Document
false--12-28Q320190000916365TRACTOR SUPPLY CO /DE/0.0080.0084000000004000000001.001.00400004000000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 28, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission file number   000-23314
imagea08.jpg
TRACTOR SUPPLY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
13-3139732
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
5401 Virginia Way, Brentwood, Tennessee 37027
(Address of Principal Executive Offices and Zip Code)
(615) 440-4000
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
 
Non-accelerated filer
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes    No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.008 par value
 
TSCO
 
NASDAQ Global Select Market
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class
 
Outstanding at October 26, 2019
Common Stock, $.008 par value
 
118,386,226



TRACTOR SUPPLY COMPANY

INDEX


 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 




Page 2

Index

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements
TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)
 
September 28,
2019
 
December 29,
2018
 
September 29,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
82,640

 
$
86,299

 
$
71,302

Inventories
1,812,772

 
1,589,542

 
1,737,273

Prepaid expenses and other current assets
104,486

 
114,447

 
109,478

Income taxes receivable
5,600

 
4,111

 
23,655

Total current assets
2,005,498

 
1,794,399

 
1,941,708

 
 
 
 
 
 
Property and equipment, net
1,143,071

 
1,134,464

 
1,112,049

Operating lease right-of-use assets
2,133,238

 

 

Goodwill and other intangible assets
124,492

 
124,492

 
124,492

Deferred income taxes

 
6,607

 
13,485

Other assets
22,997

 
25,300

 
29,200

Total assets
$
5,429,296

 
$
3,085,262

 
$
3,220,934

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Accounts payable
$
679,791

 
$
619,981

 
$
683,672

Accrued employee compensation
49,236

 
54,046

 
51,673

Other accrued expenses
218,774

 
232,416

 
209,199

Current portion of long-term debt
30,000

 
26,250

 
26,250

Current portion of finance lease liabilities
3,884

 
3,646

 
3,747

Current portion of operating lease liabilities
270,038

 

 

Income taxes payable

 
1,768

 

Total current liabilities
1,251,723

 
938,107

 
974,541

 
 
 
 
 
 
Long-term debt
613,885

 
381,100

 
547,505

Finance lease liabilities, less current portion
29,174

 
29,270

 
29,690

Operating lease liabilities, less current portion
1,966,363

 

 

Deferred income taxes
1,888

 

 

Deferred rent

 
107,038

 
108,487

Other long-term liabilities
74,441

 
67,927

 
65,414

Total liabilities
3,937,474

 
1,523,442

 
1,725,637

 
 
 
 
 
 
Stockholders’ equity:
 

 
 

 
 

Preferred stock

 

 

Common stock
1,388

 
1,375

 
1,372

Additional paid-in capital
950,908

 
823,413

 
793,090

Treasury stock
(2,970,654
)
 
(2,480,677
)
 
(2,420,106
)
Accumulated other comprehensive income
73

 
3,814

 
5,969

Retained earnings
3,510,107

 
3,213,895

 
3,114,972

Total stockholders’ equity
1,491,822

 
1,561,820

 
1,495,297

Total liabilities and stockholders’ equity
$
5,429,296

 
$
3,085,262

 
$
3,220,934

 
 
 
 
 
 
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 at all periods presented. 173,465, 171,887, and 171,488 shares issued; 118,480, 121,828, and 122,120 shares outstanding at September 28, 2019, December 29, 2018, and September 29, 2018, respectively.
Treasury Stock (at cost, shares in thousands): 54,985, 50,059, and 49,368 shares at September 28, 2019, December 29, 2018, and September 29, 2018, 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 Months Ended
 
For the Fiscal Nine Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net sales
$
1,984,144

 
$
1,881,625

 
$
6,160,146

 
$
5,777,775

Cost of merchandise sold
1,289,904

 
1,228,493

 
4,030,177

 
3,791,580

Gross profit
694,240

 
653,132

 
2,129,969

 
1,986,195

Selling, general and administrative expenses
482,604

 
454,998

 
1,432,603

 
1,333,457

Depreciation and amortization
49,819

 
44,986

 
144,584

 
131,383

Operating income
161,817

 
153,148

 
552,782

 
521,355

Interest expense, net
4,900

 
4,460

 
15,006

 
13,906

Income before income taxes
156,917

 
148,688

 
537,776

 
507,449

Income tax expense
34,784

 
31,904

 
119,601

 
111,943

Net income
$
122,133

 
$
116,784

 
$
418,175

 
$
395,506

 
 
 
 
 
 
 
 
Net income per share – basic
$
1.03

 
$
0.96

 
$
3.48

 
$
3.22

Net income per share – diluted
$
1.02

 
$
0.95

 
$
3.45

 
$
3.20

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
118,956

 
121,876

 
120,180

 
122,818

Diluted
120,058

 
122,761

 
121,239

 
123,570

 
 
 
 
 
 
 
 
Dividends declared per common share outstanding
$
0.35

 
$
0.31

 
$
1.01

 
$
0.89


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 Months Ended
 
For the Fiscal Nine Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net income
$
122,133

 
$
116,784

 
$
418,175

 
$
395,506

 
 
 
 
 
 
 
 
Other comprehensive (loss)/income:
 
 
 
 
 
 
 
Change in fair value of interest rate swaps,
net of taxes
(809
)
 
227

 
(4,458
)
 
2,611

Total other comprehensive (loss)/income
(809
)
 
227

 
(4,458
)
 
2,611

Total comprehensive income
$
121,324

 
$
117,011

 
$
413,717

 
$
398,117


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 29, 2018
121,828

 
$
1,375

 
$
823,413

 
$
(2,480,677
)
 
$
3,814

 
$
3,213,895

 
$
1,561,820

Common stock issuance under stock award plans & ESPP
570

 
5

 
34,727

 
 
 
 
 
 
 
34,732

Share-based compensation
 
 
 
 
9,624

 
 
 
 
 
 
 
9,624

Repurchase of shares to satisfy tax obligations
 
 
 
 
(3,026
)
 
 
 
 
 
 
 
(3,026
)
Repurchase of common stock
(1,724
)
 
 
 
 
 
(155,319
)
 
 
 
 
 
(155,319
)
Dividends paid
 
 
 
 
 
 
 
 
 
 
(37,623
)
 
(37,623
)
Change in fair value of interest rate swaps, net of taxes
 
 
 
 
 
 
 
 
(1,464
)
 
 
 
(1,464
)
Net income
 
 
 
 
 
 
 
 
 
 
76,832

 
76,832

Cumulative adjustment as a result of ASU 2017-12 adoption
 
 
 
 
 
 
 
 
717

 
(717
)
 

Stockholders’ equity at
March 30, 2019
120,674

 
$
1,380

 
$
864,738

 
$
(2,635,996
)
 
$
3,067

 
$
3,252,387

 
$
1,485,576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issuance under stock award plans & ESPP
781

 
6

 
54,693

 
 
 
 
 
 
 
54,699

Share-based compensation
 
 
 
 
8,776

 
 
 
 
 
 
 
8,776

Repurchase of shares to satisfy tax obligations
 
 
 
 
(113
)
 
 
 
 
 
 
 
(113
)
Repurchase of common stock
(1,732
)
 
 
 
 
 
(178,916
)
 
 
 
 
 
(178,916
)
Dividends paid
 
 
 
 
 
 
 
 
 
 
(42,105
)
 
(42,105
)
Change in fair value of interest rate swaps, net of taxes
 
 
 
 
 
 
 
 
(2,185
)
 
 
 
(2,185
)
Net income
 
 
 
 
 
 
 
 
 
 
219,210

 
219,210

Stockholders’ equity at
June 29, 2019
119,723

 
$
1,386

 
$
928,094

 
$
(2,814,912
)
 
$
882

 
$
3,429,492

 
$
1,544,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issuance under stock award plans & ESPP
227

 
2

 
16,110

 
 
 
 
 
 
 
16,112

Share-based compensation
 
 
 
 
7,355

 
 
 
 
 
 
 
7,355

Repurchase of shares to satisfy tax obligations
 
 
 
 
(651
)
 
 
 
 
 
 
 
(651
)
Repurchase of common stock
(1,470
)
 
 
 
 
 
(155,742
)
 
 
 
 
 
(155,742
)
Dividends paid
 
 
 
 
 
 
 
 
 
 
(41,518
)
 
(41,518
)
Change in fair value of interest rate swaps, net of taxes
 
 
 
 
 
 
 
 
(809
)
 
 
 
(809
)
Net income
 
 
 
 
 
 
 
 
 
 
122,133

 
122,133

Stockholders’ equity at
September 28, 2019
118,480

 
$
1,388

 
$
950,908

 
$
(2,970,654
)
 
$
73

 
$
3,510,107

 
$
1,491,822


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


Page 6

Index



TRACTOR SUPPLY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(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 30, 2017
125,303

 
$
1,363

 
$
716,228

 
$
(2,130,901
)
 
$
3,358

 
$
2,828,625

 
$
1,418,673

Common stock issuance under stock award plans & ESPP
123

 
1

 
4,362

 
 
 
 
 
 
 
4,363

Share-based compensation
 
 
 
 
8,567

 
 
 
 
 
 
 
8,567

Repurchase of shares to satisfy tax obligations
 
 
 
 
(569
)
 
 
 
 
 
 
 
(569
)
Repurchase of common stock
(2,367
)
 
 
 
 
 
(157,463
)
 
 
 
 
 
(157,463
)
Dividends paid
 
 
 
 
 
 
 
 
 
 
(33,591
)
 
(33,591
)
Change in fair value of interest rate swaps, net of taxes
 
 
 
 
 
 
 
 
1,832

 
 
 
1,832

Net income
 
 
 
 
 
 
 
 
 
 
71,433

 
71,433

Stockholders’ equity at
March 31, 2018
123,059

 
$
1,364

 
$
728,588

 
$
(2,288,364
)
 
$
5,190

 
$
2,866,467

 
$
1,313,245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issuance under stock award plans & ESPP
229

 
2

 
9,980

 
 
 
 
 
 
 
9,982

Share-based compensation
 
 
 
 
7,842

 
 
 
 
 
 
 
7,842

Repurchase of common stock
(1,477
)
 
 
 
 
 
(95,082
)
 
 
 
 
 
(95,082
)
Dividends paid
 
 
 
 
 
 
 
 
 
 
(37,786
)
 
(37,786
)
Change in fair value of interest rate swaps, net of taxes
 
 
 
 
 
 
 
 
552

 
 
 
552

Net income
 
 
 
 
 
 
 
 
 
 
207,289

 
207,289

Stockholders’ equity at
June 30, 2018
121,811

 
$
1,366

 
$
746,410

 
$
(2,383,446
)
 
$
5,742

 
$
3,035,970

 
$
1,406,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issuance under stock award plans & ESPP
761

 
6

 
40,355

 
 
 
 
 
 
 
40,361

Share-based compensation
 
 
 
 
6,378

 
 
 
 
 
 
 
6,378

Repurchase of shares to satisfy tax obligations
 
 
 
 
(53
)
 
 
 
 
 
 
 
(53
)
Repurchase of common stock
(452
)
 
 
 
 
 
(36,660
)
 
 
 
 
 
(36,660
)
Dividends paid
 
 
 
 
 
 
 
 
 
 
(37,782
)
 
(37,782
)
Change in fair value of interest rate swaps, net of taxes
 
 
 
 
 
 
 
 
227

 
 
 
227

Net income
 
 
 
 
 
 
 
 
 
 
116,784

 
116,784

Stockholders’ equity at
September 29, 2018
122,120

 
$
1,372

 
$
793,090

 
$
(2,420,106
)
 
$
5,969

 
$
3,114,972

 
$
1,495,297


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 28,
2019
 
September 29,
2018
Cash flows from operating activities:
 
 
 
Net income
$
418,175

 
$
395,506

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
144,584

 
131,383

Gain on disposition of property and equipment
(262
)
 
(285
)
Share-based compensation expense
25,755

 
22,787

Deferred income taxes
8,495

 
5,009

Change in assets and liabilities:
 

 
 

Inventories
(223,230
)
 
(284,065
)
Prepaid expenses and other current assets
9,961

 
(21,226
)
Accounts payable
59,810

 
107,104

Accrued employee compensation
(4,810
)
 
20,000

Other accrued expenses
(21,622
)
 
667

Income taxes
(3,257
)
 
(29,667
)
Other
728

 
6,206

Net cash provided by operating activities
414,327

 
353,419

Cash flows from investing activities:
 

 
 

Capital expenditures
(144,342
)
 
(193,693
)
Proceeds from sale of property and equipment
2,317

 
2,029

Net cash used in investing activities
(142,025
)
 
(191,664
)
Cash flows from financing activities:
 

 
 

Borrowings under debt facilities
947,000

 
968,500

Repayments under debt facilities
(710,750
)
 
(820,750
)
Debt issuance costs

 
(346
)
Principal payments under finance lease liabilities
(2,741
)
 
(2,725
)
Repurchase of shares to satisfy tax obligations
(3,790
)
 
(622
)
Repurchase of common stock
(489,977
)
 
(289,205
)
Net proceeds from issuance of common stock
105,543

 
54,706

Cash dividends paid to stockholders
(121,246
)
 
(109,159
)
Net cash used in financing activities
(275,961
)
 
(199,601
)
Net change in cash and cash equivalents
(3,659
)
 
(37,846
)
Cash and cash equivalents at beginning of period
86,299

 
109,148

Cash and cash equivalents at end of period
$
82,640

 
$
71,302

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest                                                                        
$
15,189

 
$
15,445

Income taxes
112,693

 
137,041

 
 
 
 
Supplemental disclosures of non-cash activities:
 
 
 
Non-cash accruals for construction in progress
$
10,981

 
$
15,521

Operating lease assets and liabilities recognized upon adoption of ASC 842
2,084,880

 

Increase of operating lease assets and liabilities from new or modified leases
240,969

 

Increase of finance lease assets and liabilities from new or modified leases
2,883

 


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 1General:

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.


Page 9

Index

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.

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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 5Debt:

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




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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

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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.


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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,

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2019, the Company had not breached any of these provisions or posted any collateral related to the underlying interest rate swap agreements.

Note 7Leases:

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.


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Index

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.


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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