Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2008
OR
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o |
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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)
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Delaware
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13-3139732 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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200 Powell Place, Brentwood, Tennessee
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37027 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants Telephone Number, Including Area Code: (615) 440-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
(check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date.
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Class
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Outstanding at April 26, 2008 |
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Common Stock, $.008 par value
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37,353,168 |
TRACTOR SUPPLY COMPANY
INDEX
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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March 29, |
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December 29, |
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March 31, |
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2008 |
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2007 |
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2007 |
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(Unaudited) |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
17,383 |
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$ |
13,700 |
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$ |
20,440 |
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Inventories |
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747,531 |
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635,988 |
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722,928 |
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Prepaid expenses and other current assets |
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43,065 |
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41,959 |
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32,458 |
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Deferred income taxes |
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277 |
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10,952 |
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Total current assets |
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807,979 |
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691,924 |
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786,778 |
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Property and equipment, net of accumulated depreciation |
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345,124 |
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332,928 |
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305,975 |
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Goodwill |
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10,258 |
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10,258 |
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10,258 |
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Deferred income taxes |
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18,041 |
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16,692 |
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10,281 |
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Other assets |
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6,669 |
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6,169 |
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7,309 |
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Total assets |
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$ |
1,188,071 |
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$ |
1,057,971 |
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$ |
1,120,601 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
360,785 |
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$ |
258,346 |
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$ |
320,934 |
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Other accrued expenses |
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98,268 |
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115,601 |
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110,551 |
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Current portion of capital lease obligations |
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724 |
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847 |
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975 |
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Income taxes currently payable |
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5,062 |
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1,934 |
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Deferred tax liabilities |
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1,133 |
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Total current liabilities |
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460,910 |
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379,856 |
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434,394 |
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Revolving credit loan |
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102,500 |
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55,000 |
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53,418 |
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Capital lease obligations, less current maturities |
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2,221 |
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2,351 |
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2,602 |
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Straight line rent liability |
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32,651 |
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30,886 |
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25,870 |
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Other long-term liabilities |
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24,166 |
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24,541 |
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18,991 |
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Total liabilities |
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622,448 |
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492,634 |
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535,275 |
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Stockholders equity: |
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Preferred stock, 40,000 shares authorized, $1.00 par value;
no shares issued |
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Common stock, 100,000,000 shares authorized; $.008 par
value; 40,762,242 shares issued and 37,469,030 shares
outstanding at March 29, 2008, 40,700,209 shares issued and
37,484,022 shares outstanding at December 29, 2007 and
40,343,447 shares issued and 39,929,955 shares outstanding
at March 31, 2007 |
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326 |
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326 |
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323 |
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Additional paid-in capital |
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155,606 |
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151,317 |
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133,860 |
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Treasury stock, at cost, 3,293,212 shares at March 29, 2008,
3,216,187 shares at December 29, 2007 and 413,492 shares
at March 31, 2007 |
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(152,900 |
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(150,049 |
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(21,332 |
) |
Other comprehensive loss |
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(26 |
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Retained earnings |
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562,591 |
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563,743 |
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472,501 |
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Total stockholders equity |
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565,623 |
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565,337 |
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585,326 |
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Total liabilities and stockholders equity |
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$ |
1,188,071 |
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$ |
1,057,971 |
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$ |
1,120,601 |
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The accompanying notes are an integral part of this statement.
Page 3
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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For the fiscal three months ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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(Unaudited) |
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Net sales |
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$ |
576,208 |
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$ |
559,832 |
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Cost of merchandise sold |
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399,304 |
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391,652 |
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Gross margin |
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176,904 |
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168,180 |
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Selling, general and administrative expenses |
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163,185 |
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147,187 |
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Depreciation and amortization |
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14,372 |
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12,013 |
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Operating income (loss) |
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(653 |
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8,980 |
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Interest expense, net |
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1,223 |
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925 |
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Income (loss) before income taxes |
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(1,876 |
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8,055 |
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Income tax expense (benefit) |
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(724 |
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3,056 |
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Net income (loss) |
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$ |
(1,152 |
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$ |
4,999 |
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Net income (loss) per share basic |
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$ |
(0.03 |
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$ |
0.12 |
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Net income (loss) per share diluted |
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$ |
(0.03 |
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$ |
0.12 |
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The accompanying notes are an integral part of this statement.
Page 4
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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For the fiscal three months ended |
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March 29, |
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March 31, |
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2008 |
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2007 |
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(Unaudited) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(1,152 |
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$ |
4,999 |
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Adjustments to reconcile net income (loss) to net
cash used in operating activities: |
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Depreciation and amortization |
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14,372 |
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12,013 |
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Loss on sale of property and equipment |
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55 |
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289 |
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Stock compensation expense |
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3,151 |
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2,663 |
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Deferred income taxes |
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61 |
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(1,406 |
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Change in assets and liabilities: |
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Inventories |
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(111,543 |
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(128,077 |
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Prepaid expenses and other current assets |
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(180 |
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4,453 |
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Accounts payable |
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102,439 |
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91,763 |
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Other accrued expenses |
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(17,333 |
) |
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(808 |
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Income taxes currently payable |
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(5,994 |
) |
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(9,616 |
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Other |
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856 |
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476 |
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Net cash used in operating activities |
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(15,268 |
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(23,251 |
) |
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Cash flows from investing activities: |
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Capital expenditures |
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(26,492 |
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(16,411 |
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Proceeds from sale of property and equipment |
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12 |
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87 |
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Net cash used in investing activities |
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(26,480 |
) |
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(16,324 |
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Cash flows from financing activities: |
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Borrowings under revolving credit agreement |
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203,051 |
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236,664 |
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Repayments under revolving credit agreement |
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(155,551 |
) |
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(183,246 |
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Tax benefit on stock option exercises |
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121 |
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462 |
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Principal payments under capital lease obligations |
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(253 |
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(296 |
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Repurchase of common stock |
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(2,851 |
) |
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(21,332 |
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Net proceeds from issuance of common stock |
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914 |
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1,370 |
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Net cash provided by financing activities |
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45,431 |
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33,622 |
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Net increase (decrease) in cash and cash equivalents |
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3,683 |
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(5,953 |
) |
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Cash and cash equivalents at beginning of period |
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13,700 |
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26,393 |
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Cash and cash equivalents at end of period |
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$ |
17,383 |
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$ |
20,440 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
1,405 |
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$ |
585 |
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Income taxes |
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5,182 |
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12,658 |
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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 our Annual Report on Form 10-K for the fiscal year
ended December 29, 2007. The results of operations for the fiscal three-month periods are not
necessarily indicative of results for the full fiscal year.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the
second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable
weather, excessive rain, drought, and early or late frosts may also affect our sales. We believe,
however, that the impact of adverse weather conditions is somewhat mitigated by the geographic
dispersion of our stores.
We experience our highest inventory and accounts payable balances during the first fiscal quarter
each year for purchases of seasonal products in anticipation of the spring selling season and again
during the third fiscal quarter in anticipation of the winter selling season.
Note 2 Reclassifications:
Certain amounts in previously issued financial statements have been reclassified to conform to the
fiscal 2008 presentation. Cash balances in our bank concentration account at March 31, 2007 have
been reclassified and netted against the related book overdraft included in accounts payable in the
Consolidated Balance Sheets.
Note 3 Inventories:
Inventories are stated using the lower of last-in, first-out (LIFO) cost or market. Inventories are
not in excess of market value. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the fiscal year, sales for the year and
the expected 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 $27.0 million,
$25.5 million and $21.6 million higher than reported at March 29, 2008, December 29, 2007 and March
31, 2007, respectively.
Note 4 Property and Equipment:
Property and equipment is comprised as follows:
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March 29, |
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December 29, |
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March 31, |
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2008 |
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2007 |
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|
2007 |
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Land |
|
$ |
25,411 |
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|
$ |
23,151 |
|
|
$ |
21,805 |
|
Buildings and improvements |
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|
291,154 |
|
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|
279,313 |
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|
252,159 |
|
Furniture, fixtures and equipment |
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|
180,318 |
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|
175,941 |
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|
151,288 |
|
Computer software and hardware |
|
|
64,835 |
|
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|
61,732 |
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|
48,520 |
|
Construction in progress |
|
|
14,448 |
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|
10,006 |
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|
15,473 |
|
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|
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|
576,166 |
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|
550,143 |
|
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|
489,245 |
|
Accumulated depreciation and amortization |
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(231,042 |
) |
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(217,215 |
) |
|
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(183,270 |
) |
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|
$ |
345,124 |
|
|
$ |
332,928 |
|
|
$ |
305,975 |
|
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|
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|
Page 6
Note 5 Share-Based Compensation:
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payments
(SFAS 123(R)), we recognize compensation expense for share-based payments based on the fair value
of the awards. Share-based payments include stock option grants and certain transactions under our
other stock plans. SFAS 123(R) requires share-based compensation expense to be based on the
following: a) grant date fair value estimated in accordance with the original provisions of
SFAS 123 for unvested options granted prior to the adoption of SFAS 123(R); b) grant date fair
value estimated in accordance with the provisions of SFAS 123(R) for all share-based payments
granted subsequent to adoption; and c) the discount on shares sold to employees subsequent to
adoption, which represents the difference between the grant date fair value and the employee
purchase price. For the first quarter of fiscal 2008 and 2007, share-based compensation expense
lowered pre-tax income by $3.2 million and $2.7 million, respectively. The benefits of tax
deductions in excess of recognized compensation expense are reported as a financing cash flow.
Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce expense ratably
over the vesting period. This estimate is adjusted periodically based on the extent to which actual
forfeitures differ, or are expected to differ, from the previous estimate.
Stock Incentive Plan
Under our 2006 Stock Incentive Plan, options may be granted to officers, non-employee directors and
other employees. The per share exercise price of options granted shall not be less than the fair
market value of the stock on the date of grant and such options will expire no later than ten years
from the date of grant. Also, the aggregate fair market value of the stock with respect to which
incentive stock options are exercisable on a tax deferred basis for the first time by an individual
in any calendar year may not exceed $100,000. Vesting of options commences at various anniversary
dates following the dates of grant.
The fair value of each option grant is separately estimated for each vesting date. The fair value
of each option is recognized as compensation expense ratably over the vesting period. We have
estimated the fair value of all stock option awards as of the date of the grant by applying a
modified Black-Scholes pricing valuation model. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the determination of compensation expense,
including expected stock price volatility.
The following summarizes information concerning stock option grants during the first quarter of
fiscal 2008 and 2007:
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|
|
Three months ended |
|
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|
March 29, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
Stock options granted |
|
|
556,874 |
|
|
|
414,850 |
|
Weighted average exercise price |
|
$ |
38.41 |
|
|
$ |
46.17 |
|
Weighted average fair value |
|
$ |
14.56 |
|
|
$ |
19.41 |
|
The weighted average key assumptions used in determining the fair value of options granted in the
three months ended March 29, 2008 and March 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 29, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
Expected price volatility |
|
|
38.5 |
% |
|
|
41.6 |
% |
Risk-free interest rate |
|
|
2.9 |
% |
|
|
4.7 |
% |
Weighted average expected lives in years |
|
|
4.9 |
|
|
|
4.7 |
|
Forfeiture rate |
|
|
5.9 |
% |
|
|
6.0 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Page 7
As of March 29, 2008, total unrecognized compensation expense related to non-vested stock options
and restricted stock units was $22,054,429 with a weighted average expense recognition period of
1.69 years.
Restricted Stock Units
During the first quarter of 2008, we issued 72,855 restricted stock units which vest over a
three-year term and had a grant date fair value of $38.39. During the first quarter of 2007, we
issued 59,500 restricted stock units which vest over a three-year term and had a grant date fair
value of $46.17.
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (the ESPP) whereby all our employees have the opportunity
to purchase, through payroll deductions, shares of common stock at a 15% discount. Pursuant to the
terms of the ESPP, we issued 13,005 and 11,503 shares of common stock during the first quarter of
fiscal 2008 and 2007, respectively. Total stock compensation expense related to the ESPP was
approximately $122,000 and $113,000 during the first fiscal quarter of 2008 and 2007, respectively.
At March 29, 2008, there were 3,286,398 shares of common stock reserved for future issuance under
the ESPP.
There were no significant modifications to our share-based compensation plans during the three
months ended March 29, 2008.
Note 6 Net Income Per Share:
We present both basic and diluted earning per share (EPS) on the face of the consolidated
statements of operations. As provided by SFAS 128 Earnings per Share, basic EPS is calculated as
income available to common stockholders divided by the weighted average number of shares
outstanding during the period. Diluted EPS is calculated using the weighted average outstanding
common shares and the treasury stock method for options and warrants.
Net income per share is calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,152 |
) |
|
|
37,514 |
|
|
$ |
(0.03 |
) |
|
$ |
4,999 |
|
|
|
40,228 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,152 |
) |
|
|
37,514 |
|
|
$ |
(0.03 |
) |
|
$ |
4,999 |
|
|
|
41,083 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 636,000 shares related to employee and director stock options were excluded for the
three months ended March 29, 2008 because such shares would have been antidilutive.
Note 7 Credit Agreement:
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group,
which provides for borrowings up to $250 million (with sublimits of $75 million and $10 million for
letters of credit and swingline loans, respectively). In February 2008, we exercised the Increase
Option on this facility, increasing the overall capacity from $250 million to $350 million. Each
of the nine lenders within our credit facility bank group participated in the increase.
Simultaneously, the Credit Facility was modified to: (1) add an additional Increase Option for
$150 million (subject to additional lender group commitments); (2) modify the definition of
swingline committed amount from $10 million to $20 million; and (3) revise the definition of the
fixed charge coverage ratio covenant to remove certain defined fixed charges. All pricing terms
and the term of the facility remained the same.
Page 8
The Senior Credit Facility is unsecured and matures in February 2012, with proceeds expected to be
used for working capital, capital expenditures and share repurchases. Borrowings will bear
interest at either the banks base rate or LIBOR plus an additional amount ranging from 0.35% to
0.90% per annum, adjusted quarterly based on our performance (0.50% at March 29, 2008 and March 31,
2007). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for
unused capacity (0.10% at March 29, 2008 and March 31, 2007). The agreement requires quarterly
compliance with respect to fixed charge coverage and leverage ratios.
Note 8 Treasury Stock:
We have a Board-approved share repurchase program which provides for repurchase of up to $200
million of common stock, exclusive of any fees, commissions, or other expenses related to such
repurchases, through February 2010. The repurchases may be made from time to time on the open
market or in privately negotiated transactions. The timing and amount of any shares repurchased
under the program will depend on a variety of factors, including price, corporate and regulatory
requirements, capital availability, and other market conditions. Repurchased shares will be held in
treasury. The program may be limited or terminated at any time without prior notice.
We repurchased 77,025 and 413,492 shares under the share repurchase program during the first fiscal
quarter of 2008 and 2007, respectively. The total cost of the shares repurchased was $2.9 million
and $21.3 million during the first quarter of fiscal 2008 and 2007, respectively. As of March 29,
2008, we had remaining authorization under the share repurchase program of $47.2 million.
Note 9 New Accounting Pronouncements:
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), which amended SFAS 157 and delayed its
effective date for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at
least annually). FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items within the scope of
FSP 157-2. We adopted the remaining provisions of SFAS 157 effective December 30, 2007. The
adoption of SFAS 157 did not impact our financial condition, results of operations, or cash flow.
We are currently evaluating the impact that the adoption of FSP 157-2 will have on our consolidated
financial statements.
In February 2007, the FASB issued statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 allows entities the option to measure eligible
financial instruments at fair value as of specified dates. Such election, which may be applied on
an instrument by instrument basis, is typically irrevocable once elected. We adopted SFAS 159
effective December 30, 2007. The adoption of SFAS 159 did not impact our financial condition,
results of operations, or cash flow.
Note 10 Commitments and Contingencies:
Construction commitments
We had commitments for new store construction projects and a distribution center expansion project
totaling approximately $18.9 million at March 29, 2008.
Litigation
We are involved in various litigation matters arising in the ordinary course of business. After
consultation with legal counsel, our management expects these matters will be resolved without
material adverse effect on our consolidated financial position or results of operations. Any
estimated loss related to such matters has been adequately provided in accrued liabilities to the
extent probable and reasonably estimable. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially affected by changes in
circumstances relating to these proceedings.
Page 9
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
General
The following discussion and analysis should be read in conjunction with our Annual Report on Form
10-K for the fiscal year ended December 29, 2007. The following discussion and analysis also
contains certain historical and forward-looking information. The forward-looking statements
included herein are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the Act). All statements, other than statements of historical
facts, which address activities, events or developments that we expect or anticipate will or may
occur in the future, including such things as estimated results of operations in future periods,
future capital expenditures (including their amount and nature), business strategy, expansion and
growth of our business operations and other such matters are forward-looking statements. These
forward-looking statements may be affected by certain risks and uncertainties, any one, or a
combination of which could materially affect the results of our operations. To take advantage of
the safe harbor provided by the Act, we are identifying certain factors that could cause actual
results to differ materially from those expressed in any forward-looking statements, whether oral
or written.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the
second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable
weather, excessive precipitation, natural disasters, drought, and early or late frosts may also
affect our sales. We believe, however, that the impact of severe weather conditions is somewhat
mitigated by the geographic dispersion of our stores.
We experience our highest inventory and accounts payable balances during the first fiscal quarter
each year for purchases of seasonal products in anticipation of the spring selling season and again
during the third fiscal quarter in anticipation of the winter selling season.
As with any business, many aspects of our operations are subject to influences outside our control.
These 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 and fund growth and identify suitable locations and negotiate favorable lease
agreements on new and relocated stores, the impact of new stores on our business, the timing and
acceptance of new products in the stores, the mix of goods sold, the continued availability of
favorable credit sources, capital market conditions in general, the ability to increase sales at
existing stores, the ability to retain vendors, the risk of product liability and other claims,
reliance on foreign suppliers, the ability to maintain and improve our management information
systems and internal controls over financial reporting, potential legal proceedings, effective tax
rate changes, and the seasonality of our business. We discuss in greater detail risk factors
relating to our business in Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 29, 2007. Forward-looking statements are based on our knowledge of our business and the
environment in which we operate, but because of the factors listed above or other factors, actual
results could differ materially from those reflected by any forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these cautionary
statements and there can be no assurance that the actual results or developments anticipated will
be realized or, even if substantially realized, that they will have the expected consequences to or
effects on our business and operations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We undertake no obligation to
release publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Page 10
Results of Operations
Fiscal Three Months (First Quarter) Ended March 29, 2008 and March 31, 2007
Net sales increased 2.9% to $576.2 million for the first quarter of 2008 from $559.8 million for
the first quarter of 2007. Same-store sales for the period decreased 6.5%. We had one less
selling day related to the shift of the Easter holiday into the first quarter of 2008. This shift
resulted in a negative impact of approximately 170 basis points on first quarter same-store sales.
Strong sales in our core consumable business were offset by reduced sales in discretionary and
big-ticket items due to weak consumer spending coupled by a late spring. We experienced lower than
anticipated sales in categories such as shortline equipment, compressors, trailers, generators and
riders.
During the first quarter of 2008, we opened a total of 27 new stores compared to 22 stores in the
first quarter of 2007. We relocated no stores in the first quarter of 2008 compared to seven store
relocations in the first quarter of 2007. We operated 791 stores as of the end of the first
quarter of 2008 compared to 698 stores as of the end of the first quarter of 2007.
The following chart indicates the average percentage of sales represented by each of our major
product categories during the first quarter of fiscal 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 29, |
|
|
March 31, |
|
Product Category: |
|
2008 |
|
|
2007 |
|
Livestock and pet |
|
|
41 |
% |
|
|
37 |
% |
Seasonal products |
|
|
19 |
|
|
|
22 |
|
Hardware and tools |
|
|
16 |
|
|
|
17 |
|
Clothing and footwear |
|
|
10 |
|
|
|
9 |
|
Truck, trailer and towing |
|
|
9 |
|
|
|
9 |
|
Agricultural |
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Gross margin increased 5.2% to $176.9 million for the first quarter of 2008 from $168.2 million for
the first quarter of 2007. As a percent of sales, gross margin increased 70 basis points to 30.7%
compared to 30.0% in the first quarter of 2007, primarily from enhanced product sourcing, as well
as the mix of products sold which largely resulted from the reduced sales in rider and other
big-ticket items (such items typically sell at a margin lower than the chain average).
Additionally, we had strong markdown management in the quarter and our price optimization
initiatives have begun to show some impact. These improvements were partially offset by higher
fuel-related transportation costs.
Selling, general and administrative expenses, including depreciation and amortization, increased
240 basis points to 30.8% of sales in the first quarter of 2008 compared to 28.4% of sales in the
first quarter of 2007. The increase as a percent of sales was primarily attributable to
deleveraging resulting from lower than anticipated sales and increased occupancy costs.
Interest expense increased to $1.2 million in the first quarter of 2008 from $0.9 million in the
first quarter of 2007, as a result of larger average amounts outstanding on the revolving credit
loan, offset in part by a lower average interest rate. Our effective income tax rate increased to
38.6% in the first quarter of 2008 compared with 37.9% for the first quarter of 2007 largely due to
recent increases in certain state tax rates.
As a result of the foregoing factors, net loss for the first quarter of 2008 was $1.2 million,
which is a $6.2 million decrease from net income of $5.0 million in the first quarter of 2007. Net
loss per diluted share was $(0.3) for the first quarter of 2008 compared to net income per diluted
share of $0.12 for the first quarter of 2007.
Page 11
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for store
expansion and remodeling programs, including inventory purchases and capital expenditures. Our
primary ongoing sources of liquidity are funds provided from operations, commitments available
under our revolving credit agreement and normal trade credit.
At March 29, 2008, we had working capital of $347.1 million, a $35.0 million increase from
December 29, 2007. This increase was primarily attributable to changes in the following components
of current assets and current liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 29, |
|
|
Dec. 29, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17.4 |
|
|
$ |
13.7 |
|
|
$ |
3.7 |
|
Inventories |
|
|
747.5 |
|
|
|
636.0 |
|
|
|
111.5 |
|
Prepaid expenses and other current assets |
|
|
43.1 |
|
|
|
41.9 |
|
|
|
1.2 |
|
Deferred income taxes |
|
|
|
|
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
808.0 |
|
|
|
691.9 |
|
|
|
116.1 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
360.8 |
|
|
|
258.3 |
|
|
|
102.5 |
|
Other accrued expenses |
|
|
98.3 |
|
|
|
115.6 |
|
|
|
(17.3 |
) |
Current portion of capital lease obligations |
|
|
0.7 |
|
|
|
0.8 |
|
|
|
(0.1 |
) |
Income taxes currently payable |
|
|
|
|
|
|
5.1 |
|
|
|
(5.1 |
) |
Deferred tax liabilities |
|
|
1.1 |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460.9 |
|
|
|
379.8 |
|
|
|
81.1 |
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
347.1 |
|
|
$ |
312.1 |
|
|
$ |
35.0 |
|
|
|
|
|
|
|
|
|
|
|
Despite the soft sales trend and negative same-store sales performance, we generated strong working
capital through inventory management and an increase in our financed inventory from 43.5% to 47.0%.
The increase in inventories and related increase in accounts payable resulted primarily from the
purchase of additional inventory for new stores offset by a decrease in average inventory per store
due to inventory management initiatives. Trade credit arises from our vendors granting extended
payment terms for inventory purchases. Payment terms generally vary from 30 days to 180 days
depending on the inventory product.
Operations used net cash of $15.3 million and $23.3 million in the first quarter of 2008 and 2007,
respectively. The $8.0 million reduction in net cash used in 2008 compared to 2007 is due to
changes in the following operating activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 29, |
|
|
March 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
Net income (loss) |
|
$ |
(1.2 |
) |
|
$ |
5.0 |
|
|
$ |
(6.2 |
) |
Inventories and accounts payable |
|
|
(9.1 |
) |
|
|
(36.3 |
) |
|
|
27.2 |
|
Prepaid expenses and other current assets |
|
|
(0.2 |
) |
|
|
4.5 |
|
|
|
(4.7 |
) |
Other accrued expenses |
|
|
(17.3 |
) |
|
|
(0.8 |
) |
|
|
(16.5 |
) |
Income taxes currently payable |
|
|
(6.0 |
) |
|
|
(9.6 |
) |
|
|
3.6 |
|
Other, net |
|
|
18.5 |
|
|
|
13.9 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations |
|
$ |
(15.3 |
) |
|
$ |
(23.3 |
) |
|
$ |
8.0 |
|
|
|
|
|
|
|
|
|
|
|
The reduction in net cash used in operations in the first quarter of 2008 compared with the first
quarter of 2007 is due to the timing of payments, primarily related to inventory purchases. The
increase in cash used for accrued expenses was primarily due to the timing of expenses incurred and
their related payment.
Investing activities used $26.5 million and $16.3 million in the first quarter of 2008 and 2007,
respectively. The majority of this cash requirement relates to our capital expenditures.
Page 12
Capital expenditures for the first three months of fiscal 2008 and 2007 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 29, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
New/relocated stores and stores not yet opened |
|
$ |
10.2 |
|
|
$ |
8.4 |
|
Existing store properties acquired from lessors |
|
|
8.5 |
|
|
|
|
|
Existing stores |
|
|
2.9 |
|
|
|
5.5 |
|
Information technology |
|
|
3.4 |
|
|
|
1.5 |
|
Distribution center capacity and improvements |
|
|
1.5 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
$ |
26.5 |
|
|
$ |
16.4 |
|
|
|
|
|
|
|
|
The above table reflects 27 new stores in the first quarter of 2008, compared to 29 new/relocated
stores in the first quarter of 2007.
Financing activities provided $45.4 million and $33.6 million in the first quarter of 2008 and
2007, respectively. This increase in net cash provided is largely due to a decrease in the
repurchase of shares of common stock in the first quarter of 2008 compared to the first quarter of
2007. We had approximately $228.0 million available for future borrowings, net of outstanding
letters of credit, under our revolving credit agreement at March 29, 2008.
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group,
which provides for borrowings up to $250 million (with sublimits of $75 million and $10 million for
letters of credit and swingline loans, respectively). In February 2008, we exercised the Increase
Option on this facility, increasing the overall capacity from $250 million to $350 million. Each
of the nine lenders within our credit facility bank group participated in the increase.
Simultaneously, the Credit Facility was modified to: (1) add an additional Increase Option for
$150 million (subject to additional lender group commitments); (2) modify the definition of
swingline committed amount from $10 million to $20 million; and (3) revise the definition of the
fixed charge coverage ratio covenant to remove certain defined fixed charges. All pricing terms
and the term of the facility remained the same.
The Senior Credit Facility is unsecured and matures in February 2012, with proceeds expected to be
used for working capital, capital expenditures and share repurchases. Borrowings will bear
interest at either the banks base rate or LIBOR plus an additional amount ranging from 0.35% to
0.90% per annum, adjusted quarterly based on our performance (0.50% at March 29, 2008 and March 31,
2007). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for
unused capacity (0.10% at March 29, 2008 and March 31, 2007). The agreement requires quarterly
compliance with respect to fixed charge coverage and leverage ratios.
We believe that our cash flow from operations, borrowings available under our Senior Credit
Facility, and normal trade credit will be sufficient to fund our operations and capital expenditure
needs, including store openings and renovations, over the next several years.
Share Repurchase Program
We have a Board-approved share repurchase program which provides for repurchase of up to
$200 million of our outstanding common stock through February 2010. The repurchases may be made
from time to time on the open market or in privately negotiated transactions. The timing and amount
of any shares repurchased under the program will depend on a variety of factors, including price,
corporate and regulatory requirements, capital availability, and other market conditions. The
program may be limited or terminated at any time without prior notice.
In the first quarter of 2008 and 2007, we repurchased 77,025 and 413,492 shares of our common
stock, at a total cost of $2.9 million and $21.3 million, respectively. Repurchased shares are
accounted for at cost and will be held in treasury for future issuance.
Page 13
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to operating leases and outstanding letters of
credit. Leasing buildings and equipment for retail stores and offices rather than acquiring these
significant assets allows us to utilize financial capital to operate the business rather than
maintain assets. Letters of credit allow us to purchase inventory in a timely manner.
We had outstanding letters of credit of $19.5 million at March 29, 2008.
Significant Contractual Obligations and Commercial Commitments
In addition to commitments related to construction for new stores, we have a remaining contractual
commitment of $9.6 million for the expansion of our Waco, TX distribution center. There has been
no other material change in our contractual obligations and commercial commitments other than in
the ordinary course of business since the end of fiscal 2007.
Significant Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make informed estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
Significant accounting policies, including areas of critical management judgments and estimates,
have primary impact on the following financial statement areas:
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Revenue recognition and sales returns |
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Sales tax audit reserve |
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Inventory valuation |
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Tax contingencies |
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Stock-based compensation |
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Goodwill |
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Self-insurance reserves |
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Long-lived assets |
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See the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended December 29, 2007 for a discussion of our critical accounting policies. Our
financial position and/or results of operations may be materially different when reported under
different conditions or when using different assumptions in the application of such policies. In
the event estimates or assumptions prove to be different from actual amounts, adjustments are made
in subsequent periods to reflect more current information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have no separate investments subject to market risk, however we remain exposed to changes in
interest rates primarily from our Senior Credit Facility (the Credit Agreement). The Credit
Agreement bears interest at either the banks base rate (5.25% and 8.25% at March 29, 2008 and
March 31, 2007, respectively) or LIBOR (2.68% and 5.32% at March 29, 2008 and March 31, 2007,
respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly,
based on our performance (0.50% at March 29, 2008 and March 31, 2007). We are also required to
pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% based on the daily average
unused portion of the Credit Agreement (0.10% at March 29, 2008 and March 31, 2007). See Note 7 of
Notes to the Consolidated Financial Statements included herein for further discussion regarding the
Credit Agreement.
Although we cannot determine the full effect of inflation on our operations, we believe our sales
and results of operations are affected by inflation. We are subject to market risk with respect to
the pricing of certain products and services, which include, among other items, steel, grain,
petroleum, corn, soybean and other commodities as well as diesel fuel and transportation services
and utility costs. If the cost of these products and services continues to increase, consumer
demand may fall and/or we may not be able to pass all such increases on to our customers and, as a
result, sales and/or gross margins could decline. Our strategy is to reduce or mitigate the
effects of inflation principally by taking advantage of vendor incentive programs, economies of
scale from increased volume of purchases, increasing retail prices and selectively buying from the
most competitive vendors without sacrificing quality. Due to the competitive environment, such
conditions have and may continue to adversely impact our gross margin.
Page 14
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the 1934
Act), under the supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of March
29, 2008. Based on this evaluation, our principal executive officer and principal financial
officer concluded that, as of March 29, 2008, our disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in the reports that we file or submit
under the 1934 Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the first fiscal
quarter of 2008 that have materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
Page 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various litigation matters arising in the ordinary course of business. After
consultation with legal counsel, management expects these matters will be resolved without material
adverse effect on our consolidated financial position or results of operations. Any estimated loss
related to such matters has been adequately provided for in accrued liabilities to the extent
probable and reasonably estimable. It is possible, however, that future results of operations for
any particular quarterly or annual period could be materially affected by changes in circumstances
relating to these proceedings.
Item 1A. Risk Factors
There have been no material changes to our risk factors as previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended December 29, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
We have a share repurchase program which provides for repurchase of up to $200 million of our
outstanding common stock through February 2010. Stock repurchase activity during the first quarter
of 2008 was as follows:
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Total Number |
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of Shares |
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Maximum Dollar |
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Purchased as |
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Value of Shares |
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Total |
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Part of Publicly |
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That May Yet Be |
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Number of |
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Average |
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Announced |
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Purchased Under |
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Shares |
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Price Paid |
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Plans or |
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the Plans or |
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Period |
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Purchased |
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Per Share |
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Programs |
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Programs |
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December 30, 2007 - January 26, 2008 |
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$ |
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$ |
50,047,236 |
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January 27, 2008 - February 23, 2008 |
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50,047,236 |
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February 24, 2008 - March 29, 2008 |
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77,025 |
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37.00 |
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77,025 |
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47,199,295 |
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As of March 29, 2008 |
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77,025 |
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77,025 |
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$ |
47,199,295 |
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We expect to implement the balance of the repurchase program through purchases made from time to
time either in the open market or through private transactions, in accordance with regulations of
the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Page 16
Item 6. Exhibits
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Exhibits |
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31.1 |
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Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1 |
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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.
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TRACTOR SUPPLY COMPANY
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Date: May 6, 2008 |
By: |
/s/ Anthony F. Crudele
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Anthony F. Crudele |
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Executive Vice President - Chief Financial Officer and Treasurer
(Duly Authorized Officer and Principal Financial Officer) |
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Page 17