NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – General:
Nature of Business
Founded in 1938, Tractor Supply Company (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers and ranchers and those who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. Stores are located primarily in towns outlying major metropolitan markets and in rural communities. The Company also owns and operates Petsense, LLC (“Petsense”), a small-box pet specialty supply retailer focused on meeting the needs of pet owners, primarily in small and mid-sized communities, and offering a variety of pet products and services. At September 28, 2019, the Company operated a total of 1,990 retail stores in 49 states (1,814 Tractor Supply and Del’s retail stores and 176 Petsense retail stores) and also offered an expanded assortment of products online at TractorSupply.com and Petsense.com.
Basis of Presentation
The accompanying interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP 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, 2018. The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.
In the first quarter of fiscal 2019, the Company adopted lease accounting guidance as discussed in Note 7 and Note 13 to the Condensed Consolidated Financial Statements. Adoption of the new lease accounting guidance had a material impact to our Condensed Consolidated Balance Sheets and related disclosures, and resulted in the recording of additional right-of-use assets and lease liabilities of approximately $2.08 billion as of the date of adoption. This guidance was applied using the optional transition method which allowed the Company to not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the effective date in the period of adoption. No adjustment to retained earnings was made as a result of the adoption of this guidance. Consistent with the optional transition method, the financial information in the Condensed Consolidated Balance Sheets prior to the adoption of this new lease accounting guidance has not been adjusted and is therefore not comparable to the current period presented. The standard did not materially impact our Condensed Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, or Cash Flows. For additional information, including the required disclosures, related to the impact of adopting this standard, see Note 7 and Note 13 to the Condensed Consolidated Financial Statements.
In the first quarter of fiscal 2019, the Company adopted Accounting Standards Update 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” using the modified retrospective transition method. This method allows for a cumulative effect adjustment to retained earnings, as of the effective date in the period of adoption, for previously recorded amounts of hedge ineffectiveness. Upon adoption of the guidance, we recognized a cumulative-effect adjustment of $0.7 million, from retained earnings to accumulated other comprehensive income. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures. For additional information on the required disclosures related to the impact of adopting this guidance, see Note 6 and Note 13 to the Condensed Consolidated Financial Statements.
Note 2 – Fair Value of Financial Instruments:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments consist of cash and cash equivalents, short-term receivables, trade payables, debt instruments, and interest rate swaps. Due to their short-term nature, the carrying values of cash and cash equivalents, short-term receivables, and trade payables approximate current fair value at each balance sheet date. As described in further detail in Note 5 to the Condensed Consolidated Financial Statements, the Company had $645.0 million, $408.8 million, and $575.3 million in borrowings under its debt facilities at September 28, 2019, December 29, 2018, and September 29, 2018, respectively. Based on market interest rates (Level 2 inputs), the carrying value of borrowings in our debt facilities approximates fair value for each period reported. The fair value of the Company’s interest rate swaps is determined based on the present value of expected future cash flows using forward rate curves (a Level 2 input). As described in further detail in Note 6 to the Condensed Consolidated Financial Statements, the fair value of the interest rate swaps, excluding accrued interest, was a net asset of $0.1 million, $5.8 million, and $8.7 million at September 28, 2019, December 29, 2018, and September 29, 2018, respectively.
Note 3 – Share-Based Compensation:
Share-based compensation includes stock options, restricted stock units, performance-based restricted share units, and certain transactions under our Employee Stock Purchase Plan (the “ESPP”). Share-based compensation expense is recognized based on grant date fair value of all stock options, restricted stock units, and performance-based restricted share units plus a 15% discount on shares purchased by employees as a part of the ESPP. The discount under the ESPP represents the difference between the purchase date market value and the employee’s purchase price.
There were no significant modifications to the Company’s share-based compensation plans during the fiscal nine months ended
September 28, 2019.
For the third quarter of fiscal 2019 and 2018, share-based compensation expense was $7.4 million and $6.4 million, respectively, and $25.8 million and $22.8 million for the first nine months of fiscal 2019 and 2018, respectively.
Stock Options
The following table summarizes information concerning stock option grants during the first nine months of fiscal 2019:
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
|
|
September 28, 2019
|
|
Stock options granted
|
392,088
|
|
|
Weighted average exercise price
|
$
|
89.71
|
|
|
Weighted average grant date fair value per option
|
$
|
20.80
|
|
As of September 28, 2019, total unrecognized compensation expense related to non-vested stock options was approximately $9.7 million with a remaining weighted average expense recognition period of 1.7 years.
Restricted Stock Units and Performance-Based Restricted Share Units
The following table summarizes information concerning restricted stock unit and performance-based restricted share unit grants during the first nine months of fiscal 2019:
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
|
|
September 28, 2019
|
|
Restricted stock units granted
|
252,905
|
|
|
Performance-based restricted share units granted (a)
|
58,115
|
|
|
Weighted average grant date fair value per share
|
$
|
87.50
|
|
(a) Assumes 100% target level achievement of the relative performance targets.
In fiscal 2019, the Company granted awards that are subject to the achievement of specified performance goals. The performance metrics for the units are growth in net sales and growth in earnings per diluted share. The number of performance-based restricted share units presented in the foregoing table represent the shares that can be achieved at the performance metric target value. The actual number of shares that will be issued under the performance share awards, which may be higher or lower than the target, will be determined by the level of achievement of the performance goals. If the performance targets are achieved, the units will be issued based on the achievement level and the grant date fair value and will cliff vest in full on the third anniversary of the date of the grant.
As of September 28, 2019, total unrecognized compensation expense related to non-vested restricted stock units and non-vested performance-based restricted share units was approximately $25.0 million with a remaining weighted average expense recognition period of 2.1 years.
Note 4 – Net Income Per Share:
The Company presents both basic and diluted net income per share on the Condensed Consolidated Statements of Income. Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average diluted shares outstanding during the period. Dilutive shares are computed using the treasury stock method for share-based awards. Performance-based restricted share units are included in diluted shares only if the related performance conditions are considered satisfied as of the end of the reporting period. Net income per share is calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Three Months Ended
|
|
|
September 28, 2019
|
|
September 29, 2018
|
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Basic net income per share:
|
$
|
122,133
|
|
|
118,956
|
|
|
$
|
1.03
|
|
|
$
|
116,784
|
|
|
121,876
|
|
|
$
|
0.96
|
|
|
Dilutive effect of share-based awards
|
—
|
|
|
1,102
|
|
|
(0.01
|
)
|
|
—
|
|
|
885
|
|
|
(0.01
|
)
|
|
Diluted net income per share:
|
$
|
122,133
|
|
|
120,058
|
|
|
$
|
1.02
|
|
|
$
|
116,784
|
|
|
122,761
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
|
Fiscal Nine Months Ended
|
|
|
September 28, 2019
|
|
September 29, 2018
|
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Basic net income per share:
|
$
|
418,175
|
|
|
120,180
|
|
|
$
|
3.48
|
|
|
$
|
395,506
|
|
|
122,818
|
|
|
$
|
3.22
|
|
|
Dilutive effect of share-based awards
|
—
|
|
|
1,059
|
|
|
(0.03
|
)
|
|
—
|
|
|
752
|
|
|
(0.02
|
)
|
|
Diluted net income per share:
|
$
|
418,175
|
|
|
121,239
|
|
|
$
|
3.45
|
|
|
$
|
395,506
|
|
|
123,570
|
|
|
$
|
3.20
|
|
Anti-dilutive stock awards excluded from the above calculations totaled approximately 0.3 million and 1.8 million shares for the fiscal three months ended September 28, 2019 and September 29, 2018, respectively, and 0.4 million and 3.4 million shares for the fiscal nine months ended September 28, 2019 and September 29, 2018, respectively.
Note 5 – Debt:
The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28,
2019
|
|
December 29,
2018
|
|
September 29,
2018
|
|
Senior Notes
|
|
$
|
150.0
|
|
|
$
|
150.0
|
|
|
$
|
150.0
|
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
February 2016 Term Loan
|
|
150.0
|
|
|
165.0
|
|
|
165.0
|
|
|
June 2017 Term Loan
|
|
90.0
|
|
|
93.8
|
|
|
93.8
|
|
|
Revolving credit loans
|
|
255.0
|
|
|
—
|
|
|
166.5
|
|
|
Total outstanding borrowings
|
|
645.0
|
|
|
408.8
|
|
|
575.3
|
|
|
Less: unamortized debt issuance costs
|
|
(1.1
|
)
|
|
(1.4
|
)
|
|
(1.5
|
)
|
|
Total debt
|
|
643.9
|
|
|
407.4
|
|
|
573.8
|
|
|
Less: current portion of long-term debt
|
|
(30.0
|
)
|
|
(26.3
|
)
|
|
(26.3
|
)
|
|
Long-term debt
|
|
$
|
613.9
|
|
|
$
|
381.1
|
|
|
$
|
547.5
|
|
|
|
|
|
|
|
|
|
|
Outstanding letters of credit
|
|
$
|
34.0
|
|
|
$
|
33.5
|
|
|
$
|
36.7
|
|
Senior Notes
On August 14, 2017, the Company entered into a note purchase and private shelf agreement (the “Note Purchase Agreement”), pursuant to which the Company agreed to sell $150 million aggregate principal amount of senior unsecured notes due August 14, 2029 (the “2029 Notes”) in a private placement. The 2029 Notes bear interest at 3.70% per annum with interest payable semi-annually in arrears on each annual and semi-annual anniversary of the issuance date. The obligations under the Note Purchase Agreement are unsecured, but guaranteed by each of the Company’s material subsidiaries.
The Company may from time to time issue and sell additional senior unsecured notes (the “Shelf Notes”) pursuant to the Note Purchase Agreement, in an aggregate principal amount of up to $150 million. The Shelf Notes will have a maturity date of no more than 12 years after the date of original issuance and may be issued through August 14, 2020, unless earlier terminated in accordance with the terms of the Note Purchase Agreement.
Pursuant to the Note Purchase Agreement, the 2029 Notes and any Shelf Notes (collectively, the “Notes”) are redeemable by the Company, in whole at any time or in part from time to time, at 100% of the principal amount of the Notes being redeemed, together with accrued and unpaid interest thereon and a make whole amount calculated by discounting all remaining scheduled payments on the Notes by the yield on the U.S. Treasury security with a maturity equal to the remaining average life of the Notes plus 0.50%.
Senior Credit Facility
On February 19, 2016, the Company entered into a senior credit facility (the “2016 Senior Credit Facility”) consisting of a $200 million term loan (the “February 2016 Term Loan”) and a $500 million revolving credit facility (the “Revolver”) with a sublimit of $50 million for swingline loans. This agreement is unsecured and matures on February 19, 2022.
On June 15, 2017, pursuant to an accordion feature available under the 2016 Senior Credit Facility, the Company entered into an incremental term loan agreement (the “June 2017 Term Loan”) which increased the term loan capacity under the 2016 Senior Credit Facility by $100 million. This agreement is unsecured and matures on June 15, 2022.
The February 2016 Term Loan of $200 million requires quarterly payments totaling $10 million per year in years one and two and $20 million per year in years three through the maturity date, with the remaining balance due in full on the maturity date of February 19, 2022. The June 2017 Term Loan of $100 million requires quarterly payments totaling $5 million per year in years one and two and $10 million per year in years three through the maturity date, with the remaining balance due in full on the maturity date of June 15, 2022. The 2016 Senior Credit Facility also contains a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans).
Borrowings under the February 2016 Term Loan and Revolver bear interest at either the bank’s base rate (5.000% at September 28, 2019) or the London Inter-Bank Offer Rate (“LIBOR”) (2.032% at September 28, 2019) plus an additional amount ranging from 0.500% to 1.125% per annum (0.750% at September 28, 2019), adjusted quarterly based on our leverage ratio. The Company is also required to pay, quarterly in arrears, a commitment fee for unused capacity ranging from 0.075% to 0.200% per annum (0.125% at September 28, 2019), adjusted quarterly based on the Company’s leverage ratio. Borrowings under the June 2017 Term Loan bear interest at either the bank’s base rate (5.000% at September 28, 2019) or LIBOR (2.032% at September 28, 2019) plus an additional 1.000% per annum. As further described in Note 6 to the Condensed Consolidated Financial Statements, the Company has entered into interest rate swap agreements in order to hedge our exposure to variable rate interest payments associated with each of the term loans under the 2016 Senior Credit Facility.
Proceeds from the 2016 Senior Credit Facility may be used for working capital, capital expenditures, dividends, share repurchases, and other matters. There are no compensating balance requirements associated with the 2016 Senior Credit Facility.
Covenants and Default Provisions of the Debt Agreements
The 2016 Senior Credit Facility and the Note Purchase Agreement (collectively, the “Debt Agreements”) require quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. Both ratios are calculated on a trailing twelve-month basis at the end of each fiscal quarter. The fixed charge coverage ratio compares earnings before interest, taxes, depreciation, amortization, share-based compensation, and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding any straight-line rent adjustments). The fixed charge coverage ratio shall be greater than or equal to 2.00 to 1.0 as of the last day of each fiscal quarter. The leverage ratio compares rental expense (excluding any straight-line rent adjustments) multiplied by a factor of six plus total debt to consolidated EBITDAR. The leverage ratio shall be less than or equal to 4.00 to 1.0 as of the last day of each fiscal quarter. The Debt Agreements also contain certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and
sales of assets, prepayment of debts, transactions with subsidiaries or affiliates, and liens. As of September 28, 2019, the Company was in compliance with all debt covenants.
The Debt Agreements contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, and invalidity of loan documents. Upon certain changes of control, payment under the Debt Agreements could become due and payable. In addition, under the Note Purchase Agreement, upon an event of default or change of control, the make whole payment described above may become due and payable.
The Note Purchase Agreement also requires that, in the event the Company amends its 2016 Senior Credit Facility, or any subsequent credit facility of $100 million or greater, such that it contains covenant or default provisions that are not provided in the Note Purchase Agreement or that are similar to those contained in the Note Purchase Agreement but which contain percentages, amounts, formulas or grace periods that are more restrictive than those set forth in the Note Purchase Agreement or are otherwise more beneficial to the lenders thereunder, the Note Purchase Agreement shall be automatically amended to include such additional or amended covenants and/or default provisions.
Note 6 – Interest Rate Swaps:
The Company entered into an interest rate swap agreement which became effective on March 31, 2016, with a maturity date of February 19, 2021. The notional amount of this swap agreement began at $197.5 million (the principal amount of the February 2016 Term Loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the February 2016 Term Loan borrowings, as described in Note 5 to the Condensed Consolidated Financial Statements, up to the maturity date of the interest rate swap agreement on February 19, 2021. As of September 28, 2019, the notional amount of the interest rate swap was $150.0 million.
The Company entered into a second interest rate swap agreement which became effective on June 30, 2017, with a maturity date of June 15, 2022. The notional amount of this swap agreement began at $100 million (the principal amount of the June 2017 Term Loan borrowings as of June 30, 2017) and will amortize at the same time and in the same amount as the June 2017 Term Loan borrowings, as described in Note 5 to the Condensed Consolidated Financial Statements. As of September 28, 2019, the notional amount of the interest rate swap was $90.0 million.
The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. Both interest rate swap agreements entitle the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement, without exchange of the underlying notional amount.
The Company has designated its interest rate swap agreements as cash flow hedges and accounts for the underlying activity in accordance with hedge accounting. The interest rate swaps are presented within the Condensed Consolidated Balance Sheets at fair value. In accordance with hedge accounting, the gains and losses on interest rate swaps that are designated and qualify as cash flow hedges are recorded as a component of Other Comprehensive Income (“OCI”), net of related income taxes, and reclassified into earnings in the same income statement line and period during which the hedged transactions affect earnings.
As of September 28, 2019, amounts to be reclassified from Accumulated Other Comprehensive Income (“AOCI”) into interest during the next twelve months are not expected to be material. No significant amounts were excluded from the assessment of cash flow hedge effectiveness as of September 28, 2019.
The assets and liabilities measured at fair value related to the Company’s interest rate swaps, excluding accrued interest, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
as Cash Flow Hedges
|
|
Balance Sheet Location
|
|
September 28,
2019
|
|
December 29,
2018
|
|
September 29,
2018
|
|
Interest rate swaps (short-term portion)
|
|
Other current assets
|
|
$
|
631
|
|
|
$
|
2,601
|
|
|
$
|
2,735
|
|
|
Interest rate swaps (long-term portion)
|
|
Other assets
|
|
105
|
|
|
3,222
|
|
|
5,991
|
|
|
Total derivative assets
|
|
|
|
$
|
736
|
|
|
$
|
5,823
|
|
|
$
|
8,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (short-term portion)
|
|
Other accrued expenses
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swaps (long-term portion)
|
|
Other long-term liabilities
|
|
581
|
|
|
—
|
|
|
—
|
|
|
Total derivative liabilities
|
|
|
|
$
|
638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The offset to the interest rate swap asset or liability is recorded as a component of equity, net of deferred taxes, in AOCI, and will be reclassified into earnings over the term of the underlying debt as interest payments are made.
The following table summarizes the changes in AOCI, net of tax, related to the Company’s interest rate swaps (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28,
2019
|
|
December 29,
2018
|
|
September 29,
2018
|
|
Beginning fiscal year AOCI balance
|
|
$
|
3,814
|
|
|
$
|
3,358
|
|
|
$
|
3,358
|
|
|
|
|
|
|
|
|
|
|
Current fiscal period (loss)/gain recognized in OCI
|
|
(4,458
|
)
|
|
456
|
|
|
2,611
|
|
|
Cumulative adjustment as a result of ASU 2017-12 adoption
|
|
717
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive (loss)/gain, net of tax
|
|
(3,741
|
)
|
|
456
|
|
|
2,611
|
|
|
Ending fiscal period AOCI balance
|
|
$
|
73
|
|
|
$
|
3,814
|
|
|
$
|
5,969
|
|
Cash flows related to the interest rate swaps are included in operating activities on the Condensed Consolidated Statements of Cash Flows.
The following table summarizes the impact of pre-tax gains and losses derived from the Company’s interest rate swaps (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Nine Months Ended
|
|
|
Financial Statement Location
|
|
September 28,
2019
|
|
September 29,
2018
|
|
September 28,
2019
|
|
September 29,
2018
|
|
Amount of (losses)/gains recognized in OCI during the period
|
Other comprehensive (loss)/income
|
|
$
|
(841
|
)
|
|
$
|
306
|
|
|
$
|
(5,725
|
)
|
|
$
|
3,511
|
|
The following table summarizes the impact of taxes affecting AOCI as a result of the Company’s interest rate swaps (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Nine Months Ended
|
|
|
September 28,
2019
|
|
September 29,
2018
|
|
September 28,
2019
|
|
September 29,
2018
|
|
Income tax (benefit)/expense of interest rate swaps on AOCI
|
$
|
(32
|
)
|
|
$
|
79
|
|
|
$
|
(1,267
|
)
|
|
$
|
900
|
|
Credit-risk-related contingent features
In accordance with the underlying interest rate swap agreements, the Company could be declared in default on its interest rate swap obligations if repayment of the underlying indebtedness (i.e., the Company’s term loans) is accelerated by the lender due to the Company's default on such indebtedness.
If the Company had breached any of the provisions in the underlying agreements at September 28, 2019, it could have been required to post full collateral or settle its obligations under the Company’s interest rate swap agreements. However, as of September 28,
2019, the Company had not breached any of these provisions or posted any collateral related to the underlying interest rate swap agreements.
Note 7 – Leases:
The Company leases the majority of its retail store locations, two distribution sites, its Merchandise Innovation Center, and certain equipment under various non-cancellable operating leases. The leases have varying terms and expire at various dates through 2037. Store leases typically have initial terms of between 10 and 15 years, with two to four optional renewal periods of five years each. The exercise of lease renewal options is at our sole discretion. The Company has included lease renewal options in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes, and insurance costs) together with nonlease components (e.g., fixed payment common-area maintenance) as a single component. Certain lease agreements require variable payments based upon actual costs of common-area maintenance, real estate taxes, and insurance. Further, certain lease agreements require variable payments based upon store sales above agreed-upon sales levels for the year and others require payments adjusted periodically for inflation. As substantially all of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement or modification date in determining the present value of lease payments.
In addition to the operating lease right-of-use assets presented on the Condensed Consolidated Balance Sheets, assets, net of accumulated amortization, under finance leases of $29.7 million are recorded within the Property and equipment, net line on the Condensed Consolidated Balance Sheets as of September 28, 2019.
The following table summarizes the Company’s classification of lease cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Nine Months Ended
|
|
|
|
Statement of Income Location
|
|
September 28, 2019
|
|
September 28, 2019
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of lease assets
|
|
Depreciation and amortization
|
|
$
|
1,075
|
|
|
$
|
3,165
|
|
|
Interest on lease liabilities
|
|
Interest expense, net
|
|
407
|
|
|
1,207
|
|
|
Operating lease cost
|
|
Selling, general and administrative expenses
|
|
88,820
|
|
|
262,838
|
|
|
Variable lease cost
|
|
Selling, general and administrative expenses
|
|
18,394
|
|
|
55,545
|
|
|
Net lease cost
|
|
|
|
$
|
108,696
|
|
|
$
|
322,755
|
|
The following table summarizes the future maturities of the Company’s lease liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases (a)
|
|
Finance Leases
|
|
Total
|
|
2019 (b)
|
|
$
|
92,364
|
|
|
$
|
1,364
|
|
|
$
|
93,728
|
|
|
2020
|
|
358,275
|
|
|
5,471
|
|
|
363,746
|
|
|
2021
|
|
337,373
|
|
|
5,531
|
|
|
342,904
|
|
|
2022
|
|
313,814
|
|
|
4,409
|
|
|
318,223
|
|
|
2023
|
|
289,207
|
|
|
3,217
|
|
|
292,424
|
|
|
After 2023
|
|
1,348,926
|
|
|
23,000
|
|
|
1,371,926
|
|
|
Total lease payments
|
|
2,739,959
|
|
|
42,992
|
|
|
2,782,951
|
|
|
Less: Interest
|
|
(503,558
|
)
|
|
(9,934
|
)
|
|
(513,492
|
)
|
|
Present value of lease liabilities
|
|
$
|
2,236,401
|
|
|
$
|
33,058
|
|
|
$
|
2,269,459
|
|
(a) Operating lease payments exclude $168.6 million of legally binding minimum lease payments for leases signed, but not yet commenced.
(b) Excluding the nine-month period ended September 28, 2019.
The following table summarizes the Company’s lease term and discount rate:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
Weighted-average remaining lease term (years):
|
|
|
|
Finance leases
|
|
9.8
|
|
|
Operating leases
|
|
8.9
|
|
|
Weighted-average discount rate:
|
|
|
|
Finance leases
|
|
5.2
|
%
|
|
Operating leases
|
|
4.4
|
%
|
The following table summarizes the other information related to the Company’s lease liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Nine Months Ended
|
|
|
|
September 28, 2019
|
|
September 28, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Financing cash flows from finance leases
|
|
$
|
936
|
|
|
$
|
2,741
|
|
|
Operating cash flows from finance leases
|
|
388
|
|
|
1,188
|
|
|
Operating cash flows from operating leases
|
|
88,820
|
|
|
251,800
|
|
The Company adopted new lease accounting guidance in the first quarter of fiscal 2019, as discussed in Note 1 and Note 13 to the Condensed Consolidated Financial Statements, and as required, the following disclosure is provided for periods prior to adoption. As of December 29, 2018 future minimum payments, by year and in the aggregate, under leases with initial or remaining terms of one year or more consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
2019
|
|
$
|
5,215
|
|
|
$
|
344,836
|
|
|
2020
|
|
5,234
|
|
|
328,589
|
|
|
2021
|
|
5,294
|
|
|
306,572
|
|
|
2022
|
|
4,172
|
|
|
284,327
|
|
|
2023
|
|
2,980
|
|
|
260,518
|
|
|
Thereafter
|
|
20,169
|
|
|
1,175,972
|
|
|
Total minimum lease payments
|
|
43,064
|
|
|
$
|
2,700,814
|
|
|
Amount representing interest
|
|
(10,148
|
)
|
|
|
|
|
Present value of minimum lease payments
|
|
32,916
|
|
|
|
|
|
Less: current portion
|
|
(3,646
|
)
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
29,270
|
|
|
|
|
Note 8 – Capital Stock and Dividends:
Capital Stock
The authorized capital stock of the Company consists of common stock and preferred stock. The Company is authorized to issue 400 million shares of common stock. The Company is also authorized to issue 40 thousand shares of preferred stock, with such designations, rights and preferences as may be determined from time to time by the Board of Directors.
Dividends
During the first nine months of fiscal 2019 and 2018, the Board of Directors declared the following cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Dividend Amount
Per Share of Common Stock
|
|
Record Date
|
|
Date Paid
|
|
August 7, 2019
|
|
$
|
0.35
|
|
|
August 26, 2019
|
|
September 10, 2019
|
|
May 8, 2019
|
|
$
|
0.35
|
|
|
May 28, 2019
|
|
June 11, 2019
|
|
February 6, 2019
|
|
$
|
0.31
|
|
|
February 25, 2019
|
|
March 12, 2019
|
|
|
|
|
|
|
|
|
|
|
August 8, 2018
|
|
$
|
0.31
|
|
|
August 27, 2018
|
|
September 11, 2018
|
|
May 9, 2018
|
|
$
|
0.31
|
|
|
May 29, 2018
|
|
June 12, 2018
|
|
February 7, 2018
|
|
$
|
0.27
|
|
|
February 26, 2018
|
|
March 13, 2018
|
It is the present intention of the Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company, along with any other factors that the Board of Directors deems relevant.
On November 6, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.35 per share of the Company’s outstanding common stock. The dividend will be paid on December 10, 2019, to stockholders of record as of the close of business on November 25, 2019.
Note 9 – Treasury Stock:
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program. On May 8, 2019, the Board of Directors authorized a $1.5 billion increase to the existing share repurchase program, bringing the total amount authorized to $4.5 billion, exclusive of any fees, commissions, or other expenses related to such repurchases. 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 are accounted for at cost and will be held in treasury for future issuance. The program may be limited or terminated at any time without prior notice. As of September 28, 2019, the Company had remaining authorization under the share repurchase program of $1.53 billion, exclusive of any fees, commissions, or other expenses.
The following table provides the number of shares repurchased, average price paid per share, and total amount paid for share repurchases during the fiscal three and nine months ended September 28, 2019 and September 29, 2018, respectively (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Nine Months Ended
|
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
|
Total number of shares repurchased
|
1,470
|
|
|
452
|
|
|
4,926
|
|
|
4,296
|
|
|
Average price paid per share
|
$
|
105.97
|
|
|
$
|
81.23
|
|
|
$
|
99.46
|
|
|
$
|
67.33
|
|
|
Total cash paid for share repurchases
|
$
|
155,742
|
|
|
$
|
36,660
|
|
|
$
|
489,977
|
|
|
$
|
289,205
|
|
Note 10 – Income Taxes:
The Company’s effective income tax rate increased to 22.2% in the third quarter of fiscal 2019 compared to 21.5% in the third quarter of fiscal 2018. The primary driver for the increase in the Company’s effective income tax rate was an incremental tax benefit associated with share-based compensation in the third quarter of fiscal 2018. The effective income tax rate increased to 22.2% compared to 22.1% in the first nine months of fiscal 2019 and fiscal 2018, respectively.
Note 11 – Commitments and Contingencies:
Construction and Real Estate Commitments
At September 28, 2019, there were no material commitments related to real estate or construction projects extending greater than twelve months.
Letters of Credit
At September 28, 2019, there were $34.0 million of outstanding letters of credit under the 2016 Senior Credit Facility.
Litigation
The Company is involved in various litigation matters arising in the ordinary course of business. The Company believes that any estimated loss related to such matters has been adequately provided for in accrued liabilities, to the extent probable and reasonably estimable. Accordingly, the Company currently expects these matters will be resolved without material adverse effect on its consolidated financial position, results of operations, or cash flows.
Note 12 – Segment Reporting:
The Company has one reportable segment which is the retail sale of products that support the rural lifestyle. The following table indicates the percentage of net sales represented by each major product category during the fiscal three and nine months ended September 28, 2019 and September 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Nine Months Ended
|
|
Product Category:
|
September 28,
2019
|
|
September 29,
2018
|
|
September 28,
2019
|
|
September 29,
2018
|
|
Livestock and Pet
|
49
|
%
|
|
49
|
%
|
|
48
|
%
|
|
48
|
%
|
|
Hardware, Tools and Truck
|
23
|
|
|
22
|
|
|
21
|
|
|
21
|
|
|
Seasonal, Gift and Toy Products
|
18
|
|
|
18
|
|
|
20
|
|
|
20
|
|
|
Clothing and Footwear
|
5
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
Agriculture
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Note 13 – New Accounting Pronouncements:
New Accounting Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This update requires a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842.” This update permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASU 2016-02 and that were not accounted for as leases under previous lease guidance. In July 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases,” was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Furthermore, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an optional transition method in addition to the existing modified retrospective transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. These new leasing standards are effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In March of 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” which was issued to provide more detailed guidance and clarification for implementing ASU 2016-02.
The Company adopted this guidance in the first quarter of fiscal 2019 and as a part of that process, made the following elections:
|
|
|
|
•
|
The Company elected the optional transition method which allows for the lessee to not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the effective date in the period of adoption. No such adjustment to retained earnings was made as a result of the adoption of this guidance.
|
|
|
|
|
•
|
The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allowed us to carry forward our prior lease classification under Accounting Standards Codification (“ASC”) Topic 840.
|
|
|
|
|
•
|
The Company did not elect the hindsight practical expedient for all leases.
|
|
|
|
|
•
|
The Company elected to make the accounting policy election for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term.
|
|
|
|
|
•
|
The Company elected the land easement practical expedient.
|
Adoption of the new standard had a material impact to our Condensed Consolidated Balance Sheets and related disclosures, and resulted in the recording of additional right-of-use assets and lease liabilities of approximately $2.08 billion as of the date of adoption. The standard did not materially impact our Condensed Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, or Cash Flows.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. This update expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments in ASU 2017-12 provide new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2017-12 require that an entity with cash flow or net investment hedges existing at the date of adoption apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness to the opening balance of retained earnings as of the beginning of the fiscal year in which the entity adopts this guidance. The amended presentation and disclosure guidance should be adopted prospectively. The Company adopted this guidance in the first quarter of fiscal 2019 and recognized a cumulative-effect adjustment of $0.7 million from retained earnings to accumulated other comprehensive income. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.
In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” which expands the permissible benchmark interest rates to include the Secured Overnight Financing Rate (SOFR) to be eligible as a U.S. benchmark interest rate for purposes of applying hedge accounting under Topic 815, Derivatives and Hedging. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted if an entity has previously adopted ASU 2017-12. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.
New Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its Condensed Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the impact that adoption of this guidance will have on its Condensed Consolidated Financial Statements and related disclosures.