PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPT. 25, DECEMBER 27,
2004 2003
-------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 23,488 $ 19,980
Inventories..................................................................... 435,007 324,518
Prepaid expenses and other current assets....................................... 36,771 27,725
Assets held for sale............................................................ 2,877 3,636
Deferred income taxes........................................................... 5,850 7,467
-------------- --------------
Total current assets..................................................... 503,993 383,326
-------------- --------------
Land.............................................................................. 15,757 14,307
Buildings and improvements........................................................ 150,302 124,968
Furniture, fixtures and equipment................................................. 105,409 89,633
Construction in progress.......................................................... 10,917 3,563
-------------- --------------
282,385 232,471
Accumulated depreciation and amortization......................................... (98,129) (83,880)
-------------- --------------
Property and equipment, net..................................................... 184,256 148,591
Other assets...................................................................... 5,945 4,292
-------------- --------------
Total assets............................................................. $ 694,194 $ 536,209
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 199,264 $ 131,564
Accrued employee compensation................................................... 6,221 12,716
Other accrued expenses.......................................................... 78,200 61,208
Current portion of capital lease obligations.................................... 532 339
-------------- --------------
Total current liabilities................................................ 284,217 205,827
-------------- --------------
Revolving credit loan............................................................. 44,153 19,403
Capital lease obligations......................................................... 1,852 1,807
Deferred income taxes............................................................. 2,916 8,879
Other long-term liabilities....................................................... 8,008 4,909
-------------- --------------
Total liabilities........................................................ 341,146 240,825
-------------- --------------
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; 38,268,885
and 37,390,469 shares issued and outstanding in 2004 and 2003, respectively.... 306 299
Additional paid-in capital........................................................ 76,591 62,083
Retained earnings................................................................. 276,151 233,002
-------------- --------------
Total stockholders' equity............................................... 353,048 295,384
-------------- --------------
Total liabilities and stockholders' equity............................... $ 694,194 $ 536,209
============== ==============
The accompanying notes are an integral part of this statement.
Page 3 of 21
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL FOR THE FISCAL
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales ........................................ $ 426,384 $ 361,204 $ 1,282,857 $ 1,084,355
Cost of merchandise sold........................... 306,808 251,971 903,569 758,033
---------- ---------- ----------- -----------
Gross margin.................................. 119,576 109,233 379,288 326,322
Selling, general and administrative expenses....... 100,647 84,075 292,144 243,569
Depreciation and amortization...................... 6,269 5,165 18,186 14,369
---------- ---------- ----------- -----------
Income from operations........................ 12,660 19,993 68,958 68,384
Interest expense, net.............................. 171 805 742 2,756
---------- ---------- ----------- -----------
Income before income taxes and cumulative effect
of change in accounting principle................ 12,489 19,188 68,216 65,628
Income tax expense................................. 4,537 7,059 25,067 24,099
---------- ---------- ----------- -----------
Income before cumulative effect of change in
accounting principle............................. 7,952 12,129 43,149 41,529
Cumulative effect on prior years of retroactive
application of change in accounting principle,
net of income taxes of $1,165 ................... -- -- -- (1,888)
---------- ---------- ----------- -----------
Net income........................................ $ 7,952 $ 12,129 $ 43,149 $ 39,641
========== ========== =========== ===========
Net income per share - basic, before cumulative
effect of change in accounting principle......... $ 0.21 $ 0.33 $ 1.13 $ 1.12
Cumulative effect of accounting change, net of
income taxes..................................... -- -- -- (0.05)
---------- ---------- ----------- -----------
Net income per share - basic....................... $ 0.21 $ 0.33 $ 1.13 $ 1.07
========== ========== =========== ===========
Net income per share - assuming dilution before
cumulative effect of change in accounting
principle........................................ $ 0.19 $ 0.30 $ 1.03 $ 1.03
Cumulative effect of accounting change, net of
income taxes..................................... -- -- -- (0.04)
---------- ---------- ----------- -----------
Net income per share - assuming dilution........... $ 0.19 $ 0.30 $ 1.03 $ 0.99
========== ========== =========== ===========
The accompanying notes are an integral part of this statement.
Page 4 of 21
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL
NINE MONTHS ENDED
-----------------------------
SEPT. 25, SEPT. 27,
2004 2003
----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income............................................................. $ 43,149 $ 39,641
Tax benefit of stock options exercised................................. 8,141 3,757
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle.............. -- 1,888
Depreciation and amortization...................................... 18,186 14,369
Gain on sale of property and equipment............................ (856) (666)
Asset impairment related to closed stores......................... 160 279
Deferred income taxes............................................. (4,346) 490
Change in assets and liabilities:
Inventories.................................................... (110,489) (88,649)
Prepaid expenses and other current assets...................... (9,046) (5,143)
Accounts payable............................................... 67,700 80,748
Accrued expenses............................................... 10,497 (6,084)
Income taxes currently payable................................. -- (1,814)
Other.......................................................... 2,018 1,359
----------- -----------
Net cash provided by operating activities.............................. 25,114 40,175
----------- -----------
Cash flows from investing activities:
Capital expenditures............................................... (55,194) (39,142)
Proceeds from sale of property and equipment....................... 2,784 3,174
----------- -----------
Net cash used in investing activities.................................. (52,410) (35,968)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit agreement........................ 233,524 391,593
Repayments under revolving credit agreement........................ (208,774) (381,926)
Repayment of long-term debt........................................ -- (1,607)
Principal payments under capital lease obligations................. (320) (267)
Net proceeds from issuance of common stock......................... 6,374 5,130
----------- -----------
Net cash provided by financing activities.............................. 30,804 12,923
----------- -----------
Net increase in cash and cash equivalents.............................. 3,508 17,130
Cash and cash equivalents at beginning of period....................... 19,980 13,773
----------- -----------
Cash and cash equivalents at end of period............................. $ 23,488 $ 30,903
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 400 $ 2,484
Income taxes......................................................... 26,443 21,953
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligation for equipment ................................ $ 558 $ --
The accompanying notes are an integral part of this statement.
Page 5 of 21
TRACTOR SUPPLY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
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 27, 2003. The results of operations for the fiscal three-month
and nine-month periods are not necessarily indicative of results for the full
fiscal year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
SEASONALITY AND WEATHER
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 a buildup of inventory and accounts payable during its
first fiscal quarter each year for purchases of seasonal product in anticipation
of the April through June spring selling season and again during its third
fiscal quarter in anticipation of the October through December winter selling
season.
MANAGEMENT ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States inherently
requires estimates and assumptions by management that affect the reported
amounts of assets and liabilities, revenues and expenses and related
disclosures. Actual results could differ from those estimates.
Significant estimates and assumptions by management primarily impact the
following key financial statement areas:
INVENTORY VALUATION
The Company identifies potentially excess and slow-moving inventory by
evaluating turn rates and overall inventory levels. Excess quantities
are identified through the application of benchmark turn targets and
historical sales experience. Further, exposure to inadequate realization
of carrying value is identified through analysis of gross margin
achievement and markdown experience, in combination with all
merchandising initiatives. The estimated reserve is based on
management's current knowledge with respect to inventory levels, sales
trends and historical experience relating to the sale of the excess
and/or slow-moving inventory. Management does not believe the Company's
merchandise inventories are subject to significant risk of obsolescence
in the near-term, and management has the ability to adjust purchasing
practices based on anticipated sales trends and general economic
conditions. However, changes in consumer purchasing patterns could
result in the need for additional reserves.
Page 6 of 21
The Company estimates its expected shrinkage of inventory between
physical inventory counts by assessing the chain-wide average shrinkage
experience rate, applied to the related periods' sales volumes. Such
assessments are updated on a regular basis for the most recent
individual store experiences.
The Company receives funding from its vendors for promotion of the
Company's brand as well as the sale of their products. Vendor funding is
accounted for as a discount on the purchase price of inventories and is
recognized as a reduction of cost of sales as inventory is sold. The
amount of expected funding is estimated based upon initial guaranteed
commitments, as well as anticipated purchase levels with applicable
vendors. The estimated purchase volume and related vendor funding is
based on management's current knowledge with respect to inventory
levels, sales trends and expected customer demand, as well as planned
new store openings. Although management believes it has the ability to
reasonably estimate its purchase volume and related vendor funding, it
is possible that actual results could significantly differ from the
estimated amounts.
SALES RETURNS
The Company generally honors customer refunds within 30 days of the
original purchase, with the supporting receipt. The Company estimates
its reserve for likely customer returns based on the average refund
experience in relation to sales for the related period. Due to the
seasonality of the Company's sales, the refund experience can vary,
depending on the fiscal quarter of measurement.
SELF-INSURANCE
The Company is self-insured for certain losses relating to workers'
compensation, medical and general liability claims. However, the Company
has stop-loss limits and umbrella insurance coverage for certain risk
exposures subject to specified limits. Self-insurance claims filed and
claims incurred but not reported are accrued based upon management's
estimates of the aggregate liability for uninsured claims incurred using
actuarial reports and assumptions followed in the insurance industry and
historical experience. Although management believes it has the ability
to adequately record estimated losses related to claims, it is possible
that actual results could significantly differ from recorded
self-insurance liabilities.
REVENUE RECOGNITION
The Company recognizes revenue when sales transactions occur and customers take
possession of the merchandise. A provision for anticipated merchandise returns
is provided in the period during which the related sales are recorded.
STORE PRE-OPENING COSTS
Non-capital expenditures incurred in connection with start-up activities are
expensed as incurred.
STORE CLOSING COSTS
The Company recognizes store closing costs in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with a maturity of three months
or less when purchased to be cash equivalents. The majority of payments due from
banks for customer credit card transactions process within 24 to 48 hours and
are accordingly classified as cash and cash equivalents.
Page 7 of 21
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term receivables and payables and long-term debt instruments, including
capital leases. The carrying values of cash and cash equivalents, receivables,
and trade payables equal current fair value. The terms of the Company's senior
revolving credit agreement includes a variable interest rate which approximates
the current market rate.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company complies with SFAS Nos. 133, 137, and 138 (collectively "SFAS 133")
pertaining to the accounting for derivatives and hedging activities. SFAS 133
requires the Company to recognize all derivative instruments in the balance
sheet at fair value. The Company's interest rate swap expired in November 2003,
and there are presently no interest rate swap agreements outstanding.
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 $5.2 million higher than reported at
September 25, 2004. At December 27, 2003, LIFO and FIFO inventory values were
the same.
FREIGHT COSTS
The Company incurs various types of transportation and delivery costs in
connection with inventory purchases and distribution. Such costs are included as
a component of the overall cost of merchandise.
WAREHOUSING AND DISTRIBUTION COSTS
Costs incurred at the Company's distribution centers for receiving, warehousing
and preparing product for delivery are expensed as incurred. These costs are
included in selling, general and administrative expenses in the accompanying
statements of income.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets. Improvements
to leased premises are amortized using the straight-line method over the life of
the lease or the useful life of the improvement, whichever is shorter. The
following estimated useful lives are generally applied:
LIFE
Buildings 30 - 35 years
Leasehold improvements 5 - 15 years
Furniture, fixtures and equipment 5 - 10 years
Computer software and hardware 3 - 7 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of the asset may not be recoverable. Impairment is
recognized on assets classified as held and used when the sum of undiscounted
estimated future cash flows expected to result from the use of the asset is less
than the carrying value. Impairment on long-lived assets to be disposed of is
recognized by writing down the related assets to their fair value (less costs to
sell, as appropriate) when the criteria have been met for the asset to be
classified as held for sale or disposal. (Note 3)
Page 8 of 21
ADVERTISING COSTS
Advertising costs consist of expenses incurred in connection with newspaper
circulars, television and radio, as well as direct mail, newspaper
advertisements and other promotions. Expenses incurred are charged to operations
at the time the related advertising first takes place.
INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to be recovered or settled.
STOCK-BASED COMPENSATION PLANS
As permitted by SFAS 123, "Accounting for Stock-Based Compensation," the Company
has elected to account for its stock-based compensation plans under the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees."
Under APB No. 25, compensation expense would be recorded if the current market
price of the underlying stock on the date of grant exceeded the exercise price.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date (derived through use of Black-Scholes
methodology) for awards under the plans consistent with the method prescribed by
SFAS 123, the Company's pro forma net income and net income per share for the
fiscal three and nine months ended September 25, 2004 and September 27, 2003,
would have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income - as reported $ 7,952 $ 12,129 $ 43,149 $ 39,641
Pro forma compensation expense, net
of income taxes (1,135) (1,539) (3,255) (3,038)
----------- ----------- ----------- -----------
Net income - pro forma $ 6,817 $ 10,590 $ 39,894 $ 36,603
=========== =========== =========== ===========
Net income per share - basic:
As reported $ 0.21 $ 0.33 $ 1.13 $ 1.07
Pro forma $ 0.18 $ 0.29 $ 1.05 $ 0.99
Net income per share - diluted:
As reported $ 0.19 $ 0.30 $ 1.03 $ 0.99
Pro forma $ 0.16 $ 0.27 $ 0.96 $ 0.92
NET INCOME PER SHARE
The Company presents both basic and diluted earning per share ("EPS") on the
face of the 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 treasury stock method for options.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE:
Beginning in 2003, the Company adopted the provisions of Emerging Issues Task
Force Issue No. 02-16 ("EITF 02-16"). EITF 02-16 provides guidance for the
accounting and financial statement classifications for consideration
Page 9 of 21
given by a vendor to a retailer in connection with the sale of the vendor's
products or for the promotion of sales of the vendor's products. The EITF
concluded that such consideration received from vendors should be reflected as a
decrease in prices paid for inventory and recognized in cost of sales as the
related inventory is sold, unless specific criteria are met qualifying the
consideration for treatment as reimbursement of specific, identifiable
incremental costs. Prior to adopting this pronouncement, the Company classified
all vendor-provided marketing support funds as a reduction in selling, general
and administrative expenses.
The effect of applying the consensus of EITF 02-16 on prior-period financial
statements resulted in a change to previously reported net income; thus, the
Company has reported the adoption of EITF 02-16 as a cumulative effect
adjustment in accordance with Accounting Principles Board Opinion ("APB") No.
20, "Accounting Changes" and Financial Accounting Standards Board ("FASB")
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements"
and as permitted by EITF 02-16. In the first quarter of 2003, the Company
recognized a net income reduction of $3.1 million ($1.9 million net of income
taxes) that resulted from the cumulative effect on prior years.
NOTE 3 - ASSETS HELD FOR SALE:
Assets held for sale consists of certain buildings and related store properties
that the Company intends to sell. The Company applies the provisions of SFAS
144, "Accounting for the Impairment or Disposal of Long Lived Assets," to assets
held for sale. SFAS 144 requires assets held for sale to be valued on an
asset-by-asset basis at the lower of carrying amount or fair value less costs to
sell. In applying these provisions, recent appraisals, valuations, offers and
bids are considered. The Company recorded an impairment charge of $0.1 million
and $0.2 million in the third quarter of fiscal 2004 and 2003, respectively, to
adjust the carrying value of certain property to fair value, less costs to sell.
Impairment charges of $0.2 million and $0.3 million were required during the
first nine months of fiscal 2004 and 2003, respectively. These charges are
included in selling, general and administrative expenses.
The buildings and properties held for sale are separately presented as assets
held for sale in the accompanying consolidated balance sheets. The assets are
classified as current, as the Company believes they will be sold within the next
twelve months and have met all the criteria for classification as held for sale
pursuant to SFAS 144.
NOTE 4 - CREDIT AGREEMENT:
In August 2002, the Company entered into a replacement unsecured senior
revolving credit agreement (the "Credit Agreement") with Bank of America, N.A.,
as agent for a lender group, expanding the maximum available borrowings from
$125 million to $155 million and extending the maturity to February 2006. The
Credit Agreement bears interest at either the bank's prime rate (4.75% at
September 25, 2004) or the London Inter-Bank Offer Rate (1.84% at September 25,
2004) plus an additional amount ranging from 0.75% to 1.5% per annum, adjusted
quarterly based on the Company's performance (0.75% at September 25, 2004).
On January 28, 2004, the Credit Agreement was amended to extend the maturity
date to February 28, 2007. Additionally, the amendment included changes to
certain financial covenants, primarily to provide flexibility for capital
expenditures.
On September 30, 2004, the Credit Agreement was amended to extend the maturity
date to February 27, 2008. Additionally, the Amendment included changes to
certain financial covenants, primarily to provide flexibility for capital
expenditures.
NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS:
During fiscal 2000, the Company entered into an interest rate swap agreement as
a means of managing its interest rate exposure. This agreement, which matured in
November 2003, had the effect of converting certain of the Company's variable
rate obligations to fixed rate obligations.
The Company complies with SFAS 133 and recognized the fair value of the interest
rate swap in its consolidated balance sheet. The Company regularly adjusted the
carrying value of the interest rate swap to reflect its current fair
Page 10 of 21
value. The related gain or loss on the swap was deferred in stockholders' equity
(as a component of comprehensive income) to the extent that the swap was an
effective hedge. The deferred gain or loss was recognized in income in the
period in which the related interest rate payments being hedged were recognized
as an expense. However, to the extent that the change in value of an interest
rate swap contract did not perfectly offset the change in the interest rate
payments being hedged, the ineffective portion was immediately recognized as an
expense. Net amounts paid or received were reflected as adjustments to interest
expense.
NOTE 6 - COMPREHENSIVE INCOME:
Comprehensive income includes the change in the fair value of the Company's
interest rate swap agreement (which expired in November 2003), which qualified
for hedge accounting. Comprehensive income for each period is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ------------------------
SEPT. 25, SEPT. 27, SEPT. 25, SEPT. 27,
2004 2003 2004 2003
---------- ----------- ----------- -----------
Net income -- as reported $ 7,952 $ 12,129 $ 43,149 $ 39,641
Change in fair value of effective portion of
interest rate swap agreement, net of income
taxes -- 285 -- 849
---------- ----------- ----------- -----------
Comprehensive income $ 7,952 $ 12,414 $ 43,149 $ 40,490
========== =========== =========== ===========
NOTE 7 - NET INCOME PER SHARE:
Basic net income per share is based on the weighted average outstanding common
shares. Diluted net income per share is based on the weighted average
outstanding common shares and reflects basic net income per share reduced by the
dilutive effect of stock options.
Net income per share is calculated as follows (in thousands, except per share
amounts):
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 25, 2004 SEPTEMBER 27, 2003
------------------------------------- ------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BASIC NET INCOME PER SHARE:
Net income $ 7,952 38,259 $ 0.21 $ 12,129 37,262 $ 0.33
DILUTED NET INCOME PER SHARE:
Net income $ 7,952 41,731 $ 0.19 $ 12,129 40,553 $ 0.30
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 25, 2004 SEPTEMBER 27, 2003
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BASIC NET INCOME PER SHARE:
Net income, before cumulative
effect of accounting change $ 43,149 38,100 $ 1.13 $ 41,529 36,986 $ 1.12
Cumulative effect of
accounting change -- 38,100 -- (1,888) 36,986 (0.05)
---------- ------ --------- ------
Net income $ 43,149 38,100 $ 1.13 $ 39,641 36,986 $ 1.07
========== ====== ========= ======
DILUTED NET INCOME PER SHARE:
Net income, before cumulative
effect of accounting change $ 43,149 41,757 $ 1.03 $ 41,529 40,190 $ 1.03
Cumulative effect of
accounting change -- 41,757 -- (1,888) 40,190 (0.04)
---------- ------ --------- ------
Net income $ 43,149 41,757 $ 1.03 $ 39,641 40,190 $ 0.99
========== ====== ========= ======
Page 11 of 21
Weighted average shares outstanding are as follows:
On July 17, 2003, the Company's Board of Directors approved a two-for-one split
of the Company's common stock. As a result, stockholders received one additional
share on August 21, 2003 for each share held as of the record date of August 4,
2003. The par value of the Company's common stock remains $0.008. All share and
per share data included in the fiscal 2003 consolidated financial statements and
notes thereto have been restated to give effect to the stock split.
NOTE 8 - CONTINGENCIES:
LITIGATION
A purported shareholder derivative lawsuit has been filed in the Chancery Court
for Davidson County, Tennessee by the Hawaii Laborers Pension Plan against each
of the Company's directors, certain of its officers and one former director. The
Company is named as a nominal defendant. On August 4, 2004, the Company moved to
dismiss the original complaint for failure to make a pre-suit demand on the
Board of Directors. On September 17, 2004, the plaintiff filed an amended
complaint which alleges breaches of fiduciary duty, acts of bad faith, abuse of
control, mismanagement, waste of corporate assets, unjust enrichment and other
violations of Tennessee law relating to the preparation of the Company's
financial statements. The amended complaint seeks, on behalf of the Company,
unspecified damages, a constructive trust on certain of the defendants' proceeds
from selling Company stock, injunctive relief, restitution, the plaintiff's
costs and disbursements and such other relief as the Court deems proper. The
Audit Committee of the Board of Directors, with the assistance of independent
legal counsel, is conducting an investigation of the claims set forth in the
complaint. On October 8, 2004, the Company moved to dismiss the amended
complaint for failure to make a pre-suit demand on the Board of Directors.
The Company is also involved in various litigation 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 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.
SELF INSURANCE
During the third fiscal quarter of 2004, the Company determined, through
assistance with insurance industry analysts, that one of its former insurance
carriers appears insolvent. The carrier insures the Company for both workers'
compensation and general liability claims for policy years 1999 through 2001.
The Company's exposure to related claims are at risk of not being limited to
previously established stop-loss aggregates. A charge of $0.5 million was
recognized in the current period for the estimated additional cost to the
Company due to the expected loss of stop-loss coverage. This additional
estimated liability was determined using a third party actuary service. There
can be no assurance that the Company will not incur additional claims in excess
of the estimated amounts.
NOTE 9 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE"), an
Interpretation of Accounting Research Bulletin No. 51" ("FIN 46") as amended by
FIN 46-R. The Interpretation provides guidance for determining whether an entity
is a variable interest
Page 12 of 21
entity and evaluation for consolidation based on a company's variable interests.
The Interpretation was effective (1) immediately for VIEs created after January
31, 2003 and (2) in the first interim period ending after March 15, 2004 for
VIEs created prior to February 1, 2003. The adoption of FIN 46-R had no impact
on the Company's financial position or results of operations.
NOTE 10 - MOVE OF CORPORATE FACILITY:
In July 2004, the Company relocated its existing headquarters to consolidate
multiple headquarter facilities within one facility. The Company recognized
incremental after-tax costs of approximately $2.0 million primarily related to
remaining facility and technology lease obligations and other moving costs.
NOTE 11 - RECOGNITION OF ADDITIONAL FREIGHT COSTS:
During the third quarter of fiscal 2004, the Company identified certain
unrecorded freight costs totaling approximately $2.5 million which relate to
prior periods. Due to the immaterial impact of this cost on the Company's
financial position and results of operations, this cost has been recognized in
the current period as additional cost of merchandise sold.
Page 13 of 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis describe certain factors affecting Tractor
Supply Company (the "Company"), its results of operations for the fiscal
three-month and nine-month periods ended September 25, 2004 and September 27,
2003 and significant developments affecting its financial condition since the
end of the fiscal year, December 27, 2003, and should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended December
27, 2003. 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.
All phases of the Company's operations are subject to influences outside its
control. Any one, or a combination, of these factors could materially affect the
results of the Company's operations. These factors include general economic
cycles affecting consumer spending, weather factors, operating factors affecting
customer satisfaction, consumer debt levels, pricing and other competitive
factors, inflation in commodity costs, the ability to attract, train and retain
highly qualified employees, the ability to identify suitable locations and
negotiate favorable lease agreements on new and relocated stores, the timing and
acceptance of new products in the stores, the mix of goods sold, the continued
availability of favorable credit sources, capital market conditions in general,
and the seasonality of the Company's business. Consequently, the forward-looking
statements made herein are qualified by these cautionary statements, and there
can be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will have
the expected consequences to or effects on the Company or its business and
operations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
SEASONALITY AND WEATHER
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 a buildup of inventory and accounts payable during its
first fiscal quarter each year for purchases of seasonal product in anticipation
of the April through June spring selling season and again during its third
fiscal quarter in anticipation of the October through December winter selling
season.
RESULTS OF OPERATIONS
THE FISCAL THREE MONTHS (THIRD QUARTER) AND NINE MONTHS ENDED SEPTEMBER 25, 2004
AND SEPTEMBER 27, 2003
Net sales increased 18.0% to $426.4 million for the third quarter of fiscal 2004
from $361.2 million for the third quarter of fiscal 2003. Net sales rose 18.3%
to $1,282.9 million for the first nine months of fiscal 2004 from $1,084.4
million for the first nine months of fiscal 2003. The net sales increase
resulted primarily from same-store sales increases of 10.1% for the third
quarter of fiscal 2004 and 10.7% for the first nine months of fiscal 2004, as
well as from sales of stores open for less than one year. Same-store sales
increases for the fiscal nine months were generally experienced across all
product lines, with equine, animal and pet products representing the strongest
Page 14 of 21
category. The Company's average ticket increased 4.0% to $39.19 for the third
quarter of fiscal 2004 and 4.9% to $39.70 for the first nine months of fiscal
2004. Increased average transaction counts also contributed to the positive
same-store sales experience. Same-store sales increases include approximately
3.4% for the third quarter of fiscal 2004 and approximately 2.4% for the first
nine months of fiscal 2004 resulting from increased selling prices of
merchandise impacted by rising steel and other commodity costs. Stores impacted
by recent hurricanes averaged a 36% sales increase, while northern tier stores,
where temperatures were warmer than expected, averaged a 4% increase.
The following charts indicate the average percentages of sales represented by
each of the Company's major product categories during the first nine months and
third quarter of fiscal 2004 and 2003:
The Company opened a total of 13 new stores in the third quarter of fiscal 2004
and 38 new stores during the first nine months of fiscal 2004. This compares to
four new store openings in the third quarter of fiscal 2003 and 29 new stores in
the first nine months of fiscal 2003. The Company also relocated four stores in
the third quarter of fiscal 2004 and 13 stores in the first nine months of
fiscal 2004, compared to seven store relocations in the third quarter of fiscal
2003 and 12 store relocations in the first nine months of fiscal 2003. The
Company operated 500 stores in 32 states at September 25, 2004 compared to 462
stores in 30 states at September 27, 2003.
The gross margin rate for the third quarter and first nine months of fiscal 2004
was 28.0% and 29.6%, respectively. This represents a decrease of 220 and 50
basis points, respectively, over the comparable prior year periods.
Gross margin was negatively impacted by several factors, including: (i) a sales
mix shift towards lower margin hurricane-related products and promotional items
and lower than expected sales of higher margin fall/winter products in the third
quarter, (ii) the impact of higher steel and other commodity costs (the impact
of which was not fully passed through to consumers in higher retail prices),
(iii) higher than anticipated freight costs, and (iv) an adverse swing in the
LIFO inventory reserve due to higher product costs. As described in Note 11 to
the consolidated financial statements, the Company identified certain unrecorded
freight costs of approximately $2.5 million which relate to prior periods. This
cost has been recognized in the current period as an increase in cost of
merchandise sold.
As a percent of net sales, selling, general and administrative ("SG&A") expenses
were 23.6% and 22.8% of net sales for the third quarter and first nine months of
fiscal 2004, respectively. The increase over comparable prior year periods (30
basis points for both periods) is primarily a result of increased spending on
long-term growth initiatives including distribution capacity, supply chain
technology and development of personnel as well as a pre-tax charge of
approximately $2.9 million in the third quarter of fiscal 2004 related to the
consolidation and relocation of the Company's existing headquarters.
Additionally, in the third quarter of fiscal 2004, the Company incurred an
aggregate of $3.4 million in incremental store payroll and travel expenses
related to significant reset activity, a charge due to the pending bankruptcy of
an insurance carrier, uninsured hurricane losses, and increased legal expenses.
These increases were partially offset by a $3.0 million reduction in management
incentives compared to the third quarter of fiscal 2003.
Depreciation and amortization expense in the third quarter and first nine months
of fiscal 2004 increased 21.4% and 26.6% over the third quarter and the first
nine months of fiscal 2003, respectively. These increases are due primarily
Page 15 of 21
to costs associated with new and relocated stores, the purchase of the
Pendleton, Indiana and Waco, Texas distribution centers and increased technology
investments.
Net interest expense in the third quarter and first nine months of fiscal 2004
decreased $0.6 million and $2.0 million over the third quarter and the first
nine months of fiscal 2003, respectively. These decreases reflect stronger cash
flow, which permitted reduced short-term borrowings under the Credit Agreement
to fund new store expansion and increased distribution capacity. In addition,
the expiration of fixed rate agreements under the Credit Agreement and term note
in November 2003 resulted in less interest cost being incurred in fiscal 2004.
For the third quarter of fiscal 2004, the Company's effective income tax rate
decreased 50 basis points to 36.3%, whereas for the first nine months of fiscal
2004 the rate remained at 36.7%, primarily due to changes in the Company's
effective state tax rate resulting from the geographic dispersion of business.
As a result of the foregoing factors, net income for the third quarter of fiscal
2004 was $8.0 million, or $0.19 per diluted share, compared with $12.1 million,
or $0.30 per diluted share for the prior year quarter. Net income for the first
nine months of fiscal 2004 was $43.1 million, or $1.03 per diluted share,
compared to net income of $39.6 million, or $0.99 per diluted share for the
prior year period. The results for the first nine months of fiscal 2003 included
an after-tax charge of $1.9 million, or $0.04 per diluted share, related to the
adoption of new accounting guidance for allowances that requires retailers to
recognize, as a reduction of product cost, any consideration given by a vendor
to a retailer in connection with the purchase of the vendor's products or the
promotion of sales of the vendor's products by the retailer. See Note 2 of Notes
to Unaudited Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In addition to normal operating expenses, the Company's primary ongoing cash
requirements are for expansion, remodeling and relocation programs, including
inventory purchases and capital expenditures. The Company's primary ongoing
sources of liquidity are funds provided from operations, commitments available
under its revolving Credit Agreement and normal trade credit. The Company's
inventory and accounts payable levels typically build in the first and third
fiscal quarters in anticipation of the spring and winter selling seasons,
respectively.
At September 25, 2004, the Company had working capital of $219.8 million, a
$42.3 million increase from December 27, 2003. This increase is primarily
attributable to the changes in the following components of current assets and
current liabilities (in millions):
SEPT. 25, DEC. 27,
2004 2003 VARIANCE
--------- ---------- ----------
Current assets:
Cash and cash equivalents $ 23.5 $ 20.0 $ 3.5
Inventories 435.0 324.5 110.5
Prepaid expenses and other current assets 36.8 27.7 9.1
Other, net 8.7 11.1 (2.4)
-------- --------- ---------
504.0 383.3 120.7
-------- --------- ---------
Current liabilities:
Accounts payable 199.3 131.6 67.7
Accrued expenses 84.4 73.9 10.5
Other, net 0.5 0.3 0.2
-------- --------- ---------
284.2 205.8 78.4
-------- --------- ---------
Working capital $ 219.8 $ 177.5 $ 42.3
======== ========= =========
The increases in cash and cash equivalents and prepaid expenses are generally
due to the increase in the number of stores in operation and resulting increases
in sales, growth in operations, and timing of payments.
The increase in inventories and related increase in trade credit resulted
primarily from the addition of new stores and increased sales expectations as
well as cost increases in certain commodities. The $42.8 million increase in
Page 16 of 21
inventory over the related increase in accounts payable is due to the expected
seasonal build of inventories. Payment terms vary from 30 to 180 days depending
on the inventory product.
The increase in accrued expenses is primarily due to additional freight costs
and timing of payments, offset by a decrease in incentive compensation
(resulting from lower 2004 incentives and payment of 2003 annual incentives
during the first quarter of 2004).
Operations provided net cash of $25.1 million and $40.2 million in the first
nine months of fiscal 2004 and fiscal 2003, respectively. This $15.1 million
decrease in net cash provided is primarily due to changes in the following
operating activities (in millions):
NINE MONTHS ENDED
-------------------------------
SEPT. 25, 2004 SEPT. 27, 2003 VARIANCE
-------------- -------------- --------------
Net income $ 43.1 $ 39.6 $ 3.5
Tax benefit of stock options exercised 8.1 3.8 4.3
Cumulative effect of a change in accounting principle -- 1.9 (1.9)
Depreciation and amortization 18.2 14.4 3.8
Deferred income taxes (4.3) 0.5 (4.8)
Income taxes currently payable -- (1.8) 1.8
Inventories and accounts payable (42.8) (7.9) (34.9)
Accrued expenses 10.5 (6.1) 16.6
Other, net (7.7) (4.2) (3.5)
------------ ------------ ------------
Net cash provided by operations $ 25.1 $ 40.2 $ (15.1)
============ ============ ============
The decrease in net cash provided by operations in the first nine months of
fiscal 2004 compared with fiscal 2003 is primarily due to the increase in
inventory in excess of accounts payable as discussed above. The increase is more
prevalent in the current year due to the increase in the number of stores,
higher inventory costs resulting from rising steel and other commodities and a
greater investment in inventory on a Company-wide basis for sales-driving
initiatives planned for the fourth quarter. The increase in depreciation and
amortization is primarily due to capital expenditures associated with new and
relocated stores, the purchase of the Pendleton, Indiana (January 2004) and
Waco, Texas (October 2003) distribution centers and increased technology
investments. The decrease in cash used for accrued expenses is due to the timing
of payments and increased freight costs as described above.
Investing activities used $52.4 million and $36.0 million in the first nine
months of fiscal 2004 and fiscal 2003, respectively. The majority of this cash
requirement relates to the Company's capital expenditures as described above.
Financing activities provided $30.8 million and $12.9 million in the first nine
months of fiscal 2004 and fiscal 2003, respectively, largely due to greater
borrowing requirements resulting from cash flow from operations, partially
reduced by proceeds received from the exercise of stock options.
The Company plans to spend approximately $46.7 million to purchase fixed assets
during the balance of fiscal 2004. Significant future purchases include an
expansion of the Pendleton, Indiana distribution center, construction and
purchase of a new distribution center in Hagerstown, Maryland, additional new
and relocated stores and ongoing technology enhancements.
The Company believes that its cash flow from operations, borrowings available
under the 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 few years.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's off-balance sheet arrangements are confined 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
Page 17 of 21
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 $19.5 million at September 25,
2004.
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:
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 Unaudited Consolidated Financial Statements 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.
CONTINGENCIES
A purported shareholder derivative lawsuit has been filed in the Chancery Court
for Davidson County, Tennessee by the Hawaii Laborers Pension Plan against each
of the Company's directors, certain of its officers and one former director. The
Company is named as a nominal defendant. On August 4, 2004, the Company moved to
dismiss the original complaint for failure to make a pre-suit demand on the
Board of Directors. On September 17, 2004, the plaintiff filed an amended
complaint which alleges breaches of fiduciary duty, acts of bad faith, abuse of
control, mismanagement, waste of corporate assets, unjust enrichment and other
violations of Tennessee law relating to the preparation of the Company's
financial statements. The amended complaint seeks, on behalf of the Company,
unspecified damages, a constructive trust on certain of the defendants' proceeds
from selling Company stock, injunctive relief, restitution, the plaintiff's
costs and disbursements and such other relief as the Court deems proper. The
Audit Committee of the Board of Directors, with the assistance of independent
legal counsel, is conducting an investigation of the claims set forth in the
complaint. On October 8, 2004, the Company moved to dismiss the amended
complaint for failure to make a pre-suit demand on the Board of Directors.
During the third fiscal quarter of 2004, the Company determined, through
assistance with insurance industry analysts, that one of its former insurance
carriers appears insolvent. The carrier insures the Company for both workers'
compensation and general liability claims for policy years 1999 through 2001.
The Company's exposure to related claims are at risk of not being limited to
previously established stop-loss aggregates. A charge of $0.5 million was
recognized in the current period for the estimated additional cost to the
Company due to the expected loss of stop-loss coverage. This additional
estimated liability was determined using a third party actuary service. There
can be no assurance that the Company will not incur additional claims in excess
of the estimated amounts.
CHANGE IN ACCOUNTING PRINCIPLE
Emerging Issue Task Force Issue 02-16 ("EITF 02-16"), "Accounting by a Customer
(including a Reseller) for Certain Consideration Received from a Vendor"
provides guidance for the accounting treatment and income statement
classification for consideration given by a vendor to a retailer in connection
with the sale of the vendor's products or for the promotion of sales of the
vendor's products. The EITF concluded that such consideration
Page 18 of 21
received from vendors should be reflected as a decrease in prices paid for
inventory and recognized in cost of sales as the related inventory is sold,
unless specific criteria are met qualifying the consideration for treatment as
reimbursement of specific, identifiable incremental costs. Prior to adopting
this pronouncement, the Company classified all vendor-provided marketing support
funds as a reduction in selling, general and administrative expenses.
The effect of applying EITF 02-16 on prior-period financial statements results
in a change to previously reported net income; thus, the Company has reported
the adoption of EITF 02-16 as a cumulative effect adjustment in accordance with
APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and as permitted by EITF
02-16. Accordingly, in the first quarter of fiscal 2003, the Company recorded a
cumulative effect of accounting change of $3.1 million ($1.9 million net of
income taxes) for the impact of this adoption on prior fiscal years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company entered into an interest rate swap agreement as a means of managing
its interest rate exposure. This agreement, which matured in November 2003, had
the effect of converting certain of the Company's variable rate obligations to
fixed rate obligations. Net amounts paid or received are reflected as an
adjustment to interest expense.
The Company complies with SFAS Nos. 133, 137, and 138 (collectively "SFAS 133")
pertaining to the accounting for derivatives and hedging activities. SFAS 133
requires the Company to recognize all derivative instruments in the balance
sheet at fair value. The Company currently has no derivatives or hedging
activities.
The Company is exposed to changes in interest rates primarily from its Credit
Agreement. The Credit Agreement bears interest at either the bank's base rate
(4.75% and 4.00% at September 25, 2004 and September 27, 2003, respectively) or
LIBOR (1.84% and 1.12% at September 25, 2004 and September 27, 2003,
respectively) plus an additional amount ranging from 0.75% to 1.50% per annum,
adjusted quarterly, based on Company performance (0.75% at September 25, 2004
and September 27, 2003). 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 Unaudited
Consolidated Financial Statements for further discussion regarding the Credit
Agreement.)
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it believes its sales and results of operations have been
somewhat affected by inflation. The Company is subject to market risk with
respect to the pricing of certain products and services, which include, among
other items, petroleum, steel, corn, soybean and other commodities as well as
transportation services. If prices of these materials and services continue to
increase in a significant manner, consumer demand may fall and /or the Company
may not be able to pass such increases on to its customers and, as a result,
sales and/or gross margins could decline. The Company has been successful in
reducing or mitigating the effects of inflation, principally through selective
buying from the most competitive vendors and by increasing retail prices. Due to
the competitive environment, such conditions have and may continue to adversely
impact the Company's gross margins.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
At September 25, 2004, 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 for gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, as of September 25, 2004, and 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.
Page 19 of 21
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal control over financial reporting
during the third quarter of 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A purported shareholder derivative lawsuit has been filed in the Chancery Court
for Davidson County, Tennessee by the Hawaii Laborers Pension Plan against each
of the Company's directors, certain of its officers and one former director. The
Company is named as a nominal defendant. On August 4, 2004, the Company moved to
dismiss the original complaint for failure to make a pre-suit demand on the
Board of Directors. On September 17, 2004, the plaintiff filed an amended
complaint which alleges breaches of fiduciary duty, acts of bad faith, abuse of
control, mismanagement, waste of corporate assets, unjust enrichment and other
violations of Tennessee law relating to the preparation of the Company's
financial statements. The amended complaint seeks, on behalf of the Company,
unspecified damages, a constructive trust on certain of the defendants' proceeds
from selling Company stock, injunctive relief, restitution, the plaintiff's
costs and disbursements and such other relief as the Court deems proper. The
Audit Committee of the Board of Directors, with the assistance of independent
legal counsel, is conducting an investigation of the claims set forth in the
complaint. On October 8, 2004, the Company moved to dismiss the amended
complaint for failure to make a pre-suit demand on the Board of Directors.
ITEM 5. OTHER INFORMATION
On September 30, 2004, the Company entered into an amendment of its Credit
Agreement. The amendment provided an extension of the maturity to February 2008
and changed certain financial covenants to (a) add an aggregate of $3.0 million
of one-time relocation costs back to consolidated earnings and (b) increase the
permitted annual capital expenditures to a maximum of $110 million. A copy of
the amendment is included as Exhibit 10.1 to this report.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Second Amendment to Revolving Credit Agreement, dated as
of September 30, 2004 by and among Tractor Supply
Company, the banks party thereto, and Bank of America.
N.A., as Administrative Agent.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Page 20 of 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRACTOR SUPPLY COMPANY
Date: NOVEMBER 4, 2004 By: /S/ CALVIN B. MASSMANN
------------------------- ----------------------------------------
Calvin B. Massmann
Senior Vice President - Chief Financial
Officer and Treasurer
(Duly Authorized Officer and Principal
Financial Officer)
Page 21 of 21
Exhibit 10.56
September 30, 2004
Tractor Supply Company
200 Powell Place
Brentwood, TN 37027
Attn: Calvin B. Massmann, CFO
Re: Credit Agreement dated as of August 15, 2002 (as amended from
time to time, the "CREDIT AGREEMENT") among Tractor Supply
Company (the "BORROWER"), certain Subsidiaries of the Borrower
from time to time party thereto (the "GUARANTORS"), the Lenders
identified therein and Bank of America, N.A., as Administrative
Agent. Capitalized terms used but not otherwise defined shall
have the meanings provided in the Credit Agreement.
Dear Mr. Massmann:
Reference is made to the Credit Agreement described above, the defined terms of
which are incorporated herein by reference.
The parties hereto agree that the definition of "Consolidated EBITDA" in Section
1.1 of the Credit Agreement is amended to read as follows:
"CONSOLIDATED EBITDA" MEANS, FOR ANY PERIOD, THE SUM OF (A)
CONSOLIDATED NET INCOME FOR SUCH PERIOD, PLUS (B) AN AMOUNT WHICH, IN
THE DETERMINATION OF CONSOLIDATED NET INCOME FOR SUCH PERIOD, HAS BEEN
DEDUCTED FOR (I) CONSOLIDATED INTEREST EXPENSE, (II) TOTAL FEDERAL,
STATE, LOCAL AND FOREIGN INCOME, VALUE ADDED AND SIMILAR TAXES, (III)
DEPRECIATION AND AMORTIZATION EXPENSE AND (IV) ONE-TIME RELOCATION COSTS
INCURRED DURING FISCAL YEAR 2004 IN AN AGGREGATE AMOUNT NOT EXCEEDING
$3,000,000, ALL AS DETERMINED IN ACCORDANCE WITH GAAP.
The parties hereto agree that Section 8.15 of the Credit Agreement is amended to
read as follows:
8.15 CONSOLIDATED CAPITAL EXPENDITURES.
THE CREDIT PARTIES WILL NOT PERMIT CONSOLIDATED CAPITAL
EXPENDITURES TO EXCEED $110,000,000 FOR ANY FISCAL YEAR.
Pursuant to Section 2.4(b) of the Credit Agreement, the Borrower has requested
that the Lenders extend the Maturity Date to February 27, 2008. Notwithstanding
the notice periods in Section 2.4(b) of the Credit Agreement, the Lenders party
hereto agree that the Maturity Date shall be extended to February 27, 2008.
All references in the Credit Agreement and the other Credit Documents to the
"Credit Agreement" shall be deemed to refer to the Credit Agreement as amended
hereby.
Except as modified hereby, all of the terms and provisions of the Credit
Agreement and the other Credit Documents shall remain in full force and effect.
Sincerely,
BANK OF AMERICA, N.A., as Administrative Agent
By: /s/ Michael Brashier
-------------------------------------------
Name: Michael Brashier
-------------------------------------------
Title: Vice President
-------------------------------------------
ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN:
BORROWER:
TRACTOR SUPPLY COMPANY
A Delaware corporation
By: /s/ Calvin B. Massmann
-------------------------------------------
Name: Calvin B. Massmann
-------------------------------------------
Title: Senior Vice President / Chief Financial
Officer
-------------------------------------------
TRACTOR SUPPLY CO. OF MICHIGAN, LLC
A Michigan limited liability company
By: /s/ Calvin B. Massmann
-------------------------------------------
Name: Calvin B. Massmann
-------------------------------------------
Title: Treasurer
-------------------------------------------
TRACTOR SUPPLY CO. OF TEXAS, LP
A Texas limited partnership
By: /s/ Calvin B. Massmann
-------------------------------------------
Name: Calvin B. Massmann
-------------------------------------------
Title: Treasurer
-------------------------------------------
ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN:
By: /s/ Russell S. Rogers
-------------------------------------------
Name: Russell S. Rogers
-------------------------------------------
Title: Vice President
-------------------------------------------
SOUTHTRUST BANK
By: /s/ Michael Johnson
-------------------------------------------
Name: Michael Johnson
-------------------------------------------
Title: Vice President
-------------------------------------------
AMSOUTH BANK
By: /s/ Tom Dozier, Jr.
-------------------------------------------
Name: Tom Dozier, Jr.
-------------------------------------------
Title: Vice President
-------------------------------------------
SUNTRUST BANK
By: /s/ Carlos M. Murgas
-------------------------------------------
Name: Carlos M. Murgas
-------------------------------------------
Title: Vice President
-------------------------------------------
COMPASS BANK
By: /s/ Keely W. McGee
-------------------------------------------
Name: Keely W. McGee
-------------------------------------------
Title: Vice President
-------------------------------------------
FIFTH THIRD BANK, N.A. (Tennessee)
By: /s/ David J. Hicks
-------------------------------------------
Name: David J. Hicks
-------------------------------------------
Title: Vice President
-------------------------------------------
BRANCH BANKING & TRUST COMPANY
By: /s/ Natalie B. Nelson
-------------------------------------------
Name: Natalie B. Nelson
-------------------------------------------
Title: Business Services Officer
-------------------------------------------
NATIONAL CITY BANK
By: /s/ Michael J. Durbin
-------------------------------------------
Name: Michael J. Durbin
-------------------------------------------
Title: Senior Vice President
-------------------------------------------
REGIONS BANK
By: /s/ Jay Ingram
-------------------------------------------
Name: Jay Ingram
-------------------------------------------
Title: Assistant Vice President
-------------------------------------------
Exhibit 31.1
CERTIFICATION
I, James F. Wright, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tractor Supply
Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e), for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 4, 2004 /s/ James F. Wright
--------------------------- -------------------------------------
James F. Wright
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Calvin B. Massmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tractor Supply
Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e), for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 4, 2004 /s/ Calvin B. Massmann
--------------------------- -------------------------------------
Calvin B. Massmann
Senior Vice President -
Chief Financial Officer and Treasurer
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)
We, James F. Wright, Chief Executive Officer, and Calvin B. Massmann, Chief
Financial Officer, of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of our
knowledge:
(1) The Quarterly Report on Form 10-Q of the Company for the quarter ended
September 25, 2004 (the "Report") fully complies with the requirements
of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m);
and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
Dated: November 4, 2004
/s/ James F. Wright
-----------------------------------------------------
James F. Wright
President and Chief Executive Officer
/s/ Calvin B. Massmann
-----------------------------------------------------
Calvin B. Massmann
Senior Vice President - Chief Financial Officer and Treasurer
Next Section
Previous Section