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 June 25, 2005
-----------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -----------------------
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
Incorporation or Organization) Identification No.)
200 Powell Place, Brentwood, Tennessee 37027
- --------------------------------------------- -----------------------------
(Address of Principal Executive Offices) (Zip Code)
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 _____
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 23, 2005
- --------------------------------------------- -----------------------------
Common Stock, $.008 par value 39,145,157
Page 1 of 17
TRACTOR SUPPLY COMPANY
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 25, 2005 and December 25, 2004....................................................3
Consolidated Statements of Income -
For the Fiscal Three and Six Months Ended
June 25, 2005 and June 26, 2004........................................................4
Consolidated Statements of Cash Flows -
For the Fiscal Six Months Ended
June 25, 2005 and June 26, 2004........................................................5
Notes to Unaudited Consolidated Financial Statements.....................................6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................15
Item 4. Controls and Procedures...................................................................15
Part II. Other Information:
Item 1. Legal Proceedings.........................................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...............................16
Item 3. Default upon Senior Securities............................................................16
Item 4. Submission of matters to a vote of security holders.......................................16
Item 5. Other Information.........................................................................17
Item 6. Exhibits..................................................................................17
Signature ..........................................................................................17
Page 2 of 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 25, DECEMBER 25,
2005 2004
--------------- ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 66,358 $ 28,941
Inventories..................................................................... 474,194 385,127
Prepaid expenses and other current assets....................................... 30,914 30,481
Assets held for sale............................................................ 968 2,272
Deferred income taxes........................................................... 13,387 11,584
----------- -----------
Total current assets..................................................... 585,821 458,405
----------- -----------
Land.............................................................................. 17,494 15,481
Buildings and improvements........................................................ 194,661 171,279
Furniture, fixtures and equipment................................................. 102,272 88,222
Computer software and hardware.................................................... 27,076 27,283
Construction in progress.......................................................... 10,259 24,316
----------- -----------
351,762 326,581
Accumulated depreciation and amortization......................................... (126,991) (112,947)
----------- -----------
Property and equipment, net..................................................... 224,771 213,634
Other assets...................................................................... 4,117 6,446
----------- -----------
Total assets............................................................. $ 814,709 $ 678,485
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 253,927 $ 147,950
Accrued employee compensation................................................... 8,874 10,703
Other accrued expenses.......................................................... 81,125 79,544
Current portion of capital lease obligations.................................... 1,148 882
Income taxes currently payable.................................................. 11,197 --
----------- -----------
Total current liabilities................................................ 356,271 239,079
----------- -----------
Revolving credit loan............................................................. -- 32,279
Capital lease obligations......................................................... 2,905 2,465
Deferred income taxes............................................................. 4,645 5,710
Other long-term liabilities....................................................... 31,053 28,368
----------- -----------
Total liabilities........................................................ 394,874 307,901
----------- -----------
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; 39,112,604
and 38,302,373 shares issued and outstanding in 2005 and 2004, respectively.... 313 306
Additional paid-in capital........................................................ 90,406 77,600
Retained earnings................................................................. 329,116 292,678
----------- -----------
Total stockholders' equity............................................... 419,835 370,584
----------- -----------
Total liabilities and stockholders' equity............................... $ 814,709 $ 678,485
=========== ===========
The accompanying notes are an integral part of this statement.
Page 3 of 17
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL FOR THE FISCAL
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2005 2004 2005 2004
---------- ---------- ---------- ---------
(AS RESTATED, (AS RESTATED,
SEE NOTE 2) SEE NOTE 2)
(UNAUDITED) (UNAUDITED)
Net sales ........................................ $ 613,235 $ 525,919 $ 990,438 $ 856,473
Cost of merchandise sold........................... 423,479 365,376 688,611 596,761
---------- ---------- ---------- ---------
Gross profit.................................. 189,756 160,543 301,827 259,712
Selling, general and administrative expenses....... 125,383 104,630 228,058 191,586
Depreciation and amortization...................... 8,065 6,672 15,711 12,998
---------- ---------- ---------- ---------
Income from operations........................ 56,308 49,241 58,058 55,128
Interest expense, net.............................. 224 190 901 571
---------- ---------- ---------- ---------
Income before income taxes.................... 56,084 49,051 57,157 54,557
Income tax expense................................. 20,330 18,047 20,719 20,108
---------- ---------- ---------- ---------
Net income......................................... $ 35,754 $ 31,004 $ 36,438 $ 34,449
========== ========== ========== =========
Net income per share - basic....................... $ 0.92 $ 0.81 $ 0.94 $ 0.90
========== ========= ========== =========
Net income per share - diluted..................... $ 0.87 $ 0.76 $ 0.89 $ 0.85
========== ========= ========== =========
The accompanying notes are an integral part of this statement.
Page 4 of 17
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL SIX MONTHS ENDED
-------------------------------
JUNE 25, JUNE 26,
2005 2004
----------- -----------
(AS RESTATED,
SEE NOTE 2)
(UNAUDITED)
Cash flows from operating activities:
Net income............................................................. $ 36,438 $ 34,449
Tax benefit of stock options exercised................................. 7,296 8,014
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 15,711 12,998
Gain on sale of property and equipment............................ (299) (961)
Asset impairment related to closed stores......................... 197 71
Deferred income taxes............................................. (2,868) (422)
Change in assets and liabilities:
Inventories.................................................... (89,067) (82,532)
Prepaid expenses and other current assets...................... (1,109) 4,218
Accounts payable............................................... 105,977 106,168
Accrued expenses............................................... 528 6,388
Income taxes currently payable................................. 11,197 5,542
Other.......................................................... 4,955 2,345
----------- -----------
Net cash provided by operating activities.............................. 88,956 96,278
----------- -----------
Cash flows from investing activities:
Capital expenditures............................................... (26,162) (38,524)
Proceeds from sale of property and equipment....................... 1,929 2,417
----------- -----------
Net cash used in investing activities.................................. (24,233) (36,107)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit agreement........................ 187,987 122,367
Repayments under revolving credit agreement........................ (220,266) (141,770)
Principal payments under capital lease obligations................. (544) (177)
Net proceeds from issuance of common stock......................... 5,517 5,850
----------- -----------
Net cash used in financing activities.................................. (27,306) (13,730)
----------- -----------
Net increase in cash and cash equivalents.............................. 37,417 46,441
Cash and cash equivalents at beginning of period....................... 28,941 19,980
----------- -----------
Cash and cash equivalents at end of period............................. $ 66,358 $ 66,421
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 1,088 $ 366
Income taxes......................................................... 3,680 762
Supplemental disclosure of non-cash activities:
Equipment acquired through capital leases............................ $ 1,250 $ --
The accompanying notes are an integral part of this statement.
Page 5 of 17
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
and six-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 three and six months ended June 26, 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 17
Following is a summary of the effects of these changes on the Company's
consolidated statements of income and cash flows for the three and six months
ended June 26, 2004 (in thousands, except per share amounts):
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
THREE MONTHS ENDED JUNE 26, 2004:
- ---------------------------------
Selling, general and administrative expenses $ 104,606 $ 24 $ 104,630
Depreciation and amortization 6,114 558 6,672
Income from operations 49,823 (582) 49,241
Income before income taxes 49,633 (582) 49,051
Income tax expense 18,257 (210) 18,047
Net income 31,376 (372) 31,004
Net income per share -- basic $ 0.82 $ (0.01) $ 0.81
Net income per share -- diluted $ 0.77 $ (0.01) $ 0.76
SIX MONTHS ENDED JUNE 26, 2004:
- -------------------------------
Selling, general and administrative expenses $ 191,497 $ 89 $ 191,586
Depreciation and amortization 11,917 1,081 12,998
Income from operations 56,298 (1,170) 55,128
Income before income taxes 55,727 (1,170) 54,557
Income tax expense 20,530 (422) 20,108
Net income 35,197 (748) 34,449
Net income per share -- basic $ 0.92 $ (0.02) $ 0.90
Net income per share -- diluted $ 0.86 $ (0.01) $ 0.85
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
SIX MONTHS ENDED JUNE 26, 2004:
- -------------------------------
Net cash provided by operating activities $ 94,597 $ 1,681 $ 96,278
Net cash used in investing activities $ 34,426 $ (1,681) $ 36,107
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 $10,646,000 and $9,619,000 higher than
reported at June 25, 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 17
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 and net income per share for the
fiscal quarters and the six months ended June 25, 2005 and June 26, 2004, would
have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 25, 2005 JUNE 26, 2004 JUNE 25, 2005 JUNE 26, 2004
------------- ------------- ------------- -------------
Net income - as reported.................. $ 35,754 $ 31,004 $ 36,438 $ 34,449
Pro forma compensation expense, net of
income taxes........................... (970) (1,026) (1,976) (1,935)
--------- --------- --------- ---------
Net income- pro forma..................... $ 34,784 $ 29,978 $ 34,462 $ 32,514
========= ========= ========= =========
Net income per share - basic:
As reported........................ $ 0.92 $ 0.81 $ 0.94 $ 0.90
Pro forma.......................... $ 0.89 $ 0.78 $ 0.89 $ 0.86
Net income per share - diluted:
As reported........................ $ 0.87 $ 0.76 $ 0.89 $ 0.85
Pro forma.......................... $ 0.85 $ 0.74 $ 0.84 $ 0.80
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 in the second quarter
of fiscal 2005 and $0.2 million and $0.1 million in the first six months of 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 17
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
JUNE 25, 2005 JUNE 26, 2004
------------------------------------- --------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ------------ ------------ ----------- ------------ ------------
BASIC NET INCOME PER SHARE:
Net income.......................... $ 35,754 39,008 $ 0.92 $ 31,004 38,213 $ 0.81
Dilutive stock options outstanding.. 1,976 (0.05) 2,491 (0.05)
--------- ---------- ---------- --------- ---------- ----------
DILUTED NET INCOME PER SHARE:
Net income.......................... $ 35,754 40,984 $ 0.87 $ 31,004 40,704 $ 0.76
========= ========== ========== ========= ========== ==========
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 25, 2005 JUNE 26, 2004
------------------------------------- --------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ------------ ------------ ----------- ------------ ------------
BASIC NET INCOME PER SHARE:
Net income.......................... $ 36,438 38,796 $ 0.94 $ 34,449 38,021 $ 0.90
Dilutive stock options outstanding.. 2,113 (0.05) 2,692 (0.05)
--------- ---------- ---------- --------- ---------- ----------
DILUTED NET INCOME PER SHARE:
Net income.......................... $ 36,438 40,909 $ 0.89 $ 34,449 40,713 $ 0.85
========= ========== ========== ========= ========== ==========
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 Annual Report on Form 10-K for fiscal
2004 filed on March 10, 2005 (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 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. There has been no further
activity to date on this matter and the appeal is currently pending.
Page 9 of 17
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 and six month periods ended June 25, 2005 and June 26, 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.
On July 22, 2005, the Company announced it has signed a letter of intent to
purchase privately-held Del's Farm Supply, Inc. ("Del's"). Based in Lakewood,
Washington, Del's operates 17 stores, primarily in the Pacific Northwest, that
offer a wide selection of products tailored to those who enjoy the rural
lifestyle. Del's specializes in the equine, animal and pet category, which
accounts for approximately 70% of its sales. For the year ended December 31,
2004, Del's generated approximately $34 million in sales.
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
Page 10 of 17
2004. Accordingly, the prior year financial results for the fiscal quarter and
the six months ended June 26, 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.
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 and the six months ended June 26, 2004.
RESULTS OF OPERATIONS
FISCAL THREE MONTHS (SECOND QUARTER) AND SIX MONTHS ENDED JUNE 25, 2005 AND JUNE
26, 2004
Net sales increased 16.6% to $613.2 million for the second quarter of 2005 from
$525.9 million for the second quarter of 2004. Net sales increased 15.6% to
$990.4 million for the first six months of fiscal 2005 from $856.5 million for
the first six months of fiscal 2004. The net sales increase resulted primarily
from the addition of new stores, successful store relocations, and same-store
sales improvement of 5.9%. The Company opened 19 new stores during the second
quarter and 32 stores during the first six months of fiscal 2005, compared to 12
and 25 stores opened during the second quarter and first six months of 2004,
respectively. The Company also relocated two and four stores in the second
quarter and first six months of 2005, respectively, compared to five and eight
store relocations during the second quarter and first six months of 2004,
respectively. The Company closed one store in the first quarter of 2004. The
Company operated 547 stores at June 25, 2005 as compared to 487 stores at June
26, 2004.
The following chart indicates the average percentages of sales represented by
each of the Company's major product categories during the second quarter and
first six months of fiscal 2005 and 2004:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2005 2004 2005 2004
-------- -------- -------- --------
Equine, Pet and Animal 29% 29% 32% 32%
Seasonal Products 29 29 25 25
Hardware and Tools 15 15 17 16
Truck/Trailer/Tow/Lube 12 12 12 12
Maintenance products for agriculture and rural use 10 11 8 9
Clothing and Footwear 5 4 6 6
----- ------ ------ ---
Total 100% 100% 100% 100%
==== ==== ==== ====
Gross profit for the second quarter and the first six months of fiscal 2005 was
$189.8 million and $301.8 million, respectively. This represents an increase of
18.2% and 16.2%, respectively, over the comparable periods of the prior year.
This increase is primarily attributable to a 16.6% increase in sales due to the
addition of new stores, increased volume achieved through successful store
relocations, and same store sales improvement of 5.9%. Gross profit, as a
percent of sales, was 30.9% for the second quarter of fiscal 2005, compared to
30.5% for the comparable period in fiscal 2004. For the first six months of
2005, the gross profit rate was 30.5%, compared to 30.3% for the comparable
period in fiscal 2004. This improvement in the gross profit rate is a result of
improvements in product sourcing, partially offset by higher transportation and
shrink costs.
As a percent of net sales, selling, general and administrative ("SG&A") expenses
increased 50 basis points to 20.4% of sales in the second quarter of fiscal 2005
from 19.9% of sales in the second quarter of fiscal 2004. As a percent of sales,
SG&A expenses increased 60 basis points to 23.0% of sales in the first six
months of fiscal 2005 from 22.4%
Page 11 of 17
of sales in the first six months of fiscal 2004. This increase is primarily a
result of incremental occupancy costs related to the larger store base,
increased investment in personnel and technology resources (which the Company
believes is creating an infrastructure that will sustain the pace of growth) and
additional costs related to the new support center location.
Depreciation and amortization expense increased 20.9% in both the second quarter
and the first six months of fiscal 2004 compared to the prior year due mainly to
costs associated with new and relocated stores, investment in additional
distribution center capacity and continued improvements in technology.
Net interest expense was $0.2 and $0.9 million for the second quarter and first
six months of fiscal 2005, respectively, compared to $0.2 million and $0.6
million, respectively, for the second quarter and first six months of fiscal
2004. A strong cash position coupled with lower capital expenditures in
comparison to the prior year offset by an additional inventory investment for
the Hagerstown, Maryland distribution center have resulted in relatively flat
interest incurred.
The Company's effective tax rate decreased to 36.2% in both the second quarter
and first six months of fiscal 2005 compared with 36.8% and 36.9% for the second
quarter and first six months of fiscal 2004, respectively, 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 second quarter and
first six months of fiscal 2005 increased $4.8 million and $2.0 million,
respectively, to $35.8 million and $36.4 million from $31.0 million and $34.4
million in the second quarter and first six months of fiscal 2004, respectively.
Net income, as a percent of sales, decreased 10 and 30 basis points to 5.8% and
3.7% for the second quarter and first six months of fiscal 2005, respectively,
compared to 5.9% and 4.0% for the second quarter and first six months of fiscal
2004, respectively. Net income per diluted share increased to $0.87 and $0.89
for the second quarter and the first six months of fiscal 2005, respectively,
from $0.76 and $0.85 for the second quarter and the first six months of fiscal
2004, respectively.
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.
Page 12 of 17
At June 25, 2005, the Company had working capital of $229.5 million, a $10.2
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):
JUNE 25, DEC. 25,
2005 2004 VARIANCE
------------ ------------ ------------
Current assets:
Cash and cash equivalents.............................. $ 66.4 $ 28.9 $ 37.5
Inventories............................................ 474.2 385.1 89.1
Prepaid expenses and other current assets.............. 30.9 30.5 0.4
Other, net............................................. 14.3 13.9 0.4
---------- ---------- ----------
585.8 458.4 127.4
---------- ---------- ----------
Current liabilities:
Accounts payable....................................... $ 253.9 $ 148.0 $ 105.9
Accrued expenses....................................... 90.0 90.2 (0.2)
Income taxes payable................................... 11.2 -- 11.2
Other, net............................................. 1.2 0.9 0.3
---------- ---------- ----------
356.3 239.1 117.2
---------- ---------- ----------
Working capital.......................................... $ 229.5 $ 219.3 $ 10.2
========== ========== ==========
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, as
well as the increased cost of certain products containing steel, grain or
petroleum. 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 increase in income taxes payable of $11.2 million is due primarily to the
timing of estimated payments during the year.
Operations provided net cash of $89.0 million and $96.3 million in the first six
months of fiscal 2005 and 2004, respectively. The $7.3 million decrease in net
cash provided in fiscal 2005 over fiscal 2004 is primarily due to changes in the
following operating activities (in millions):
FOR THE FISCAL SIX MONTHS
ENDED
----------------------------
JUNE 25, JUNE 24,
2005 2004 VARIANCE
----------- ----------- ------------
Net income............................................... $ 36.4 $ 34.4 $ 2.0
Tax benefit of stock options exercised................... 7.3 8.0 (0.7)
Inventories and accounts payable......................... 16.9 23.6 (6.7)
Accrued expenses......................................... 0.5 6.4 (5.9)
Income taxes payable..................................... 11.2 5.5 5.7
Other, net............................................... 16.7 18.4 (1.7)
--------- --------- ----------
Net cash provided by operations...................... $ 89.0 $ 96.3 $ (7.3)
========= ========= ==========
The decrease in net cash provided by operations in the first six months of 2005
compared with the first six months of 2004 is primarily due to a change in
vendor terms on a significant portion of seasonal products. The decrease in
accrued expenses is primarily due to the timing of payments in the current and
prior year related to the Company's transportation expenses.
Page 13 of 17
Investing activities used $24.2 million and $36.1 million in the first six
months of fiscal 2005 and fiscal 2004, respectively. The majority of this cash
requirement relates to the Company's capital expenditures. Capital expenditures
(including equipment acquired under capital lease) for the first six months of
fiscal 2005 and 2004 were as follows (in millions):
2005 2004
---- ----
New/relocated stores and stores not yet opened $ 17.8 $ 13.6
Existing stores 1.3 1.9
Distribution center capacity and improvements 5.5 17.4
Information technology 1.6 3.0
Corporate and other 1.2 2.6
------ ------
$ 27.4 $ 38.5
====== ======
The above table reflects 36 new/relocated stores in 2005, compared to 33 during
the first six months of 2004. Additionally, the current year expenditures for
distribution center capacity primarily reflect $3.0 million relating to current
construction of a new facility in Waverly, Nebraska (a total estimated
investment of $11 million) whereas the 2004 spending primarily reflects $15.3
million for the purchase of the existing, previously leased facility in
Pendleton, Indiana.
Financing activities used $27.3 million and $13.7 million in the first six
months of fiscal 2005 and fiscal 2004, respectively, largely due to the
repayment of all outstanding borrowings under the Company's revolving credit
agreement, partially offset by proceeds received from the issuance of common
stock (due to the exercise of employee stock options and purchases from the
employee stock purchase plan).
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 $14.7 million at June 25, 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
The Company's significant 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 significant 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
Page 14 of 17
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 (6.00% and 4.00% at June 25, 2005 and June 26,
2004, respectively) or LIBOR (2.10% and 1.33% at June 25, 2005 and June 26,
2004, respectively) plus an additional amount ranging from 0.75% to 1.50% per
annum, adjusted quarterly, based on Company performance (0.75% at June 25, 2005
and June 26, 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 and/or services
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 profit.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
On June 25, 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 June 25, 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 CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's second fiscal quarter that have
materially affected or are reasonable likely to materially affect the Company's
internal control over financial reporting.
Page 15 of 17
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 Annual Report on Form 10-K for fiscal
2004 filed on March 10, 2005 (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 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. There has been no further
activity to date on this matter and the appeal is currently pending.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on April 21, 2005
at the Company's corporate headquarters in Nashville, Tennessee.
(b) The stockholders elected, for a one-year term, the directors set forth
below.
(c) The stockholders voted on the following matters at the Annual Meeting:
1. Approval of an amendment to the Company's Certificate of
Incorporation to eliminate the classification of the Company's
Board of Directors.
For Against Abstain
---------- ------- -------
36,172,009 173,702 152,799
2. Upon the stockholders' approval of the amendment to the
Company's Certificate of Incorporation, the removal of each of
the Company's directors without cause.
For Against Abstain No Vote
---------- ------- ------- ---------
27,410,769 422,005 47,636 8,618,100
Page 16 of 17
3. Upon the stockholders' approval of the amendment to the
Company's Certificate of Incorporation, the election of nine
directors for a one-year term ending at the 2006 Annual Meeting
of Stockholders:
Nominees for Directors For Withheld
---------------------- ---------- --------
S. P. Braud 35,558,974 939,536
Cynthia T. Jamison 35,824,779 673,731
Gerard E. Jones 35,366,930 1,131,580
Joseph D. Maxwell 35,282,425 1,216,085
Edna K. Morris 35,824,481 674,029
Sam K. Reed 35,465,289 1,033,221
Joseph M. Rodgers 35,824,656 673,854
Joseph H. Scarlett, Jr. 35,561,764 936,746
James F. Wright 35,473,342 1,025,168
4. Ratification of the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31,
2005.
For Against Abstain
---------- ------- -------
36,450,693 14,536 33,281
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
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: August 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)
Page 17 of 17