UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 1, 2006
--------------------------------------------------
OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------------------------- -------
Commission file number 000-23314
----------
TRACTOR SUPPLY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3139732
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 POWELL PLACE, BRENTWOOD, TENNESSEE 37027
--------------------------------------- -------------------
(Address of Principal 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 29, 2006
----------------------------- -----------------------------
Common Stock, $.008 par value 39,927,023
The accompanying notes are an integral part of this statement.
Page 1
TRACTOR SUPPLY COMPANY
INDEX
PAGE NO.
--------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets -
April 1, 2006 and December 31, 2005......................3
Consolidated Statements of Income -
For the Fiscal Three Months Ended
April 1, 2006 and March 26, 2005.........................4
Consolidated Statements of Cash Flows -
For the Fiscal Three Months Ended
April 1, 2006 and March 26, 2005.........................5
Notes to Unaudited Consolidated Financial Statements......6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................11-15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................15
Item 4. Controls and Procedures.....................................16
Part II. Other Information:
Item 1. Legal Proceedings...........................................17
Item 1a. Risk Factors................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Procee...17
Item 3. Default Upon Senior Securities..............................17
Item 4. Submission of Matters to a Vote of Security Holders.........17
Item 5. Other Information...........................................17
Item 6. Exhibits....................................................17
Signature ............................................................17
The accompanying notes are an integral part of this statement.
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
APRIL 1, DECEMBER 31,
2006 2005
---------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 39,621 $ 21,203
Inventories.................................................................... 590,479 460,751
Prepaid expenses and other current assets...................................... 37,198 38,380
Deferred income taxes.......................................................... 11,135 11,079
---------- ---------
Total current assets..................................................... 678,433 531,413
---------- ---------
Property and Equipment:
Land........................................................................... 17,318 17,319
Buildings and improvements..................................................... 223,526 223,585
Furniture, fixtures and equipment.............................................. 123,656 115,784
Computer software and hardware................................................. 29,708 32,311
Construction in progress....................................................... 20,435 9,842
---------- ---------
414,643 398,841
Accumulated depreciation and amortization...................................... (146,141) (140,366)
---------- ---------
Property and equipment, net.................................................. 268,502 258,475
Goodwill 12,436 12,436
Deferred income taxes............................................................. 9,048 7,530
Other assets...................................................................... 5,837 4,941
---------- ---------
Total assets............................................................. $ 974,256 $ 814,795
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 278,576 $ 185,397
Other accrued expenses......................................................... 96,599 102,814
Current portion of capital lease obligations................................... 1,370 1,049
Income taxes currently payable................................................. -- 1,421
---------- ---------
Total current liabilities................................................ 376,545 290,681
Revolving credit loan............................................................. 64,702 8,212
Capital lease obligations, less current maturities................................ 3,184 2,527
Straight line rent liability...................................................... 19,853 18,502
Other long-term liabilities....................................................... 17,876 17,175
---------- ---------
Total liabilities........................................................ 482,160 337,097
---------- ---------
Stockholders' equity:
Preferred stock, 40,000 shares authorized, $1.00 par value; no shares issued... -- --
Common stock, 100,000,000 shares authorized; $.008 par value; 39,902,392
and 39,433,449 shares issued and outstanding in 2006 and 2005, respectively.. 319 315
Additional paid-in capital..................................................... 112,941 99,047
Other comprehensive loss....................................................... (36) (11)
Retained earnings.............................................................. 378,872 378,347
---------- ---------
Total stockholders' equity............................................... 492,096 477,698
---------- ---------
Total liabilities and stockholders' equity............................... $ 974,256 $ 814,795
========== =========
The accompanying notes are an integral part of this statement.
Page 3
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL THREE MONTHS ENDED
---------------------------------
APRIL 1, MARCH 26,
2006 2005
----------- ------------
(UNAUDITED)
Net sales.................................................. $ 465,547 $ 377,203
Cost of merchandise sold................................... 323,263 265,132
----------- ------------
Gross profit............................................ 142,284 112,071
Selling, general and administrative expenses............... 130,920 102,675
Depreciation and amortization.............................. 9,623 7,646
----------- ------------
Income from operations.................................. 1,741 1,750
Interest expense, net...................................... 907 677
----------- ------------
Income before income taxes.............................. 834 1,073
Income tax expense......................................... 309 389
----------- ------------
Net income................................................. $ 525 $ 684
=========== ============
Net income per share - basic............................... $ 0.01 $ 0.02
=========== ============
Net income per share - diluted............................. $ 0.01 $ 0.02
=========== ============
The accompanying notes are an integral part of this statement.
Page 4
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL THREE MONTHS ENDED
---------------------------------
APRIL 1, MARCH 26,
2006 2005
----------- ------------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................................. $ 525 $ 684
Tax benefit of stock options exercised..................................... -- 6,463
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization........................................... 9,623 7,646
Loss (gain) on sale of property and equipment........................... 116 (183)
Stock compensation expense.............................................. 1,860 --
Deferred income taxes................................................... (1,574) (892)
Other .................................................................. (25) 51
Change in assets and liabilities:
Inventories........................................................... (129,728) (115,994)
Prepaid expenses and other current assets............................. 6,485 (4,527)
Accounts payable...................................................... 93,179 119,970
Accrued expenses...................................................... (6,215) (17,674)
Income taxes currently payable........................................ (6,747) --
Other................................................................. 2,790 3,752
----------- ------------
Net cash used in operating activities...................................... (29,711) (704)
----------- ------------
Cash flows from investing activities:
Capital expenditures.................................................... (18,607) (6,706)
Proceeds from sale of property and equipment............................ 44 827
Other................................................................... (746) --
----------- ------------
Net cash used in investing activities...................................... (19,309) (5,879)
----------- ------------
Cash flows from financing activities:
Borrowings under revolving credit agreement............................. 164,680 112,104
Repayments under revolving credit agreement............................. (108,190) (100,383)
Excess tax benefit on stock options exercises........................... 6,270 --
Principal payments under capital lease obligations...................... (343) (258)
Net proceeds from issuance of common stock.............................. 5,021 4,069
----------- ------------
Net cash provided by financing activities.................................. 67,438 15,532
----------- ------------
Net increase in cash and cash equivalents.................................. 18,418 8,949
Cash and cash equivalents at beginning of period........................... 21,203 28,941
----------- ------------
Cash and cash equivalents at end of period................................. $ 39,621 $ 37,890
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest................................................................ $ 694 $ 603
Income taxes............................................................ 1,595 2,687
Supplemental disclosure of non-cash activities:
Equipment acquired through capital leases............................... $ 1,461 $ 967
The accompanying notes are an integral part of this statement.
Page 5
TRACTOR SUPPLY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. These statements should be read in
conjunction with the Company's annual report on Form 10-K for the fiscal year
ended December 31, 2005. The results of operations for the fiscal three-month
periods are not necessarily indicative of results for the full fiscal year.
The Company's business is highly seasonal. Historically, the Company's sales and
profits have been the highest in the second and fourth fiscal quarters of each
year due to the sale of seasonal products. The Company typically operates at
approximately break even in the first fiscal quarter of each year. Unseasonable
weather, excessive rain, drought, and early or late frosts may also affect the
Company's sales. The Company believes, however, that the impact of adverse
weather conditions is somewhat mitigated by the geographic dispersion of its
stores.
The Company experiences its highest inventory and accounts payable balances
during its first fiscal quarter each year for purchases of seasonal product in
anticipation of the spring selling season and again during its third fiscal
quarter in anticipation of the winter selling season.
NOTE 2 - INVENTORIES:
The value of the Company's inventories was determined using the lower of
last-in, first-out (LIFO) cost or market. Inventories are not in excess of
market value. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the fiscal year,
sales for the year and the rate of inflation/deflation for the year. If the
first-in, first-out (FIFO) method of accounting for inventory had been used,
inventories would have been approximately $14,551,000 and $14,168,000 higher
than reported at April 1, 2006 and December 31, 2005, respectively.
NOTE 3 - SHARE-BASED PAYMENTS:
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R) "Share-Based Payment" ("SFAS 123(R)") using the modified
prospective method and began recognizing compensation expense for its
share-based payments based on the fair value of the awards. Share-based payments
include stock option grants and certain transactions under the Company's stock
plans. SFAS 123(R) requires share-based compensation expense recognized since
January 1, 2006 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 date; b) grant date fair value estimated in
accordance with the provisions of SFAS 123(R) for all share-based payments
granted subsequent to the adoption date; and c) the discount on shares sold to
employees subsequent to the adoption date, which represents the difference
between the grant date fair value and the employee purchase price.
For the three months ended April 1, 2006, the adoption of SFAS 123(R)'s fair
value method resulted in share-based expense (a component of selling and general
and administrative expenses) in the amount of $1.9 million related to the
Company's stock plans that the Company would not have recognized if it had
continued to account for share-based compensation under APB 25. This share-based
compensation lowered pre-tax earnings by $1.9 million, lowered net income by
$1.2 million, and lowered basic and diluted earnings per share by $0.03. SFAS
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required prior to SFAS 123(R). The impact of adopting
SFAS 123(R) on future results will depend on, among other things, levels of
share-based payments granted in the future, actual forfeiture rates and the
timing of option exercises.
Page 6
Prior to January 1, 2006, the Company accounted for share-based payments using
the intrinsic-value-based recognition method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"). As
options were granted at an exercise price equal to the market value of the
underlying common stock on the date of grant, no stock-based employee
compensation cost was reflected in net income prior to adopting SFAS 123(R). As
the Company adopted SFAS 123(R) under the modified-prospective-transition
method, results from prior periods have not been restated.
The following table illustrates the effect on net income and earnings per share
as if the Company applied the fair value recognition provisions of Statement 123
to options granted under the Company's stock plans in all periods presented (in
thousands). For purposes of this pro forma disclosure, the value of the options
is estimated using a modified Black-Scholes option pricing model for all option
grants.
THREE MONTHS
ENDED
MARCH 26, 2005
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income - as reported.................................... $ 684
Pro forma compensation expense, net of related tax effects.. (1,014)
----------
Net loss - pro forma........................................ $ (330)
==========
Net income (loss) per share - basic:
As reported.............................................. $ 0.02
Pro forma................................................ $ (0.01)
Net income (loss) per share - diluted:
As reported.............................................. $ 0.02
Pro forma................................................ $ (0.01)
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. Under SFAS 123 and APB 25, the Company
elected to account for forfeitures at the time of valuation and reduce the
pro-forma expense ratably over the period.
Under the Company's 2000 Stock Incentive Plan, options may be granted to
officers, directors (including non-employee directors) and key employees.
According to the terms of the plan, 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 the outstanding
voting stock of the Company, 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.
Effective May 4, 2006, the Company adopted a 2006 Stock Incentive Plan.
Following the adoption of such plan, no further grants may be made under the
Company's 2000 Stock Incentive Plan. The Company's 2006 Stock Incentive Plan
contains similar provisions relating to stock options granted by the Company as
set forth in the paragraph above.
Under the terms of the 2006 Stock Incentive Plan adopted by the Company
effective as of May 4, 2006, a maximum of 2,750,000 shares are available for a
grant as stock options or other awards (which amount includes shares with
respect to which awards were authorized but not granted under the Company's 2000
Stock Incentive Plan). At April 1, 2006, the Company had shares reserved for
future option grants of 688,766 under the Company's 2000 Stock Incentive Plan.
Page 7
The fair value of each option grant is separately estimated for each vesting
date. The fair value of each option is amortized into compensation expense on a
straight-line basis between the grant date for the award and each vesting date.
The Company has 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. The weighted
average for key assumptions used in determining the fair value of options
granted in the three months ended April 1, 2006 and March 26, 2005 and a summary
of the methodology applied to develop each assumption are as follows:
THREE MONTHS ENDED
------------------
APRIL 1, MARCH 26,
2006 2005
---- ----
Expected price volatility...................... 48.4% 48.1%
Risk-free interest rate........................ 4.6% 3.8%
Weighted average expected lives in years....... 7.2 7.1
Forfeiture rate................................ 16.5% 23.0%
Dividend yield................................. 0.0% 0.0%
EXPECTED PRICE VOLATILITY -- This is a measure of the amount by which a
price has fluctuated or is expected to fluctuate. The Company uses
actual historical changes in the market value of our stock to calculate
expected price volatility because management believes that this is the
best indicator of future volatility. The Company calculates weekly
market value changes from the date of grant over a past period
representative of the expected life of the options to determine
volatility. An increase in the expected volatility will increase
compensation expense.
RISK-FREE INTEREST RATE -- This is the U.S. Treasury rate for the week
of the grant having a term equal to the expected life of the option. An
increase in the risk-free interest rate will increase compensation
expense.
EXPECTED LIVES -- This is the period of time over which the options
granted are expected to remain outstanding and is based on historical
experience. Options granted have a maximum term of ten years. An
increase in the expected life will increase compensation expense.
FORFEITURE RATE -- This is the estimated percentage of options granted
that are expected to be forfeited or cancelled before becoming fully
vested. This estimate is based on historical experience. An increase in
the forfeiture rate will decrease compensation expense.
DIVIDEND YIELD --- The Company has not made any dividend payments nor
does it have plans to pay dividends in the foreseeable future. An
increase in the dividend yield will decrease compensation expense.
Page 8
The Company issues new shares when options are exercised. A summary of stock
option activity since the Company's most recent fiscal year-end is as follows:
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC
EXERCISE CONTRACTUAL VALUE
OPTIONS PRICE TERM (IN THOUSANDS)
------- -------- ----------- --------------
Outstanding December 31, 2005...... 2,773,278 $ 18.30
Granted....................... 427,200 61.77
Exercised..................... (459,974) 10.02
Cancelled..................... (15,933) 38.11
-----------
Outstanding April 1, 2006.......... 2,724,571 $ 26.20 7.1 $ 109,376
===========
Vested or Expected to vest at
April 1, 2006................... 2,543,393 $ 26.20 6.9 $ 105,686
Exercisable at April 1, 2006....... 1,732,573 $ 13.63 6.8 $ 91,332
The aggregate intrinsic values in the table above represents the total
difference between the Company's closing stock price on April 1, 2006 and the
option exercise price, multiplied by the number of in-the-money options as of
April 1, 2006. As of April 1, 2006, total unrecognized compensation expense
related to non-vested stock options is $19,356,000 with a weighted average
expense recognition period of 3.0 years.
Other information relative to option activity during the three months ended
April 1, 2006 and March 26, 2005 is as follows (in thousands):
APRIL 1, MARCH 26,
2006 2005
Weighted average grant date fair value of stock options granted..... $ 34.53 $ 19.99
Total fair value of stock options vested............................ $ 5,211 $ 7,420
Total intrinsic value of stock options exercised.................... $ 23,526 $ 20,812
ASSOCIATE STOCK PURCHASE PLAN -- The Company has adopted an Associate Stock
Purchase Plan (the "ASPP") whereby eligible employees of the Company have the
opportunity to purchase, through payroll deductions, shares of common stock of
the Company at a 15% discount. Pursuant to the terms of the ASPP, the Company
issued 8,969 shares during the first quarter of fiscal 2006. The total cost to
the Company related to the ASPP was approximately $61,000 in the first quarter
of fiscal 2006. At April 1, 2006, 3,375,442 shares of common stock were reserved
for future issuance under the ASPP.
There were no significant modifications to the Company's share-based
compensation plans during the three months ended April 1, 2006 (provided that,
as noted above, the Company adopted its 2006 Stock Incentive Plan in place of
its 2000 Stock Incentive Plan effective as of May 4, 2006).
NOTE 4 - NET INCOME PER SHARE:
The Company presents both basic and diluted earning per share ("EPS") on the
face of the consolidated statements of income. As provided by SFAS 128 "Earnings
per Share", basic EPS is calculated as income available to common stockholders
divided by the weighted average number of shares outstanding during the period.
Diluted EPS is calculated using the weighted average outstanding common shares
and the treasury stock method for options and warrants.
Page 9
Net income per share is calculated as follows (in thousands, except per share
amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
APRIL 1, 2006 MARCH 26, 2005
----------------------------------- -----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
BASIC NET INCOME PER SHARE:
Net income......................... $ 525 39,698 $ 0.01 $ 684 38,583 $ 0.02
Dilutive stock options outstanding. 1,318 2,184
-------- ------- ---------- -------- ------- ----------
DILUTED NET INCOME PER SHARE:
Net income......................... $ 525 41,016 $ 0.01 $ 684 40,767 $ 0.02
======== ======= ========== ======== ====== ==========
Anti-dilutive stock options excluded from the above calculations totaled 59,781
and 57,734 in 2006 and 2005, respectively.
NOTE 5 - CONTINGENCIES:
LITIGATION
The Company is involved in various litigation matters arising in the ordinary
course of business. After consultation with legal counsel, management expects
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. Any estimated loss
related to such matters has been adequately provided in accrued liabilities to
the extent probable and reasonably estimable. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in circumstances relating to these
proceedings.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
GENERAL
The following discussion and analysis describe certain factors affecting Tractor
Supply Company (the "Company"), its results of operations for the fiscal three
month periods ended April 1, 2006 and March 26, 2005 and significant
developments affecting its financial condition since the end of the fiscal year
ended December 31, 2005, and should be read in conjunction with the Company's
Annual Report on Form 10-K, for the fiscal year ended December 31, 2005. 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 the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including their amount and nature),
business strategy, expansion and growth of the Company's business operations and
other such matters are forward-looking statements. To take advantage of the safe
harbor provided by the Act, the Company is identifying certain factors that
could cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company.
The Company's business is highly seasonal. Historically, the Company's sales and
profits have been the highest in the second and fourth fiscal quarters of each
year due to the sale of seasonal products. Unseasonable weather, excessive rain,
drought, and early or late frosts may also affect the Company's sales. The
Company believes, however, that the impact of adverse weather conditions is
somewhat mitigated by the geographic dispersion of its stores.
The Company experiences its highest inventory and accounts payable balances
during its first fiscal quarter each year for purchases of seasonal product in
anticipation of the spring selling season and again during its third fiscal
quarter in anticipation of the winter selling season.
As with any business, all phases of the Company's operations are subject to
influences outside its control. The information in this Quarterly Report on Form
10-Q contains certain forward-looking statements, including statements regarding
estimated results of operations in future periods. These forward-looking
statements are subject to the safe harbor provisions of the Act (and are subject
to the finalization of the Company's financial and accounting procedures), and
may be affected by certain risks and uncertainties, any one, or a combination,
of which could materially affect the results of the Company's operations. These
factors include general economic cycles affecting consumer spending, weather
factors, operating factors affecting customer satisfaction, consumer debt
levels, 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 the
Company's management information systems and the seasonality of the Company's
business. We discuss in greater detail risk factors relating to the Company in
Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2005. Forward-looking statements made by or on behalf of the
Company are based on our knowledge of the Company's business and the environment
in which it operates, but because of the factors listed above, 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 by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business and operations. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Page 11
RESULTS OF OPERATIONS
FISCAL THREE MONTHS (FIRST QUARTER) ENDED APRIL 1, 2006 AND MARCH 26, 2005
Net sales increased 23.4% to $465.5 million for the first quarter of 2006 from
$377.2 million for the first quarter of 2005. The net sales increase resulted
primarily from the addition of new stores and same-store sales improvement of
3.7%. Most product categories experienced same-store sales increases, led by the
agricultural, livestock and pet, and truck, trailer and towing product
categories. During the first quarter of 2006, the Company opened a total of 29
new stores compared to 13 stores in the prior year quarter. The Company also
relocated five stores in the first quarter of 2006 compared to two store
relocations in the first quarter of 2005. The Company operated 624 stores as of
the end of the first quarter of 2006 compared to 528 stores as of the end of the
first quarter of 2005.
The following chart indicates the average percentage of sales represented by
each of the Company's major product categories during the first quarter of
fiscal 2006 and 2005:
THREE MONTHS ENDED
----------------------------
APRIL 1, MARCH 26,
PRODUCT CATEGORY 2006 2005
--------- --------
Livestock and pet............................ 37% 36%
Hardware and tools........................... 19 21
Seasonal products............................ 18 18
Truck, trailer and towing.................... 12 12
Agricultural................................. 6 5
Clothing and footwear........................ 8 8
----- ---
Total..................................... 100% 100%
---- ----
The gross margin rate for the first quarter of 2006 increased 90 basis points to
30.6% of sales from 29.7% of sales in the first quarter of 2005. This increase
was primarily due to improved margins from importing, reduced discounting, a
more favorable product mix, and improved inventory shrinkage. These gains were
partially offset by higher transportation costs.
As a percent of sales, selling, general and administrative ("SG&A") expenses
increased 90 basis points to 28.1% of sales in the first quarter of 2006
compared to 27.2% of sales in the first quarter of 2005. SG&A expenses in 2006
included $1.9 million in additional pre-opening costs related to the Company's
accelerated store opening schedule and lease termination costs on relocated
stores, the recognition of $1.9 million in compensation expense related to the
adoption of Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment", and a $2.2 million shift in marketing activities into the first
quarter of 2006.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R) "Share-Based Payment" ("SFAS 123(R)") using its modified
prospective method and began recognizing compensation expense for its
share-based payments based on the fair value of the awards. Share-based payments
include stock option grants and certain transactions under the Company's other
stock plans. SFAS 123(R) requires share-based compensation expense recognized
since January 1, 2006 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 date; b) grant date fair value estimated
in accordance with the provisions of SFAS 123(R) for all share-based payments
granted subsequent to the adoption date; and c) the discount on shares sold to
employees post-adoption, which represents the difference between the grant date
fair value and the employee purchase price.
For the three months ended April 1, 2006, the adoption of SFAS 123(R)'s fair
value method has resulted in share-based expense (a component of selling and
general and administrative expenses) in the amount of $1.9 million related to
the Company's stock plans, than if it had continued to account for share-based
compensation under APB 25. This share-based compensation lowered pre-tax
earnings by $1.9 million, lowered net income by $1.2 million, and lowered basic
and diluted earnings per share by $0.03. SFAS 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash
Page 12
flow as required prior to SFAS 123(R). The impact of adopting SFAS 123(R) on
future results will depend on, among other things, levels of share-based
payments granted in the future, actual forfeiture rates and the timing of option
exercises.
Depreciation and amortization expense increased to $9.6 million from $7.6
million, as the result of new store growth and capital costs for infrastructure
and technology.
Interest expense increased to $0.9 million for the first quarter of 2006 from
$0.7 million for the first quarter of 2005. This increase primarily resulted
from increased borrowings to support the seasonal build of inventories as well
as higher interest rates from prior year.
The Company's effective tax rate increased to 37.1% in the first quarter of 2006
compared with 36.3% for the first quarter of 2005 primarily due to permanent tax
differences relating to the non-deductibility of stock compensation expense
under the new accounting rules.
As a result of the foregoing factors, net income for the first quarter of 2006
decreased $0.2 million to $0.5 million from $0.7 million in the first quarter of
2005. Net income, as a percent of sales, decreased 10 basis points to 0.1% for
the first quarter of 2006 compared to 0.2% for the first quarter of 2005. Net
income per diluted share decreased to $0.01 for the first quarter of 2006 from
$0.02 for the first quarter of 2005.
LIQUIDITY AND CAPITAL RESOURCES
In addition to normal operating expenses, the Company's primary ongoing cash
requirements are for store expansion, remodeling and relocation programs,
including inventory purchases and capital expenditures. The Company's primary
ongoing sources of liquidity are funds provided from operations, commitments
available under its revolving credit agreement and normal trade credit.
At April 1, 2006, the Company had working capital of $301.9 million, a $61.2
million increase from December 31, 2005. This increase was primarily
attributable to changes in the following components of current assets and
current liabilities (in millions):
APRIL 1, DEC. 31,
2006 2005 VARIANCE
-------- -------- --------
Current assets:
Cash and cash equivalents................... $ 39.6 $ 21.2 $ 18.4
Inventories................................. 590.5 460.8 129.7
Prepaid expenses and other current assets... 37.2 38.4 (1.2)
Other, net.................................. 11.1 11.0 0.1
-------- -------- --------
678.4 531.4 147.0
-------- -------- --------
Current liabilities:
Accounts payable............................ 278.6 185.4 93.2
Accrued expenses............................ 96.6 102.8 (6.2)
Other, net.................................. 1.3 2.5 (1.2)
-------- -------- ---------
376.5 290.7 85.8
-------- -------- --------
Working capital............................... $ 301.9 $ 240.7 $ 61.2
======== ======== ========
The increase in inventories and related increase in accounts payable resulted
primarily from the purchase of additional inventory for new stores and an
increase in average inventory per store due to increased sales expectations and
the seasonal growth in inventory levels. Trade credit arises from the Company's
vendors granting extended payment terms for inventory purchases. Payment terms
generally vary from 30 days to 180 days depending on the inventory product.
Page 13
Operations used net cash of $29.7 million and $0.7 million in the first quarter
of 2006 and 2005, respectively. The $29.0 million increase in net cash used in
2006 over 2005 is primarily due to changes in the following operating activities
(in millions):
THREE MONTHS ENDED
-------------------------
APRIL 1, MARCH 26,
2006 2005 VARIANCE
-------- ----------- --------
Net income.................................... $ 0.5 $ 0.7 $ (0.2)
Tax benefit of stock options exercised........ -- 6.5 (6.5)
Inventories and accounts payable.............. (36.5) 4.0 (40.5)
Prepaid expenses and other current assets..... 6.5 (4.5) 11.0
Accrued expenses.............................. (6.2) (17.7) 11.5
Income taxes currently payable................ (6.7) -- (6.7)
Other, net.................................... 12.7 10.3 2.4
-------- -------- --------
Net cash used in operations................. $ (29.7) $ (0.7) $ (29.0)
======== ======== ========
The increase in net cash used in operations in the first quarter of 2006
compared with the first quarter of 2005 was primarily due to the seasonal growth
in inventory levels, partially offset by the timing of payments. Growth in
inventory levels (due to lower than expected sales on certain seasonal goods)
and an increase in direct imports (which are supported by letters of credit)
resulted in less inventory being financed in the first quarter of 2006 than is
typical for the first fiscal quarter. The decrease in accrued expenses was
primarily due to the timing of the accruals and the related payment of those
accruals in their respective periods.
Investing activities used $19.3 million and $5.9 million in the first quarter of
2006 and 2005, respectively. The majority of this cash requirement relates to
the Company's capital expenditures.
Capital expenditures (including equipment acquired under capital lease) for the
first three months of fiscal 2006 and 2005 were as follows (in millions):
THREE MONTHS ENDED
--------------------------
APRIL 1, MARCH 26,
2006 2005
--------- --------
New/relocated stores and stores not yet opened.............. $ 13.8 $ 4.6
Existing stores............................................. 4.4 1.2
Distribution center capacity and improvements............... 0.7 0.3
Information technology...................................... 1.1 0.8
Corporate and other......................................... 0.1 0.7
-------- --------
$ 20.1 $ 7.6
======== ========
The above table reflects 34 new/relocated stores in the first quarter of 2006,
compared to 15 during the first quarter of 2005.
Financing activities provided $67.4 million and $15.5 million in the first
quarter of 2006 and 2005, respectively, largely due to increased borrowings
resulting from higher inventory levels, additional pre-opening costs (including
capital expenditures) and decreased cash flow from operations, partially offset
by proceeds received from the issuance of common stock received upon exercise of
stock options and purchases under the employee stock purchase plan. The Company
had approximately $74.2 million and $99.9 million available for future
borrowings, net of outstanding letters of credit, under its revolving credit
agreement at April 1, 2006 and March 26, 2005, respectively.
The Company believes that its cash flow from operations, borrowings available
under its revolving credit agreement, and normal trade credit will be sufficient
to fund the Company's operations and its capital expenditure needs, including
store openings and renovations, over the next several years.
Page 14
OFF-BALANCE SHEET ARRANGEMENTS
The Company's off-balance sheet arrangements are limited to operating leases and
outstanding letters of credit. Leasing buildings and equipment for retail stores
and offices rather than acquiring these significant assets allows the Company to
utilize financial capital to operate the business rather than maintain assets.
Letters of credit allow the Company to purchase inventory in a timely manner.
The Company had outstanding letters of credit of $16.1 million at April 1, 2006.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial position and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make informed estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The Company's
significant accounting policies, including areas of critical management
judgments and estimates, have primary impact on the following financial
statement areas:
- Inventory valuation - Self insurance
- Sales returns - Sales tax reserve
- Share-based payments (see Note 3)
The Company's critical accounting policies are subject to judgments and
uncertainties which affect the application of such policies. See Note 1 to the
Notes to the Consolidated Financial Statements of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005 for a discussion of the
Company's critical accounting policies. The Company's financial position and/or
results of operations may be materially different when reported under different
conditions or when using different assumptions in the application of such
policies. In the event estimates or assumptions prove to be different from
actual amounts, adjustments are made in subsequent periods to reflect more
current information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The Company is exposed to changes in interest rates primarily from its revolving
credit agreement (the "Credit Agreement"). The Credit Agreement bears interest
at either the bank's base rate (7.75% and 5.50% at April 1, 2006 and March 26,
2005, respectively) or LIBOR (2.81% and 2.11% at April 1, 2006 and March 26,
2005, respectively) plus an additional amount ranging from 0.75% to 1.50% per
annum, adjusted quarterly, based on Company performance (0.75% at April 1, 2006
and March 26, 2005). The Company is also required to pay, quarterly in arrears,
a commitment fee ranging from 0.20% to 0.35% based on the daily average unused
portion of the Credit Agreement. See Note 4 of Notes to the Consolidated
Financial Statements of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 for further discussion regarding the Credit
Agreement.
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it believes its sales and results of operations have been
affected by inflation. The Company is 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 dramatically,
consumer demand may fall and/or the Company may not be able to pass all such
increases on to its customers and, as a result, sales and/or gross margins could
decline. The Company's strategy is to reduce or mitigate the effects of
inflation principally by taking advantage of vendor incentive programs,
economies of scale from increased volume of purchases, increasing retail prices
and selectively buying from the most competitive vendors without sacrificing
quality. Due to the competitive environment, such conditions have and may
continue to adversely impact the Company's gross margin.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
DISCLOSURE CONTROLS AND PROCEDURES
As of April 1, 2006, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, of the design and
operation of the Company's disclosure controls and procedures. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
effective, as of April 1, 2006, for recording, processing, summarizing and
reporting the information the Company is required to disclose in the reports it
files under the Securities Exchange Act of 1934 within the time periods
specified in the Commission's rules and forms. These controls and procedures
ensure that such information is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
----------------------------------------------------
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's first fiscal quarter that have
materially affected or are reasonably likely to materially affect the Company's
internal control over financial reporting.
Page 15
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
--------------------------
The Company is involved in various litigation matters arising in the ordinary
course of business. After consultation with legal counsel, management expects
these matters will be resolved without material adverse effect on the Company's
consolidated financial position or results of operations. Any estimated loss
related to such matters has been adequately provided in accrued liabilities to
the extent probable and reasonably estimable. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in circumstances relating to these
proceedings.
ITEM 1A. RISK FACTORS
----------------------
None
ITEM 2. UNREGISTERED SALES OF EQUITY SSECURITIES AND USE OF PROCEEDS
---------------------------------------------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
--------------------------
None
ITEM 6. EXHIBITS
-----------------
Exhibits
31.1 Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRACTOR SUPPLY COMPANY
Date: MAY 11, 2006 By: /S/ ANTHONY F. CRUDELE
------------ ---------------------------------------------
Anthony F. Crudele
Senior Vice President - Chief Financial
Officer and Treasurer
(Duly Authorized Officer and Principal
Financial Officer)