Filed by Bowne Pure Compliance
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2007
OR
     
o   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
(TRACTOR SUPPLY LOGO)
TRACTOR SUPPLY COMPANY
 
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   13-3139732
     
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer 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 þ          NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o           NO þ
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 27, 2007
     
Common Stock, $.008 par value   38,531,428
 
 

 

 


 

TRACTOR SUPPLY COMPANY
INDEX
             
        Page No.  
  Financial Information        
 
           
  Financial Statements        
 
           
 
  Consolidated Balance Sheets — September 29, 2007 and December 30, 2006     3  
 
           
 
  Consolidated Statements of Income —
       
 
  For the Fiscal Three and Nine Months Ended September 29, 2007 and September 30, 2006     4  
 
           
 
  Consolidated Statement of Stockholders' Equity —
       
 
  For the Fiscal Nine Months Ended September 29, 2007     5  
 
           
 
  Consolidated Statements of Cash Flows —
       
 
  For the Fiscal Nine Months Ended September 29, 2007 and September 30, 2006     6  
 
           
 
  Notes to Unaudited Consolidated Financial Statements     7  
 
           
  Management's Discussion and Analysis of Financial Condition and Results of Operations     11  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     16  
 
           
  Controls and Procedures     16  
 
           
  Other Information        
 
           
  Legal Proceedings     17  
 
           
  Risk Factors     17  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     17  
 
           
  Defaults Upon Senior Securities     17  
 
           
  Submission of Matters to a Vote of Security Holders     17  
 
           
  Other Information     17  
 
           
  Exhibits     18  
 
           
        18  
 
           
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1

 

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
                 
    September 29,     December 30,  
    2007     2006  
ASSETS   (Unaudited)        
Current assets:
               
Cash and cash equivalents
  $ 25,722     $ 37,605  
Inventories
    699,312       594,851  
Prepaid expenses and other current assets
    43,942       37,007  
Deferred income taxes
    1,061       11,360  
 
           
Total current assets
    770,037       680,823  
 
           
 
               
Property and equipment:
               
Land
    23,151       19,495  
Buildings and improvements
    270,701       248,063  
Furniture, fixtures and equipment
    167,314       146,128  
Computer software and hardware
    50,769       46,853  
Construction in progress
    26,191       15,404  
 
           
 
    538,126       475,943  
Accumulated depreciation and amortization
    (206,366 )     (174,339 )
 
           
Property and equipment, net
    331,760       301,604  
 
               
Goodwill
    10,258       10,288  
Deferred income taxes
    15,829       10,779  
Other assets
    5,720       5,976  
 
           
 
               
Total assets
  $ 1,133,604     $ 1,009,470  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 292,208     $ 240,383  
Other accrued expenses
    111,450       111,721  
Current portion of capital lease obligations
    803       1,065  
Income taxes currently payable
          11,550  
 
           
Total current liabilities
    404,461       364,719  
 
               
Revolving credit loan
    88,552        
Capital lease obligations, less current maturities
    2,236       2,808  
Straight-line rent liability
    29,504       24,399  
Other long-term liabilities
    24,026       18,640  
 
           
Total liabilities
    548,779       410,566  
 
           
 
               
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; 40,571,265 shares issued and 38,706,651 shares outstanding at September 29, 2007 and 40,281,732 shares issued and outstanding at December 30, 2006
    325       322  
Additional paid-in capital
    145,698       129,249  
Treasury stock — at cost, 1,864,614 shares
    (94,924 )      
Accumulated other comprehensive loss
          (22 )
Retained earnings
    533,726       469,355  
 
           
Total stockholders’ equity
    584,825       598,904  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 1,133,604     $ 1,009,470  
 
           
The accompanying notes are an integral part of this statement.

 

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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. 29,     Sept. 30,     Sept. 29,     Sept. 30,  
    2007     2006     2007     2006  
    (Unaudited)     (Unaudited)  
 
                               
Net sales
  $ 629,199     $ 559,222     $ 1,979,960     $ 1,739,714  
 
                               
Cost of merchandise sold
    430,552       384,303       1,362,709       1,198,292  
 
                       
 
                               
Gross margin
    198,647       174,919       617,251       541,422  
 
                               
Selling, general and administrative expenses
    156,078       135,099       470,224       410,726  
Depreciation and amortization
    12,900       10,717       37,270       30,920  
 
                       
 
                               
Operating income
    29,669       29,103       109,757       99,776  
 
                               
Interest expense, net
    1,517       385       3,046       1,939  
 
                       
 
                               
Income before income taxes
    28,152       28,718       106,711       97,837  
 
                               
Income tax expense
    10,684       10,659       40,487       36,326  
 
                       
 
                               
Net income
  $ 17,468     $ 18,059     $ 66,224     $ 61,511  
 
                       
 
                               
Net income per share — basic
  $ 0.45     $ 0.45     $ 1.67     $ 1.54  
 
                       
 
                               
Net income per share — diluted
  $ 0.44     $ 0.44     $ 1.63     $ 1.50  
 
                       
The accompanying notes are an integral part of this statement.

 

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TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)

(Unaudited)
                                                 
                            Accumulated                
            Additional             Other             Total  
    Common     Paid-in     Treasury     Comprehensive     Retained     Stockholders'  
    Stock     Capital     Stock     Loss     Earnings     Equity  
 
                                               
Stockholders’ equity at December 30, 2006
  $ 322     $ 129,249     $     $ (22 )   $ 469,355     $ 598,904  
 
                                               
Cumulative effect of change in accounting principle (Note 8)
                                    (1,853 )     (1,853 )
Issuance of common stock under employee stock purchase plan (34,477 shares)
    1       1,367                               1,368  
Exercise of stock options (255,056 shares)
    2       3,188                               3,190  
Tax benefit on disqualifying dispositions of stock options
            3,242                               3,242  
Stock compensation
            8,652                               8,652  
Repurchase of common stock (1,864,614 shares)
                    (94,924 )                     (94,924 )
Foreign currency translation adjustment
                            22               22  
Net income
                                    66,224       66,224  
 
                                   
 
                                               
Stockholders’ equity at September 29, 2007
  $ 325     $ 145,698     $ (94,924 )   $     $ 533,726     $ 584,825  
 
                                   
The accompanying notes are an integral part of this statement.

 

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TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                 
    For the fiscal  
    nine months ended  
    Sept. 29,     Sept. 30,  
    2007     2006  
    (Unaudited)  
Cash flows from operating activities:
               
Net income
  $ 66,224     $ 61,511  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    37,270       30,920  
Gain on sale of property and equipment
    (68 )     (190 )
Stock compensation expense
    8,652       7,053  
Deferred income taxes
    5,249       (78 )
Change in assets and liabilities:
               
Inventories
    (104,461 )     (147,070 )
Prepaid expenses and other current assets
    (6,547 )     968  
Accounts payable
    51,825       58,381  
Other accrued expenses
    188       1,837  
Income taxes currently payable
    (11,550 )     (377 )
Other
    8,693       6,512  
 
           
 
               
Net cash provided by operating activities
    55,475       19,467  
 
           
 
               
Cash flows from investing activities:
               
Capital expenditures
    (68,363 )     (58,513 )
Proceeds from sale of property and equipment
    966       5,071  
Other
          (746 )
 
           
 
               
Net cash used in investing activities
    (67,397 )     (54,188 )
 
           
 
               
Cash flows from financing activities:
               
Borrowings under revolving credit agreement
    756,850       301,114  
Repayments under revolving credit agreement
    (668,298 )     (278,221 )
Tax benefit of stock options exercised
    2,687       9,002  
Principal payments under capital lease obligations
    (834 )     (933 )
Repurchase of common stock
    (94,924 )      
Net proceeds from issuance of common stock
    4,558       8,736  
 
           
 
               
Net cash provided by financing activities
    39       39,698  
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (11,883 )     4,977  
 
               
Cash and cash equivalents at beginning of period
    37,605       21,203  
 
           
 
               
Cash and cash equivalents at end of period
  $ 25,722     $ 26,180  
 
           
 
               
Supplemental disclosures of cash flow information:
               
 
               
Cash paid during the period for:
               
Interest
  $ 2,087     $ 2,169  
Income taxes
    47,010       26,672  
 
               
Supplemental disclosure of non-cash activities:
               
Equipment acquired through capital leases
  $     $ 1,461  
The accompanying notes are an integral part of this statement.

 

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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 considered necessary for a fair presentation have been included. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. The results of operations for the fiscal three-month and nine-month periods are not necessarily indicative of results for the full fiscal year.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable weather, excessive rain, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of adverse weather conditions is somewhat mitigated by the geographic dispersion of our stores.
Typically, we experience our highest inventory and accounts payable balances during our first fiscal quarter each year for purchases of seasonal product in anticipation of the spring selling season and again during our third fiscal quarter in anticipation of the winter selling season.
Note 2 — Reclassifications:
Certain amounts in previously issued financial statements have been reclassified to conform to the fiscal 2007 presentation. Inventory initially consigned but ultimately purchased has been included in the inventory and accounts payable balances in the consolidated balance sheets. Discount fees on our proprietary credit card have been reclassified from operating expenses into cost of merchandise sold in the consolidated statements of income.
Note 3 — Inventories:
The value of our inventory is 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 $23.0 million and $20.3 million higher than reported at September 29, 2007 and December 30, 2006, respectively.
Note 4 — Share-Based Payments:
Pursuant to Statement of Financial Accounting Standards No. 123(R), “Share-Based Payments” (“SFAS 123(R)”) (adopted in fiscal 2006), we recognize compensation expense for share-based payments based on the fair value of the awards, using the modified prospective method. Share-based payments include stock option grants and transactions under our other stock plans. SFAS 123(R) requires share-based compensation expense to be based on the following: a) grant date fair value estimated in accordance with the original provisions of SFAS 123 for unvested options granted prior to the adoption of SFAS 123(R); b) grant date fair value estimated in accordance with the provisions of SFAS 123(R) for all share-based payments granted subsequent to adoption; and c) the discount on shares sold to employees subsequent to adoption, which represents the difference between the grant date fair value and the employee purchase price. Share-based compensation expense lowered pre-tax income by $2.9 million and $2.4 million for the third quarter of fiscal 2007 and 2006, respectively and $8.6 million and $7.1 million for the first nine months of fiscal 2007 and 2006, respectively. The benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow.

 

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Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Stock Incentive Plan
Under our 2006 Stock Incentive Plan, options may be granted to officers, non-employee directors and other employees. The per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than ten years from the date of grant. In the case of a stockholder owning more than 10% of our outstanding voting stock, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100,000. Vesting of options commences at various anniversary dates following the dates of grant.
The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is recognized as compensation expense ratably over the vesting period. We have estimated the fair value of all stock option awards as of the date of the grant by applying a modified Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense, including expected stock price volatility.
The following summarizes information concerning stock option grants during fiscal 2007 and 2006:
                                 
    Three months ended     Nine months ended  
    Sept. 29, 2007     Sept. 30, 2006     Sept. 29, 2007     Sept. 30, 2006  
Stock options granted
    12,250       17,600       449,700       493,100  
Weighted average exercise price
  $ 48.08     $ 47.89     $ 46.49     $ 61.58  
Weighted average fair value
  $ 19.67     $ 28.04     $ 19.57     $ 34.65  
As of September 29, 2007, total unrecognized compensation expense related to non-vested stock options and restricted stock units was $19,323,000 with a weighted average expense recognition period of 1.50 years.
Restricted Stock Units
During the first nine months of 2007, we issued 63,389 restricted stock units which vest over an approximate three-year term and had a grant date weighted average fair value of $46.49.
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (the “ESPP”) whereby all our employees have the opportunity to purchase, through payroll deductions, shares of common stock at a 15% discount. Pursuant to the terms of the ESPP, we issued 34,477 and 26,890 shares of common stock during the first nine months of fiscal 2007 and 2006, respectively. Total stock compensation expense related to the ESPP was approximately $433,000 and $319,000 during the first nine months of 2007 and 2006, respectively. At September 29, 2007, there were 3,311,580 shares of common stock reserved for future issuance under the ESPP.
Note 5 — Net Income Per Share:
We present 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 shares issuable upon exercise of options and vesting of restricted stock.

 

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Net income per share is calculated as follows (in thousands, except per share amounts):
                                                 
    Three months ended     Three months ended  
    September 29, 2007     September 30, 2006  
                    Per Share                     Per Share  
    Income     Shares     Amount     Income     Shares     Amount  
Basic net income per share:
                                               
Net income
  $ 17,468       38,972     $ 0.45     $ 18,059       40,135     $ 0.45  
 
                                               
Dilutive stock options and restricted stock outstanding
            841       (0.01 )             953       (0.01 )
 
                                   
 
                                               
Diluted net income per share:
                                               
Net income
  $ 17,468       39,813     $ 0.44     $ 18,059       41,088     $ 0.44  
 
                                   
                                                 
    Nine months ended     Nine months ended  
    September 29, 2007     September 30, 2006  
                    Per Share                     Per Share  
    Income     Shares     Amount     Income     Shares     Amount  
Basic net income per share:
                                               
Net income
  $ 66,224       39,606     $ 1.67     $ 61,511       39,933     $ 1.54  
 
                                               
Dilutive stock options and restricted stock outstanding
            933       (0.04 )             1,132       (0.04 )
 
                                   
 
                                               
Diluted net income per share:
                                               
Net income
  $ 66,224       40,539     $ 1.63     $ 61,511       41,065     $ 1.50  
 
                                   
Note 6 — Credit Agreement:
In February 2007, we entered into a new Senior Credit Facility with largely the same lender group as under our previous credit facility. The new Senior Credit Facility provides for borrowings up to $250 million (with sublimits of $75 million and $10 million for letters of credit and swingline loans, respectively). This agreement is unsecured and has a five-year term, with proceeds expected to be used for working capital, capital expenditures and share repurchases. Borrowings bear interest at either the bank’s base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at September 29, 2007). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum based on our performance (0.10% at September 29, 2007). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios. We were in compliance with all covenants at September 29, 2007.
Note 7 — Treasury Stock:
In February 2007, our Board of Directors authorized a share repurchase program which provides for repurchase of up to $200 million (excluding commissions) of common stock over an approximate three-year period. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares will be held in treasury. The program may be limited or terminated at any time without prior notice.
We repurchased 645,022 and 1,864,614 shares under the share repurchase program during the third quarter and first nine months of 2007, respectively. The total cost of the share repurchases was $31.2 million and $94.9 million during the third quarter and first nine months of 2007, respectively. As of September 29, 2007, we had remaining authorization under the share repurchase program of $105.1 million.

 

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Note 8 — Accounting for Uncertainty in Income Taxes:
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This Interpretation prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Tax positions that meet a “more-likely-than-not” recognition threshold should be measured in order to determine the tax benefit to be recognized. We are no longer subject to federal examination for years before 2005, nor state and local income tax examinations for years before 2002.
We adopted the provisions of FIN 48 in fiscal 2007, as required. As a result, we charged approximately $1.9 million to retained earnings for the cumulative effect of adoption, including interest. Interest and penalties are immaterial at the date of adoption. The total amount of unrecognized tax benefits that, if recognized, would increase the effective tax rate, is $2.3 million. In addition, we will recognize current interest accrued related to these uncertain tax positions as interest expense.
Note 9 — New Accounting Pronouncements:
In March 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”), which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of EITF 06-3 would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. We adopted the provisions of EITF 06-3, as required, in fiscal 2007. EITF 06-3 does not impact the method for recording and reporting these sales taxes in our consolidated financial statements as our policy is to exclude all such taxes from revenue.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (our fiscal year 2008), and interim periods within those fiscal years. We are currently evaluating the impact that the adoption of SFAS 157 will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115,” which permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option established by this standard permits all entities to choose to measure eligible items at fair value at specified election dates. Entities choosing the fair value option would be required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Adoption is required for fiscal years beginning after November 15, 2007 (our fiscal year 2008). We are currently evaluating the expected effect of SFAS 159 on our consolidated financial statements.
Note 10 — Commitments and Contingencies:
Construction Commitments
We had commitments for new store construction projects totaling approximately $6.2 million at September 29, 2007.
Litigation
We are involved in various litigation matters arising in the ordinary course of business. After consultation with legal counsel, our management expects these matters will be resolved without material adverse effect on our 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.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis describes certain factors affecting our results of operations for the fiscal three and nine month periods ended September 29, 2007 and September 30, 2006 and significant developments affecting our financial condition since the end of the fiscal year ended December 30, 2006, and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. The following discussion and analysis also contains 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 we expect or anticipate will or may occur in the future, including such things as estimated results of operations in future periods, future capital expenditures (including their amount and nature), business strategy, expansion and growth of our business operations and other such matters are forward-looking statements. These forward-looking statements may be affected by certain risks and uncertainties, any one, or a combination of which could materially affect the results of our operations. To take advantage of the safe harbor provided by the Act, we are identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable weather, excessive rain, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of adverse weather conditions is somewhat mitigated by the geographic dispersion of our stores.
Typically, we experience our highest inventory and accounts payable balances during the first fiscal quarter each year for purchases of seasonal products in anticipation of the spring selling season and again during the third fiscal quarter in anticipation of the winter selling season.
As with any business, many aspects of our operations are subject to influences outside our control. These factors include general economic cycles affecting consumer spending, weather factors, operating factors affecting customer satisfaction, consumer debt levels, inflation, pricing and other competitive factors, the ability to attract, train and retain qualified employees, the ability to manage growth and 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, the ability to increase sales at existing stores, the ability to retain vendors, the risk of product liability and other claims, reliance on foreign suppliers, the ability to maintain and improve our management information systems and the seasonality of our business. We discuss in greater detail risk factors relating to our business in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. Forward-looking statements are based on our knowledge of our business and the environment in which we operate, but because of the factors listed above or other factors, actual results could differ materially from those reflected by any forward-looking statements. Consequently, all of the forward-looking statements made are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business and operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no 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.

 

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Results of Operations
Fiscal Three Months (Third Quarter) and Nine Months Ended September 29, 2007 and September 30, 2006
Net sales increased 12.5% to $629.2 million for the third quarter of 2007 from $559.2 million for the third quarter of 2006. Net sales increased 13.8% to $1,980.0 million for the first nine months of fiscal 2007 from $1,739.7 million for the first nine months of fiscal 2006. The net sales increase resulted primarily from the addition of new stores, successful store relocations, and same-store sales improvement of 1.9% and 3.3% for the third quarter and first nine months, respectively. Our third quarter same-store sales improvements were strongest in the animal health and pet supplies categories, but were largely offset by lower than expected performance in the seasonal (primarily heating and insulated outerware) and hardware and tools categories as well as continued negative industry pressures in outdoor power equipment.
We opened 21 new stores during the third quarter and 63 stores during the first nine months of fiscal 2007, compared to 18 and 64 stores opened during the third quarter and first nine months of 2006, respectively. Additionally, we relocated four stores in both the third quarter of 2007 and the third quarter of 2006. For the first nine months of 2007, we relocated 11 stores and sold the Del’s store in Canada, compared to 15 relocations and one closed store in the first nine months of 2006. We operated 738 stores at September 29, 2007 as compared to 658 stores at September 30, 2006.
The following chart indicates the average percentage of sales represented by each of our major product categories during the third quarter and first nine months of fiscal 2007 and 2006:
                                 
    Three months ended     Nine months ended  
    Sept. 29,     Sept. 30,     Sept. 29,     Sept. 30,  
    2007     2006     2007     2006  
Livestock and Pet
    35 %     34 %     33 %     32 %
Seasonal Products
    24       25       26       27  
Hardware and Tools
    15       16       15       15  
Truck and Towing
    10       10       10       10  
Agriculture
    9       8       9       9  
Clothing and Footwear
    7       7       7       7  
 
                       
Total
    100 %     100 %     100 %     100 %
 
                       
Gross margin for the third quarter and the first nine months of fiscal 2007 was $198.6 million and $617.3 million, respectively. This represents an increase of 13.6% and 14.0%, respectively, over the comparable periods of the prior year. Gross margin, as a percent of sales, was 31.6% for the third quarter of fiscal 2007 compared to 31.3% for the comparable period in fiscal 2006. The improvement in gross margin for the quarter resulted from more favorable product mix and enhanced product sourcing. For the first nine months of fiscal 2007, the gross margin rate was 31.2% of sales, compared to 31.1% of sales for the first nine months of fiscal 2006.
Selling, general and administrative (“SG&A”) expenses increased 60 basis points to 24.8% of sales in the third quarter of fiscal 2007 from 24.2% of sales in the third quarter of fiscal 2006. This third quarter increase was primarily attributable to higher personnel and occupancy costs resulting from continued store expansion, as well as increased costs at our distribution centers to handle more imports and additional inventory for new merchandising initiatives. SG&A expenses for the first nine months of fiscal 2007 increased 10 basis points to 23.7% of sales from 23.6% of sales in the first nine months of fiscal 2006.
Depreciation and amortization expense increased 20 basis points to 2.1% of sales in the third quarter of fiscal 2007 from 1.9% of sales in the third quarter of fiscal 2006. As a percent of sales, depreciation and amortization expense increased 10 basis points to 1.9% in the first nine months of fiscal 2007 from 1.8% in the first nine months of fiscal 2006. The increases were related directly to new store growth and capital costs for infrastructure and technology.
Interest expense for the third quarter of 2007 was $1.5 million compared to $0.4 million in the prior year quarter. For the first nine months of fiscal 2007, interest expense increased to $3.0 million compared to $1.9 million for the comparable period in fiscal 2006. The increased interest cost is primarily attributable to borrowings to fund our stock repurchase activity and, to a lesser extent, borrowings required for cash requirements.

 

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Our effective income tax rate increased to 37.9% in the third quarter and first nine months of fiscal 2007 compared with 37.1% for the third quarter and first nine months of fiscal 2006 primarily due to state taxes relating to the composition of income among the states and the adoption of FIN 48 relating to uncertainties in income tax positions. This interpretation prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Tax positions that meet a “more-likely-than-not” recognition threshold should be measured in order to determine the tax benefit to be recognized. We are no longer subject to federal examination for years before 2005, and state and local income tax examinations for years before 2002.
We adopted the provisions of FIN 48 in fiscal 2007, as required. As a result, we charged approximately $1.9 million to retained earnings for the cumulative effect of adoption including interest. Interest and penalties were immaterial at the date of adoption. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.3 million. In addition, we recognize current interest accrued related to these uncertain tax positions as interest expense.
As a result of the foregoing factors, net income for the third quarter and first nine months of fiscal 2007 decreased $0.6 million and increased $4.7 million, respectively, to $17.5 million and $66.2 million from $18.1 million and $61.5 million in the third quarter and first nine months of fiscal 2006, respectively. Net income, as a percent of sales, decreased 40 basis points to 2.8% for the third quarter of fiscal 2007 compared to 3.2% in the third quarter of fiscal 2006. For the first nine months of fiscal 2007, net income as a percent of sales decreased 20 basis points to 3.3% compared to 3.5% for the first nine months of fiscal 2006. Net income per diluted share was consistent at $0.44 for the third quarter and increased to $1.63 for the first nine months of fiscal 2007, compared to $0.44 for the third quarter and $1.50 for the first nine months of fiscal 2006.
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for store expansion, remodeling and relocation programs, including inventory purchases and capital expenditures. Our primary ongoing sources of liquidity are funds provided from operations, commitments available under our revolving credit agreement and normal trade credit.
At September 29, 2007, we had working capital of $365.5 million, a $49.4 million increase from December 30, 2006. This increase was primarily attributable to changes in the following components of current assets and current liabilities (in millions):
                         
    Sept. 29,     Dec. 30,        
    2007     2006     Variance  
Current assets:
                       
Cash and cash equivalents
  $ 25.7     $ 37.6     $ (11.9 )
Inventories
    699.3       594.9       104.4  
Prepaid expenses and other current assets
    43.9       37.0       6.9  
Other, net
    1.1       11.3       (10.2 )
 
                 
 
    770.0       680.8       89.2  
 
                 
Current liabilities:
                       
Accounts payable
    292.2       240.4       51.8  
Accrued expenses
    111.5       111.7       (0.2 )
Income tax currently payable
          11.5       (11.5 )
Other, net
    0.8       1.1       (0.3 )
 
                 
 
    404.5       364.7       39.8  
 
                 
Working capital
  $ 365.5     $ 316.1     $ 49.4  
 
                 
The increase in inventories and related increase in accounts payable resulted primarily from the purchase of additional inventory for new stores and an increase in average inventory per store due to increased sales expectations and planned merchandising initiatives. Trade credit arises from our vendors granting extended payment terms for inventory purchases. Payment terms generally vary from 30 days to 180 days depending on the inventory product.

 

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Operations provided net cash of $55.5 million and $19.5 million in the first nine months of fiscal 2007 and fiscal 2006, respectively. The $36.0 million increase in net cash provided in 2007 over 2006 is primarily due to changes in the following operating activities (in millions):
                         
    Nine months ended  
    Sept. 29,     Sept. 30,        
    2007     2006     Variance  
Net income
  $ 66.2     $ 61.5     $ 4.7  
Inventories and accounts payable
    (52.6 )     (88.7 )     36.1  
Prepaid expenses and other current assets
    (6.5 )     1.0       (7.5 )
Accrued expenses
    0.2       1.8       (1.6 )
Income taxes currently payable
    (11.6 )     (0.4 )     (11.2 )
Other, net
    59.8       44.3       15.5  
 
                 
Net cash provided by operations
  $ 55.5     $ 19.5     $ 36.0  
 
                 
The improvement in net cash provided by operations in the first nine months of fiscal 2007 compared with the first nine months of fiscal 2006 was primarily due to changes in inventory levels and the timing of payments. Inventory levels increased less in the first nine months of 2007 compared to the first nine months of 2006, due to the timing of import receipts and a focus on inventory management in 2007. Additionally, we achieved a slight increase in financed inventory, resulting in a higher accounts payable increase relative to inventory. The change in cash used for income taxes relates to the timing of payments of income taxes.
Investing activities used $67.4 million and $54.2 million in the first nine months of fiscal 2007 and fiscal 2006, respectively. The majority of this cash requirement relates to our capital expenditures.
Capital expenditures (including equipment acquired under capital lease) for the first nine months of fiscal 2007 and fiscal 2006 were as follows (in millions):
                 
    Nine months ended  
    Sept. 29,     Sept. 30,  
    2007     2006  
New/relocated stores and stores not yet opened
  $ 32.0     $ 39.1  
Existing store properties acquired from lessor
    6.8        
Existing stores
    14.3       15.4  
Distribution center capacity and improvements
    2.0       1.9  
Information technology
    13.1       3.5  
Corporate and other
    0.2       0.1  
 
           
 
  $ 68.4     $ 60.0  
 
           
The above table reflects 74 new/relocated stores in the first nine months of fiscal 2007, compared to 79 new/relocated stores in the first nine months of fiscal 2006.
Financing activities provided no significant cash in the first nine months of fiscal 2007 and $39.7 million in the first nine months of fiscal 2006. This reduction in net cash provided is largely due to the repurchase of shares of our common stock.
In February 2007, we entered into a new Senior Credit Facility with largely the same lender group as under our prior credit facility. The new Senior Credit Facility provides for borrowings up to $250 million (with sublimits of $75 million and $10 million for letters of credit and swingline loans, respectively). This agreement is unsecured and has a five-year term, with proceeds expected to be used for working capital, capital expenditures and share repurchases. Borrowings bear interest at either the bank’s base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at September 29, 2007). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum based on our performance (0.10% at September 29, 2007). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios. We were in compliance with all covenants at September 29, 2007.

 

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We had approximately $139.0 million available for future borrowings, net of outstanding letters of credit, under our revolving credit agreement at September 29, 2007.
We believe that our cash flow from operations, borrowings available under our revolving credit agreement, and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including store openings and renovations, over the next several years.
Share Repurchase Program
In February 2007, our Board of Directors authorized a share repurchase program which provides for repurchase of up to $200 million (excluding commissions) of our outstanding common stock over an approximate three-year period. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. The program may be limited or terminated at any time without prior notice.
In the third quarter of 2007, we repurchased 645,022 shares of our common stock, at a total cost of $31.2 million. On a year-to-date basis, we have repurchased approximately 1.9 million shares at a total cost of $94.9 million. Repurchased shares are accounted for at cost and will be held in treasury for future issuance.
Off-Balance Sheet Arrangements
Our 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 us to utilize financial capital to operate the business rather than maintain assets. Letters of credit allow us to purchase inventory in a timely manner.
We had outstanding letters of credit of $22.4 million at September 29, 2007.
Significant Contractual Obligations and Commercial Commitments
There has been no material change in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2006.
Significant Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based upon our 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 us 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 policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas:
         
 
  - Revenue recognition and sales returns   - Inventory valuation
 
  - Insurance reserves   - Sales tax reserve
 
  - Share-based payments   - Income taxes
See Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 for a discussion of our critical accounting policies. Our 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily from our revolving credit agreement (the “Credit Agreement”). The Credit Agreement bears interest at either the bank’s base rate (7.75% and 8.25% at September 29, 2007 and September 30, 2006, respectively) or LIBOR (5.13% and 6.08% at September 29, 2007 and September 30, 2006, respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly, based on our performance (0.50% at September 29, 2007). We are also required to pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% based on the daily average unused portion of the Credit Agreement (0.10% at September 29, 2007). See Note 6 of the Notes to the Consolidated Financial Statements included herein for further discussion regarding the Credit Agreement.
Although we cannot accurately determine the precise effect of inflation on our operations, we believe our sales and results of operations have been affected by inflation. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, petroleum, steel, corn, soybean and other commodities as well as transportation services. If prices of these materials continue to increase, consumer demand may fall and/or we may not be able to pass all such increases on to our customers and, as a result, sales and/or gross margins could decline. Our 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 our gross margin.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of September 29, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 29, 2007, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the third quarter of fiscal 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are 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 our 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.
Item 1A. Risk Factors
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In February 2007, our Board of Directors authorized a share repurchase program which provides for repurchase of up to $200 million (excluding commissions) of our outstanding common stock over an approximate three-year period. Stock repurchase activity during the third quarter of 2007 is set forth in the table below:
                                 
                    Total Number        
                    of Shares     Maximum Dollar  
                    Purchased as     Value of Shares  
    Total             Part of Publicly     That May Yet Be  
    Number of     Average     Announced     Purchased Under  
    Shares     Price Paid     Plans or     the Plans or  
Period   Purchased     Per Share     Programs     Programs  
7/1/07 — 7/28/07
    256,800     $ 50.01       256,800     $ 123,482,101  
7/29/07 — 8/25/07
    185,531       48.20       185,531       114,545,145  
8/26/07 — 9/29/07
    202,691       46.47       202,691       105,132,103  
 
                           
As of September 29, 2007
    645,022               645,022          
 
                           
We expect to implement the balance of the repurchase program through purchases made from time to time either in the open market or through private transactions, in accordance with regulations of the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None

 

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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: November 2, 2007  By:   /s/ Anthony F. Crudele    
    Anthony F. Crudele   
    Executive Vice President – Chief Financial Officer and Treasurer
(Duly Authorized Officer and Principal Financial Officer) 
 
 

 

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