UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2005
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-23314
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TRACTOR SUPPLY COMPANY
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3139732
- ------------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Powell Place,
Brentwood, Tennessee 37027
- ------------------------------------- -------------------------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, Including Area Code: (615) 366-4600
-----------------------------
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 X NO
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
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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 April 24, 2004
- ------------------------------------- -------------------------------------
Common Stock, $.008 par value 38,902,623
Page 1 of 16
TRACTOR SUPPLY COMPANY
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 26, 2005 and December 25, 2004...................................3
Consolidated Statements of Income -
For the Fiscal Three Months Ended
March 26, 2005 and March 27, 2004......................................4
Consolidated Statements of Cash Flows -
For the Fiscal Three Months Ended
March 26, 2005 and March 27, 2004......................................5
Notes to Unaudited Consolidated Financial Statements.....................6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................14
Item 4. Controls and Procedures................................................14-15
Part II. Other Information:
Item 6. Exhibits..................................................................16
Signature ..........................................................................16
Page 2 of 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 26, DECEMBER 25,
2005 2004
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 37,890 $ 28,941
Inventories..................................................................... 501,121 385,127
Prepaid expenses and other current assets....................................... 34,232 30,481
Assets held for sale............................................................ 1,704 2,272
Deferred income taxes........................................................... 12,330 11,584
----------- -----------
Total current assets..................................................... 587,277 458,405
----------- -----------
Land.............................................................................. 17,608 15,481
Buildings and improvements........................................................ 187,564 171,279
Furniture, fixtures and equipment................................................. 92,016 88,222
Computer software and hardware.................................................... 28,569 27,283
Construction in progress.......................................................... 7,592 24,316
----------- -----------
333,349 326,581
Accumulated depreciation and amortization......................................... (119,770) (112,947)
----------- -----------
Property and equipment, net..................................................... 213,579 213,634
Other assets...................................................................... 4,340 6,446
----------- -----------
Total assets............................................................. $ 805,196 $ 678,485
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 267,920 $ 147,950
Accrued employee compensation................................................... 1,887 10,703
Other accrued expenses.......................................................... 72,427 79,544
Current portion of capital lease obligations.................................... 1,132 882
----------- -----------
Total current liabilities................................................ 343,366 239,079
----------- -----------
Revolving credit loan............................................................. 44,000 32,279
Capital lease obligations......................................................... 2,924 2,465
Deferred income taxes............................................................. 5,564 5,710
Other long-term liabilities....................................................... 27,542 28,368
----------- -----------
Total liabilities........................................................ 423,396 307,901
----------- -----------
Stockholders' equity:
Preferred stock, 40,000 shares authorized; $1.00 par value; no shares issued..... -- --
Common stock, 100,000,000 shares authorized; $.008 par value; 38,881,797
and 38,302,373 shares issued and outstanding in 2005 and 2004, respectively.... 311 306
Additional paid-in capital........................................................ 88,127 77,600
Retained earnings................................................................. 293,362 292,678
----------- -----------
Total stockholders' equity............................................... 381,800 370,584
----------- -----------
Total liabilities and stockholders' equity............................... $ 805,196 $ 678,485
=========== ===========
The accompanying notes are an integral part of this statement.
Page 3 of 16
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL THREE MONTHS ENDED
---------------------------------
MARCH 26, MARCH 27,
2005 2004
------------- --------------
(AS RESTATED,
SEE NOTE 2)
(UNAUDITED)
Net sales.................................................... $ 377,203 $ 330,554
Cost of merchandise sold..................................... 265,132 231,385
------------- --------------
Gross margin............................................ 112,071 99,169
Selling, general and administrative expenses................. 102,675 86,956
Depreciation and amortization................................ 7,646 6,326
------------- --------------
Income from operations.................................. 1,750 5,887
Interest expense, net........................................ 677 381
------------- --------------
Income before income taxes.............................. 1,073 5,506
Income tax expense........................................... 389 2,061
------------- --------------
Net income................................................... $ 684 $ 3,445
============= ==============
Net income per share - basic................................. $ 0.02 $ 0.09
============= ==============
Net income per share - diluted............................... $ 0.02 $ 0.08
============= ==============
The accompanying notes are an integral part of this statement.
Page 4 of 16
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL THREE MONTHS ENDED
---------------------------------
MARCH 26, MARCH 27,
2005 2004
----------- -----------
(AS RESTATED,
SEE NOTE 2)
(UNAUDITED)
Cash flows from operating activities:
Net income............................................................. $ 684 $ 3,445
Tax benefit of stock options exercised................................. 6,463 6,725
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 7,646 6,326
Gain on sale of property and equipment............................ (183) (265)
Asset impairment related to closed stores......................... 51 71
Deferred income taxes............................................. (892) (212)
Change in assets and liabilities:
Inventories.................................................... (115,994) (77,597)
Prepaid expenses and other current assets...................... (4,527) (3,298)
Accounts payable............................................... 119,970 99,601
Accrued expenses............................................... (17,674) (7,729)
Other.......................................................... 3,752 1,738
----------- -----------
Net cash provided by (used in) operating activities.................... (704) 28,805
----------- -----------
Cash flows from investing activities:
Capital expenditures............................................... (6,706) (27,230)
Proceeds from sale of property and equipment....................... 827 1,454
----------- -----------
Net cash used in investing activities.................................. (5,879) (25,776)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit agreement........................ 112,104 88,142
Repayments under revolving credit agreement........................ (100,383) (91,584)
Principal payments under capital lease obligations................. (258) (89)
Net proceeds from issuance of common stock......................... 4,069 4,588
----------- -----------
Net cash provided by financing activities.............................. 15,532 1,057
----------- -----------
Net increase in cash and cash equivalents.............................. 8,949 4,086
Cash and cash equivalents at beginning of period....................... 28,941 19,980
----------- -----------
Cash and cash equivalents at end of period............................. $ 37,890 $ 24,066
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 590 $ 293
Income taxes......................................................... 2,687 175
Supplemental disclosure of non-cash activities:
Equipment acquired through capital leases............................ $ 967 $ --
The accompanying notes are an integral part of this statement.
Page 5 of 16
TRACTOR SUPPLY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States 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 the Company's annual report on Form 10-K for the fiscal year
ended December 25, 2004. The results of operations for the fiscal three-month
periods are not necessarily indicative of results for the full fiscal year.
The Company's business is highly seasonal. Historically, the Company's sales and
profits have been the highest in the second and fourth fiscal quarters of each
year due to the sale of seasonal products. The Company typically operates at
approximately break even in the first fiscal quarter of each year. Unseasonable
weather, excessive rain, drought, and early or late frosts may also affect the
Company's sales. The Company believes, however, that the impact of adverse
weather conditions is somewhat mitigated by the geographic dispersion of its
stores.
The Company experiences a buildup of inventory and accounts payable during its
first fiscal quarter each year for purchases of seasonal product in anticipation
of the April through June spring selling season and again during its third
fiscal quarter in anticipation of the October through December winter selling
season.
Certain amounts reflected in previously issued financial statements have been
reclassified to conform to the fiscal 2005 presentation.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
On March 10, 2005, the Company filed its annual report on Form 10-K (which
Annual Report was amended by the filing of Amendment No. 1 to the Company's
Annual Report on Form 10-K/A on April 21, 2005). In that report, the Company
restated its financial statements for fiscal years 2003 and 2002 and the first
three quarters of fiscal year 2004. Accordingly, the prior year financial
results for the fiscal quarter ended March 27, 2004 reflect the impact of the
restatement.
The issue requiring restatement related to the Company's lease-related
accounting methods. The Company determined that its methods of accounting for
(1) amortization of leasehold improvements, (2) leasehold improvements funded by
landlord incentives and (3) rent expense prior to commencement of operations and
rent payments, while in line with common industry practice, were not in
accordance with generally accepted accounting principles. As a result, the
Company restated its consolidated financial statements for each of the fiscal
years ended December 27, 2003 and December 28, 2002, and the first three
quarters of fiscal 2004.
Page 6 of 16
Following is a summary of the effects of these changes on the Company's
consolidated statements of income and cash flows for the fiscal quarter ended
March 27, 2004 (in thousands, except per share amounts):
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
------------- -------------- --------------
FISCAL QUARTER ENDED MARCH 27, 2004:
Selling, general and administrative expenses $ 86,891 $ 65 $ 86,956
Depreciation and amortization 5,803 523 6,326
Income from operations 6,475 (588) 5,887
Income before income taxes 6,094 (588) 5,506
Income tax expense 2,273 (212) 2,061
Net income 3,821 (376) 3,445
Net income per share -- basic $ 0.10 $ (0.01) $ 0.09
Net income per share -- diluted $ 0.09 $ (0.01) $ 0.08
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
------------- -------------- --------------
FISCAL QUARTER ENDED MARCH 27, 2004:
Net cash provided by operating activities $ 27,559 $ 1,246 $ 28,805
Net cash used in investing activities $ (24,530) $ (1,246) $ (25,776)
NOTE 3 - INVENTORIES:
The value of the Company's inventories was determined using the lower of
last-in, first-out (LIFO) cost or market. Inventories are not in excess of
market value. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the fiscal year,
sales for the year and the rate of inflation/deflation for the year. If the
first-in, first-out (FIFO) method of accounting for inventory had been used,
inventories would have been approximately $9,998,000 and $9,619,000 higher than
reported at March 26, 2005 and December 25, 2004, respectively.
NOTE 4 - STOCK-BASED COMPENSATION PLANS:
As permitted by Statement of Financial Accounting Standards No. 123 ("SFAS 123),
"Accounting for Stock-Based Compensation," the Company has elected to account
for its stock-based compensation plans under the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees." Under APB No. 25, compensation
expense would be recorded if the current market price of the underlying stock on
the date of grant exceeded the exercise price.
Page 7 of 16
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date (derived through use of Black-Scholes
methodology) for awards under the plans consistent with the method prescribed by
SFAS 123, the Company's pro forma net income (loss) and net income (loss) per
share for the fiscal quarters ended March 26, 2005 and March 27, 2004, would
have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED
----------------------------------
MARCH 26, 2005 MARCH 27, 2004
-------------- --------------
Net income - as reported.......................... $ 684 $ 3,445
Pro forma compensation expense, net of income
taxes........................................ (1,005) (1,013)
------------ ------------
Net income (loss) - pro forma..................... $ (321) $ 2,432
============ ============
Net income (loss) per share - basic:
As reported.................................. $ 0.02 $ 0.09
Pro forma.................................... $ (0.01) $ 0.06
Net income (loss) per share - diluted:
As reported.................................. $ 0.02 $ 0.08
Pro forma.................................... $ (0.01) $ 0.06
In December 2004, the Financial Accounting Standards Board ("FASB") published
FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)" or
the "Statement"). SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions, including grants of employee stock options, be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans.
SFAS 123(R) specifies that the fair value of an employee stock option must be
based on an observable market price or, if an observable market price is not
available, the fair value must be estimated using a valuation technique meeting
specific criteria established in the standard.
The Statement is effective for public companies at the beginning of the first
fiscal year beginning after June 15, 2005 (fiscal 2006 for the Company). The
impact of adoption of this Statement cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future. The
pro-forma compensation costs presented in the table above and in prior filings
for the Company have been calculated using a Black-Scholes option pricing model
and may not be indicative of amounts which should be expected in future years.
As of the date of this filing, the Company has not determined which option
pricing model is most appropriate for future option grants or which method of
adoption the Company will apply.
NOTE 5 - ASSETS HELD FOR SALE:
Assets held for sale consists of certain buildings and related store properties
that the Company intends to sell. The Company applies the provisions of
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long Lived Assets," to assets held for sale.
SFAS 144 requires assets held for sale to be valued on an asset-by-asset basis
at the lower of carrying amount or fair value less costs to sell. In applying
these provisions, recent appraisals, valuations, offers and bids are considered.
The Company recorded an impairment charge of $0.1 million and $0.1 million in
the first quarter of fiscal 2005 and 2004, respectively, to adjust the carrying
value of certain property to fair value, less costs to sell. This charge is
included in selling, general, and administrative expenses.
The buildings and properties held for sale are separately presented as assets
held for sale in the accompanying consolidated balance sheets. The assets are
classified as current, as the Company believes they will be sold within the next
twelve months and have met all the criteria for classification as held for sale
pursuant to SFAS 144.
Page 8 of 16
NOTE 6 - NET INCOME PER SHARE:
The Company presents both basic and diluted earning per share ("EPS") on the
face of the consolidated statements of income. As provided by SFAS 128 "Earnings
per Share", basic EPS is calculated as income available to common stockholders
divided by the weighted average number of shares outstanding during the period.
Diluted EPS is calculated using the weighted average outstanding common shares
and the treasury stock method for options and warrants.
Net income per share is calculated as follows (in thousands, except per share
amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 26, 2005 MARCH 27, 2004
---------------------------------- ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ---------- ----------- --------- ---------- -----------
BASIC NET INCOME PER SHARE:
Net income........................ $ 684 38,583 $ 0.02 $ 3,445 37,829 $ 0.09
Dilutive stock options outstanding 2,331 2,893 (0.01)
-------- --------- --------- -------- --------- ----------
DILUTED NET INCOME PER SHARE:
Net income........................ $ 684 40,914 $ 0.02 $ 3,445 40,722 $ 0.08
======== ========= ========= ======== ========= ==========
NOTE 7 - CONTINGENCIES:
LITIGATION
The Company is involved in various litigation matters arising in the ordinary
course of business. After consultation with legal counsel, management expects
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. Any estimated loss
related to such matters has been adequately provided in accrued liabilities to
the extent probable and reasonably estimable. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in circumstances relating to these
proceedings.
As previously disclosed in The Company's Form 10-K for fiscal 2004 (filed on
March 10, 2005), in July 2004, a purported shareholder derivative lawsuit was
filed in the Chancery Court for Davidson County, Tennessee by the Hawaii
Laborers Pension Plan against each of the Company's directors, certain of its
officers and one former director. The Company was named as a nominal defendant.
On September 17, 2004, the plaintiff filed an amended complaint. On October 8,
2004, the Company moved to dismiss the amended complaint for failure to make a
pre-suit demand on the Board of Directors. On December 3, 2004, the Court
granted the Company's motion to dismiss and ordered that all claims in the
amended complaint be dismissed without prejudice. On February 17, 2005, the
Court entered an order denying a motion by the plaintiff to alter or amend the
December 3, 2004 order and judgment dismissing the amended complaint. On March
18, 2005, the plaintiff appealed the order to the Tennessee Court of Appeals.
Page 9 of 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis describe certain factors affecting Tractor
Supply Company (the "Company"), its results of operations for the fiscal three
month periods ended March 26, 2005 and March 27, 2004 and significant
developments affecting its financial condition since the end of the fiscal year,
December 25, 2004, and should be read in conjunction with the Company's Annual
Report on Form 10-K, as amended, for the fiscal year ended December 25, 2004.
The following discussion and analysis also contain certain historical and
forward-looking 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"). All statements, other than statements of
historical facts, which address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including their amount and nature),
business strategy, expansion and growth of the Company's business operations and
other such matters are forward-looking statements. To take advantage of the safe
harbor provided by the Act, the Company is identifying certain factors that
could cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company.
The Company's business is highly seasonal. Historically, the Company's sales and
profits have been the highest in the second and fourth fiscal quarters of each
year due to the sale of seasonal products. The Company typically operates at
approximately break even in the first fiscal quarter of each year. Unseasonable
weather, excessive rain, drought, and early or late frosts may also affect the
Company's sales. The Company believes, however, that the impact of adverse
weather conditions is somewhat mitigated by the geographic dispersion of its
stores.
The Company experiences a buildup of inventory and accounts payable during its
first fiscal quarter each year for purchases of seasonal product in anticipation
of the April through June spring selling season and again during its third
fiscal quarter in anticipation of the October through December winter selling
season.
All phases of the Company's operations are subject to influences outside its
control. Any one, or a combination, of these factors could materially affect the
results of the Company's operations. These factors include general economic
cycles affecting consumer spending, weather factors, operating factors affecting
customer satisfaction, consumer debt levels, pricing and other competitive
factors, inflation in commodity costs, the ability to attract, train and retain
highly qualified employees, the ability to identify suitable locations and
negotiate favorable lease agreements on new and relocated stores, the timing and
acceptance of new products in the stores, the mix of goods sold, the continued
availability of favorable credit sources, capital market conditions in general,
and the seasonality of the Company's business. Consequently, the forward-looking
statements made herein are qualified by these cautionary statements, and 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 its business and
operations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any 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.
RESTATEMENT OF FINANCIAL STATEMENTS
On March 10, 2005, the Company filed its Annual Report on Form 10-K (which
Annual Report was amended by the filing of Amendment No. 1 to the Company's
Annual Report on Form 10-K/A on April 21, 2005). In that report, the Company
restated its financial statements for fiscal years 2003 and 2002 and the first
three quarters of fiscal year 2004. Accordingly, the prior year financial
results for the fiscal quarter ended March 27, 2004 reflect the impact of the
restatement.
Page 10 of 16
The issue requiring restatement related to the Company's lease-related
accounting methods. The Company determined that its methods of accounting for
(1) amortization of leasehold improvements, (2) leasehold improvements funded by
landlord incentives and (3) rent expense prior to commencement of operations and
rent payments, while in line with common industry practice, were not in
accordance with generally accepted accounting principles. As a result, the
Company restated its consolidated financial statements for each of the fiscal
years ended December 27, 2003 and December 28, 2002, and the first three
quarters of fiscal 2004.
See Note 2 to the consolidated financial statements for a summary of the effects
of this restatement on the Company's consolidated statements of income and cash
flows for the fiscal quarter ended March 27, 2004.
RESULTS OF OPERATIONS
FISCAL THREE MONTHS (FIRST QUARTER) ENDED MARCH 26, 2005 AND MARCH 27, 2004
Net sales increased 14.1% to $377.2 million for the first quarter of 2005 from
$330.6 million for the first quarter of 2004. The net sales increase resulted
primarily from the addition of new stores and same-store sales improvement of
4.2%. Most product categories experienced same-store sales increases, led by
equine, pet and animal products and hardware and tools. During the first quarter
of 2005, the Company opened a total of 13 new stores compared to 13 stores in
the prior year quarter. The Company also relocated two stores in the first
quarter of 2005 compared to three store relocations in the first quarter of
2004. The Company closed one store in the first quarter of 2004. The Company
operated 528 stores during the first quarter of 2005 compared to 475 stores
during the first quarter of 2004.
The following charts indicate the average percentages of sales represented by
each of the Company's major product categories during the first quarter of
fiscal 2005 and 2004:
THREE MONTHS ENDED
--------------------------
MARCH 26, MARCH 27,
PRODUCT CATEGORY 2005 2004
----------- -----------
Equine, Pet and Animal 37% 37%
Hardware and Tools 20 19
Seasonal Products 17 18
Truck/Trailer/Tow/Lube 12 12
Maintenance products for agriculture
and rural use 9 9
Clothing and Footwear 5 5
----------- -----------
Total 100% 100%
=========== ===========
Increased activity in clearance programs for some hardware and tools as well as
a later start to the spring selling season from prior year resulted in a slight
shift between hardware and tools and seasonal product categories.
The gross margin rate for the first quarter of 2005 decreased 30 basis points to
29.7% of sales from 30.0% of sales in the first quarter of 2004. This decrease
is primarily due to (i) a sales mix shift towards clearance of hardware tools
and winter seasonal merchandise, (ii) higher transportation costs and (iii)
increased shrinkage, partially offset by improved initial margins as a result of
selling price increases, a reduction in promotional discounting and additional
vendor mark-down support on clearance merchandise.
As a percent of sales, selling, general and administrative ("SG&A") expenses
increased 90 basis points to 27.2% of sales in the first quarter of 2005 from
26.3% of sales in the first quarter of 2004. This increase is primarily a result
of incremental occupancy costs related to the larger store base, increased
investment in personnel and technology resources and increased distribution
capacity.
Depreciation and amortization expense increased 20.9% over the first quarter of
2004 due mainly to costs associated with new and relocated stores, investment in
additional distribution center capacity and continued improvements in
technology.
Page 11 of 16
Net interest expense increased to $0.7 million for the first quarter of 2005
from $0.4 million for the first quarter of 2004. This increase primarily
resulted from increased borrowings to support the seasonal build of inventories.
The Company's effective tax rate decreased to 36.3% in the first quarter of 2005
compared with 37.4% for the first quarter of 2004 primarily due to changes in
the Company's effective state tax rate resulting from changes in the geographic
concentration of business.
As a result of the foregoing factors, net income for the first quarter of 2005
decreased $2.7 million to $0.7 million from $3.4 million in the first quarter of
2004. Net income, as a percent of sales, decreased 80 basis points to 0.2% for
the first quarter of 2005 compared to 1.0% for the first quarter of 2004. Net
income per diluted share decreased to $0.02 from $0.08 for the prior year
period.
LIQUIDITY AND CAPITAL RESOURCES
In addition to normal operating expenses, the Company's primary ongoing cash
requirements are for expansion, remodeling and relocation programs, including
inventory purchases and capital expenditures. The Company's primary ongoing
sources of liquidity are funds provided from operations, commitments available
under its revolving credit agreement and normal trade credit. The Company's
inventory and accounts payable levels typically build in the first and third
fiscal quarters in anticipation of the spring and winter selling seasons.
At March 26, 2005, the Company had working capital of $243.9 million, a $24.6
million increase from December 25, 2004. This increase is primarily attributable
to changes in the following components of current assets and current liabilities
(in millions):
MARCH 26, DEC. 25,
2005 2004 VARIANCE
---------- ---------- ----------
Current assets:
Cash and cash equivalents....................... $ 37.9 $ 28.9 $ 9.0
Inventories..................................... 501.1 385.1 116.0
Prepaid expenses and other current assets....... 34.2 30.5 3.7
Other, net...................................... 14.1 13.9 0.2
---------- ---------- ----------
587.3 458.4 128.9
---------- ---------- ----------
Current liabilities:
Accounts payable................................ $ 267.9 $ 148.0 $ 119.9
Accrued expenses................................ 74.3 90.2 (15.9)
Other, net...................................... 1.2 0.9 0.3
---------- ---------- ----------
343.4 239.1 104.3
---------- ---------- ----------
Working capital................................... $ 243.9 $ 219.3 $ 24.6
========== ========== ==========
The increase in inventories and related increase in accounts payable resulted
primarily from the purchase of additional inventory for new stores and an
increase in average inventory per store due to increased sales expectations and
increased cost of certain products containing steel, grain or petroleum.
Additionally, an increased investment in inventory is required to support the
distribution activities at the new Hagerstown, Maryland distribution center.
Trade credit arises from the Company's vendors granting extended payment terms
for inventory purchases. Payment terms generally vary from 30 days to 180 days
depending on the inventory product.
The decrease in accrued expenses is due primarily to a $5.7 million decrease in
incentive compensation accruals, (resulting from payment of 2004 year-end
incentives during the first quarter of 2005) and general timing of other
payments.
Page 12 of 16
Operations used net cash of $0.7 million and provided $28.8 million in the first
quarter of 2005 and 2004, respectively. The $29.5 million decrease in net cash
provided in 2005 over 2004 is primarily due to changes in the following
operating activities (in millions):
MARCH 26, MARCH 27,
2005 2004 VARIANCE
---------- ---------- ----------
Net income...................................... $ 0.7 $ 3.4 $ (2.7)
Tax benefit of stock options exercised.......... 6.5 6.7 (0.2)
Inventories and accounts payable................ 4.0 22.0 (18.0)
Accrued expenses................................ (17.7) (7.7) (10.0)
Other, net...................................... 5.8 4.4 1.4
--------- --------- ----------
Net cash provided by (used) in operations... $ (0.7) $ 28.8 $ (29.5)
========= ========= ==========
The decrease in net cash provided by operations in the first quarter of 2005
compared with the first quarter of 2004 is primarily due to the seasonal growth
in inventory levels and the timing of payments. An unexpected growth in
inventory levels (primarily a slow start to the spring selling season and the
result of inflation) resulted in less inventory financed in the first quarter of
2005 than is typical for the first fiscal quarter. The decrease in accrued
expenses is primarily due to higher payments of year-end incentives related to
the Company's fiscal 2004 performance compared to 2003, increased activity in
self-insurance benefits and general timing of payments.
Investing activities used $5.9 million and $25.8 million in the first quarter of
2005 and 2004, respectively. The majority of this cash requirement relates to
the Company's capital expenditures. In January 2004, the Company purchased the
land and building related to its distribution center in Pendleton, Indiana for
$15.3 million. The facility was originally built to the Company's specifications
and had been leased since 1999. The investing activities in 2005 primarily
relate to the purchase of fixtures and improvements for new and relocated
stores.
Financing activities provided $15.5 million and $1.1 million in the first
quarter of 2005 and 2004, respectively, largely due to increased borrowings
resulting from higher inventory levels and decreased cash flow from operations,
partially offset by proceeds received from the issuance of common stock.
The Company believes that its cash flow from operations, borrowings available
under its revolving credit agreement, and normal trade credit will be sufficient
to fund the Company's operations and its capital expenditure needs, including
store openings and renovations, over the next several years.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's off-balance sheet arrangements are limited to operating leases and
outstanding letters of credit. Leasing buildings and equipment for retail stores
and offices rather than acquiring these significant assets allows the Company to
utilize financial capital to operate the business rather than maintain assets.
Letters of credit allow the Company to purchase inventory in a timely manner.
The Company has outstanding letters of credit of $11.1 million at March 26,
2005.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial position and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. 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:
- Inventory valuation - Self insurance
- Sales returns
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The Company's critical accounting policies are subject to judgments and
uncertainties, which affect the application of such policies. See Note 1 to the
Notes to the Consolidated Financial Statements of the Company's annual report on
Form 10-K for the fiscal year ended December 25, 2004 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its revolving
credit agreement (the "Credit Agreement"). The Credit Agreement bears interest
at either the bank's base rate (5.50% and 4.00% at March 26, 2005 and March 27,
2004, respectively) or LIBOR (2.11% and 1.09% at March 26, 2005 and March 27,
2004, respectively) plus an additional amount ranging from 0.75% to 1.50% per
annum, adjusted quarterly, based on Company performance (0.75% at March 26, 2005
and March 27, 2004). The Company is also required to pay, quarterly in arrears,
a commitment fee ranging from 0.20% to 0.35% based on the daily average unused
portion of the Credit Agreement. (See Note 5 of Notes to the Consolidated
Financial Statements of the Company's annual report on Form 10-K for the fiscal
year ended December 25, 2004 for further discussion regarding the Credit
Agreement.)
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it believes its sales and results of operations have been
somewhat affected by inflation. The Company is subject to market risk with
respect to the pricing of certain products and services, which include, among
other materials, petroleum, steel, corn, soybean and other commodities as well
as transportation services. If prices of these materials continue to increase
dramatically, consumer demand may fall and/or the Company may not be able to
pass all such increases on to its customers and, as a result, sales and/or gross
margins could decline. The Company's strategy is to reduce or mitigate the
effects of inflation principally by taking advantage of vendor incentive
programs, economies of scale from increased volume of purchases, increasing
retail prices and selectively buying from the most competitive vendors without
sacrificing quality. Due to the competitive environment, such conditions have
and may continue to adversely impact the Company's gross margin.
ITEM 4. CONTROLS AND PROCEDURES
On March 26, 2005, the Company carried out an evaluation, under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, of the design and operation
of the Company's disclosure controls and procedures. Based on this evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective
and that the reports required under the Securities Exchange Act of 1934 are
filed within the time periods specified in the Commission's rules and forms, as
of March 26, 2005. The controls and procedures evaluated relate to the
recording, processing, reporting and summarization of the information that the
Company is required to disclose in the aforementioned reports. These controls
and procedures ensure that such information is accumulated and communicated to
the Company's management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROLS
During the first quarter of fiscal 2005, the Company implemented additional
review procedures in order to remediate a material weakness in its internal
controls over financial reporting with respect to its accounting for leases and
depreciation of property and equipment. In connection with the implementation of
these controls:
o The policy for amortization of initial leasehold improvements was
changed to ensure all improvements are amortized over the lesser of
the useful life or the life of the initial fixed noncancellable lease
term. Leasehold improvements made subsequent to the inception of the
lease will be amortized over the lesser of
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the useful life of the assets or over a term that includes renewals
that are reasonably assured. Reasonable assurance will only include
objective, verifiable evidence of renewal.
o The Company began recognizing leasehold improvements funded by
landlord incentives as a reduction in future rent obligations as
opposed to reductions in amounts spent for leasehold improvements.
Accordingly, landlord incentives are now classified as deferred rent
liabilities and amortized over the initial fixed noncancellable lease
term.
o Rent holidays will be recognized for the period during which the
Company has control of the leased premises prior to store opening,
regardless of the commencement date or terms stipulated in the lease.
There have been no other changes in the Company's internal control over
financial reporting that occurred during the Company's first fiscal quarter that
have materially affected or are reasonable likely to materially affect the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation matters arising in the ordinary
course of business. After consultation with legal counsel, management expects
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. Any estimated loss
related to such matters has been adequately provided in accrued liabilities to
the extent probable and reasonably estimable. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in circumstances relating to these
proceedings.
As previously disclosed in The Company's Form 10-K for fiscal 2004 (filed on
March 10, 2005), in July 2004, a purported shareholder derivative lawsuit was
filed in the Chancery Court for Davidson County, Tennessee by the Hawaii
Laborers Pension Plan against each of the Company's directors, certain of its
officers and one former director. The Company was named as a nominal defendant.
On September 17, 2004, the plaintiff filed an amended complaint. On October 8,
2004, the Company moved to dismiss the amended complaint for failure to make a
pre-suit demand on the Board of Directors. On December 3, 2004, the Court
granted the Company's motion to dismiss and ordered that all claims in the
amended complaint be dismissed without prejudice. On February 17, 2005, the
Court entered an order denying a motion by the plaintiff to alter or amend the
December 3, 2004 order and judgment dismissing the amended complaint. On March
18, 2005, the plaintiff appealed the order to the Tennessee Court of Appeals.
ITEM 6. EXHIBITS
Exhibits
3.1 Third Certificate of Amendment to the Restated Certificate of
Incorporation of Tractor Supply Company.
3.2 Amendment No. 2 to Amended and Restated By-laws.
31.1 Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
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.
TRACTOR SUPPLY COMPANY
Date: MAY 3, 2005 By: /s/ Calvin B. Massmann
----------- ------------------------------------------
Calvin B. Massmann
Senior Vice President - Chief Financial
Officer and Treasurer
(Duly Authorized Officer and Principal
Financial Officer)
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