UNITED
STATES
SECURITIES
& EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
|
For
the quarterly period ended March 31,
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
|
(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
X NO
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 X
|
Accelerated
Filer
|
Non-Accelerated
Filer
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)
YES
___ NO
X
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock
as of the latest practicable date.
Class
|
|
Outstanding
at April 28, 2007
|
Common
Stock, $.008 Par Value
|
|
39,736,525
|
TRACTOR
SUPPLY COMPANY
INDEX
TRACTOR
SUPPLY COMPANY
(in
thousands, except share amounts)
|
|
March
31,
|
|
December
30,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
35,786
|
|
$
|
37,605
|
|
Inventories
|
|
|
722,928
|
|
|
594,851
|
|
Prepaid
expenses and other current assets
|
|
|
32,458
|
|
|
37,007
|
|
Deferred
income taxes
|
|
|
10,952
|
|
|
11,360
|
|
Total
current assets
|
|
|
802,124
|
|
|
680,823
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
|
|
|
21,805
|
|
|
19,495
|
|
Buildings
and improvements
|
|
|
252,159
|
|
|
248,063
|
|
Furniture,
fixtures and equipment
|
|
|
151,288
|
|
|
146,128
|
|
Computer
software and hardware
|
|
|
48,520
|
|
|
46,853
|
|
Construction
in progress
|
|
|
15,473
|
|
|
15,404
|
|
|
|
|
489,245
|
|
|
475,943
|
|
Accumulated
depreciation and amortization
|
|
|
(183,270
|
)
|
|
(174,339
|
)
|
Property
and equipment, net
|
|
|
305,975
|
|
|
301,604
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
10,258
|
|
|
10,288
|
|
Deferred
income taxes
|
|
|
10,281
|
|
|
10,779
|
|
Other
assets
|
|
|
7,309
|
|
|
5,976
|
|
Total
assets
|
|
$
|
1,135,947
|
|
$
|
1,009,470
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
336,280
|
|
$
|
240,383
|
|
Other
accrued expenses
|
|
|
110,551
|
|
|
111,721
|
|
Current
portion of capital lease obligations
|
|
|
975
|
|
|
1,065
|
|
Income
taxes currently payable
|
|
|
1,934
|
|
|
11,550
|
|
Total
current liabilities
|
|
|
449,740
|
|
|
364,719
|
|
|
|
|
|
|
|
|
|
Revolving
credit loan
|
|
|
53,418
|
|
|
--
|
|
Capital
lease obligations, less current maturities
|
|
|
2,602
|
|
|
2,808
|
|
Straight
line rent liability
|
|
|
25,870
|
|
|
24,399
|
|
Other
long-term liabilities
|
|
|
18,991
|
|
|
18,640
|
|
Total
liabilities
|
|
|
550,621
|
|
|
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; 40,343,447
shares
issued and 39,929,955 shares outstanding at March 31, 2007 and 40,281,732
shares issued and outstanding at December 30, 2006
|
|
|
323
|
|
|
322
|
|
Additional
paid-in capital
|
|
|
133,860
|
|
|
129,249
|
|
Treasury
stock, at cost, 413,492 shares
|
|
|
(21,332
|
)
|
|
--
|
|
Accumulated
other comprehensive loss
|
|
|
(26
|
)
|
|
(22
|
)
|
Retained
earnings
|
|
|
472,501
|
|
|
469,355
|
|
Total
stockholders’ equity
|
|
|
585,326
|
|
|
598,904
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,135,947
|
|
$
|
1,009,470
|
|
The
accompanying notes are an integral part of this
statement.
TRACTOR
SUPPLY COMPANY
(in
thousands, except per share amounts)
|
|
For
the fiscal three months ended
|
|
|
|
March
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
559,832
|
|
$
|
465,547
|
|
|
|
|
|
|
|
|
|
Cost
of merchandise sold
|
|
|
391,652
|
|
|
323,552
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
168,180
|
|
|
141,995
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
147,187
|
|
|
130,631
|
|
Depreciation
and amortization
|
|
|
12,013
|
|
|
9,623
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
8,980
|
|
|
1,741
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
925
|
|
|
907
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
8,055
|
|
|
834
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
3,056
|
|
|
309
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,999
|
|
$
|
525
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
0.12
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Net
income per share - assuming dilution
|
|
$
|
0.12
|
|
$
|
0.01
|
|
The
accompanying notes are an integral part of this
statement.
TRACTOR
SUPPLY COMPANY
(in
thousands, except share amounts)
(Unaudited)
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Retained
Earnings
|
|
Total
Stockholders’
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 (11,503) shares
|
|
|
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
514
|
|
Exercise
of stock options (50,212 shares)
|
|
|
1
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
856
|
|
Tax benefit
on
disqualifying dispositions of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
579
|
|
Stock
compensation
|
|
|
|
|
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
2,663
|
|
Repurchase
of common stock (413,492 shares)
|
|
|
|
|
|
|
|
$
|
(21,332
|
)
|
|
|
|
|
|
|
|
(21,332
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
(4
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,999
|
|
|
4,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity at March 31, 2007
|
|
$
|
323
|
|
$
|
133,860
|
|
$
|
(21,332
|
)
|
$
|
(26
|
)
|
$
|
472,501
|
|
$
|
585,326
|
|
The
accompanying notes are an integral part of this
statement.
TRACTOR
SUPPLY COMPANY
(in
thousands)
|
|
For
the fiscal three months ended
|
|
|
|
March
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
4,999
|
|
$
|
525
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12,013
|
|
|
9,623
|
|
Loss
on sale of property and equipment
|
|
|
289
|
|
|
116
|
|
Stock
compensation expense
|
|
|
2,663
|
|
|
1,860
|
|
Deferred
income taxes
|
|
|
(1,406
|
)
|
|
(1,574
|
)
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Inventories
|
|
|
(128,077
|
)
|
|
(164,264
|
)
|
Prepaid
expenses and other current assets
|
|
|
4,453
|
|
|
6,485
|
|
Accounts
payable
|
|
|
95,897
|
|
|
127,715
|
|
Other
accrued expenses
|
|
|
(808
|
)
|
|
(6,215
|
)
|
Income
taxes currently payable
|
|
|
(9,616
|
)
|
|
(6,747
|
)
|
Other
|
|
|
476
|
|
|
2,765
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(19,117
|
)
|
|
(29,711
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(16,411
|
)
|
|
(18,607
|
)
|
Proceeds
from sale of property and equipment
|
|
|
87
|
|
|
44
|
|
Other
|
|
|
--
|
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(16,324
|
)
|
|
(19,309
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
under revolving credit agreement
|
|
|
236,664
|
|
|
164,680
|
|
Repayments
under revolving credit agreement
|
|
|
(183,246
|
)
|
|
(108,190
|
)
|
Tax
benefit on stock option exercises
|
|
|
462
|
|
|
6,270
|
|
Principal
payments under capital lease obligations
|
|
|
(296
|
)
|
|
(343
|
)
|
Repurchase
of common stock
|
|
|
(21,332
|
)
|
|
--
|
|
Net
proceeds from issuance of common stock
|
|
|
1,370
|
|
|
5,021
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
33,622
|
|
|
67,438
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,819
|
)
|
|
18,418
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
37,605
|
|
|
21,203
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
35,786
|
|
$
|
39,621
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
585
|
|
$
|
694
|
|
Income
taxes
|
|
|
12,658
|
|
|
1,595
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
Equipment
acquired through capital leases
|
|
$
|
--
|
|
$
|
1,461
|
|
The
accompanying notes are an integral part of this
statement.
TRACTOR
SUPPLY COMPANY
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 our Annual Report on Form 10-K for the fiscal year ended
December 30, 2006. The results of operations for the fiscal three-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.
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.
Note
2 - Reclassifications:
Certain
amounts in previously issued financial statements have been reclassified to
conform to the fiscal 2007 presentation. Inventories in-transit and inventory
initially consigned but ultimately purchased have 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:
Inventories
are stated 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 $21.6 million and $20.3 million higher than reported at March
31,
2007 and December 30, 2006, respectively.
Note
4 - Share-Based Compensation:
Pursuant
to
Statement of Financial Accounting Standards (“SFAS”) 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 certain 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. For the first quarter of fiscal 2007 and 2006,
share-based compensation expense lowered pre-tax income by $2.7 million and
$1.9
million, respectively. The benefits of tax deductions in excess of recognized
compensation expense are reported as a financing cash flow.
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
the
first
quarter of fiscal 2007 and 2006:
|
|
Three
months ended
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
|
|
|
|
|
|
Stock
options granted
|
|
|
414,850
|
|
|
436,600
|
|
Weighted
average exercise price
|
|
$
|
46.17
|
|
$
|
61.88
|
|
Weighted
average fair value
|
|
$
|
19.41
|
|
$
|
34.62
|
|
The
weighted average key assumptions used in determining the fair value of options
granted in the three months ended March 31, 2007 and April 1, 2006 are as
follows:
|
|
Three
months ended
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
Expected
price volatility
|
|
|
41.6
|
%
|
|
48.4
|
%
|
Risk-free
interest rate
|
|
|
4.7
|
%
|
|
4.6
|
%
|
Weighted
average expected lives in years
|
|
|
4.7
|
|
|
7.2
|
|
Forfeiture
rate
|
|
|
6.0
|
%
|
|
16.1
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
As
of
March 31, 2007, total unrecognized compensation expense related to non-vested
stock options and restricted stock units was $23,256,675 with a weighted average
expense recognition period of 2.06 years.
Restricted
Stock Units
During
the first quarter of 2007, we issued 59,500 restricted stock units which vest
over a three-year term and had a grant date fair value of $46.17.
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 11,503 and 8,869
shares of common stock during the first quarter of fiscal 2007 and 2006,
respectively. Total stock compensation expense related to the ESPP was
approximately $113,000 and $61,000 during the first fiscal quarter of 2007
and
2006, respectively. At March 31, 2007, there were 3,334,554 shares of common
stock reserved for future issuance under the ESPP.
There
were no significant modifications to our share-based compensation plans during
the three months ended March 31, 2007.
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 options and warrants.
Net
income per share is calculated as follows (in thousands, except per share
amounts):
|
|
Three
months ended
March
31, 2007
|
|
Three
months ended
April
1, 2006
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
Amount
|
|
Income
|
|
Shares
|
|
Per
Share
Amount
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,999
|
|
|
40,228
|
|
$
|
0.12
|
|
$
|
525
|
|
|
39,698
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
stock options outstanding
|
|
|
|
|
|
855
|
|
|
|
|
|
|
|
|
1,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,999
|
|
|
41,083
|
|
$
|
0.12
|
|
$
|
525
|
|
|
41,016
|
|
$
|
0.01
|
|
Note
6 - Credit Agreement:
In
February 2007, we entered into a new Senior Credit Facility with largely the
same lender group as under the Credit Agreement. 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
will 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 March 31, 2007). We are also required to pay a commitment
fee ranging from 0.06% to 0.18% per annum for unused capacity (0.10% at March
31, 2007). The agreement requires quarterly compliance with respect to fixed
charge coverage and leverage ratios.
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 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 413,492 shares under the share repurchase program during the first
fiscal quarter of 2007. The total cost of the share repurchases was $21.3
million. As of March 31, 2007, we had remaining authorization under the share
repurchase program of $178.7 million.
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. This Interpretation
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, and state and local income tax examinations for years before
2002.
We
have
adopted the provisions of FIN 48 in fiscal 2007, as required. As a result we
have currently charged retained earning approximately $1.9 million 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 affect the effective tax rate is $2.3
million. In addition, we will recognize current interest accrued related to
these uncertain tax positions as an operating 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. EITF 06-3
was adopted 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. 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 $7.5
million at March 31, 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.
General
The
following discussion and analysis describes certain factors affecting our
results of operations for the fiscal three month periods ended March 31, 2007
and April 1, 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.
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 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. 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.
Results
of Operations
Fiscal
Three Months (First Quarter) Ended March 31, 2007 and April 1,
2006
Net
sales
increased 20.3% to $559.8 million for the first quarter of 2007 from
$465.5 million for the first quarter of 2006. The net sales increase
resulted primarily from the addition of new stores and same-store sales
improvement of 8.5%. Our same-store sales improvement was strongest in
winter-related merchandise such as insulated outerwear, snow removal and heating
products as well as in the apparel and animal health categories. These results
were driven primarily by cold weather during January and February in the
northern and midwestern states.
During
the first quarter of 2007, we opened a total of 22 new stores compared to 29
stores in the first quarter of 2006. We also relocated seven stores in the
first
quarter of 2007 compared to five store relocations in the first quarter of
2006.
We operated 698 stores as of the end of the first quarter of 2007 compared
to
624 stores as of the end of the first quarter of 2006.
The
following chart indicates the average percentage of sales represented by each
of
our major product categories during the first quarter of fiscal 2007 and
2006:
|
|
Three
months ended
|
|
Product
Category:
|
|
March
31,
2007
|
|
April
1,
2006
|
|
Livestock
and pet
|
|
|
37
|
%
|
|
37
|
%
|
Seasonal
products
|
|
|
22
|
|
|
22
|
|
Hardware
and tools
|
|
|
17
|
|
|
17
|
|
Clothing
and footwear
|
|
|
9
|
|
|
8
|
|
Truck,
trailer and towing
|
|
|
9
|
|
|
9
|
|
Agricultural
|
|
|
6
|
|
|
7
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
Gross
profit increased 18.4% to 168.2 million for the first quarter of 2007 from
$142.0 million for the first quarter of 2006. As a percent of sales, gross
profit decreased 50 basis points to 30.0% compared to 30.5% in the first quarter
of 2006, largely as a result of seasonal markdowns, product mix and increased
freight costs.
Selling,
general and administrative (“SG&A”) expenses decreased 170 basis points to
26.3% of sales in the first quarter of 2007 compared to 28.0% of sales in the
first quarter of 2006. The expense leverage is a result of the increased sales
and a planned decrease in pre-opening and marketing expenses, some of which
will
shift into the second quarter.
Depreciation
and amortization expense increased to $12.0 million in the first quarter of
2007 from $9.6 million in the first quarter of 2006, as the result of new
store growth and capital costs for infrastructure and technology.
Interest
expense for the first quarter of 2007 remained consistent with the prior year
at
$0.9 million. Our effective income tax rate increased to 37.9% in the first
quarter of 2007 compared with 37.1% for the first quarter of 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
have
adopted the provisions of FIN 48 in fiscal 2007, as required. As a result we
have currently charged retained earning approximately $1.9 million 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 affect the effective tax rate is $2.3
million. In addition, we will recognize current interest accrued related to
these uncertain tax positions as an operating expense.
As
a
result of the foregoing factors, net income for the first quarter of 2007
increased $4.5 million to $5.0 million from $0.5 million in the first quarter
of
2006. Net income, as a percent of sales, increased 80 basis points to 0.9%
for
the first quarter of 2007. Net income per diluted share was $0.12 for the first
quarter of 2007 compared to $0.01 for the first quarter of 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
March
31, 2007, we had working capital of $352.4 million, a $36.3 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):
|
|
March
31,
2007
|
|
Dec.
30,
2006
|
|
Variance
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
35.8
|
|
$
|
37.6
|
|
$
|
(1.8
|
)
|
Inventories
|
|
|
722.9
|
|
|
594.9
|
|
|
128.0
|
|
Prepaid
expenses and other current assets
|
|
|
32.5
|
|
|
37.0
|
|
|
(4.5
|
)
|
Deferred
income taxes
|
|
|
10.9
|
|
|
11.3
|
|
|
(0.4
|
)
|
|
|
|
802.1
|
|
|
680.8
|
|
|
121.3
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
336.3
|
|
|
240.4
|
|
|
95.9
|
|
Other
accrued expenses
|
|
|
110.5
|
|
|
111.7
|
|
|
(1.2
|
)
|
Income
taxes currently payable
|
|
|
1.9
|
|
|
11.5
|
|
|
(9.6
|
)
|
Current
portion of capital lease obligations
|
|
|
1.0
|
|
|
1.1
|
|
|
(0.1
|
)
|
|
|
|
449.7
|
|
|
364.7
|
|
|
85.0
|
|
Working
capital
|
|
$
|
352.4
|
|
$
|
316.1
|
|
$
|
36.3
|
|
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,
planned merchandising initiatives and the typical seasonal growth in inventory
levels. 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.
Operations
used net cash of $19.1 million and $29.7 million in the first quarter of 2007
and 2006, respectively. The $10.6 million improvement in net cash used in
2007 over 2006 is due to changes in the following operating activities (in
millions):
|
|
Three
months ended
|
|
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
Variance
|
|
Net
income
|
|
$
|
5.0
|
|
$
|
0.5
|
|
$
|
4.5
|
|
Inventories
and accounts payable
|
|
|
(32.2
|
)
|
|
(36.5
|
)
|
|
4.3
|
|
Prepaid
expenses and other current assets
|
|
|
4.5
|
|
|
6.5
|
|
|
(2.0
|
)
|
Other
acccrued expenses
|
|
|
(0.8
|
)
|
|
(6.2
|
)
|
|
5.4
|
|
Income
taxes currently payable
|
|
|
(9.6
|
)
|
|
(6.7
|
)
|
|
(2.9
|
)
|
Other,
net
|
|
|
14.0
|
|
|
12.7
|
|
|
1.3
|
|
Net
cash used in operations
|
|
$
|
(19.1
|
)
|
$
|
(29.7
|
)
|
$
|
10.6
|
|
The
improvement in net cash used in operations in the first quarter of 2007 compared
with the first quarter of 2006 is primarily due to strong sales performance
and
the timing of payments. The decrease in cash used for inventory results from
a
partial build of seasonal stock levels prior to the beginning of fiscal 2007.
The decrease in cash used for accrued expenses was primarily due to the timing
of the accruals and the related payment of those accruals.
Investing
activities used $16.3 million and $19.3 million in the first quarter of 2007
and
2006, respectively. The majority of this cash requirement relates to our capital
expenditures.
Capital
expenditures (including equipment acquired under capital leases) for the first
three months of fiscal 2007 and 2006 were as follows (in millions):
|
|
Three
months ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
New/relocated
stores and stores not yet opened
|
|
$
|
8.4
|
|
$
|
13.8
|
|
Existing
stores
|
|
|
6.7
|
|
|
4.4
|
|
Distribution
center capacity and improvements
|
|
|
0.8
|
|
|
0.7
|
|
Information
technology
|
|
|
0.3
|
|
|
1.1
|
|
Corporate
and other
|
|
|
0.2
|
|
|
0.1
|
|
|
|
$
|
16.4
|
|
$
|
20.1
|
|
The
above
table reflects 29 new/relocated stores in the first quarter of 2007, compared
to
34 during the first quarter of 2006.
Financing
activities provided $33.6 million and $67.4 million in the first quarter of
2007
and 2006, respectively. This reduction in net cash provided is largely due
to
the repurchase of shares of common stock, as well as a reduction in the tax
benefit on stock option exercises. We had approximately $171.4 million and
$74.2
million available for future borrowings, net of outstanding letters of credit,
under our revolving credit agreement at March 31, 2007 and April 1, 2006,
respectively.
In
February 2007, we entered into a new Senior Credit Facility with largely the
same lender group as under the Credit Agreement. 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
will 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 March 31, 2007). We are also required to pay a commitment
fee ranging from 0.06% to 0.18% per annum for unused capacity (0.10% at March
31, 2007). The agreement requires quarterly compliance with respect to fixed
charge coverage and leverage ratios.
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 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
first quarter of 2007, we repurchased 413,492 shares of our common stock, at
a
total cost of $21.3 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 $25.2 million at March 31, 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
See
Note
1 to 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.
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 (8.25% and 7.75% at March 31, 2007 and April 1,
2006, respectively) or LIBOR (5.32% and 4.83% at March 31, 2007 and April 1,
2006, respectively) plus an additional amount ranging from 0.35% to 0.90% per
annum, adjusted quarterly, based on our performance (0.50% at March 31, 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 March 31, 2007). See Note 6 of 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.
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
March 31, 2007. Based on this evaluation, our principal executive officer and
principal financial officer concluded that, as of March 31, 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
first fiscal quarter of 2007 that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
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 for 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.
There
have been no material changes to our risk factors as previously disclosed in
our
Form 10-K for the fiscal year ended December 30, 2006.
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 of our outstanding
common stock over an approximate three-year period. Stock repurchase activity
during the first quarter of 2007 was as follows:
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
Per
Share
|
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
Maximum
Dollar
Value
of Shares
That
May Yet Be
Purchased
Under
the
Plans or
Programs
|
|
Fiscal
January 2007
|
|
|
--
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
Fiscal
February 2007
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Fiscal
March 2007
|
|
|
413,492
|
|
|
51.59
|
|
|
413,492
|
|
|
178,668,000
|
|
As
of March 31, 2007
|
|
|
413,492
|
|
|
|
|
|
413,492
|
|
$
|
178,668,000
|
|
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.
None
None
None
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.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
TRACTOR
SUPPLY COMPANY
|
|
|
|
|
Date:
May 10,
2007 |
|
|
By:
/s/
Anthony F. Crudele
|
|
|
|
Anthony
F. Crudele
Senior
Vice President - Chief Financial Officer and Treasurer
(Duly
Authorized Officer and Principal Financial
Officer)
|