UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549



FORM 10-Q

(Mark One)



 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 26, 2016April 1, 2017



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 1-5039



WEIS MARKETS, INC.
(Exact name of registrant as specified in its charter)





 

 

PENNSYLVANIA
(State or other jurisdiction of incorporation or organization)

 

24-0755415
(I.R.S. Employer Identification No.)



1000 S. Second Street
P. O. Box 471
Sunbury, Pennsylvania
(Address of principal executive offices)

 



17801-0471
(Zip Code)







 

Registrant's telephone number, including area code: (570) 286-4571

Registrant's web address:  www.weismarkets.com



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 [X]  No [   ]



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes [X]  No [   ]



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”filer,”  “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 



 

 

 

Large accelerated filer  [  ]   

 

 

Accelerated filer  [X]

Non-accelerated filer   [  ]

(Do not check if a smaller reporting company)

 

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 [X]



As of May 5, 2016,11, 2017, there were issued and outstanding 26,898,443 shares of the registrant’s common stock.


 

WEIS MARKETS, INC.



TABLE OF CONTENTS





 

FORM 10-Q

Page

Part I. Financial Information

 

Item 1. Financial Statements

 

Consolidated Balance Sheets

1

Consolidated Statements of Income

2

Consolidated Statements of Comprehensive Income

3

Consolidated Statements of Cash Flows

4

Notes to Consolidated Financial Statements

5

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

109

Item 3. Quantitative and Qualitative Disclosures about Market Risk

1715

Item 4. Controls and Procedures

1715

Part II. Other Information

 

Item 6. Exhibits

1816

Signatures

1816

Exhibit 31.1 Rule 13a-14(a) Certification - CEO

 

Exhibit 31.2 Rule 13a-14(a) Certification - CFO

 

Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350

 





 


 

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

WEIS MARKETS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)



 

 

 

 

 

 

 

 

 

 

 

March 26, 2016

 

 

December 26, 2015

 

 

 

 

 

(dollars in thousands)

 

(unaudited)

 

 

 

 

April 1, 2017

 

 

December 31, 2016

Assets

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

30,401 

 

$

17,596 

$

12,295 

 

$

14,653 

Marketable securities

 

78,561 

 

 

91,629 

 

64,279 

 

 

67,171 

SERP investment

 

9,842 

 

 

9,079 

 

12,640 

 

 

11,154 

Accounts receivable, net

 

82,994 

 

 

88,083 

 

77,455 

 

 

96,170 

Inventories

 

226,047 

 

 

229,399 

 

275,217 

 

 

276,783 

Prepaid expenses and other current assets

 

16,629 

 

 

17,198 

 

16,932 

 

 

16,310 

Income taxes recoverable

 

 -

 

 

1,666 

 

 -

 

 

1,625 

Total current assets

 

444,474 

 

 

454,650 

 

458,818 

 

 

483,866 

Property and equipment, net

 

745,679 

 

 

738,985 

 

870,072 

 

 

878,195 

Goodwill

 

35,162 

 

 

35,162 

 

52,330 

 

 

52,330 

Intangible and other assets, net

 

7,663 

 

 

7,162 

 

18,173 

 

 

16,913 

Total assets

$

1,232,978 

 

$

1,235,959 

$

1,399,393 

 

$

1,431,304 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

138,697 

 

$

160,441 

$

170,897 

 

$

199,159 

Accrued expenses

 

43,616 

 

 

37,819 

 

34,949 

 

 

50,947 

Accrued self-insurance

 

17,301 

 

 

16,770 

 

14,912 

 

 

19,330 

Deferred revenue, net

 

4,382 

 

 

6,898 

 

5,252 

 

 

6,730 

Income taxes payable

 

11,107 

 

 

 -

 

323 

 

 

 -

Total current liabilities

 

215,103 

 

 

221,928 

 

226,333 

 

 

276,166 

Long-term debt

 

70,874 

 

 

64,476 

Postretirement benefit obligations

 

13,362 

 

 

14,368 

 

14,969 

 

 

15,277 

Accrued self-insurance

 

22,761 

 

 

22,761 

 

21,353 

 

 

21,353 

Deferred income taxes

 

96,326 

 

 

97,020 

 

126,932 

 

 

119,445 

Other

 

962 

 

 

8,135 

 

8,380 

 

 

7,865 

Total liabilities

 

348,514 

 

 

364,212 

 

468,841 

 

 

504,582 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

Common stock, no par value, 100,800,000 shares authorized, 33,047,807 shares issued,

 

 

 

 

 

 

 

 

 

 

26,898,443 shares outstanding

 

9,949 

 

 

9,949 

 

9,949 

 

 

9,949 

Retained earnings

 

1,019,953 

 

 

1,007,894 

 

1,066,544 

 

 

1,062,778 

Accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

(Net of deferred taxes of $3,782 in 2016 and $3,323 in 2015)

 

5,419 

 

 

4,761 

(Net of deferred taxes of $3,393 in 2017 and $3,382 in 2016)

 

4,916 

 

 

4,852 

 

1,035,321 

 

 

1,022,604 

 

1,081,409 

 

 

1,077,579 

Treasury stock at cost, 6,149,364 shares

 

(150,857)

 

 

(150,857)

 

(150,857)

 

 

(150,857)

Total shareholders’ equity

 

884,464 

 

 

871,747 

 

930,552 

 

 

926,722 

Total liabilities and shareholders’ equity

$

1,232,978 

 

$

1,235,959 

$

1,399,393 

 

$

1,431,304 

See accompanying notes to Consolidated Financial  Statements.

1


 

 

Table of Contents

WEIS MARKETS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

13 Weeks Ended

(dollars in thousands, except shares and per share amounts)

March 26, 2016

 

March 28, 2015

April 1, 2017

March 26, 2016

Net sales

$

738,204 

 

$

712,426 

$

852,229 

 

$

738,204 

Cost of sales, including warehousing and distribution expenses

 

531,092 

 

 

517,311 

 

622,433 

 

 

531,092 

Gross profit on sales

 

207,112 

 

 

195,115 

 

229,796 

 

 

207,112 

Operating, general and administrative expenses

 

175,842 

 

 

175,250 

 

209,546 

 

 

175,842 

Income from operations

 

31,270 

 

 

19,865 

 

20,250 

 

 

31,270 

Investment income

 

637 

 

 

532 

Investment income and interest expense

 

824 

 

 

637 

Income before provision for income taxes

 

31,907 

 

 

20,397 

 

21,074 

 

 

31,907 

Provision for income taxes

 

11,778 

 

 

7,074 

 

9,238 

 

 

11,778 

Net income

$

20,129 

 

$

13,323 

$

11,836 

 

$

20,129 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and diluted

 

26,898,443 

 

 

26,898,443 

 

26,898,443 

 

 

26,898,443 

Cash dividends per share

$

0.30 

 

$

0.30 

$

0.30 

 

$

0.30 

Basic and diluted earnings per share

$

0.75 

 

$

0.50 

$

0.44 

 

$

0.75 

See accompanying notes to Consolidated Financial  Statements.

2


 

 

Table of Contents

WEIS MARKETS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

13 Weeks Ended

(dollars in thousands)

March 26, 2016

 

March 28, 2015

April 1, 2017

March 26, 2016

Net income

$

20,129 

 

$

13,323 

$

11,836 

 

$

20,129 

Other comprehensive income by component, net of tax:

 

 

 

 

 

 

 

 

 

 

Available-for-sale marketable securities

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during period

 

 

 

 

 

 

 

 

 

 

(Net of deferred taxes of $570 and $13, respectively)

 

816 

 

 

18 

(Net of deferred taxes of $11 and $570, respectively)

 

64 

 

 

816 

Reclassification adjustment for gains included in net income

 

 

 

 

 

 

 

 

 

 

(Net of deferred taxes of $111 and $3, respectively)

 

(158)

 

 

(3)

(Net of deferred taxes of $0 and $111, respectively)

 

 -

 

 

(158)

Other comprehensive income, net of tax

 

658 

 

 

15 

 

64 

 

 

658 

Comprehensive income, net of tax

$

20,787 

 

$

13,338 

$

11,900 

 

$

20,787 

See accompanying notes to Consolidated Financial  Statements.



3


 

 

Table of Contents

WEIS MARKETS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

13 Weeks Ended

(dollars in thousands)

 

March 26, 2016

 

March 28, 2015

April 1, 2017

March 26, 2016

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

20,129 

$

13,323 

$

11,836 

$

20,129 

Adjustments to reconcile net income to

 

 

 

 

 

 

 

 

net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

16,233 

 

15,303 

Amortization

 

2,135 

 

1,996 

(Gain) loss on disposition of fixed assets

 

(75)

 

Depreciation and amortization

 

20,962 

 

18,368 

Gain on disposition of fixed assets

 

(796)

 

(75)

Gain on sale of marketable securities

 

(269)

 

(6)

 

 -

 

(269)

Deferred income taxes

 

(1,153)

 

(3,730)

 

7,476 

 

(1,153)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

3,352 

 

3,093 

 

1,566 

 

3,352 

Accounts receivable and prepaid expenses

 

5,658 

 

4,608 

 

17,539 

 

5,658 

Income taxes recoverable

 

1,666 

 

612 

Accounts payable and other liabilities

 

(21,239)

 

(10,030)

 

(45,789)

 

(21,239)

Income taxes payable

 

11,107 

 

5,666 

Income taxes

 

1,948 

 

12,773 

Other

 

525 

 

183 

 

(110)

 

525 

Net cash provided by operating activities

 

38,069 

 

31,026 

 

14,632 

 

38,069 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

(29,935)

 

(20,624)

 

(17,056)

 

(29,935)

Proceeds from the sale of property and equipment

 

124 

 

27 

 

1,142 

 

124 

Purchase of marketable securities

 

(1,284)

 

(9,907)

 

(2,579)

 

(1,284)

Proceeds from maturities of marketable securities

 

1,895 

 

 -

Proceeds from the sale of marketable securities

 

15,213 

 

3,191 

 

4,006 

 

15,213 

Purchase of intangible assets

 

(549)

 

(644)

 

(1,240)

 

(549)

Change in SERP investment

 

(763)

 

(873)

 

(1,486)

 

(763)

Net cash used in investing activities

 

(17,194)

 

(28,830)

 

(15,318)

 

(17,194)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

6,398 

 

 -

Dividends paid

 

(8,070)

 

(8,070)

 

(8,070)

 

(8,070)

Net cash used in financing activities

 

(8,070)

 

(8,070)

 

(1,672)

 

(8,070)

Net increase (decrease) in cash and cash equivalents

 

12,805 

 

(5,874)

Net (decrease) increase in cash and cash equivalents

 

(2,358)

 

12,805 

Cash and cash equivalents at beginning of year

 

17,596 

 

22,986 

 

14,653 

 

17,596 

Cash and cash equivalents at end of period

$

30,401 

$

17,112 

$

12,295 

$

30,401 

See accompanying notes to Consolidated Financial Statements.  There was no cash paid for income taxes in the first quarter of 2017 and $157 thousand paid for income taxes in the first quarter of 2016.  Cash paid for interest related to long-term debt was $258 thousand and $0 in the first quarter of 2017 and 2016, respectively.



 

4


 

Table of Contents

WEIS MARKETS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(1) Significant Accounting Policies
Basis of Presentation:  The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring deferrals and accruals) considered necessary for a fair presentation have been included.  The operating results for the periods presented are not necessarily indicative of the results to be expected for the full year.  The Company has evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited consolidated interim financial statements and there were no material subsequent events which require additional disclosure.  For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's latest Annual Report on Form 10-K.



(2) Current Relevant Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”)(FASB) issued Accounting Standards Update ("ASU")(ASU) 2014-09, Revenue from Contracts with Customers (Topic 606),  whichas amended the existing accounting standards for revenue recognition.  ASU 2014-09by several subsequent ASU’s, which establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services.  The standard was initially effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  In August 2015, the FASB issued a one-year deferral of the effective date of this new guidance resulting in it now being effective for the Company beginning in fiscal year 2018.  In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606), which amends the guidance in ASU 2014-09.  Early adoption is not permitted.  The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.  The Company is currently in the process of evaluating the impact of adoption of the ASU.  The Company expects that the adoption of the ASU will not have a significant impact on its Consolidated Financial Statements.the Company’s point of sale product sales.

   

In August 2014,January 2016, the FASB issued ASU 2014-15,2016-01 PresentationFinancial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Statements – Going Concern (Subtopic 205-40)(Topic 718): DisclosureAssets and Financial Liabilities.  ASU 2016-01 generally requires that equity investments (excluding equity method investments) be measured at fair value with changes in fair value recognized in net income.  The Company expects that the adoption of Uncertainties about an Entity’s Ability to Continue as a Going Concern.ASU 2014-15 provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related note disclosures.  The new requirements are effective for the annual periods ending after December 15, 2016, and for interim periods and annual periods thereafter.  Early adoption is permitted.  Adoption of the new ASU2016-01 will notlikely have an impact on the net income reported in the Company’s Consolidated Financial Statements.

In July 2015,Statements of Income, but will not impact the FASB issued ASU 2015-11, Inventory (Topic 330):  Simplifying the Measurement of Inventory.  ASU 2015-11 amends guidance on the measurement of inventory from lower of costCompany’s comprehensive income or market to net realizable value.  The amendment applies to all inventory other than those measured by Last-In-First-Out (LIFO) and the Retail Inventory Method (RIM).shareholders’ equity.  The amendment is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is permitted.  Adoption2017, with the cumulative effect of the new ASUadoption made to the balance sheet as of the date of adoption.  Adoption will not haveresult in a materialreclassification of the related accumulated unrealized appreciation, net of applicable deferred income taxes, currently included in accumulated other comprehensive income to retained earnings, resulting in no impact on the Company’s Consolidated Financial Statements.shareholders’ equity.



In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  ASU 2015-16 requires that any effect on earnings due to depreciation, amortization or other income effects, due to a change to the provisional amounts be recorded in the current period’s financial statements as if the accounting had been completed at the acquisition date.  The portion of the amount recorded in the current-period earnings, which would have been recorded in the previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date, must be presented separately on the face of the income statement or disclosed in the notes to the financial statements by line item.  The amendment is effective for the fiscal year beginning after December 15, 2015. The amendments are to be applied prospectively to any adjustments occurring after the effective date. Adoption of the ASU did not have an impact on the Company’s 2016 Consolidated Financial Statements.

5


Table of Contents

WEIS MARKETS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(2) Current Relevant Accounting Standards (continued)

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842).  ASU 2016-02 requires lessees to recognize assets and liabilities for the rights and obligations created by their leases with lease terms more than 12 months.  Current guidance only requires capital leases to be recognized on the balance sheet.  However, the ASU 2016-02 now requires that both capital and operating leases be recognized on the balance sheet.  The effect on cash flows will strictly depend on whether the lease is classified as an operating lease or capital lease.  The ASU 2016-02 will require disclosures to aid investors and other financial statement users to better understand the amount, timing and uncertainty of the cash flows arising from leases.  These disclosures are to include qualitative and quantitative information about the amounts recorded in the financial statements.  This update remains unchanged for lessors. However, new guidance contains targeted improvements to align, where necessary, the lessor’s accounting with the lessee’s accounting standards.  ASU 2016-02 will become effective for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years.  The Company is currently in the process of evaluating the impact of adoption of the ASU and expects the adoption to have a significant impact on itsthe Company’s Consolidated Financial Statements.Balance Sheet.



In March 2016, the FASB issued ASU 2016-04 Liabilities – Extinguishments of Liabilities (Suptopic(Subtopic 405-20) Recognition of Breakage for Certain Prepaid Stored-Value Products.  ASU 2016-04 requires the debtor to derecognize a liability, such as a prepaid stored-value product, if and only if it has been extinguished by paying the creditor in cash, other financial assets, goods or services or if the debtor is relieved of its obligation legally, either judicially or by the creditor.  ASU 2016-04 also requires that an entity must disclose the methodology and specific judgements made in applying the breakage recognized.  ASU 2016-04 will become effective for the financial statements issued for the fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.2017.  Early application is permitted including adoption in an interim period.  The Company is currently inexpects that the process of evaluating the impact of adoption of the ASU will not have a significant impact on itsthe Company’s Consolidated Financial Statements.





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Table of Contents

WEIS MARKETS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(3)  InvestmentsMarketable Securities 

The Company’s marketable securities are all classified as available-for-sale within “Current Assets” in the Company’s Consolidated Balance Sheets.  FASB has established three levels of inputs that may be used to measure fair value: 

Level 1  Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2  Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and

Level 3  Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s marketable securities valued using Level 1 inputs include highly liquid equity securities, for which quoted market prices are available.  The Company’s municipal bond portfolio is valued using Level 2 inputs.  The Company’s municipal bonds are valued using a combination of pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs, which are considered Level 2 inputs.



For Level 2 investment valuation, the Company utilizes standard pricing procedures of its investment brokerageadvisory firm(s) which include various third party pricing services.  These procedures also require specific price monitoring practices as well as pricing review reports, valuation oversight and pricing challenge procedures to maintain the most accurate representation of investment fair market value. In addition, the Company engages an independent firm to value a sample of the Company’s municipal bond holdings annually in order to validate the investment’s assigned fair value.



The Company accrues interest on its municipal bond portfolio throughout the life of each bond held.  Dividends from the equity securities are recognized as received.  Both interest and dividends are recognized in “Investment Income”income and interest expense” on the Company’s Consolidated Statements of Income.  Investment income was $1.1 million and $637 thousand for the first quarter of 2017 and 2016, respectively.



Marketable securities, as of March 26, 2016April 1, 2017 and December 26, 2015,31, 2016, consisted of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

(dollars in thousands)

Amortized

Unrealized

Fair

Amortized

Unrealized

Fair

March 26, 2016

Cost

Holding Gains

Holding Losses

Value

April 1, 2017

Cost

Holding Gains

Holding Losses

Value

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

$

1,198 

$

7,659 

$

 -

$

8,857 

$

1,198 

$

7,804 

$

 -

$

9,002 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

68,162 

 

1,553 

 

(11)

 

69,704 

 

54,773 

 

784 

 

(280)

 

55,277 

$

69,360 

$

9,212 

$

(11)

$

78,561 

$

55,971 

$

8,588 

$

(280)

$

64,279 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

(dollars in thousands)

Amortized

Unrealized

Fair

Amortized

Unrealized

Fair

December 26, 2015

Cost

Holding Gains

Holding Losses

Value

December 31, 2016

Cost

Holding Gains

Holding Losses

Value

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

$

1,198 

$

6,682 

$

 -

$

7,880 

$

1,198 

$

8,162 

$

 -

$

9,360 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

82,347 

 

1,468 

 

(66)

 

83,749 

 

57,739 

 

531 

 

(459)

 

57,811 

$

83,545 

$

8,150 

$

(66)

$

91,629 

$

58,937 

$

8,693 

$

(459)

$

67,171 



Maturities of marketable securities classified as available-for-sale at March 26, 2016,April 1, 2017, were as follows:

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(dollars in thousands)

 

Cost

 

Value

 

Cost

 

Value

Available-for-sale:

 

 

 

 

 

 

 

 

Due within one year

$

5,401 

$

5,439 

$

7,623 

$

7,667 

Due after one year through five years

 

46,389 

 

47,209 

 

24,811 

 

25,161 

Due after five years through ten years

 

16,372 

 

17,056 

 

22,339 

 

22,449 

Equity securities

 

1,198 

 

8,857 

 

1,198 

 

9,002 

$

69,360 

$

78,561 

$

55,971 

$

64,279 

76


 

Table of Contents

WEIS MARKETS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(3)  InvestmentsMarketable Securities (continued)

The Company also maintains a non-qualified supplemental executive retirement plan and a non-qualified pharmacist deferred compensation plan for certain of its associates which allows them to defer income to future periods.  Participants in the plans earn a return on their deferrals based on mutual fund investments.  The Company chooses to invest in the underlying mutual fund investments to offset the liability associated with the non-qualified deferred compensation plans.  Such investments are reported on the balance sheetCompany’s Consolidated Balance Sheet as SERP investments,“SERP investment,” are classified as trading securities and are measured at fair value using Level 1 inputs with gains and losses included in investment income.“Investment income and interest expense” on the Company’s Consolidated Statements of Income.  The changes in the underlying liability to the employeeassociates are recorded in operating“Operating, general and administrative expenses.









(4)  Accumulated Other Comprehensive Income

All balances in accumulated other comprehensive income are related to available-for-sale marketable securities.  The following table sets forth the balance of the Company’s accumulated other comprehensive income, net of tax. 





 

 



 

 



 

Unrealized Gains



 

on Available-for-Sale

(dollars in thousands)

 

Marketable Securities

Accumulated other comprehensive income balance as of December 26, 201531, 2016

$

4,7614,852 



 

 

    Other comprehensive income before reclassifications

 

81664 

    Amounts reclassified from accumulated other comprehensive income

 

(158)

 -

Net current period other comprehensive income

 

65864 

Accumulated other comprehensive income balance as of March 26, 2016April 1, 2017

$

5,4194,916 



 

 



The following table sets forth the effects on net income of the amounts reclassified out of accumulated other comprehensive income for the periods ended April 1, 2017 and March 26, 2016 and March 28, 2015.2016.



 

 

 

 

 



 

Gains Reclassified from



 

Accumulated Other Comprehensive Income to the



 

Consolidated Statements of Income



 

13 Weeks Ended

(dollars in thousands)

Location

 

March 26, 2016

 

March 28, 2015

Unrealized gains on available-for-sale marketable securities

 

 

 

 

 



Investment income

$

269 

$



Provision for income taxes

 

(111)

 

(3)

Total amount reclassified, net of tax

 

$

158 

$

Gains Reclassified from

Accumulated Other Comprehensive Income to the

Consolidated Statements of Income

13 Weeks Ended

(dollars in thousands)

Location

April 1, 2017

March 26, 2016

Unrealized gains on available-for-sale marketable securities

Investment income

$

 -

$

269 

Provision for income taxes

 -

(111)

Total amount reclassified, net of tax

$

 -

$

158 









(5) Income TaxesAcquisitions

Cash paid for federal income taxes was $0On August 1, 2016, the Company purchased five Mars Super Market stores located in Maryland.  Weis Markets, Inc. acquired these locations and $4.5their operations in an effort to expand its presence in the Baltimore County region.  The results of operations of the former Mars Super Market acquisition are included in the accompanying Consolidated Financial Statements from the date of acquisition.  The five former Mars Super Market stores contributed $23.2 million to sales in the first quarter of 20162017.  The cash purchase price paid was $24.6 million for the property, equipment, inventories, prepaid expenses and 2015, respectively.goodwill related to this purchase.  The Company accounted for this transaction as a business combination in accordance with the acquisition method.  The fair value of intangibles was determined based on the discounted cash flow model and property and equipment were determined based on external appraisals.  Weis Markets, Inc. assumed two lease obligations in the acquisition of the former Mars Super Market stores and entered into two new lease agreements.  Goodwill of $13.3 million has been recorded, based upon the expected benefits to be derived from new management business strategy and cost synergies.  The goodwill is deductible for tax purposes. 



87


 

Table of Contents

WEIS MARKETS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(6) Basis of Presentation(5) Acquisitions (continued)

In conjunctionSeptember 2016, the Company began its acquisition of 38 former Food Lion, LLC stores.  Within eight weeks, ending in October 2016, Weis Markets acquired 21 Maryland, 13 Virginia and 4 Delaware former Food Lion, LLC stores.  The results of operations of the 38 former Food Lion, LLC stores are included in the accompanying Consolidated Financial Statements from the date of acquisition.  The Company accounted for this transaction as a business combination in accordance with the September 26, 2015 quarterly financial statement closeacquisition method.  The fair value of intangibles was determined based on the discounted cash flow model and property and equipment were determined based on external appraisals.  The acquired locations were part of a FTC forced divestiture in the approval process of the merger of Ahold and while researching alternative methodsDelhaize Group, which resulted in a below fair value purchase price consideration.  The cash purchase price paid was $29.4 million for the property, equipment, inventories, prepaid expenses and liabilities.  Weis Markets, Inc. assumed thirty lease obligations and ownership of eight locations.  The Company recognized a gain of $23.9 million on the purchase of the 38 former Food Lion, LLC stores.  The 38 former Food Lion, LLC stores contributed $93.7 million to calculate retained claim liabilitysales in the first quarter of 2017.

On October 30, 2016, Weis Markets acquired a former Nell’s Family Market store located in East Berlin, Pa from C&S Wholesale Grocers.  The results of operations of the former Nell’s Family Market acquisition are included in the accompanying Consolidated Financial Statements from the date of acquisition.  The purchase price was $13.0 million, of which $3.4 million is payable over a 4 year term for the property, equipment, inventory, prepaid expenses and liabilities.  The Company accounted for this transaction as a business combination in accordance with the acquisition method.  The fair value of intangibles was determined based on the discounted cash flow model and property and equipment were determined based on external appraisals.  The former Nell’s Family Market contributed $4.1 million worth of sales in the first quarter of 2017.  Goodwill of $3.9 million has been recorded, based upon the expected benefits to be derived from new management business strategy and cost synergies.  The goodwill is deductible for tax purposes.

The pro forma information includes historical results of operations of the 38 former Food Lion Supermarket and 5 former Mars Super Market stores but does not include efficiencies, cost reductions, synergies or investments in lower prices for the Company’s self-insured workers compensationcustomers expected to result from the acquisitions.  The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the 38 former Food Lion Supermarket and general liability insurance programs,the 5 former Mars Super Market stores been acquired at the beginning of 2016.  Pro forma results of sales, assuming the acquisitions had taken place at the beginning of 2016, are included in the following table.  The Company does not have reliable information to provide additional pro forma disclosures.



 

 

 

 

 

 



 

 

 

 

 

 



 

13 Weeks Ended

(dollars in thousands)

 

April 1, 2017

 

March 26, 2016

Sales

 

$

852,229 

 

$

878,323 

(6) Long-Term Debt

On September 1, 2016, Weis Markets entered into a revolving credit agreement with Wells Fargo Bank, National Association (the Credit Agreement).  The Credit Agreement provides for an unsecured revolving credit facility with an aggregate principal amount not to exceed $100.0 million with an additional discretionary amount available of $50.0 million.  On March 13, 2017, the unsecured revolving credit facility was increased to $120.0 million.  As of April 1, 2017, $70.9 million of the available $120.0 million was borrowed from the credit facility.  The loan will bear interest on the outstanding principal amount at the one month LIBOR rate plus the applicable margin rate of 0.65% until its maturity on September 1, 2019.  The loan was used to fund the recent acquisitions and the Company’s working capital requirements.  The only financial covenant in the credit facility requires the Company’s minimum EBITDA to be at least $75.0 million.  The Credit Agreement is also being utilized by the Company discovered errors infor letters of credit.   As of April 1, 2017, the applicationCompany had $16.7 million, of the actuarial methods usedavailable $120.0 million from the credit facility, committed to estimateoutstanding letters of credit.  The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the obligationCompany.  The Company does not anticipate drawing on any of future payments resulting from claims due to past events.  These errors primarilythem.

Interest expense related to long-term debt was $273,000 for the Company’s selection of loss development factors and the application of such factors to the population of claims.  The impact of these prior13 week period misstatements to the Company’s Consolidated Financial Statements resulted in the understatement of workers compensation and general liability expense with a corresponding understatement of self-insurance liabilities over multiple fiscal periods through June 27, 2015. Consequently, the Company has restated certain prior period amounts to correct these errors.ending April 1, 2017.

 

Based on an analysis of quantitative and qualitative factors in accordance with SEC Staff Accounting Bulletins 99 and 108, the Company concluded that these errors were not material to the consolidated financial position, results of operations or cash flows as presented in the Company’s quarterly and annual financial statements that have been previously filed in the Company’s Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.  As a result, amendment of such reports was not required.   In preparing the Company’s Consolidated Financial Statements for the thirteen and thirty-nine weeks ended September 26, 2015 and for each of the three years in the period ended December 26, 2015, the Company made appropriate revisions to its Consolidated Financial Statements for historical periods.  Such changes were reflected in the financial results for the thirteen and thirty-nine weeks ended September 26, 2015 and are also reflected in the historical financial results included in these Consolidated Financial Statements.

The effect of these errors increased net income by $214,000, or $0.01 per share, for the thirteen weeks ended March 28, 2015.  Additional information about these corrections, including a reconciliation of each financial statement line item affected, has been included in Note 7 to the Company’s Consolidated Financial Statements contained in its Quarterly Report on Form 10-Q for the period ended September 26, 2015.

 

98


 

Table of Contents

WEIS MARKETS, INC.
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis of Weis Markets, Inc.’s (the ���Company”“Company”) financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q, the Company’s audited Consolidated Financial Statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2015,31, 2016, filed with the U.S. Securities and Exchange Commission, as well as the cautionary statement captioned "Forward-Looking Statements" immediately following this analysis.



OverviewCompany Summary

Weis Markets Inc. was founded in 1912 by Harry and Sigmund Weis, in Sunbury, Pennsylvania.  Today, the Company ranks among the top 50 food and drug retailers in the United States in revenues generated. Currently, the Companyis a conventional supermarket chain that operates 162204 retail food stores with a total of 23,000 associates located in Pennsylvania and foursix surrounding states: Delaware, Maryland, New Jersey, New York, Virginia and West Virginia.

Company revenues are generated in its retail food stores from the sale of a wide variety of consumer Its products includingsold include groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, deli products, prepared foods, bakery products, beer and wine, fuel, and general merchandise items, such as health and beauty care and household products.  The store product selection includes national, local and private brands and the Company supportspromotes by using Everyday Low Price, Low Price Guarantee and Loyalty programs.  The Loyalty program includes fuel rewards that may be redeemed at the Company’s fuel stations or one of its retail operations through athird party fuel station partners. 

Utilizing its own centrally located distribution facility, its owncenter and transportation fleet, Weis Markets self distributes approximately 67% of product with the remaining being supplied by direct store vendors.  In addition, the Company has three manufacturing facilities which process milk, ice cream and its administrative offices.fresh meat products.  The corporate offices are located in Sunbury, Pa where the Company was founded in 1912.  The Company's operations are reported as a single reportable segment.



In 2016, Weis Markets acquired five Mars Super Market locations in Baltimore County, Md, 38 Food Lion stores throughout Maryland, Virginia and Delaware, and a Nell's Family Market in East Berlin, Pa.  The completion of these individual acquisitions expanded the Company's footprint into Virginia and Delaware, and increased its store count by 25 percent. Beginning August 1, 2016, the Company converted the 44 stores to Weis Markets stores in 96 days ending in November, during which it interviewed and hired more than 2,000 team members who were previously employed at the acquired locations.  In 2017, the acquired store group is providing a positive cash flow for the Company as management continues to develop the stores using its business model.  Although there are no pending acquisitions, the Company continues to investigate acquisition opportunities as well as grow its existing store base organically.

On March 9, 2017, the Company opened its new 65,000 square-foot prototype store next to a major competitor in Enola, Pa.  Designated the “Community Market” format, the store features a brand new store layout and unique features to elevate the shopping experience including a  pub, grill and ice cream parlor, featuring the Company’s own ice cream.  The store contains a Pennsylvania foods section and more than 1,900 organic and gluten-free products, along with a  mix-and-match pick K-cup 12-packs section and a Chobani Yogurt Bar.  The Company plans to review the success of the new features and utilize them where appropriate in other stores.

9


Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Changes

 

 

 

 

 

 

Percentage Changes

13 Weeks Ended

2016 vs. 2015

13 Weeks Ended

2017 vs. 2016

(dollars in thousands except per share amounts)

March 26, 2016

March 28, 2015

13 Weeks Ended

April 1, 2017

March 26, 2016

13 Weeks Ended

Net sales

$

738,204 

 

$

712,426 

 

 

3.6

%

$

852,229 

 

$

738,204 

 

 

15.4

%

Cost of sales, including warehousing and distribution expenses

 

531,092 

 

 

517,311 

 

 

2.7

 

 

622,433 

 

 

531,092 

 

 

17.2

 

Gross profit on sales

 

207,112 

 

 

195,115 

 

 

6.1

 

 

229,796 

 

 

207,112 

 

 

11.0

 

Gross profit margin

 

28.1 

%

 

27.4 

%

 

 

 

 

27.0 

%

 

28.1 

%

 

 

 

Operating, general and administrative expenses

 

175,842 

 

 

175,250 

 

 

0.3

 

 

209,546 

 

 

175,842 

 

 

19.2

 

O, G & A, percent of net sales

 

23.8 

%

 

24.6 

%

 

 

 

 

24.6 

%

 

23.8 

%

 

 

 

Income from operations

 

31,270 

 

 

19,865 

 

 

57.4

 

 

20,250 

 

 

31,270 

 

 

(35.2)

 

Operating margin

 

4.2 

%

 

2.8 

%

 

 

 

 

2.4 

%

 

4.2 

%

 

 

 

Investment income

 

637 

 

 

532 

 

 

19.7

 

Investment income, percent of net sales

 

0.1 

%

 

0.1 

%

 

 

 

Investment income and interest expense

 

824 

 

 

637 

 

 

29.4

 

Investment income and interest expense, percent of net sales

 

0.1 

%

 

0.1 

%

 

 

 

Income before provision for income taxes

 

31,907 

 

 

20,397 

 

 

56.4

 

 

21,074 

 

 

31,907 

 

 

(34.0)

 

Income before provision for income taxes, percent of net sales

 

4.3 

%

 

2.9 

%

 

 

 

 

2.5 

%

 

4.3 

%

 

 

 

Provision for income taxes

 

11,778 

 

 

7,074 

 

 

66.5

 

 

9,238 

 

 

11,778 

 

 

(21.6)

 

Effective income tax rate

 

36.9 

%

 

34.7 

%

 

 

 

 

43.8 

%

 

36.9 

%

 

 

 

Net income

$

20,129 

 

$

13,323 

 

 

51.1

%

$

11,836 

 

$

20,129 

 

 

(41.2)

%

Net income, percent of net sales

 

2.7 

%

 

1.9 

%

 

 

 

 

1.4 

%

 

2.7 

%

 

 

 

Basic and diluted earnings per share

$

0.75 

 

$

0.50 

 

 

50.0

%

$

0.44 

 

$

0.75 

 

 

(41.3)

%



Income is earned by selling merchandise at price levels that produce revenues in excess of cost of merchandise sold and operating and administrative expenses.  Although the Company may experience short term fluctuations in its earnings due to unforeseen short-term operating cost increases, it historically has been able to increase revenues and maintain stable earnings from year to year.



10


 

 

Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)



Net Sales
The Company's revenues are earned and cash is generated as merchandise is sold to customers at the point

Analysis of sale.  Discounts provided to customers by the Company at the point of sale are recognized as a reduction in sales as products are sold or over the life of a promotional program if redeemable in the future.  Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons.Sales



Total store sales increased 3.6% in the first quarter of 2016 compared to the same period in 2015.  Excluding fuel sales, total store  sales increased 3.6%.

Percentage Changes

2017 vs. 2016

13 Weeks Ended

Net Sales

15.4 

%

Net sales, excluding fuel sales

15.2 

Comparable store sales

(0.3)

Comparable store sales, excluding fuel sales

(0.9)

Comparable store sales, adjusted for holiday impact

1.1 

Comparable store sales, adjusted for holiday impact, excluding fuel sales

0.5 

Average sales per customer transaction

(3.3)

Identical customer store visits

0.7 

%



When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation for five full quarters.  Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction.  Planned store dispositions are excluded from the calculation.  The Company only includes retail food stores in the calculation.



Comparable store sales increased 3.6% in the first quarter of 2016 compared to the same quarter in 2015.  Excluding fuel sales, comparable store sales increased 3.7% in first quarter of 2016 compared to the same period in 2015.  The Company’s first quarter 2016 sales benefited from the Easter and New Year holiday period,periods, which fell in the first quarter last year.  In 2016, Easter sales week occurred on the last week of the quarter.  Due to the Company’s 2016 fiscal year being comprised of 53 weeks,  the first quarter of 2017 did not include a New Year holiday sales week and Easter fell in the second quarter last year.of 2017.  Management estimates the incremental holiday sales impact was approximately $7.1 million or an increase in comparable store sales of 1.0%.  While the first quarter sales experienced a surge due to the Easter holiday period shift, the second quarter sales will be adversely affected, as there is usually a slump in sales the week following the holiday.

The Company also attributes the increased sales to its continued strategic pricing investments and ongoing improvement of its store assortment by market.  This includes targeted promotional activity in key regional markets and its Everyday Lower Prices (EDLP) and Lowest Price Guarantee promotional programs. Compared to the first quarter of 2015, the Company experienced a  1.1% decrease in average sales per customer transaction in the first quarter of 2016, while identical customer store visits increased by 4.7%.

The Company’s results also benefited from improved store level, supply chain and store support efficiencies to deliver a better customer experience, which increased customer traffic and overall market share.    In addition,  the Weis Preferred Club Shopper program continues to target customer members with personalized offers and digital coupons to help them save money.  As part of this loyalty marketing program, the Company continues to offer its "Gas Rewards" program in most markets.  The "Gas Rewards" program allows Weis Preferred Shoppers club card members to earn gas discounts resulting from their in-store purchases.  Customers can redeem these gas discounts at any of the thirty-one Weis Gas-n-Go locations, as well as participating third-party gas retail locations such as Sheetz convenience stores, which are located in most of the Company’s markets.  

Comparable center store sales increased 1.2% in the first quarter of 2016 compared to the same quarter in 2015.  Within center store sales, comparable frozen department sales increased 2.8% and comparable health and beauty care sales increased 3.0% in the first quarter of 2016 compared to the same quarter in 2015.  Both categories benefited from new promotional programs which began in January 2016.

Comparable fresh sales increased 5.2% in the first quarter of 2016 compared to the same quarter in 2015.  Within fresh sales, comparable produce, food service, bakery and floral department sales increased 6.4%, 11.0%, 13.2% and 29.1%, respectively, in the first quarter of 2016 compared to the same quarter of 2015. These increases are primarily due to the Easter holiday sales shift.   In addition to Easter sales, produce sales increased as a result of inflation during the first quarter of 2016.  Food service sales also increased due to the Company’s expanded lunch options and the rotisserie chicken program. 

11


Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

Net Sales (continued)

Comparable pharmacy sales increased 10.0% in the first quarter of 2016 compared to the same period in 2015. The pharmacy sales increase was driven by an increased number of filled prescriptions, primarily due to an increased acceptance of additional preferred third-party insurance plans as well as expanded pharmacy hours.     

Comparable fuel sales decreased 9.1% in the first quarter of 2016 compared to the same quarter in 2015. The fuel sales decrease is mainly due to decreasing retail fuel prices.  According to the U.S. Department of Energy, the thirteen week average price of gasoline in the Central Atlantic States decreased 16.8% or $0.43 per gallon in the first quarter of 2016 compared to the same quarter in 2015. While fuel prices decreased, the impact was minimized as a result of the Company selling additional gallons due to the timing of the current gas rewards redemption period ending.

Management remains confident in its ability to generate sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company's competitive position.

Cost of Sales and Gross Profit
Cost of sales consists of direct product costs (net of discounts and allowances), distribution center and transportation costs, as well as manufacturing facility operations.  Almost all of the increase in cost of sales in 2016, as compared to 2015 is due to the increased sales volume in 2016.  Both direct product cost and distribution cost increase when sales volume  increases.$10.1 million.



According to the latest U.S. Bureau of Labor Statistics’ report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 0.3%decreased 1.5% compared to an increase of 2.9%0.3% for the same period last year.  Even though the U.S. Bureau of Labor Statistics’ index rates may be reflective of a trend, it will not necessarily be indicative of the Company’s actual results.  Despite the fluctuation of retail and wholesale prices, the Company has achieved a gross profit rate of 28.1% and 27.4% in the first quarter of 2016 and 2015, respectively.    The increase in gross profit rate was driven by a shift in sales mix from fuel to grocery sales which carry a higher profit margin. 

The Company's profitability is impacted by the cost of oil.  Fluctuating fuel prices affect the delivered cost of product and the cost of other petroleum-based supplies.  As a percentage of sales, the cost of diesel fuel used by the Company to deliver goods from its distribution center to its stores decreased 0.06% in the first quarter of 2016 compared to the first quarter of 2015.  Although the Company experienced a decrease in these costs, the decline was minimized due to higher fuel usage resulting from more store deliveries to meet the higher sales demand.  According to the U.S. Department of Energy, the thirteen week average diesel fuel price forof gasoline in the Central Atlantic States increased 22.2% or $0.47 per gallon in the first quarter of 2016 was $2.27 per gallon2017 compared to $3.20 per gallon in the same periodquarter in 2015,2016.

The Company experienced deflation for an average decreasethe first quarter of $0.93 per gallon. Based upon2017 in its core sales compared to the U.S. Energy Information Administration’s current projections, same quarter last year, particularly in its meat, produce, dairy and seafood departments.  It was partially able to offset the Company is expecting dieselimpact of deflation by increasing the number of units sold.  Pharmacy sales increased as script counts grew proportionally.  Fuel sales benefited from inflation as comparable fuel pricessales rose 18.8%.  In addition to remain fairly steady throughoutdeflation, management estimates winter weather events negatively impacted the rest of 2016.sales comparison between quarters by approximately $7 million on a comparable store basis.



Although the Company experienced product costretail inflation and deflation in various commodities for the quarters presented, management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.  Management remains confident in its ability to generate sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company's competitive position.



Cost of Sales and Gross Profit

Cost of sales consists of direct product costs (net of discounts and allowances), distribution center and transportation costs, as well as manufacturing facility operations.  Almost all of the increase in cost of sales in 2017 as compared to 2016 is due to the increased sales volume in 2017.  Both direct product cost and distribution cost increase when sales volume increases.

11


Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

Cost of Sales and Gross Profit (continued)

The 1.1% decline in gross profit margin from first quarter 2016 to 2017 was attributable to the comparable store sales volume decline described previously.  Decreased sales volume negatively impacts the gross profit margin by increasing inventory shrinkage, increasing fixed distribution costs comparative rate and decreasing the margin between product cost and retail pricing in a deflationary market due to slower inventory turns.  As a percentage of sales, the cost of diesel fuel used by the Company to deliver goods from its distribution center to its stores increased 0.05%, reducing gross margin in the first quarter of 2017 compared to the first quarter of 2016. In addition, the 2016 acquired stores product mix reduced gross profit margin by 0.06%.  Management believes that any distribution synergies gained from the acquired stores will be offset by the increased transportation costs due to the distance of the acquired stores.

Non-cash LIFO inventory valuation adjustments changed from expense of $0.7 million for the first quarter of 2016 to income of $0.1 million during the same quarter in 2017, accounting for 0.1% of the gross margin increase in 2017 versus 2016.

Although the Company experienced product cost inflation and deflation in various commodities for the quarters presented, management cannot accurately measure the full impact of inflation or deflation on costs due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.

Operating, General and Administrative Expenses
The majority of the increase in operating, general and administrative expenses was driven by increased sales volume.

Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise approximately 60% of the total “Operating, general and administrative expenses.”  As a percent of sales, direct store labor increased 0.2%  in the first quarter of 2017 compared to the first quarter of 2016.  Of the total increase of $14.5 million, $14.1 million of the direct store labor increase was attributable to the stores acquired in 2016.  The Company continues to monitor store labor efficiencies and develop labor standards to reduce cost while maintaining the Company’s customer service expectations.

The Company’s self-insured health care benefit expenses decreased $476,000 or 8.4% in the first quarter of 2017 compared to the same quarter last year.  The variance is mainly attributed to a decrease in claims costs.  However, the Company remains concerned about the impact that The Patient Protection and Affordable Care Act (ACA) will have on its future operating expenses. 

Depreciation and amortization expense was $20.9 million, or 2.5% of net sales for the first quarter of 2017 compared to $18.4 million or 2.5% of net sales for the first quarter of 2016.  The increase in depreciation and amortization expense was the result of additional capital expenditures as the Company implements its capital expansion program and the 2016 acquisitions.  See the Liquidity and Capital Resources section for further information regarding the Company’s capital expansion program.



 

 

 

 

A breakdown of the material increases (decreases) as a percent of sales in "Operating, general and administrative expenses" is as follows:



 

 

 

 



13 Weeks Ended

(dollars in thousands)

Increase

Increase (Decrease)

April 1, 2017

(Decrease)

as a % of sales

Employee-related expenses

$

18,464 0.2 

%

Store supply expense

 

1,501 0.1 

 

Utility expense

 

2,041 0.1 

 

Rent expense

 

2,642 0.2 

 

Repairs/Maintenance expense

$

1,936 0.2 

%

The variance in the percent of sales for the above expense items are primarily driven by the acquisition of five former Mars stores, 38 former Food Lion stores and a former Nell’s Family Market store in the second half of 2016.  The Company expects the percent of sales to decrease over time as it develops the acquisition stores’ sales and implements cost saving strategies.

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Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)



Operating, General and Administrative Expenses
Business operating costs including expenses generated from administration and purchasing functions, are recorded in "Operating, general and administrative expenses."  Business operating costs include items such as wages, benefits, utilities, repairs and maintenance, advertising costs and credits, rent, insurance, depreciation, leasehold amortization and costs for outside provided services.  The majority of the increase in operating, general and administrative expenses were driven by increased sales.

The Company may not be able to recover rising expenses through increased prices charged to its customers.  The majority of our associates are paid hourly rates related to federal and state minimum wage laws.  The Company increased the base hourly rate for associates to $9 per hour, as of August 2, 2015, in order to attract and retain talented associates with a goal of delivering best-in-class customer service.  The Company has decided not to increase prices to offset this hourly wage rate increase.  

Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise approximately 60% of the total “Operating, general and administrative expenses.”  As a percent of sales, direct store labor increased 0.2% compared to the first quarter of 2015.  The increase in base hourly rate for associates to $9 per hour and related wage compression had an estimated cost of $2.7 million in the first quarter of 2016.  Hourly wages also increased in 2016 due to the additional sales resulting from the Easter holiday shifting into the first quarter.  Increases in the employee related expenses were offset by savings realized from a store labor efficiency project. 

The Company’s self-insured health care benefit expenses decreased $808,000 or 12.5% in the first quarter of 2016 compared to the same quarter last year.  The variance is mainly attributed to a decrease in claims costs.  However, the Company remains concerned about the impact that The Patient Protection and Affordable Care Act(ACA) will have on its future operating expenses.  Based on the ACA definition of full time employment, there is approximately an 18% increase in full time employees, which is currently estimated to cost the Company $1.0 million annually. 

Depreciation and amortization expense was $18.4 million, or 2.5% of net sales for the first quarter of 2016 compared to $17.3 million, or 2.4% of net sales for the first quarter of 2015.  The increase in depreciation and amortization expense was the result of additional capital expenditures as the Company implements its capital expansion program.  See the Liquidity and Capital Resources section for further information regarding the Company’s capital expansion program.

Retail store profitability is sensitive to volatility in utility costs due to the amount of electricity and gas required to operate the Company’s stores and facilities. The Company is responding to this volatility in operating costs by employing conservation technologies, procurement strategies and associate energy awareness programs to manage and reduce consumption.  The Company continues to be a member of the EPA GreenChill program for advancing environmentally beneficial refrigerant management systems and has ten stores registered under this program.  In addition, all Company stores have an assigned Green Leader to promote in-store energy conservation. 

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Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

Operating, General and Administrative Expenses (continued)



 

 

 

 

A breakdown of the material increases (decreases) as a percent of sales in "Operating, general and administrative expenses" is as follows:



 

 

 

 



 

13 Weeks Ended

(dollars in thousands)
March 26, 2016

 

Increase
(Decrease)

Increase (Decrease)
as a %
of sales

Employee related expenses

$

2,176 (0.2)

%

Store advertising expense

$

(730)(0.1)

%

Depreciation and amortization

$

1,043 0.1 

%

Utility expense

$

(1,430)(0.2)

%

Store supplies expense

$

(544)(0.1)

%

General liability insurance expense

$

(701)(0.1)

%

Employee-related expenses increased in dollars and as a percent of sales for the reasons noted above, primarily related to increases in the basic hourly rate and increases in sales volume. Hourly employees, particularly part-time employees, are required to work increased hours when there is growth in sales volume. Increases in employee related expenses were offset by savings realized from a store labor efficiency project.

Store advertising expense decreased due to reduced spending on direct mail and weekly ads, as well as advertising fewer grand re-openings in the first quarter of 2016 compared to 2015.

Depreciation and amortization increased in the first quarter of 2016 compared to the same quarter of 2015 as a result of the Company’s store capital expenditure program and technology investments.

Utility expense decreased in the first quarter of 2016 for the reasons noted above related to energy conservation efforts and procurement strategies, along with reduced electricity costs and usage and a reduction in the use of natural gas. 

Store supplies expense decreased in the first quarter of 2016 due to planned purchasing changes which will be shifting store supplies expense from the first quarter of 2016 to future quarters.

General liability insurance expense decreased due to a reduced number of general liability payments in the first quarter of 2016 compared to the first quarter of 2015.

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Table of Contents

WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

Investment Income

The Company’s investment portfolio consists of marketable securities, which currently includes municipal bonds and equity securities, as well as the Company’s SERP investment, which is comprised of mutual funds that are maintained within the Company’s non-qualified supplemental executive retirement plan and the non-qualified pharmacist deferred compensation plan.  The Company classifies all of its municipal bonds and equity securities as available-for-sale.  The SERP investments are classified as trading securities.



 

 

 

 

 

 

 

 



 

 

 

 

Dollar

Analysis of Investment Income

13 Weeks Ended

 

Changes

(dollars in thousands)

March 26, 2016

 

March 28, 2015

 

2016 vs. 2015

Bond income

$

571 

 

$

360 

 

$

211 

Equity income

 

106 

 

 

104 

 

 

SERP investment

 

(40)

 

 

68 

 

 

(108)

Investment income

$

637 

 

$

532 

 

$

105 

Bond income increased in the first quarter of of 2016 compared to the first quarter of 2015 as a result of recognizing gains on the sale of municipal bonds in the first quarter of 2016.  

Provision for Income Taxes
The effective income tax rate was 36.9%43.8% and 34.7%36.9% for the first quarter of 20162017 and 2015,2016, respectively.  The increase in the effective income tax rate is due to a discrete item recorded in the first quarter of 2017 and an increase in the state tax expense.  The effect of this increase was partially offset by an increase in tax benefits related to food donations, the Domestic Production Activities Deduction and the Work Opportunity Tax Credit. Historically, the effective income tax rate differed from the federal statutory rate, primarily due to the effect of state taxes, net of permanent differences. 

 

Liquidity and Capital Resources



DuringThe primary sources of cash are cash flows generated from operations and borrowings under the first quarter2016 revolving credit agreement from Wells Fargo Bank, NA.  The Company’s revolving credit agreement has a principal amount of 2016,$100.0 million with an additional discretionary availability of $50.0 million.  On March 13, 2017, the Company generated $38.1was approved to access $20.0 million in cash flows from operating activities compared to $31.0 million for the same period in 2015.  Cash flows from operating activities increased in the first quarter of 2016 as a result of increased sales, despite a decrease in accounts payable, compared to the first quarter of 2015.  Since the beginning of the fiscal year, working capital decreased 1.4%  indiscretionary amount bringing the first quarterCompany’s immediate borrowing capacity to $120.0 million.  As of 2016  as comparedApril 1, 2017 the Company’s unused availability under the revolving credit agreement was $32.4 million with $70.9 million of borrowings outstanding and $16.7 million of letters of credit outstanding.  The letters of credit are maintained primarily to an increasesupport performance, payment, deposit or surety obligations of 0.2% in the first quarterCompany.  The Company does not anticipate drawing on any of 2015.them.



Net cash used in investing activities was $17.2 million compared to $28.8 million in the first quarter of 2016 and 2015, respectively.  Property and equipment purchases during the first quarter of 2016 totaled $29.9 million compared to $20.6 million in the first quarter of 2015.  The increase was partially attributed to the Company purchasing four properties in the first quarter of 2016.    As a percentage of sales, capital expenditures were 4.1% and 2.9% in the first quarter of 2016 and 2015, respectively. The sale of $15.2 millionCompany’s investment portfolio consists of marketable securities, inwhich currently includes municipal bonds and equity securities.  As of April 1, 2017, the first quarter of 2016 reducedportfolio totaled $64.3 million.  Management anticipates maintaining the Company’s net investing activities, whereasinvestment portfolio, but has the Company purchased $9.9 million of marketable securities in the first quarter of 2015.ability to liquidate if needed.



The Company’s capital expansion program includes the construction of new superstores, the expansion and remodeling of existing units, the acquisition of sites for future expansion, new technology purchases and the continued upgrade of the Company’s distribution facilities and transportation fleet.  Management currently plans to invest approximately $140$90.0 million in its capital expansion program in 2016.2017. 

The Company expects that cash generated from operations and available under the 2016 revolving credit agreement will fund its working capital requirements, debt requirements, capital expansion program, acquisitions and dividends.  The Company has no other commitment of capital resources as of April 1, 2017, other than the lease commitments on its store facilities and transportation equipment under operating leases that expire at various dates through 2033.

The Board of Directors’ 2004 resolution authorizing the repurchase of up to one million shares of the Company’s common stock has a remaining balance of 752,468 shares.

Quarterly Cash Dividends

At its regular meeting held in April, the Board of Directors unanimously approved a quarterly dividend of $.30 per share, payable on May 22, 2017 to shareholders of record on May 8, 2017.  The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors reconsiders the declaration of dividends quarterly. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments and the amount of the dividends depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant.

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WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Liquidity and Capital Resources (continued)Cash Flow Information



 

 

 

 

 

 

 

 

 



13 Weeks Ended

2017 vs. 2016

(dollars in thousands)

April 1, 2017

March 26, 2016

13 Weeks Ended

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

Operating activities

$

14,632 

 

$

38,069 

 

$

(23,437)

 

Investing activities

 

(15,318)

 

 

(17,194)

 

 

1,876 

 

Financing activities

$

(1,672)

 

$

(8,070)

 

$

6,398 

 

Operating

Cash flows from operating activities decreased in the first quarter of 2017 mainly as a result of decreased operating income compared to the first quarter of 2016.  In addition, long-term incentive payments to associates of $11.8 million were issued during the quarter.



Net cash used in financing activities was $8.1Investing

Property and equipment purchases during the first quarter of 2017 totaled $17.1 million compared to $29.9 million in the first quarter of 2016 and 2015, which solely consisted2016.  The decrease of dividend payments$12.9 million was partially attributable to shareholders.  As of March 26, 2016, the Company had a $30 million line of credit, of which $13.3 million was committed to outstanding letters of credit.  The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.  The Company does not anticipate drawing on any of them.  The Company has a $50 million short-term facility agreement to fund future financing activities.

Total cash dividend payments on common stock, on a per share basis, amounted to $.30purchasing four properties in the first quarter of 2016.  As a percentage of sales, capital expenditures were 2.0% and 4.1% in the first quarter of 2017 and 2016, and 2015.  At its regular meeting held in April,respectively.  In 2016, the BoardCompany sold $15.2 million of Directors unanimously approved a quarterly dividend of $.30 per share, payable on May 16, 2016marketable securities as it prepared to shareholders of record on May 2, 2016.  The Board of Directors’ 2004 resolution authorizing the repurchase of up to one million shares of the Company’s common stock has a remaining balance of 752,468 shares. finance future acquisitions.



Financing

The Company has no other commitmentpaid a dividend of capital resources as$8.1 million for the first quarters of March 26, 2016, other than the lease commitments on its store facilitiesboth 2017 and transportation equipment under operating leases that expire at various dates through 2029. The Company anticipates funding its working capital requirements and its $140.0 million 2016 capital expansion program through cash and investment reserves and future internally generated cash flows2016.  In 2017, proceeds from operations.

The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates as they relate to available-for-sale securities and any future long-term debt borrowings.  The Company’s marketable securities portfolio currently consists of municipal bonds and equity securities.  Other short-term investments are classified asoffset the dividend thereby reducing cash equivalents on the Consolidated Balance Sheets.used in financing activities by $6.4 million.



Accounting Policies and Estimates



The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the Consolidated Financial Statements included in the 20152016 Annual Report on  Form 10-K.  There have been no changes to the CriticalSignificant Accounting Policies since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 26, 2015.31, 2016.



Forward-Looking Statements



In addition to historical information, this 10-Q Report may contain forward-looking statements, which are included pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Any forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected.  For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the retail industry; the regulatory environment; rapidly changing technology and competitive factors, including increased competition with regional and national retailers; and price pressures.  Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof.  The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.  Readers should carefully review the risk factors described in other documents the Company files periodically with the Securities and Exchange Commission.

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WEIS MARKETS, INC.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Quantitative Disclosure - There have been no material changes in the Company's market risk during the three months ended March 26, 2016.April 1, 2017.  Quantitative information is set forth in Item 7a on the Company’s Annual Report on Form 10-K under the caption “Quantitative and Qualitative Disclosures About Market Risk,” which was filed for the fiscal year ended December 26, 201531, 2016 and is incorporated herein by reference.



Qualitative Disclosure - This information is set forth in the Company's Annual Report on Form 10-K under the caption “Liquidity and Capital Resources,” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which was filed for the fiscal year ended December 26, 201531, 2016 and is incorporated herein by reference.



ITEM 4.  CONTROLS AND PROCEDURES



The Chief Executive Officer and the Chief Financial Officer, together with the Company’s Disclosure Committee, evaluated the Company’s disclosure controls and procedures as of the fiscal quarter ended March 26, 2016.April 1, 2017.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports was accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



In connection with the evaluation described above, there was no change in the Company’s internal control over financial reporting during the fiscal quarter ended March 26, 2016,April 1, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 



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WEIS MARKETS, INC.

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS



Exhibits
        Exhibit 31.1 Rule 13a-14(a) Certification - CEO
        Exhibit 31.2 Rule 13a-14(a) Certification - CFO
        Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to  be signed on its behalf by the undersigned thereunto duly authorized.







 

 

 

 

 

 



 

WEIS MARKETS, INC.



 

(Registrant)



 

 

Date  05/05/201611/2017

 

/S/Jonathan H. Weis



 

Jonathan H. Weis



 

Chairman,



 

President and Chief Executive Officer



 

(Principal Executive Officer)



 

 

Date  05/05/201611/2017

 

/S/Scott F. Frost



 

Scott F. Frost



 

Senior Vice President, Chief Financial Officer



 

and Treasurer



 

(Principal Financial Officer)



 

 

 

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