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 September 24, 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 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
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
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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 October 22, 2005
- -------------------------------------- --------------------------------------
Common Stock, $.008 par value 39,330,882
TRACTOR SUPPLY COMPANY
INDEX
PAGE NO.
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 24, 2005 and December 25, 2004.............................3
Consolidated Statements of Income -
For the Fiscal Three and Nine Months Ended
September 24, 2005 and September 25, 2004............................4
Consolidated Statements of Cash Flows -
For the Fiscal Nine Months Ended
September 24, 2005 and September 25, 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.....................................................16
Item 6. Exhibits..............................................................16
Signature ......................................................................17
Page 2 of 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPT. 24, DEC. 25,
2005 2004
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 25,659 $ 28,941
Inventories.................................................................... 487,026 385,127
Prepaid expenses and other current assets...................................... 37,892 30,481
Assets held for sale........................................................... 1,401 2,272
Deferred income taxes.......................................................... 10,019 11,584
----------- -----------
Total current assets..................................................... 561,997 458,405
----------- -----------
Land.............................................................................. 17,435 15,481
Buildings and improvements........................................................ 202,758 171,279
Furniture, fixtures and equipment................................................. 107,845 88,222
Computer software and hardware.................................................... 27,969 27,283
Construction in progress.......................................................... 21,241 24,316
----------- -----------
377,248 326,581
Accumulated depreciation and amortization......................................... (134,869) (112,947)
------------ -----------
Property and equipment, net.................................................... 242,379 213,634
Deferred income taxes............................................................. 7,972 --
Other assets...................................................................... 4,190 6,446
----------- -----------
Total assets............................................................. $ 816,538 $ 678,485
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 224,572 $ 147,950
Accrued employee compensation................................................... 6,071 10,703
Other accrued expenses.......................................................... 85,206 79,544
Current portion of capital lease obligations.................................... 1,068 882
Income taxes currently payable.................................................. 664 --
----------- -----------
Total current liabilities................................................ 317,581 239,079
----------- -----------
Revolving credit loan............................................................. 20,000 32,279
Capital lease obligations......................................................... 2,706 2,465
Deferred income taxes............................................................. -- 5,710
Other long-term liabilities....................................................... 33,233 28,368
----------- -----------
Total liabilities........................................................ 373,520 307,901
----------- -----------
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; 39,320,759
and 38,302,373 shares issued and outstanding in 2005 and 2004, respectively.... 315 306
Additional paid-in capital........................................................ 95,258 77,600
Retained earnings................................................................. 347,445 292,678
----------- -----------
Total stockholders' equity............................................... 443,018 370,584
----------- -----------
Total liabilities and stockholders' equity............................... $ 816,538 $ 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 NINE MONTHS ENDED
--------------------------- --------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
2005 2004 2005 2004
----------- ----------- ----------- -----------
(AS RESTATED, (AS RESTATED,
SEE NOTE 2) SEE NOTE 2)
(UNAUDITED) (UNAUDITED)
Net sales ........................................ $ 479,607 $ 426,384 $ 1,470,045 $ 1,282,857
Cost of merchandise sold........................... 332,702 306,808 1,021,313 903,569
----------- ----------- ----------- -----------
Gross profit.................................. 146,905 119,576 448,732 379,288
Selling, general and administrative expenses....... 109,073 100,555 337,131 292,141
Depreciation and amortization...................... 8,893 6,893 24,604 19,891
----------- ----------- ----------- -----------
Income from operations........................ 28,939 12,128 86,997 67,256
Interest expense, net.............................. 189 171 1,090 742
----------- ----------- ----------- -----------
Income before income taxes.................... 28,750 11,957 85,907 66,514
Income tax expense................................. 10,421 4,345 31,140 24,453
----------- ----------- ----------- -----------
Net income......................................... $ 18,329 $ 7,612 $ 54,767 $ 42,061
=========== =========== =========== ===========
Net income per share - basic....................... $ 0.47 $ 0.20 $ 1.41 $ 1.10
=========== =========== =========== ===========
Net income per share - diluted..................... $ 0.45 $ 0.19 $ 1.34 $ 1.03
=========== =========== =========== ===========
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 NINE MONTHS ENDED
--------------------------------
SEPT. 24, SEPT. 25,
2005 2004
----------- -----------
(AS RESTATED,
SEE NOTE 2)
(UNAUDITED)
Cash flows from operating activities:
Net income......................................................... $ 54,767 $ 42,061
Tax benefit of stock options exercised................................. 10,355 8,141
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 24,604 19,891
Gain on sale of property and equipment............................. (580) (940)
Asset impairment related to closed stores.......................... 197 160
Deferred income taxes.............................................. (12,117) (4,960)
Change in assets and liabilities:
Inventories...................................................... (101,899) (110,489)
Prepaid expenses and other current assets........................ (8,436) (9,046)
Accounts payable................................................. 76,622 67,700
Accrued expenses................................................. 1,692 7,134
Income taxes currently payable................................... 664 --
Other............................................................ 7,425 8,223
----------- -----------
Net cash provided by operating activities.............................. 53,294 27,875
----------- -----------
Cash flows from investing activities:
Capital expenditures............................................... (53,163) (57,955)
Proceeds from sale of property and equipment....................... 2,372 2,784
----------- -----------
Net cash used in investing activities.................................. (50,791) (55,171)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit agreement........................ 255,172 233,524
Repayments under revolving credit agreement........................ (267,451) (208,774)
Principal payments under capital lease obligations................. (818) (320)
Net proceeds from issuance of common stock......................... 7,312 6,374
----------- -----------
Net cash provided by (used in) financing activities.................... (5,785) 30,804
----------- -----------
Net increase (decrease) in cash and cash equivalents................... (3,282) 3,508
Cash and cash equivalents at beginning of period....................... 28,941 19,980
----------- -----------
Cash and cash equivalents at end of period............................. $ 25,659 $ 23,488
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................... $ 1,149 $ 425
Income taxes....................................................... 33,126 26,665
Supplemental disclosure of non-cash activities:
Equipment acquired through capital leases.......................... $ 1,250 $ 558
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 nine-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 nine months ended September 25, 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 nine months
ended September 25, 2004 (in thousands, except per share amounts):
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- ---------------- ----------------
THREE MONTHS ENDED SEPTEMBER 25, 2004:
- --------------------------------------
Selling, general and administrative expenses $ 100,647 $ (92) $ 100,555
Depreciation and amortization 6,269 624 6,893
Income from operations 12,660 (532) 12,128
Income before income taxes 12,489 (532) 11,957
Income tax expense 4,537 (192) 4,345
Net income 7,952 (340) 7,612
Net income per share -- basic $ 0.21 $ (0.01) $ 0.20
Net income per share -- diluted $ 0.20 $ (0.01) $ 0.19
NINE MONTHS ENDED SEPTEMBER 25, 2004:
- -------------------------------------
Selling, general and administrative expenses $ 292,144 $ (3) $ 292,141
Depreciation and amortization 18,186 1,705 19,891
Income from operations 68,958 (1,702) 67,256
Income before income taxes 68,216 (1,702) 66,514
Income tax expense 25,067 (614) 24,453
Net income 43,149 (1,088) 42,061
Net income per share -- basic $ 1.13 $ (0.03) $ 1.10
Net income per share -- diluted $ 1.06 $ (0.03) $ 1.03
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- ---------------- ----------------
NINE MONTHS ENDED SEPTEMBER 25, 2004:
- -------------------------------------
Net cash provided by operating activities $ 25,114 $ 2,761 $ 27,875
Net cash used in investing activities $ (52,410) $ (2,761) $ (55,171)
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 $12,918,000 and $9,619,000 higher than
reported at September 24, 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
three months and the nine months ended September 24, 2005 and September 25,
2004, would have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income - as reported................. $ 18,329 $ 7,612 $ 54,767 $ 42,061
Pro forma compensation expense, net of
income taxes.......................... (963) (1,028) (2,938) (2,975)
---------- ---------- ---------- ----------
Net income- pro forma.................... $ 17,366 $ 6,584 $ 51,829 $ 39,086
========== ========== ========== ==========
Net income per share - basic:
As reported......................... $ 0.47 $ 0.20 $ 1.41 $ 1.10
Pro forma........................... $ 0.44 $ 0.17 $ 1.33 $ 1.03
Net income per share - diluted:
As reported......................... $ 0.45 $ 0.19 $ 1.34 $ 1.03
Pro forma........................... $ 0.43 $ 0.16 $ 1.28 $ 0.97
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 no impairment charges in the third quarter of fiscal 2005
and 2004 and $0.2 million in the first nine months of both 2005 and 2004, 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
SEPTEMBER 24, 2005 SEPTEMBER 25, 2004
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ---------- ------------ ----------- ---------- ------------
BASIC NET INCOME PER SHARE:
Net income.......................... $ 18,329 39,236 $ 0.47 $ 7,612 38,259 $ 0.20
Dilutive stock options outstanding.. 1,950 (0.02) 2,424 (0.01)
--------- --------- --------- --------- --------- ---------
DILUTED NET INCOME PER SHARE:
Net income.......................... $ 18,329 41,186 $ 0.45 $ 7,612 40,683 $ 0.19
========= ========= ========= ========= ========= =========
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 24, 2005 SEPTEMBER 25, 2004
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ---------- ------------ ----------- ---------- ------------
BASIC NET INCOME PER SHARE:
Net income.......................... $ 54,767 38,942 $ 1.41 $ 42,061 38,100 $ 1.10
Dilutive stock options outstanding.. 2,059 (0.07) 2,603 (0.07)
--------- --------- --------- --------- --------- ---------
DILUTED NET INCOME PER SHARE:
Net income.......................... $ 54,767 41,001 $ 1.34 $ 42,061 40,703 $ 1.03
========= ========= ========= ========= ========= =========
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. On October 3, 2005,
plaintiff filed a motion to dismiss the appeal and on October 19, 2005, the
Tennessee Court of Appeals dismissed the appeal.
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 nine-month periods ended September 24, 2005 and September 25,
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 has identified herein and in the Company's other filings with the
Securities and Exchange Commission 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 the assets of 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. This acquisition
is expected to close in the fourth fiscal quarter of 2005.
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
Page 10 of 17
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 and the nine months ended
September 25, 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 nine months ended September 25, 2004.
RESULTS OF OPERATIONS
FISCAL THREE MONTHS (THIRD QUARTER) AND NINE MONTHS ENDED SEPTEMBER 24, 2005 AND
SEPTEMBER 25, 2004
Net sales increased 12.5% to $479.6 million for the third quarter of 2005 from
$426.4 million for the third quarter of 2004. Net sales increased 14.6% to
$1,470.0 million for the first nine months of fiscal 2005 from $1,282.9 million
for the first nine months of fiscal 2004.
The net sales increase for the third quarter and nine months ended September 24,
2005 resulted primarily from the addition of new stores, successful store
relocations, and same-store sales improvement of 1.8% and 4.1%, respectively.
The Company opened 15 new stores during the third quarter and 47 stores during
the first nine months of fiscal 2005, compared to 13 and 38 stores opened during
the third quarter and first nine months of 2004, respectively. The Company also
relocated eight and 12 stores in the third quarter and first nine months of
2005, respectively, compared to four and 12 store relocations during the third
quarter and first nine months of 2004, respectively. The Company closed one
store in the first quarter of 2004. The Company operated 562 stores at September
24, 2005 as compared to 500 stores at September 25, 2004.
The following chart indicates the average percentages of sales represented by
each of the Company's major product categories during the third quarter and
first nine months of fiscal 2005 and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
2005 2004 2005 2004
--------- --------- --------- ---------
Equine, Pet and Animal 32% 33% 32% 32%
Seasonal Products 22 22 24 24
Hardware and Tools 18 19 17 18
Truck/Trailer/Tow/Lube 14 13 12 12
Maintenance products for agriculture and rural use 8 8 9 8
Clothing and Footwear 6 5 6 6
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
Gross profit for the third quarter and the first nine months of fiscal 2005 was
$146.9 million and $448.7 million, respectively. This represents an increase of
22.9% and 18.3%, respectively, over the comparable periods of the prior year.
This increase is primarily attributable to the increase in sales described
above. Gross profit, as a percent of sales, was 30.6% for the third quarter of
fiscal 2005, compared to 28.0% for the comparable period in fiscal 2004. For the
first nine months of 2005, the gross profit rate was 30.5%, compared to 29.6%
for the comparable period in fiscal 2004. This improvement in the gross profit
rate primarily reflects a return to normalized gross profit levels after
relatively soft gross profit results in 2004.
Page 11 of 17
As a percent of net sales, selling, general and administrative ("SG&A") expenses
improved 90 basis points to 22.7% of sales in the third quarter of fiscal 2005
from 23.6% of sales in the third quarter of fiscal 2004. Excluding an
approximate $2.9 million pretax expense incurred in the third quarter of 2004
related to consolidating and relocating the Company's store support center,
selling general and administrative expenses, as a percentage of sales, improved
20 basis points. This was primarily due to reduced advertising expense and
improved leverage for personnel costs offset somewhat by higher occupancy costs
due the addition of new stores. As a percent of sales, SG&A expenses increased
10 basis points to 22.9% of sales in the first nine months of fiscal 2005 from
22.8% of sales in the first nine months of fiscal 2004. Excluding an approximate
$3.3 million pretax expense incurred for the Company's store support center
relocation in 2004, SG&A increased 40 basis points for the first nine months of
fiscal 2005. This increase is primarily a result of incremental occupancy costs
related to the larger store base and increased investment in technology
resources (which the Company believes is creating an infrastructure that will
support the Company's pace of growth).
Depreciation and amortization expense increased 29.0% in the third quarter and
23.7% in the first nine months of fiscal 2005 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 $1.1 million for the third quarter and first
nine months of fiscal 2005, respectively, compared to $0.2 million and $0.7
million, respectively, for the third quarter and first nine months of fiscal
2004. The Company's financing activities and liquidity are discussed in the
LIQUIDITY AND CAPITAL RESOURCES section below.
The Company's effective tax rate decreased to 36.2% in both the third quarter
and first nine months of fiscal 2005 compared with 36.3% and 36.8% for the third
quarter and first nine 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 third quarter and first
nine months of fiscal 2005 increased $10.7 million and $12.7 million,
respectively, to $18.3 million and $54.8 million from $7.6 million and $42.1
million in the third quarter and first nine months of fiscal 2004, respectively.
Net income, as a percent of sales, increased 200 basis points to 3.8% for the
third quarter, and 40 basis points to 3.7% for the first nine months of fiscal
2005, compared to 1.8% for the third quarter and 3.3% for the first nine months
of fiscal 2004, respectively. Net income per diluted share increased to $0.45
and $1.34 for the third quarter and the first nine months of fiscal 2005,
respectively, from $0.19 and $1.03 for the third quarter and the first nine
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 September 24, 2005, the Company had working capital of $244.4 million, a
$25.1 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):
SEPT. 24, DEC. 25,
2005 2004 CHANGE
------------- ------------- -------------
Current assets:
Cash and cash equivalents......................... $ 25.7 $ 28.9 $ (3.2)
Inventories....................................... 487.0 385.1 101.9
Prepaid expenses and other current assets......... 37.9 30.5 7.4
Other, net........................................ 11.4 13.9 (2.5)
--------- --------- ---------
562.0 458.4 103.6
--------- --------- ---------
Current liabilities:
Accounts payable.................................. 224.6 148.0 76.6
Accrued expenses.................................. 91.3 90.2 1.1
Income taxes payable.............................. 0.7 -- 0.7
Current portion of capital lease obligations...... 1.0 0.9 0.1
--------- --------- ---------
317.6 239.1 78.5
--------- --------- ---------
Working capital..................................... $ 244.4 $ 219.3 $ 25.1
========= ========= =========
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 prepaid expenses and other current assets is generally due to
the increase in the number of stores in operation, an increase in receivables
due to vendor-related funding resulting from increased purchase activity and
timing of related payments and receipts, primarily volume rebate and vendor
support.
Operations provided net cash of $53.3 million and $27.9 million in the first
nine months of fiscal 2005 and 2004, respectively. The $25.4 million increase 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 NINE
MONTHS ENDED
----------------------------
SEPT. 24, DEC. 25,
2005 2004 CHANGE
------------- ----------------------------
Net income...................................... $ 54.8 $ 42.0 $ 12.8
Tax benefit of stock options exercised.......... 10.4 8.1 2.3
Depreciation and amortization................... 24.6 19.9 4.7
Deferred income taxes........................... (12.1) (5.0) (7.1)
Inventories and accounts payable................ (25.3) (42.8) 17.5
Accrued expenses................................ 1.7 7.1 (5.4)
Other, net...................................... (0.8) (1.4) 0.6
--------- --------- ---------
Net cash provided by operations............. $ 53.3 $ 27.9 $ 25.4
========= ========= =========
The increase in net cash provided by operations in the first nine months of
fiscal 2005 compared with the first nine months of fiscal 2004 is primarily due
to an increase in the number of stores in operation and increased same-store
sales performance resulting in improved net income and cash flow. The change in
cash provided by inventories and accounts payable is due to a significant
investment in September 2004 in preparation for new sales driving
Page 13 of 17
initiatives in the fourth quarter. Purchases in the current year have more
closely matched sales volume. This variance is partially offset by the change in
accrued expenses which is primarily due to the timing of payments.
Investing activities used $50.8 million and $55.2 million in the first nine
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 nine months of
fiscal 2005 and 2004 were as follows (in millions):
2005 2004
---- ----
New/relocated stores and stores not yet opened $ 28.1 $ 18.9
Existing stores 11.4 8.8
Distribution center capacity and improvements 12.0 23.3
Information technology 2.3 5.6
Corporate and other 0.6 1.9
-------- --------
$ 54.4 $ 58.5
======== ========
The above table reflects 59 new/relocated stores in 2005, compared to 50 during
the first nine months of 2004. The current year expenditures for distribution
center capacity primarily reflect $8.4 million relating to current construction
of a new facility in Waverly, Nebraska (a total estimated investment of $15.8
million) and an additional $2.6 million in spending related to the completed
construction of a new distribution center in Hagerstown, Maryland, whereas the
2004 spending primarily reflects $17.2 million for the purchase of the existing,
previously leased facility in Pendleton, Indiana and $5.0 million for the new
distribution center in Hagerstown, Maryland. Capital expenditures for the
remainder of fiscal 2005 are expected to approximate $29.2 million.
Financing activities used $5.8 million and provided $30.8 million in the first
nine months of fiscal 2005 and fiscal 2004, respectively. This was largely due
to the net repayment of outstanding borrowings under the Company's revolving
credit agreement and was partially offset by proceeds received from the issuance
of common stock (received upon 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. The Company expects
to fund its acquisition of Del's (approximately $17.0 million) through its
existing revolving credit agreement.
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 $25.3 million at September 24,
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. Significant accounting
estimates and assumptions made by management primarily impact the following key
financial statement areas:
- Inventory valuation - Self insurance
- Sales returns
Page 14 of 17
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 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 (6.75% and 4.75% at September 24, 2005 and
September 25, 2004, respectively) or LIBOR (4.55% and 1.84% at September 24,
2005 and September 25, 2004, respectively), plus an additional amount ranging
from 0.75% to 1.50% per annum, adjusted quarterly, based on Company performance
(0.75% at September 24, 2005 and September 25, 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, natural gas and other
utilities, 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
As of September 24, 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 September 24, 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 third 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. On October 3, 2005,
plaintiff filed a motion to dismiss the appeal and on October 19, 2005, the
Tennessee Court of Appeals dismissed the appeal.
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
10.1 Change in Control Agreement, dated October 31, 2005, between
Tractor Supply Company and Anthony F. Crudele.
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.
Page 16 of 17
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: November 1, 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