores and stores not yet opened | (61.5) | | | (31.3) | | | (30.2) | |
Information technology | (51.1) | | | (49.1) | | | (2.0) | |
Corporate and other | (1.2) | | | (2.2) | | | 1.0 | |
Total capital expenditures | (349.6) | | | (265.3) | | | (84.3) | |
Proceeds from sale of property and equipment | 0.8 | | | 0.2 | | | 0.6 | |
Proceeds from Orscheln acquisition net working capital settlement | 4.3 | | | — | | | 4.3 | |
Net cash used in investing activities | $ | (344.5) | | | $ | (265.1) | | | $ | (79.4) | |
| | | | | |
Note: Amounts may not sum to totals due to rounding.
The increase in spending for existing stores in the first six months of fiscal 2023 as compared to the first six months of fiscal 2022 primarily reflects our strategic initiatives related to store remodels, including internal space productivity and the sidelot garden center transformations. Spending in the first six months of both fiscal 2023 and fiscal 2022 also includes routine refresh activity.
The increase in spending for distribution center capacity and improvements in the first six months of fiscal 2023 as compared to the first six months of fiscal 2022 is primarily related to the construction of the new distribution centers in Maumelle, Arkansas and Navarre, Ohio.
In the first six months of fiscal 2023, the Company opened 34 new Tractor Supply stores compared to 13 new Tractor Supply stores during the first six months of fiscal 2022. The Company also opened six new Petsense by Tractor Supply stores during the first six months of fiscal 2023 compared to one store during the first six months of fiscal 2022.
Expenditures for information technology represent continued support for improvements in mobility in our stores, our omni-channel initiatives, increased security and compliance, and other strategic initiatives.
Our projected capital expenditures for fiscal 2023 are currently estimated to be in a range of $800 million to $850 million. The capital expenditures include plans to open a total of approximately 70 new Tractor Supply stores, complete the Orscheln conversions to Tractor Supply, continue the Project Fusion remodels and garden center transformations, and open a total of 10 to 15 new Petsense by Tractor Supply stores.
Financing Activities
Financing activities used net cash of $20.3 million in the first six months of fiscal 2023 compared to using net cash of $707.7 million in the first six months of fiscal 2022. The $687.4 million change in net cash used in financing activities in the first six months of fiscal 2023 compared to the first six months of fiscal 2022 is due to changes in the following (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | Variance |
Net borrowings and repayments under debt facilities | $ | 572.0 | | | $ | — | | | $ | 572.0 | |
Repurchase of common stock | (345.7) | | | (484.4) | | | 138.7 | |
Cash dividends paid to stockholders | (226.2) | | | (206.1) | | | (20.1) | |
Net proceeds from issuance of common stock | 15.3 | | | 13.0 | | | 2.3 | |
Other, net | (35.7) | | | (30.2) | | | (5.5) | |
Net cash used in financing activities | $ | (20.3) | | | $ | (707.7) | | | $ | 687.4 | |
Note: Amounts may not sum to totals due to rounding.
The $687.4 million change in net cash used in financing activities in the first six months of fiscal 2023 compared to the first six months of fiscal 2022 is primarily due to net borrowings under the Note Purchase Agreement are unsecured, but guaranteeddebt facilities and a decrease in the repurchase of common stock, partially offset by eachan increase in cash dividends paid to stockholders.
Dividends
During the first six months of fiscal 2023 and fiscal 2022, the Company's Board of Directors declared the following cash dividends:
| | | | | | | | | | | | | | | | | | | | |
Date Declared | | Dividend Amount Per Share of Common Stock | | Record Date | | Date Paid |
| | | | | | |
| | | | | | |
May 10, 2023 | | $ | 1.03 | | | May 30, 2023 | | June 13, 2023 |
February 8, 2023 | | $ | 1.03 | | | February 27, 2023 | | March 14, 2023 |
| | | | | | |
| | | | | | |
May 10, 2022 | | $ | 0.92 | | | May 25, 2022 | | June 8, 2022 |
January 26, 2022 | | $ | 0.92 | | | February 21, 2022 | | March 8, 2022 |
It is the present intention of the Company’s material subsidiaries.
The Company may from timeBoard of Directors to time issuecontinue to pay a quarterly cash dividend; however, the declaration and sell additional senior unsecured notes (the “Shelf Notes”) pursuant topayment of future dividends will be determined by the Note Purchase Agreement,Company’s Board of Directors in an aggregate principal amount of up to $150 million. The Shelf Notesits sole discretion and will have a maturity date of no more than 12 years afterdepend upon the date of original issuanceearnings, financial condition, and may be issued through August 14, 2020, unless earlier terminated in accordance with the termscapital needs of the Note Purchase Agreement.Company, along with any other factors that the Company’s Board of Directors deem relevant.
On August 9, 2023, the Note Purchase Agreement, the 2029 Notes and any Shelf Notes (collectively, the "Notes") are redeemable by the Company, in whole at any time or in part from time to time, at 100%Company’s Board of Directors declared a quarterly cash dividend of $1.03 per share of the principal amountCompany’s outstanding common stock. The dividend will be paid on September 12, 2023, to stockholders of the Notes being redeemed, together with accrued and unpaid interest thereon and a make whole amount calculated by discounting all remaining scheduled payments on the Notes by the yield on the U.S. Treasury security with a maturity equal to the remaining average life of the Notes plus 0.50%.
Senior Credit Facility
On February 19, 2016, the Company entered into a senior credit facility (the “2016 Senior Credit Facility”) consisting of a $200 million term loan (the “February 2016 Term Loan”) and a $500 million revolving credit facility (the “Revolver”) with a sublimit of $50 million for swingline loans. This agreement is unsecured and matures on February 19, 2021.
On June 15, 2017, pursuant to an accordion feature available under the 2016 Senior Credit Facility, the Company entered into an incremental term loan agreement (the “June 2017 Term Loan”) which increased the term loan capacity under the 2016 Senior Credit Facility by $100 million. This agreement is unsecured and matures on June 15, 2022.
The February 2016 Term Loan of $200 million requires quarterly payments totaling $10 million per year in years one and two and $20 million per year in years three through five, with the remaining balance due in full on the maturity date of February 19, 2021. The June 2017 Term Loan of $100 million requires quarterly payments totaling $5 million per year in years one and two and $10 million per year in years three through five, with the remaining balance due in full on the maturity date of June 15, 2022. The 2016 Senior Credit Facility also contains a $500 million revolving credit facility with a sublimit of $50 million for swingline loans.
Borrowings under the February 2016 Term Loan and Revolver bear interest at either the bank’s base rate (4.250% at September 30, 2017) or the London Inter-Bank Offer Rate (“LIBOR”) (1.232% at September 30, 2017) plus an additional amount ranging from 0.500% to 1.125% per annum (0.750% at September 30, 2017), adjusted quarterly based on our leverage ratio. The Company is also required to pay, quarterly in arrears, a commitment fee for unused capacity ranging from 0.075% to 0.200% per annum (0.125% at September 30, 2017), adjusted quarterly based on the Company’s leverage ratio. Borrowings under the June 2017 Term Loan bear interest at either the bank’s base rate (4.250% at September 30, 2017) or LIBOR (1.232% at September 30, 2017) plus an additional 1.000% per annum. As further described in Note 7, the Company has entered into interest rate swap agreements in order to hedge our exposure to variable rate interest payments associated with each of the term loans under the 2016 Senior Credit Facility.
Proceeds from the 2016 Senior Credit Facility may be used for working capital, capital expenditures, dividends, share repurchases and other matters. There are no compensating balance requirements associated with the 2016 Senior Credit Facility.
During the period of October 24, 2011 through February 19, 2016, the Company was party to a senior credit facility (the “2011 Senior Credit Facility”), which provided for borrowings up to $400 million with a sublimit of $30 million for swingline loans.
Covenants and Default Provisions of the Debt Agreements
The 2016 Senior Credit Facility and the Note Purchase Agreement (collectively, the “Debt Agreements”) require quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. Both ratios are calculated on a trailing twelve-month basis at the end of each fiscal quarter. The fixed charge coverage ratio compares earnings before interest, taxes, depreciation, amortization, share-based compensation and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding any straight-line rent adjustments). The fixed charge coverage ratio shall be greater than or equal to 2.00 to 1.0record as of the last dayclose of each fiscal quarter. The leverage ratio compares rental expense (excluding anybusiness on August 28, 2023.
straight-line rent adjustments) multiplied by a factor of six plus total debt to consolidated EBITDAR. The leverage ratio shall be less than or equal to 4.00 to 1.0 as of the last day of each fiscal quarter. The Debt Agreements also contain certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and sales of assets, prepayment of debts, transactions with subsidiaries or affiliates, and liens. As of September 30, 2017, the Company was in compliance with all debt covenants.
The Debt Agreements contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events and invalidity of loan documents. Upon certain changes of control, payment under the Debt Agreements could become due and payable. In addition, under the Note Purchase Agreement, upon an event of default or change of control, the make whole payment described above may become due and payable.
The Note Purchase Agreement also requires that, in the event the Company amends its 2016 Senior Credit Facility, or any subsequent credit facility of $100 million or greater, such that it contains covenant or default provisions that are not provided in the Note Purchase Agreement or that are similar to those contained in the Note Purchase Agreement but which contain percentages, amounts, formulas or grace periods that are more restrictive than those set forth in the Note Purchase Agreement or are otherwise more beneficial to the lenders thereunder, the Note Purchase Agreement shall be automatically amended to include such additional or amended covenants and/or default provisions.
Interest Rate Swaps
The Company entered into an interest rate swap agreement which became effective on March 31, 2016, with a maturity date of February 19, 2021. The notional amount of this swap agreement began at $197.5 million (the principal amount of the February 2016 Term Loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the February 2016 Term Loan borrowings as described in Note 6 to the unaudited condensed consolidated financial statements. As of September 30, 2017, the notional amount of the interest rate swap was $182.5 million.
The Company entered into a second interest rate swap agreement which became effective on June 30, 2017, with a maturity date of June 15, 2022. The notional amount of this swap agreement began at $100 million (the principal amount of the June 2017 Term Loan borrowings as of June 30, 2017) and will amortize at the same time and in the same amount as the June 2017 Term Loan borrowings as described in Note 6 to the unaudited condensed consolidated financial statements. As of September 30, 2017, the notional amount of the interest rate swap was $98.8 million.
The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. Both interest rate swap agreements entitle the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement, without exchange of the underlying notional amount.
Share Repurchase Program
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program upwhich was announced in February 2007. The total authorized amount of the program, which has been increased from time to $3.0time, is currently $6.50 billion, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 31, 2020.repurchases. The share repurchase program does not have an expiration date. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares are accounted for at cost and will be held in treasury for future issuance. The program may be limited, temporarily paused, or terminated at any time without prior notice.
The Company repurchased approximately 1.4 million shares of common stock under the share repurchase program during the third quarters of both fiscal 2017 and 2016, for a total cost of $78.5 million and $108.8 million, respectively. During the first nine months of fiscal 2017 and fiscal 2016, the Company repurchased 5.2 million and 2.7 million shares under the share repurchase program for a total cost of $326.6 million and $215.7 million, respectively. As of September 30, 2017,July 1, 2023, the Company had remaining authorization under the share repurchase program of $0.9$1.29 billion, exclusive of any fees, commissions, or other expenses.
The following table provides the number of shares repurchased, average price paid per share, and total amount paid for share repurchases during the fiscal three months and fiscal six months ended July 1, 2023 and June 25, 2022, respectively (in thousands, except per share amounts):
Dividends | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended | | Fiscal Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Total number of shares repurchased | 692 | | | 942 | | | 1,558 | | 2,300 |
Average price paid per share | $ | 222.42 | | | $ | 199.88 | | | $ | 225.34 | | | $ | 210.62 | |
Total cost of share repurchases (a) | $ | 157,448 | | | $ | 188,210 | | | $ | 354,616 | | | $ | 484,390 | |
During(a) Effective January 1, 2023, the first nine months of fiscal 2017 and 2016, the Board of Directors declared the following cash dividends:
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| | | | | | | | |
Date Declared | | Dividend Amount Per Share | | Record Date | | Date Paid |
August 7, 2017 | | $ | 0.27 |
| | August 21, 2017 | | September 6, 2017 |
May 8, 2017 | | $ | 0.27 |
| | May 22, 2017 | | June 6, 2017 |
February 8, 2017 | | $ | 0.24 |
| | February 27, 2017 | | March 14, 2017 |
| | | | | | |
August 1, 2016 | | $ | 0.24 |
| | August 15, 2016 | | August 30, 2016 |
May 2, 2016 | | $ | 0.24 |
| | May 16, 2016 | | June 1, 2016 |
February 3, 2016 | | $ | 0.20 |
| | February 22, 2016 | | March 8, 2016 |
It is the present intentionCompany’s share repurchases are subject to a 1% excise tax as a result of the BoardInflation Reduction Act of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs2022. Excise taxes incurred on share repurchases represent direct costs of the Company, along with other factors which the Board of Directors deems relevant.
On November 6, 2017, the Company’s Board of Directors declaredrepurchase and are recorded as a quarterly cash dividend of $0.27 per sharepart of the Company’s outstanding commoncost basis of the shares within treasury stock. The dividend will be paidcost of shares repurchased may differ from the repurchases of common stock amounts in the consolidated statements of cash flows due to unsettled share repurchases at the end of a period and excise taxes incurred on December 5, 2017 to stockholders of record as of the close of business on November 20, 2017.share repurchases.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. The Company typically leases buildings for retail stores rather than acquiring these assets, which allows the Company to utilize financial capital to operate the business rather than invest in fixed assets. Letters of credit allow the Company to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.
Significant Contractual Obligations and Commercial Commitments
At September 30, 2017,For a description of the Company’s significant contractual obligations and commercial commitments, refer to Note 12 to the Consolidated Financial Statements included under Part II, Item 8 in our 2022 Form 10-K for the fiscal year ended December 31, 2022. As of July 1, 2023, the Company had contractual commitments of approximately $30$76.0 million related to the ongoing construction and onboarding of its new distribution centercenters. As of July 1, 2023, there has been no other material change in Frankfort, New York, which is expected to be operational by the end ofinformation disclosed in the 2022 Form 10-K for the fiscal 2018. There were no material commitments related to construction projects extending greater than twelve months.year ended December 31, 2022.
At September 30, 2017, there were $41.6 million of outstanding letters of credit under the 2016 Senior Credit Facility.
Significant Accounting Policies and Estimates
Management’s discussion and analysis of the Company’s financial position and results of operations are based upon its consolidated financial statements,Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s significant accounting policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas:
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| | | | |
- | Inventory valuation | - | Income tax contingencies |
- | Self-insurance reserves |
- | - | Impairment of long-lived assets |
- | Sales tax audit reserve | - | Impairment of goodwill and other indefinite-lived intangible assets |
See the NotesNote 1 to the Consolidated Financial Statements in our Annual Report on2022 Form 10-K for the fiscal year ended December 31, 2016, for a discussion of the Company’s critical accounting policies. The Company’s financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.
information. There have been no changes to our significant accounting policies and estimates as previously disclosed in our 2022 Form 10-K.
New Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
InFor recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of July 2015,1, 2023, refer to Note 1 to the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory.” This update requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory method to measure inventory at the lower of cost and net realizable value. The Company adopted this guidance in the first quarter of fiscal 2017 using a prospective application. The adoption of this guidance did not have a material impact to ourCondensed Consolidated Financial Statements and related disclosures.
In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.” This update requires that liabilities related to the sale of prepaid stored-value products (gift cards) be adjusted periodically to reflect breakage. The Company adopted this guidance in the first quarter of fiscal 2017. The Company was recording gift card breakage prior to the adoptionincluded under Part I, Item 1 of this guidance; therefore, the adoption of this guidance did not have a material impact to our Consolidated Financial Statements and related disclosures.Quarterly Report on Form 10-Q.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts on the statement of cash flows. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards is dependent on our stock price at the date the awards are exercised or settled. The Company adopted this guidance in the first quarter of fiscal 2017, which did not have a material impact to our Consolidated Financial Statements and related disclosures. The Company has elected to continue estimating forfeitures of share-based awards. The Company has elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using a retrospective transition method, and as a result, excess tax benefits related to share-based awards which had been previously classified as cash flows from financing activities will be reclassified as cash flows from operating activities.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by U.S. GAAP and thereby reduces the current and potential future diversity in practice. The Company adopted this guidance in the first quarter of fiscal 2017. The adoption of this guidance did not impact the classification of any of the Company’s cash flow activity and therefore did not have a material impact to our Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies the measurement of goodwill by eliminating the second step from the goodwill impairment test, which requires the comparison of the implied fair value of goodwill with the current carrying amount of goodwill. Instead, under the amendments in this guidance, an entity shall perform a goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount and an impairment charge is to be recorded for the amount, if any, in which the carrying value exceeds the reporting unit’s fair value. The Company adopted this guidance in the first quarter of fiscal 2017 using a prospective application. The adoption of this guidance did not have a material impact to our Consolidated Financial Statements and related disclosures.
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which implemented a one-year deferral of ASU 2014-09. As a result of the deferral, the amendments in ASU 2014-09 are effective for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which further clarifies the implementation guidance on principal versus agent considerations. In April 2016, the
FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which provides implementation guidance in regards to (a) assessing the collectability criterion, (b) the presentation of taxes collected from customers, (c) noncash consideration, (d) contract modification at transition, (e) completed contracts at transition and (f) other technical corrections. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to clarify the codification and to correct unintended application of guidance pertaining to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as the effective date and transition requirements of ASU 2014-09. Entities that transition to these standards may either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at the date of adoption. The Company will adopt this guidance in the first quarter of fiscal 2018. Based on an evaluation of the standard as a whole, the Company has identified customer incentives and principal versus agent considerations as the areas that will most likely be affected by the new revenue recognition guidance. The Company continues to evaluate the adoption of this standard, including the transition method; however, adoption is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update requires a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The Company is currently assessing the impact that adoption of this guidance will have on its Consolidated Financial Statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless (a) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (b) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified or (c) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU 2017-09 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not been issued. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company plans to adopt this guidance in the first quarter of fiscal 2018. The adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. This update expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments in ASU 2017-12 provide new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2017-12 require that an entity with cash flow or net investment hedges existing at the date of adoption apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness to the opening balance of retained earnings as of the beginning of the fiscal year that the entity adopts this guidance. The amended presentation and disclosure guidance is adopted prospectively. The adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate changes, primarily asFor a resultdescription of borrowings underthe Company’s quantitative and qualitative disclosures about market risks, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” included in our 2016 Senior Credit Facility (as discussed in Note 6 to the unaudited condensed consolidated financial statements) which bear interest based on variable rates.
As discussed in Note 7 to the unaudited condensed consolidated financial statements, we entered into interest rate swap agreements which are intended to mitigate interest rate risk associated with future changes in interest rates2022 Form 10-K for the term loan borrowings under the 2016 Senior Credit Facility.fiscal year ended December 31, 2022. As a result of these interest rate swaps, our exposure to interest rate volatility is minimized. The interest rate swap agreements haveJuly 1, 2023, there has been executed for risk management purposes and are not held for trading purposes.
A 1%no material change in interest rates on our variable rate debt in excess of that amount covered by the interest rate swaps would have affected interest expense by approximately $0.3 million and $0.1 million in the three months ended September 30, 2017 and September 24, 2016, respectively and $1.8 million and $0.8 million in the nine months ended September 30, 2017 and September 24, 2016, respectively.this information.
Purchase Price Volatility
Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, grain, corn, steel, petroleum, cotton and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressure on product cost, which may impact consumer demand and, as a result, sales and gross margin. Our strategy is to reduce or mitigate the effects of purchase price volatility principally by taking advantage of vendor incentive programs, growing economies of scale from increased volume of purchases, adjusting retail prices and selectively buying from the most competitive vendors without sacrificing quality.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
WeOur management carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the 1934 Act) as of September 30, 2017.July 1, 2023. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2017,July 1, 2023, our disclosure controls and procedures were effective.
Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 103For a description of SEC Regulation S-K requires disclosure of certain environmentalthe Company's legal proceedings, if the proceeding reasonably involves potential monetary sanctions of $100,000 or more. We periodically receive information requests and notices of potential noncompliance with environmental laws and regulations from governmental agencies, which are addressed on a case-by-case basis with the relevant agency. The Company received a subpoena from the District Attorney of Yolo County, California, requesting records and information regarding its hazardous waste management and disposal practices in California. The Company and the Office of the District Attorney of Yolo County engaged in settlement discussions which resulted in the settlement of the matter. A consent decree reflecting the terms of settlement was filed with the Yolo County Superior Court on June 23, 2017. Under the settlement, the Company has agreedrefer to pay a civil penalty and fund supplemental environmental projects furthering consumer protection and environmental enforcement in California. The civil penalty did not differ materially from the amount accrued. The cost of the settlement and the compliance with the consent decree will not have a material effect on our consolidated financial position, results of operations or cash flows.
The Company is also involved in various litigation matters arising in the ordinary course of business. The Company believes that any estimated loss related to such matters has been adequately provided for in accrued liabilities,Note 10 to the extent probable and reasonably estimable. Accordingly, the Company currently expects these matters will be resolved without material adverse effectCondensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on its consolidated financial position, results of operations or cash flows. Form 10-Q.
Item 1A. Risk Factors
The risk factors described in Part I, Item 1A “Risk Factors” in our 2022 Form 10-K should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes to our risk factors as previously disclosed in our Annual Report on2022 Form 10-K for the fiscal year ended December 31, 2016. Other risks that we do not presently know about or that we presently believe are not material could also adversely affect us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Share repurchases were made pursuant to the share repurchase program, which is described under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q under the heading “Share Repurchase Program.” Additionally, the Company withholds shares from vested restricted stock units and performance-based restricted share units to satisfy employees’ minimum statutory tax withholding requirements. Stock repurchase activity during the thirdsecond quarter of fiscal 20172023 was as follows:
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Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (b) |
April 2, 2023 - April 29, 2023 | (a) | 140,771 | | | $ | 239.40 | | | 140,732 | | | $ | 1,414,166,346 | | |
April 30, 2023 - May 27, 2023 | (a) | 188,555 | | | 223.58 | | | 186,833 | | | 1,372,425,027 | | |
May 28, 2023 - July 1, 2023 | (a) | 369,692 | | | 215.20 | | | 364,540 | | | 1,293,928,890 | | |
Total | | 699,018 | | | $ | 222.33 | | | 692,105 | | | $ | 1,293,928,890 | | |
| | | | | | | | | |
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| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
July 2, 2017 - July 29, 2017 | | 568,462 |
| | $ | 52.29 |
| | 568,462 |
| | $ | 961,227,444 |
|
July 30, 2017 - August 26, 2017 | | 558,020 |
| (a) | 55.02 |
| | 557,800 |
| | 930,546,072 |
|
August 27, 2017 - September 30, 2017 | | 301,088 |
| (a) | 60.47 |
| | 299,109 |
| | 912,461,301 |
|
Total | | 1,427,570 |
| | $ | 55.08 |
| | 1,425,371 |
| | $ | 912,461,301 |
|
(a) The number of shares purchased and average price paid per share include 220includes 39, 1,722, and 1,9795,152 shares withheld from vested restricted stock unitsawards to satisfy employees’ minimum statutory tax withholding requirements for the period of April 2, 2023 - April 29, 2023, April 30, 2023 - May 27, 2023, and May 28, 2023 - July 30, 2017 - August 26, 2017 and August 27, 2017 - September 30, 2017,1, 2023, respectively.
Share repurchases were made pursuant to the(b) Excludes excise taxes incurred on share repurchase program described under Part I Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations. repurchases.
We expect to implement the balance of the share repurchase program through purchases made from time to time either in the open market or through private transactions, in accordance with regulations of the Securities and Exchange CommissionSEC and other applicable legal requirements. The timing and amount of any common stock repurchased under the program will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions.
Any additional share repurchase programs will be subject to the discretion of our Board of Directors and will depend upon earnings, financial condition, and capital needs of the Company, along with any other factors which the Board of Directors deem relevant. The program may be limited, temporarily paused, or terminated at any time, without prior notice.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None. Without limiting the generality of the foregoing, during the Company’s three fiscal months ended July 1, 2023, none of the Company’s directors or officers adopted or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Item 6. Exhibits
Exhibit
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101 | The following financial information from our Quarterly Report on Form 10-Q for the third quarter of fiscal 2017, filed with the Securities and Exchange Commission on November 9, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets at September 30, 2017, December 31, 2016 and September 24, 2016, (ii) the Condensed Consolidated Statements of Income for the fiscal three and nine months ended September 30, 2017 and September 24, 2016, (iii) the Condensed Consolidated Statements of Comprehensive Income for the fiscal three and nine months ended September 30, 2017 and September 24, 2016, (iv) the Condensed Consolidated Statements of Cash Flows for the fiscal nine months ended September 30, 2017 and September 24, 2016, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements. |
101* The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104* The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL (included in Exhibit 101).
* Filed herewith
** Furnished herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | TRACTOR SUPPLY COMPANY |
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Date: | November 9, 2017August 10, 2023 | By: | /s/ Kurt D. Barton |
| | | Kurt D. Barton |
| | | SeniorExecutive Vice President - Chief Financial Officer and Treasurer |
| | | (Duly Authorized Officer and Principal Financial Officer) |