Item 1. Financial Statements

64K characters. Original on sec.gov · Markdown

Item 1. Financial Statements

TRACTOR SUPPLY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)


	September 24,		December 25,		September 25,
	2022		2021		2021
ASSETS
Current assets:
Cash and cash equivalents	$	211,241	$	878,030	$	1,111,711

Inventories	2,678,193		2,191,192		2,199,773
Prepaid expenses and other current assets	211,941		164,118		149,550
Income taxes receivable	8,430		17,100		6,827
Total current assets	3,109,805		3,250,440		3,467,861

Property and equipment, net	1,843,324		1,617,806		1,441,704
Operating lease right-of-use assets	2,803,798		2,785,858		2,725,510
Goodwill and other intangible assets	55,520		55,520		55,520
Deferred income taxes	—		2,437		16,590
Other assets	99,281		55,406		38,009
Total assets	$	7,911,728	$	7,767,467	$	7,745,194

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,219,593	$	1,155,630	$	1,197,813
Accrued employee compensation	80,390		109,618		122,007
Other accrued expenses	453,747		474,412		408,887

Current portion of finance lease liabilities	3,140		3,897		4,242
Current portion of operating lease liabilities	333,388		321,285		312,296
Income taxes payable	4,942		—		762

Total current liabilities	2,095,200		2,064,842		2,046,007

Long-term debt	1,077,926		986,382		985,867
Finance lease liabilities, less current portion	35,460		32,848		30,041
Operating lease liabilities, less current portion	2,608,832		2,574,882		2,536,875
Deferred income taxes	39,540		—		—

Other long-term liabilities	113,625		105,848		125,651
Total liabilities	5,970,583		5,764,802		5,724,441

Stockholders’ equity:
Preferred stock	—		—		—
Common stock	1,414		1,411		1,410
Additional paid-in capital	1,236,161		1,210,512		1,191,785
Treasury stock	(4,763,862)		(4,155,846)		(3,954,926)
Accumulated other comprehensive income/(loss)	12,298		1,345		(592)
Retained earnings	5,455,134		4,945,243		4,783,076
Total stockholders’ equity	1,941,145		2,002,665		2,020,753
Total liabilities and stockholders’ equity	$	7,911,728	$	7,767,467	$	7,745,194

Preferred Stock (shares in thousands): $1.00 par value; 40 shares authorized; no shares were issued or outstanding during any period presented.

Common Stock (shares in thousands): $0.008 par value; 400,000 shares authorized for all periods presented. 176,771, 176,371, and 176,290 shares issued; 110,587, 113,125, and 113,946 shares outstanding at September 24, 2022, December 25, 2021, and September 25, 2021, respectively.

Treasury Stock (at cost, shares in thousands): 66,184, 63,246, and 62,344 shares at September 24, 2022, December 25, 2021, and September 25, 2021, respectively.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 3

Index

TRACTOR SUPPLY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Unaudited)


	For the Fiscal Three				For the Fiscal Nine
	Months Ended				Months Ended
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Net sales	$	3,270,804	$	3,017,926	$	10,198,342	$	9,411,821
Cost of merchandise sold	2,104,989		1,932,616		6,589,763		6,055,246
Gross profit	1,165,815		1,085,310		3,608,579		3,356,575
Selling, general and administrative expenses	772,167		718,261		2,284,604		2,148,200
Depreciation and amortization	87,236		69,824		248,242		194,731

Operating income	306,412		297,225		1,075,733		1,013,644
Interest expense, net	6,226		6,146		20,392		20,068
Income before income taxes	300,186		291,079		1,055,341		993,576
Income tax expense	66,049		66,679		237,499		217,800
Net income	$	234,137	$	224,400	$	817,842	$	775,776

Net income per share – basic	$	2.11	$	1.96	$	7.32	$	6.74
Net income per share – diluted	$	2.10	$	1.95	$	7.27	$	6.68

Weighted average shares outstanding:
Basic	110,861		114,223		111,660		115,170
Diluted	111,560		115,193		112,461		116,170

Dividends declared per common share outstanding	$	0.92	$	0.52	$	2.76	$	1.56

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 4

Index

TRACTOR SUPPLY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Fiscal Three				For the Fiscal Nine
	Months Ended				Months Ended
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Net income	$	234,137	$	224,400	$	817,842	$	775,776

Other comprehensive income:
Change in fair value of interest rate swaps, net of taxes	3,150		206		10,953		2,651
Total other comprehensive income	3,150		206		10,953		2,651
Total comprehensive income	$	237,287	$	224,606	$	828,795	$	778,427

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 5

Index

TRACTOR SUPPLY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)


	Common Stock				Additional Paid-in Capital		Treasury Stock		Accum. Other Comp. Income		Retained Earnings		Total Stockholders’ Equity
Shares		Dollars
Stockholders’ equity at December 25, 2021	113,125		$	1,411	$	1,210,512	$	(4,155,846)	$	1,345	$	4,945,243	$	2,002,665
Common stock issuance under stock award plans & ESPP	308		2		7,908								7,910
Share-based compensation expense					12,316								12,316
Repurchase of shares to satisfy tax obligations					(26,442)								(26,442)
Repurchase of common stock	(1,358)						(296,180)						(296,180)
Cash dividends paid to stockholders											(103,467)		(103,467)
Change in fair value of interest rate swaps, net of taxes									5,993				5,993
Net income											187,227		187,227
Stockholders’ equity at March 26, 2022	112,075		$	1,413	$	1,204,294	$	(4,452,026)	$	7,338	$	5,029,003	$	1,790,022

Common stock issuance under stock award plans & ESPP	64		1		5,084								5,085
Share-based compensation expense					12,534								12,534
Repurchase of shares to satisfy tax obligations					(1,230)								(1,230)
Repurchase of common stock	(942)						(188,210)						(188,210)
Cash dividends paid to stockholders											(102,622)		(102,622)
Change in fair value of interest rate swaps, net of taxes									1,810				1,810
Net income											396,478		396,478
Stockholders’ equity at June 25, 2022	111,197		$	1,414	$	1,220,682	$	(4,640,236)	$	9,148	$	5,322,859	$	1,913,867

Common stock issuance under stock award plans & ESPP	28		—		2,502								2,502
Share-based compensation expense					13,681								13,681
Repurchase of shares to satisfy tax obligations					(704)								(704)
Repurchase of common stock	(638)						(123,626)						(123,626)
Cash dividends paid to stockholders											(101,862)		(101,862)
Change in fair value of interest rate swaps, net of taxes									3,150				3,150
Net income											234,137		234,137
Stockholders’ equity at September 24, 2022	110,587		$	1,414	$	1,236,161	$	(4,763,862)	$	12,298	$	5,455,134	$	1,941,145

Page 6

Index


	Common Stock				Additional Paid-in Capital		Treasury Stock		Accum. Other Comp. (Loss) / Income		Retained Earnings		Total Stockholders’ Equity
Shares		Dollars
Stockholders’ equity at December 26, 2020	116,246		$	1,401	$	1,095,500	$	(3,356,953)	$	(3,243)	$	4,187,135	$	1,923,840
Common stock issuance under stock award plans & ESPP	941		8		58,700								58,708
Share-based compensation expense					12,318								12,318
Repurchase of shares to satisfy tax obligations					(12,067)								(12,067)
Repurchase of common stock	(1,600)						(253,409)						(253,409)
Cash dividends paid to stockholders											(60,570)		(60,570)
Change in fair value of interest rate swaps, net of taxes									2,125				2,125
Net income											181,354		181,354
Stockholders’ equity at March 27, 2021	115,587		$	1,409	$	1,154,451	$	(3,610,362)	$	(1,118)	$	4,307,919	$	1,852,299

Common stock issuance under stock award plans & ESPP	154		1		11,317								11,318
Share-based compensation expense					10,876								10,876
Repurchase of shares to satisfy tax obligations					(1,521)								(1,521)
Repurchase of common stock	(1,118)						(203,305)						(203,305)
Cash dividends paid to stockholders											(59,896)		(59,896)
Change in fair value of interest rate swaps, net of taxes									320				320
Net income											370,022		370,022
Stockholders’ equity at June 26, 2021	114,623		$	1,410	$	1,175,123	$	(3,813,667)	$	(798)	$	4,618,045	$	1,980,113

Common stock issuance under stock award plans & ESPP	67		—		5,167								5,167
Share-based compensation expense					12,543								12,543
Repurchase of shares to satisfy tax obligations					(1,048)								(1,048)
Repurchase of common stock	(744)						(141,259)						(141,259)
Cash dividends paid to stockholders											(59,369)		(59,369)
Change in fair value of interest rate swaps, net of taxes									206				206
Net income											224,400		224,400
Stockholders’ equity at September 25, 2021	113,946		$	1,410	$	1,191,785	$	(3,954,926)	$	(592)	$	4,783,076	$	2,020,753

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 7

Index

TRACTOR SUPPLY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Fiscal Nine Months Ended
	September 24, 2022		September 25, 2021
Cash flows from operating activities:
Net income	$	817,842	$	775,776
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	248,242		194,731
Loss on disposition of property and equipment	1,453		3,295
Share-based compensation expense	38,531		35,737
Deferred income taxes	41,977		14,996
Change in assets and liabilities:
Inventories	(487,001)		(416,503)
Prepaid expenses and other current assets	(47,823)		(15,891)
Accounts payable	63,963		221,717
Accrued employee compensation	(29,228)		2,306
Other accrued expenses	(40,241)		74,680
Income taxes	13,612		(26,003)
Other	5,003		6,996
Net cash provided by operating activities	626,330		871,837
Cash flows from investing activities:
Capital expenditures	(451,154)		(382,358)
Proceeds from sale of property and equipment	169		1,094

Net cash used in investing activities	(450,985)		(381,264)
Cash flows from financing activities:
Borrowings under debt facilities	120,000		—
Repayments under debt facilities	(30,000)		—


Principal payments under finance lease liabilities	(3,288)		(3,367)
Repurchase of shares to satisfy tax obligations	(28,376)		(14,636)
Repurchase of common stock	(608,016)		(597,973)
Net proceeds from issuance of common stock	15,497		75,193
Cash dividends paid to stockholders	(307,951)		(179,835)
Net cash used in financing activities	(842,134)		(720,618)
Net decrease in cash and cash equivalents	(666,789)		(230,045)
Cash and cash equivalents at beginning of period	878,030		1,341,756
Cash and cash equivalents at end of period	$	211,241	$	1,111,711

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	16,130	$	16,008
Income taxes	184,887		229,122

Supplemental disclosures of non-cash activities:
Non-cash accruals for property and equipment	$	43,984	$	22,036
Increase of operating lease assets and liabilities from new or modified leases	264,318		534,222
Increase of finance lease assets and liabilities from new or modified leases	5,143		—

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 8

Index

TRACTOR SUPPLY COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General:

Nature of Business

Founded in 1938, Tractor Supply Company (the “Company,” “Tractor Supply,” “we,” “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, ranchers, and all those who enjoy living the rural lifestyle (which we refer to as the “Out Here” lifestyle). The Company's stores are located primarily in towns outlying major metropolitan markets and in rural communities. The Company also owns and operates Petsense, LLC ("Petsense by Tractor Supply"), 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 24, 2022, the Company operated a total of 2,207 retail stores in 49 states (2,027 Tractor Supply retail stores and 180 Petsense by Tractor Supply retail stores) and also offered an expanded assortment of products through the Tractor Supply mobile application and online at TractorSupply.com and Petsense.com.

On October 12, 2022, the Company completed the acquisition of Orscheln Farm and Home, LLC (“Orscheln”). The Company acquired 166 Orscheln stores for approximately $320 million before working capital adjustments. As part of the remedy reached with the Federal Trade Commission ("FTC"), the Company divested 85 store locations to two buyers shortly after the closing of the acquisition. Proceeds from the store divestitures were approximately $72 million. The acquisition was financed with cash-on-hand and borrowings under the 2022 Senior Credit Facility (as defined below). Refer to Note 11, “Subsequent Events” for more information.

Basis of Presentation

The accompanying interim unaudited 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 25, 2021. The results of operations for our interim periods are not necessarily indicative of results for the full fiscal year.

New Accounting Pronouncements Not Yet Adopted

In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, " Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations," which makes a number of changes meant to add certain disclosure requirements for a buyer in a supplier finance program. The amendments are effective for all companies for fiscal years beginning after December 15, 2022 on a retrospective basis. The Company plans to adopt this ASU effective January 1, 2023 and is currently evaluating the impact these disclosures will have on our Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” This collective guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Inter-Bank Offer Rate ("LIBOR") related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The adoption of this guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The primary contract and hedging relationship for which LIBOR was used as of September 24, 2022 are the Senior Credit Facility (as defined below) and related interest rate swap. The Senior Credit Facility was replaced by the 2022 Senior Credit Facility (as defined below) on September 30, 2022. In connection with the debt refinancing, the Company transitioned from LIBOR to the Secured Overnight Financing Rate ("SOFR") and elected the optional expedients under the standard. Refer to Note 11, "Subsequent Events" for more information.

Page 9

Index

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 $1.09 billion in borrowings under its debt facilities as of September 24, 2022 and $1.00 billion in borrowings at each of December 25, 2021 and September 25, 2021. The fair value of the Company's $150 million 3.70% Senior Notes (the "3.70% Senior Notes"), the $200 million term loan (the "November 2020 Term Loan"), and the $90 million in borrowings under the Company's revolving credit facility (the "Revolver") were determined based on market interest rates (Level 2 inputs). The carrying value of borrowings in the 3.70% Senior Notes, the November 2020 Term Loan, and the Revolver all approximate fair value for each period reported.

The fair value of the Company's $650 million 1.75% Senior Notes (the "1.75% Senior Notes") is determined based on quoted prices in active markets, which are considered Level 1 inputs. The carrying value and the fair value of the 1.75% Senior Notes, net of discount were as follows (in thousands):


	September 24, 2022				December 25, 2021				September 25, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value



1.75% Senior Notes	$	638,876	$	492,902	$	637,844	$	614,881	$	637,500	$	628,654

The Company's interest rate swap is carried at fair value, which is determined based on the present value of expected future cash flows using forward rate curves, which is considered a Level 2 input. 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, net of related income taxes, and reclassified into earnings in the same income statement line and period in which the hedged transactions affect earnings. The fair value of the interest rate swap, excluding accrued interest, was as follows (in thousands):


	Fair Value Measurements at
	September 24, 2022		December 25, 2021		September 25, 2021
Interest rate swap assets (Level 2)	$	16,537	$	1,809	$	—

Interest rate swap liabilities (Level 2)	$	—	$	—	$	795

Note 3 – Share-Based Compensation:

Share-based compensation includes stock options, restricted stock units, performance-based restricted share units, and transactions under the Company's 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. Share-based compensation expense is also recognized for the value of the 15% discount on shares purchased by employees as a part of the ESPP. The discount under the ESPP represents the difference between the market value on the first day of the purchase period or the market value on the purchase date, whichever is lower, 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

Page 10

Index

September 24, 2022.

Share-based compensation expense was $13.7 million and $12.5 million for the third quarter of fiscal 2022 and 2021, respectively, and $38.5 million and $35.7 million for the first nine months of fiscal 2022 and 2021, respectively.

Stock Options

The following table summarizes information concerning stock option grants during the first nine months of fiscal 2022:


	Fiscal Nine Months Ended
	September 24, 2022
Stock options granted	141,264
Weighted average exercise price	$	220.70
Weighted average grant date fair value per option	$	49.64

As of September 24, 2022, total unrecognized compensation expense related to non-vested stock options was approximately $9.5 million with a remaining weighted average expense recognition period of 1.9 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 2022:


	Fiscal Nine Months Ended
	September 24, 2022
Restricted stock units granted	196,545
Weighted average grant date fair value per share - Restricted stock units	$	208.86
Performance-based restricted share units granted (a)	53,050
Weighted average grant date fair value per share - Performance-based restricted share units	$	223.76

(a) Assumes 100% target level achievement of the relative performance targets.

In the first nine months of fiscal 2022, the Company granted performance-based restricted share unit 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 and also include a relative total shareholder return modifier. 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-based restricted share unit awards, which may be higher or lower than the target, will be determined by the level of achievement of the performance goals and the relative total shareholder return modifier. If the performance targets are achieved, the units will be issued based on the achievement level, inclusive of the relative total shareholder return modifier, and the grant date fair value and will cliff vest in full on the third anniversary of the date of the grant, subject to continued employment.

As of September 24, 2022, total unrecognized compensation expense related to non-vested restricted stock units and non-vested performance-based restricted share units was approximately $68.9 million with a remaining weighted average expense recognition period of 2.0 years.

Page 11

Index

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
	September 24, 2022					September 25, 2021
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic net income per share:	$	234,137	110,861	$	2.11	$	224,400	114,223	$	1.96
Dilutive effect of share-based awards	—		699	(0.01)		—		970	(0.01)
Diluted net income per share:	$	234,137	111,560	$	2.10	$	224,400	115,193	$	1.95


	Fiscal Nine Months Ended					Fiscal Nine Months Ended
	September 24, 2022					September 25, 2021
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic net income per share:	$	817,842	111,660	$	7.32	$	775,776	115,170	$	6.74
Dilutive effect of share-based awards	—		801	(0.05)		—		1,000	(0.06)
Diluted net income per share:	$	817,842	112,461	$	7.27	$	775,776	116,170	$	6.68

Anti-dilutive stock awards excluded from the above calculations totaled approximately 0.1 million for fiscal three months ended September 24, 2022 and less than 0.1 million shares for the fiscal three months ended September 25, 2021. Anti-dilutive stock awards excluded from the above calculations totaled approximately 0.1 million shares for the fiscal nine months ended September 24, 2022 and less than 0.1 million shares for the fiscal nine months ended September 25, 2021.

Page 12

Index

Note 5 – Debt:

The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):


	September 24, 2022		December 25, 2021		September 25, 2021
1.75% Senior Notes due 2030	$	650.0	$	650.0	$	650.0
3.70% Senior Notes due 2029 (a)	150.0		150.0		150.0
Senior Credit Facility:
November 2020 Term Loan	200.0		200.0		200.0
Revolver	90.0		—		—
Total outstanding borrowings	1,090.0		1,000.0		1,000.0
Less: unamortized debt discounts and issuance costs	(12.1)		(13.6)		(14.1)
Total debt	1,077.9		986.4		985.9
Less: current portion of long-term debt	—		—		—
Long-term debt	$	1,077.9	$	986.4	$	985.9

Outstanding letters of credit	$	55.8	$	52.9	$	46.5

(a) Also referred to herein as the "Note Purchase Agreement," referring to the Note Purchase and Private Shelf Agreement dated as of August 14, 2017 by and among the Company, PGIM, Inc. ("Prudential") and the noteholders party thereto, as amended through September 24, 2022, under which the notes were purchased. The Note Purchase Agreement was further amended on September 30, 2022 and November 2, 2022. Refer to Note 11, "Subsequent Events" for information regarding the amendments.

Borrowings under both the Company's $500 million Revolver and the Company's November 2020 Term Loan, each under the Company's senior credit facility (the "Senior Credit Facility"), bore interest either at the bank’s base rate (6.250% at September 24, 2022) plus an additional amount ranging from 0.000% to 0.375% (0.125% at September 24, 2022) or at LIBOR (3.080% at September 24, 2022) plus an additional amount ranging from 0.875% to 1.375% per annum (1.125% at September 24, 2022), adjusted based on the Company's public credit ratings. The Company was also required to pay, quarterly in arrears, a commitment fee related to unused capacity on the Revolver ranging from 0.090% to 0.200% per annum (0.125% at September 24, 2022), adjusted based on the Company's public credit ratings. Refer to Note 11, "Subsequent Events" for information regarding the Company's entry into a new credit facility on September 30, 2022. The 2022 Senior Credit Facility (as defined below) replaced the Company's Senior Credit Facility. Proceeds from borrowings under the 2022 Senior Credit Facility were used to pay off the Senior Credit Facility.

The Company has entered into an interest rate swap agreement in order to hedge its exposure to variable rate interest payments associated with the Senior Credit Facility, which was replaced by the 2022 Senior Credit Facility (as defined below). The interest rate swap agreement will mature on March 18, 2025 and the notional amount of the agreement is fixed at $200 million.

Covenants and Default Provisions of the Debt Agreements

As of September 24, 2022, the Senior Credit Facility and the Note Purchase Agreement (collectively, the “Debt Agreements”) required 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 was required to be greater than or equal to 2.0 to 1.0 as of the last day of each fiscal quarter. The leverage ratio compares total funded debt to consolidated EBITDAR. The leverage ratio was required to be less than or equal to 4.0 to 1.0 as of the last day of each fiscal quarter. The Debt Agreements also contain certain other restrictions regarding additional subsidiary indebtedness, business operations, subsidiary guarantees, mergers, consolidations and sales of assets, transactions with subsidiaries or affiliates, and liens. As of September 24, 2022, 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, amounts outstanding 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, a whole payment may become due and payable.

Page 13

Index

The Note Purchase Agreement also requires that, in the event the Company amends its 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 – 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 Company's Board of Directors.

Dividends

During the first nine months of fiscal 2022 and fiscal 2021, the Company's Board of Directors declared the following cash dividends:


Date Declared	Dividend Amount Per Share of Common Stock		Record Date	Date Paid

August 4, 2022	$	0.92	August 22, 2022	September 7, 2022
May 10, 2022	$	0.92	May 25, 2022	June 8, 2022
January 26, 2022	$	0.92	February 21, 2022	March 8, 2022

August 4, 2021	$	0.52	August 23, 2021	September 8, 2021
May 5, 2021	$	0.52	May 24, 2021	June 8, 2021
January 27, 2021	$	0.52	February 22, 2021	March 9, 2021

It is the present intention of the Company’s Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company’s 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 Company’s Board of Directors deem relevant.

On November 2, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.92 per share of the Company's outstanding common stock. The dividend will be paid on December 6, 2022, to stockholders of record as of the close of business on November 21, 2022.

Note 7 – Treasury Stock:

The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program which was announced in February 2007. The total authorized amount was increased by the Company's Board of Directors on January 26, 2022 by $2.00 billion for a total authorization of $6.50 billion, exclusive of any fees, commissions, or other expenses related to such repurchases. The share repurchase program does not have an expiration date. 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, temporarily paused, or terminated at any time without prior notice. As of September 24, 2022, the Company had remaining authorization under the share repurchase program of $1.74 billion, exclusive of any fees, commissions, or other expenses.

Page 14

Index

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 months and fiscal nine months ended September 24, 2022 and September 25, 2021, respectively (in thousands, except per share amounts):


	Fiscal Three Months Ended				Fiscal Nine Months Ended
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Total number of shares repurchased	638		744		2,938		3,462
Average price paid per share	$	193.70	$	190.03	$	206.95	$	172.73
Total cash paid for share repurchases	$	123,626	$	141,259	$	608,016	$	597,973

Note 8 – Income Taxes:

The Company’s effective income tax rate was 22.0% in the third quarter of fiscal 2022 compared to 22.9% in the third quarter of fiscal 2021. The decrease in the effective income tax rate in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021 was driven primarily by an increase in certain state tax credits. The effective income tax rate was 22.5% in the first nine months of fiscal 2022 compared to 21.9% in the first nine months of fiscal 2021. The increase in the effective income tax rate in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021 was driven primarily by a decrease in the benefit derived from share-based compensation awards.

Note 9 – Commitments and Contingencies:

Construction and Real Estate Commitments

The Company is building new distribution centers in Maumelle, Arkansas and Navarre, Ohio, for which, as of September 24, 2022, the Company had contractual commitments of approximately $94.3 million and $20.5 million, respectively.

Letters of Credit

At September 24, 2022, the Company had $55.8 million in outstanding letters of credit under the Senior Credit Facility.

Litigation

The Company is involved in various litigation matters arising in the ordinary course of business. The Company believes that, based upon information currently available, 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. However, litigation and other legal matters involve an element of uncertainty. Future developments in such matters, including adverse decisions or settlements or resulting required changes to the Company's business operations, could affect our consolidated operating results when resolved in future periods or could result in liability or other amounts material to the Company's Condensed Consolidated Financial Statements.

Note 10 – 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 24, 2022 and September 25, 2021:

Page 15

Index


	Fiscal Three Months Ended				Fiscal Nine Months Ended
Product Category:	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Livestock and Pet	54	%	49	%	51	%	48	%
Seasonal, Gift and Toy Products	18		19		20		21
Hardware, Tools and Truck	19		22		19		21
Clothing and Footwear	5		5		6		6
Agriculture	4		5		4		4
Total	100	%	100	%	100	%	100	%

Note 11 – Subsequent Events:

Credit Facility Refinancing

On September 30, 2022, the Company entered into a new credit agreement, providing for a credit facility (the “2022 Senior Credit Facility”), consisting of a revolving credit facility in the maximum principal amount of $1.20 billion (with a sublimit of $50 million for swingline loans and a sublimit of $150 million for letters of credit). In addition, the Company has an option to increase the revolving credit facility or establish term loans in an amount not to exceed $500 million in the aggregate, subject to, among other things, the receipt of commitments for the increased amount. The 2022 Senior Credit Facility is unsecured and has a five-year term with two options to request that the lenders extend the maturity date of the notes held by each lender for one year.

Borrowings for the revolving credit facility will bear interest at either the bank’s base rate plus an additional margin ranging from 0.000% to 0.250% or adjusted SOFR plus an additional margin ranging from 0.750% to 1.250% adjusted based on the Company's public credit ratings. The Company is also required to pay, quarterly in arrears, a commitment fee related to unused capacity ranging from 0.080% to 0.150% per annum, adjusted based on the Company's public credit ratings.

The 2022 Senior Credit Facility replaced the Company’s Senior Credit Facility. Proceeds from borrowings under the 2022 Senior Credit Facility were used to pay off the Senior Credit Facility.

In connection with the debt refinancing, the Company amended its interest rate swap agreement to convert the reference rate from one-month LIBOR to one-month term SOFR and elected the optional expedients offered under the Accounting Standards Codification 848, Reference Rate Reform, which allows the cash flow hedge to continue being recognized under hedge accounting without dedesignation.

Amendments to Note Purchase and Private Shelf Agreement

On September 30, 2022, the Company entered into a Third Amendment to Note Purchase and Private Shelf Agreement (the “Third Amendment”) by and among the Company, PGIM, Inc. (“Prudential”) and other holders of the notes. The Third Amendment modifies certain provisions of the Note Purchase and Private Shelf Agreement dated as of August 14, 2017 by and among the Company, Prudential and the noteholders party thereto, as amended (collectively as amended by the Amendment, the“Note Purchase Facility”) and conforms certain representations, warranties and covenants with the 2022 Senior Credit Facility.

On November 2, 2022, the Company entered into a Fourth Amendment to Note Purchase and Private Shelf Agreement (the “Fourth Amendment”) by and among the Company, Prudential and other holders of the notes which also amends the Note Purchase Facility. The Fourth Amendment extends the issuance period in which the Company may issue and sell, and Prudential may consider in its sole discretion the purchase of, in one or a series of transactions, additional senior unsecured notes of the Company (the “Shelf Note”), in an aggregate principal amount of up to $150 million under the Note Purchase Facility. The Shelf Notes may be issued through November 1, 2025, unless either party terminates such issuance right.

Acquisition of Orscheln Farm and Home, LLC

On October 12, 2022, the Company completed the acquisition of Orscheln. The Company acquired 166 Orscheln stores for approximately $320 million before working capital adjustments. Consistent with the remedy negotiated with the FTC, the Company divested 85 locations to two buyers, Bomgaars Supply, Inc. (73 stores) and Buchheit Enterprises, Inc. (12 stores), shortly after closing the acquisition. Proceeds from the store divestitures were approximately $72 million. In addition, the

Page 16

Index

Company has agreed to sell the Orscheln corporate headquarters and distribution center to Bomgaars for approximately $10 million within 15 months after the closing of the acquisition. The acquisition was financed with cash-on-hand and borrowings under the 2022 Senior Credit Facility.

Page 17

Index

Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations