UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended |
| 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)
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PENNSYLVANIA |
| 24-0755415 |
1000 S. Second Street |
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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, 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.
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Large accelerated filer [ ] |
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| Accelerated filer [X] |
Non-accelerated filer [ ] | (Do not check if a smaller reporting company) |
| Smaller reporting company [ ] |
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| 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 11, 2017,10, 2018, there were issued and outstanding 26,898,443 shares of the registrant’s common stock.
WEIS MARKETS, INC.
WEIS MARKETS, INC.
PART I – FINANCIAL INFORMATION
WEIS MARKETS, INC.
(unaudited)
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(dollars in thousands) |
| April 1, 2017 |
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| December 31, 2016 | March 31, 2018 |
| December 30, 2017 | ||
Assets |
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Current: |
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Cash and cash equivalents | $ | 12,295 |
| $ | 14,653 | $ | 50,215 |
| $ | 47,917 |
Marketable securities |
| 64,279 |
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| 67,171 |
| 61,209 |
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| 63,665 |
SERP investment |
| 12,640 |
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| 11,154 |
| 15,409 |
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| 14,476 |
Accounts receivable, net |
| 77,455 |
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| 96,170 |
| 48,452 |
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| 56,265 |
Inventories |
| 275,217 |
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| 276,783 |
| 267,065 |
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| 279,509 |
Prepaid expenses and other current assets |
| 16,932 |
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| 16,310 |
| 19,621 |
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| 19,435 |
Income taxes recoverable |
| - |
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| 1,625 |
| - |
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| 2,047 |
Total current assets |
| 458,818 |
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| 483,866 |
| 461,971 |
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| 483,314 |
Property and equipment, net |
| 870,072 |
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| 878,195 |
| 883,424 |
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| 886,243 |
Goodwill |
| 52,330 |
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| 52,330 |
| 52,330 |
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| 52,330 |
Intangible and other assets, net |
| 18,173 |
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| 16,913 |
| 20,882 |
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| 19,852 |
Total assets | $ | 1,399,393 |
| $ | 1,431,304 | $ | 1,418,607 |
| $ | 1,441,739 |
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Liabilities |
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Current: |
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Accounts payable | $ | 170,897 |
| $ | 199,159 | $ | 200,155 |
| $ | 216,252 |
Accrued expenses |
| 34,949 |
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| 50,947 |
| 34,641 |
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| 33,403 |
Accrued self-insurance |
| 14,912 |
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| 19,330 |
| 16,526 |
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| 17,470 |
Deferred revenue, net |
| 5,252 |
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| 6,730 |
| 5,334 |
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| 7,217 |
Income taxes payable |
| 323 |
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| - |
| 4,974 |
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| - |
Total current liabilities |
| 226,333 |
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| 276,166 |
| 261,630 |
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| 274,342 |
Long-term debt |
| 70,874 |
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| 64,476 |
| 17,912 |
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| 34,988 |
Postretirement benefit obligations |
| 14,969 |
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| 15,277 |
| 18,423 |
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| 18,409 |
Accrued self-insurance |
| 21,353 |
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| 21,353 |
| 20,136 |
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| 20,140 |
Deferred income taxes |
| 126,932 |
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| 119,445 |
| 86,373 |
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| 87,422 |
Other |
| 8,380 |
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| 7,865 |
| 13,533 |
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| 13,594 |
Total liabilities |
| 468,841 |
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| 504,582 |
| 418,007 |
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| 448,895 |
Shareholders’ Equity |
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Common stock, no par value, 100,800,000 shares authorized, 33,047,807 shares issued, |
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26,898,443 shares outstanding |
| 9,949 |
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| 9,949 |
| 9,949 |
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| 9,949 |
Retained earnings |
| 1,066,544 |
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| 1,062,778 |
| 1,141,474 |
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| 1,127,872 |
Accumulated other comprehensive income |
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(Net of deferred taxes of $3,393 in 2017 and $3,382 in 2016) |
| 4,916 |
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| 4,852 | |||||
(Net of deferred taxes of $13 in 2018 and $2,310 in 2017) |
| 34 |
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| 5,880 | |||||
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| 1,081,409 |
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| 1,077,579 |
| 1,151,457 |
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| 1,143,701 |
Treasury stock at cost, 6,149,364 shares |
| (150,857) |
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| (150,857) |
| (150,857) |
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| (150,857) |
Total shareholders’ equity |
| 930,552 |
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| 926,722 |
| 1,000,600 |
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| 992,844 |
Total liabilities and shareholders’ equity | $ | 1,399,393 |
| $ | 1,431,304 | $ | 1,418,607 |
| $ | 1,441,739 |
See accompanying notes to Consolidated Financial Statements.
1
WEIS MARKETS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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| 13 Weeks Ended | 13 Weeks Ended | |||||||||
(dollars in thousands, except shares and per share amounts) | April 1, 2017 | March 26, 2016 | March 31, 2018 | April 1, 2017 | |||||||
Net sales | $ | 852,229 |
| $ | 738,204 | $ | 876,106 |
| $ | 852,229 |
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Cost of sales, including warehousing and distribution expenses |
| 622,433 |
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| 531,092 | ||||||
Cost of sales, including advertising, warehousing and distribution expenses |
| 641,199 |
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| 623,193 |
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Gross profit on sales |
| 229,796 |
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| 207,112 |
| 234,907 |
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| 229,036 |
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Operating, general and administrative expenses |
| 209,546 |
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| 175,842 |
| 212,068 |
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| 208,786 |
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Income from operations |
| 20,250 |
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| 31,270 |
| 22,839 |
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| 20,250 |
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Investment income and interest expense |
| 824 |
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| 637 |
| (532) |
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| 824 |
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Income before provision for income taxes |
| 21,074 |
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| 31,907 |
| 22,307 |
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| 21,074 |
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Provision for income taxes |
| 9,238 |
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| 11,778 |
| 6,116 |
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| 9,238 |
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Net income | $ | 11,836 |
| $ | 20,129 | $ | 16,191 |
| $ | 11,836 |
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Weighted-average shares outstanding, basic and diluted |
| 26,898,443 |
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| 26,898,443 |
| 26,898,443 |
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| 26,898,443 |
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Cash dividends per share | $ | 0.30 |
| $ | 0.30 | $ | 0.30 |
| $ | 0.30 |
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Basic and diluted earnings per share | $ | 0.44 |
| $ | 0.75 | $ | 0.60 |
| $ | 0.44 |
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See accompanying notes to Consolidated Financial Statements.
2
WEIS MARKETS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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| 13 Weeks Ended | ||||
(dollars in thousands) | April 1, 2017 | March 26, 2016 | |||
Net income | $ | 11,836 |
| $ | 20,129 |
Other comprehensive income by component, net of tax: |
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Available-for-sale marketable securities |
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Unrealized holding gains arising during period |
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(Net of deferred taxes of $11 and $570, respectively) |
| 64 |
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| 816 |
Reclassification adjustment for gains included in net income |
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(Net of deferred taxes of $0 and $111, respectively) |
| - |
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| (158) |
Other comprehensive income, net of tax |
| 64 |
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| 658 |
Comprehensive income, net of tax | $ | 11,900 |
| $ | 20,787 |
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| 13 Weeks Ended | |||||
(dollars in thousands) | March 31, 2018 | April 1, 2017 | ||||
Net income | $ | 16,191 |
| $ | 11,836 |
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Other comprehensive income (loss) by component, net of tax: |
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Available-for-sale marketable securities |
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Unrealized holding gains (losses) arising during period |
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(Net of deferred taxes of $158 and $11, respectively for the 13 Weeks Ended) |
| (403) |
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| 64 |
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Reclassification adjustment for (gains) losses included in net income |
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(Net of deferred taxes of $15 and $0, respectively for the 13 Weeks Ended) |
| 39 |
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| - |
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Other comprehensive income (loss), net of tax |
| (364) |
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| 64 |
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Comprehensive income, net of tax | $ | 15,827 |
| $ | 11,900 |
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See accompanying notes to Consolidated Financial Statements.
3
WEIS MARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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| 13 Weeks Ended | 13 Weeks Ended | ||||||||
(dollars in thousands) | April 1, 2017 | March 26, 2016 | March 31, 2018 | April 1, 2017 | ||||||
Cash flows from operating activities: |
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Net income | $ | 11,836 | $ | 20,129 | $ | 16,191 |
| $ | 11,836 |
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Adjustments to reconcile net income to |
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net cash provided by operating activities: |
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Depreciation and amortization |
| 20,962 |
| 18,368 |
| 22,763 |
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| 20,962 |
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Gain on disposition of fixed assets |
| (796) |
| (75) | ||||||
Gain on sale of marketable securities |
| - |
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(Gain) loss on disposition of fixed assets |
| 30 |
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| (796) |
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Loss on sale of marketable securities |
| 54 |
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| - |
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Unrealized loss in value of equity securities |
| 780 |
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Deferred income taxes |
| 7,476 |
| (1,153) |
| (905) |
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| 7,476 |
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Changes in operating assets and liabilities: |
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Inventories |
| 1,566 |
| 3,352 |
| 12,444 |
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| 1,566 |
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Accounts receivable and prepaid expenses |
| 17,539 |
| 5,658 |
| 7,627 |
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| 10,712 |
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Accounts payable and other liabilities |
| (45,789) |
| (21,239) |
| (15,616) |
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| (45,789) |
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Income taxes |
| 1,948 |
| 12,773 |
| 7,021 |
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| 1,948 |
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Other |
| (110) |
| 525 |
| 398 |
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| (110) |
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Net cash provided by operating activities |
| 14,632 |
| 38,069 |
| 50,787 |
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| 7,805 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
| (17,056) |
| (29,935) |
| (21,844) |
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| (17,056) |
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Proceeds from the sale of property and equipment |
| 1,142 |
| 124 |
| 8 |
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| 1,142 |
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Purchase of marketable securities |
| (2,579) |
| (1,284) |
| (586) |
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| (2,579) |
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Proceeds from maturities of marketable securities |
| 1,895 |
| - |
| 1,000 |
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| 1,895 |
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Proceeds from the sale of marketable securities |
| 4,006 |
| 15,213 |
| 512 |
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| 4,006 |
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Purchase of intangible assets |
| (1,240) |
| (549) |
| (1,500) |
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| (1,240) |
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Change in SERP investment |
| (1,486) |
| (763) |
| (933) |
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| (1,486) |
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Net cash used in investing activities |
| (15,318) |
| (17,194) |
| (23,343) |
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| (15,318) |
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Cash flows from financing activities: |
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Proceeds from long-term debt |
| 6,398 |
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Proceeds from (payments on) long-term debt |
| (17,076) |
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| 6,398 |
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Dividends paid |
| (8,070) |
| (8,070) |
| (8,070) |
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| (8,070) |
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Net cash used in financing activities |
| (1,672) |
| (8,070) |
| (25,146) |
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| (1,672) |
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Net (decrease) increase in cash and cash equivalents |
| (2,358) |
| 12,805 | ||||||
Net increase (decrease) in cash and cash equivalents |
| 2,298 |
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Cash and cash equivalents at beginning of year |
| 14,653 |
| 17,596 |
| 47,917 |
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| 46,818 |
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Cash and cash equivalents at end of period | $ | 12,295 | $ | 30,401 | $ | 50,215 |
| $ | 37,633 |
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See accompanying notes to Consolidated Financial Statements. There was no cash paid for income taxes in the first quarter13 weeks of 20172018 and $157 thousand paid for income taxes in the first quarter of 2016.2017. Cash paid for interest related to long-term debt was $258$180 thousand and $0$258 thousand in the first quarter13 weeks of 2018 and 2017, and 2016, respectively.
(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. As of December 31, 2017, the Company changed its accounting policy for cash and cash equivalents and advertising costs. See Note 7 Cash and Cash Equivalents and Advertising Accounting Policies.
(2) Current Relevant Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic(Topic 606), as amended by 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. 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. The Company is currently in the process of evaluatinghas evaluated the impact of adoption of the ASU. The Company’s assessment of the new guidance has identified customer loyalty programs and gift cards affected by the new guidance. The Company expectsadopted the new standard using the modified retrospective method beginning December 31, 2017. The effects related to these transactions did not materially effect the Company’s Consolidated Financial Statements. The Company determined that the adoption of the ASU willdid not have a significant impact on the Company’s point of sale product sales.
In January 2016, the FASB issued ASU 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets 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 ASU 2016-01 will likely havehad an impact on the net income reported in the Company’s Consolidated Statements of Income but will not impactfor the Company’s comprehensive income or shareholders’ equity.first 13 weeks of 2018 of $0.8 million. The amendment is effective for fiscal years beginning afterASU was adopted as of December 15, 2017, with the31, 2017. The cumulative effect of the adoption was made to the balance sheet as of the date of adoption. Adoption will resultDecember 31, 2017 and resulted in a reclassification of the$5.5 million of related accumulated unrealized appreciation,gains, net of applicable deferred income taxes, currentlythat were included in accumulated other comprehensive income to retained earnings, resulting in no impact on the Company’s shareholders’ equity.
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. 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 the Company’s Consolidated Balance Sheet.Sheets.
In March 2016, the FASB issued ASU 2016-04 Liabilities – Extinguishments of Liabilities (Subtopic 405-20) Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 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. Early application is permitted including adoption in an interim period. The Company expects thathas evaluated the effect of the adoption of the ASU willand determined there was not have a significant impact on the Company’s Consolidated Financial Statements. The Company adopted ASU 2016-04 beginning December 31, 2017.
5
(3) Marketable 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 advisory firm(s)firm which includeincludes 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.
The Company accrues interest on its bond portfolio throughout the life of each bond held. Dividends from the equity securities are recognized as received. Both interestInterest, dividends and dividendsunrealized gains and losses on equity securities are recognized in “Investment income and interest expense” on the Company’s Consolidated Statements of Income. Investment loss, which includes a $780 thousand unrealized loss in equity securities, was $365 thousand in the first quarter of 2018. Investment income was $1.1 million and $637 thousand forin the first quarter of 2017 and 2016, respectively.2017.
Marketable securities, as of April 1, 2017March 31, 2018 and December 31, 2016,30, 2017, consisted of:
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(dollars in thousands) | Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | ||||||||||
April 1, 2017 | Cost | Holding Gains | Holding Losses | Value | ||||||||||||
March 31, 2018 | Cost | Holding Gains | Holding Losses | Value | ||||||||||||
Available-for-sale: |
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Level 1 |
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Equity securities | $ | 1,198 | $ | 7,804 | $ | - | $ | 9,002 | $ | 1,198 | $ | 6,855 | $ | - | $ | 8,053 |
Level 2 |
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Municipal bonds |
| 54,773 |
| 784 |
| (280) |
| 55,277 |
| 53,110 |
| 363 |
| (317) |
| 53,156 |
| $ | 55,971 | $ | 8,588 | $ | (280) | $ | 64,279 | $ | 54,308 | $ | 7,218 | $ | (317) | $ | 61,209 |
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(dollars in thousands) | Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | ||||||||||
December 31, 2016 | Cost | Holding Gains | Holding Losses | Value | ||||||||||||
December 30, 2017 | Cost | Holding Gains | Holding Losses | Value | ||||||||||||
Available-for-sale: |
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Level 1 |
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Equity securities | $ | 1,198 | $ | 8,162 | $ | - | $ | 9,360 | $ | 1,198 | $ | 7,634 | $ | - | $ | 8,832 |
Level 2 |
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Municipal bonds |
| 57,739 |
| 531 |
| (459) |
| 57,811 |
| 54,278 |
| 671 |
| (116) |
| 54,833 |
| $ | 58,937 | $ | 8,693 | $ | (459) | $ | 67,171 | $ | 55,476 | $ | 8,305 | $ | (116) | $ | 63,665 |
Maturities of marketable securities classified as available-for-sale at April 1, 2017,March 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
| Amortized |
| Fair |
| Amortized |
| Fair |
(dollars in thousands) |
| Cost |
| Value |
| Cost |
| Value |
Available-for-sale: |
|
|
|
|
|
|
|
|
Due within one year | $ | 7,623 | $ | 7,667 | $ | 11,738 | $ | 11,761 |
Due after one year through five years |
| 24,811 |
| 25,161 |
| 21,765 |
| 21,910 |
Due after five years through ten years |
| 22,339 |
| 22,449 |
| 19,607 |
| 19,485 |
Equity securities |
| 1,198 |
| 9,002 |
| 1,198 |
| 8,053 |
| $ | 55,971 | $ | 64,279 | $ | 54,308 | $ | 61,209 |
6
(3) Marketable Securities (continued)
SERP Investments
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 Company’s Consolidated Balance Sheet as “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 and interest expense” on the Company’s Consolidated Statements of Income. The changes in the underlying liability to the associates are recorded in “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 | $ | |
|
|
|
Amount reclassified to retained earnings for equity unrealized gain (adoption of ASU 2016-01) | (5,482) | |
Other comprehensive |
| |
Amounts reclassified from accumulated other comprehensive income |
|
|
Net current period change in other comprehensive income |
| |
Accumulated other comprehensive income balance as of | $ | |
34 |
The following table sets forth the effects on net income of the amounts reclassified out of accumulated other comprehensive income for the periods ended March 31, 2018 and April 1, 2017 and March 26, 2016.2017.
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| ||
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| ||
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| |||||
|
| Accumulated Other Comprehensive Income to the | |||||
|
| Consolidated Statements of Income | |||||
|
| 13 Weeks Ended | |||||
(dollars in thousands) | Location | March 31, 2018 | April 1, 2017 |
| |||
Unrealized gains (losses) on available-for-sale marketable securities |
|
|
|
| |||
| Investment income and interest expense | $ | 54 | $ | - |
| |
| Provision for income taxes |
|
|
| - | ||
Total amount reclassified, net of tax |
| $ |
| $ | - |
(5) Acquisitions
On August 1, 2016, the Company purchased five Mars Super Market stores located in Maryland. Weis Markets, Inc. acquired these locations and their 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 2017. The cash purchase price paid was $24.6 million for the property, equipment, inventories, prepaid expenses and 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.
7
(5) Acquisitions (continued)
In September 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 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 acquired locations were part of a FTC forced divestiture in the approval process of the merger of Ahold and Delhaize 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 sales 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 customers 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 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, $70.9March 31, 2018, $17.9 million of the available $120.0$100.0 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 recent2016 acquisitions and the Company’s working capital requirements. The only financial covenant in the credit facility requires the Company’s minimumtrailing twelve month EBITDA to be at least $75.0 million. The Credit Agreement is also being utilized by the Company for letters of credit. As of April 1, 2017, the Company had $16.7$18.2 million of the available $120.0 million from the credit facility, committed to outstanding letters of credit.credit as of March 31, 2018. 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.
Interest expense related to long-term debt was $273,000$167 thousand and $273 thousand in the first quarter of 2018 and 2017, respectively.
(6) Revenue Recognition
The adoption of ASU 2014-9 Revenue from Contracts with Customers (ASC 606) did not have a material impact on the Company’s Consolidated Financial Statements. The Chief Operating Officer, the Company’s chief operating decision maker, analyzes store operational revenues by geographical area but each area offers customers similar product, has similar distribution methods, and supported by centralized management processes. The Company’s operations are reported as a single reportable segment.
The following table represents net sales by type of product for the 13 week periodperiods ending March 31, 2018 and April 1, 2017:
|
|
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|
|
|
|
|
|
|
|
|
|
|
| 13 Weeks Ended | ||||||||||
(dollars in thousands) |
| March 31, 2018 |
| April 1, 2017 | ||||||||
Grocery |
| $ | 768,019 |
| 87.7 | % |
| $ | 749,561 |
| 88.0 | % |
Pharmacy |
|
| 77,940 |
| 8.9 |
|
|
| 76,250 |
| 8.9 |
|
Fuel |
|
| 28,645 |
| 3.3 |
|
|
| 24,450 |
| 2.9 |
|
Manufacturing |
|
| 1,502 |
| 0.1 |
|
|
| 1,967 |
| 0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 876,106 |
| 100.0 | % |
| $ | 852,229 |
| 100.0 | % |
(7) Cash and Cash Equivalents and Advertising Accounting Policies
As of December 31, 2017, the Company changed its policy for cash and cash equivalents to include all credit card, debit card and electronic benefits transfer transactions that process in less than seven days in the amount of $31.4 million and $26.6 million as of March 31, 2018 and December 30, 2017, respectively. Management deems the classification of the amounts due from third-party financial institutions to be more appropriately reported in cash and cash equivalents due to certainty and timely settlement in less than seven days. The amounts have been reclassified from accounts receivable to cash and cash equivalents as of December 30, 2017 in the amount of $26.6 million to conform to the presentation of the Consolidated Balance Sheets as of March 31, 2018.
As of December 31, 2017, the Company changed its policy for advertising costs to expense advertising costs as incurred, net of vendor paid cooperative advertising credits, in Cost of sales in the amount of $1.9 million and $760 thousand for the thirteen weeks ended March 31, 2018 and April 1, 2017, respectively. Management deems the policy change to record net advertising costs in Cost of sales instead of Operating, general and administrative expenses better represents Cost of sales inclusive of direct product costs (net of discounts and allowances), distribution center and transportation costs, manufacturing facility operations and advertising costs that are primarily funded by vendor cooperative advertising credits and occur in the same period the product is sold. Advertising costs net of vendor cooperative advertising credits have been reclassified to Cost of sales out of Operating, General and Administrative costs for the thirteen weeks ended and April 1, 2017 in the amount of $760 thousand to conform to the presentation of the Consolidated Statement of income for the thirteen weeks ended March 31, 2018.
8
(7) Cash and Cash Equivalents and Advertising Accounting Policies (continued)
The tables below summarize the effect of the reclassifications of previously reported Consolidated Financial Statements for the fiscal year ended December 30, 2017 and the thirteen weeks ended April 1, 2017.
|
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|
|
| As of December 30, 2017 | |||||||
|
| As Previously |
|
|
|
|
|
| |
Consolidated Balance Sheets (dollars in thousands) |
| Reported |
| Reclassifications |
| As Adjusted | |||
Cash and Cash Equivalent |
| $ | 21,305 |
| $ | 26,612 |
| $ | 47,917 |
Accounts Receivable, net |
|
| 82,877 |
|
| (26,612) |
|
| 56,265 |
|
|
|
|
|
|
|
|
|
|
|
| 13 Weeks Ended | |||||||
|
| April 1, 2017 | |||||||
Consolidated Statements of Income |
| As Previously |
|
|
|
|
|
| |
(dollars in thousands) |
| Reported |
| Reclassifications |
| As Adjusted | |||
Cost of sales, including advertising, warehousing and distribution expenses |
| $ | 622,433 |
| $ | 760 |
| $ | 623,193 |
Gross profit on sales |
|
| 229,796 |
|
| (760) |
|
| 229,036 |
Operating, general and administrative expenses |
|
| 209,546 |
|
| (760) |
|
| 208,786 |
|
|
|
|
|
|
|
|
|
|
|
| 13 Weeks Ended | |||||||
|
| April 1, 2017 | |||||||
Consolidated Statements of Cash Flows |
| As Previously |
|
|
|
|
|
| |
(dollars in thousands) |
| Reported |
| Reclassifications |
| As Adjusted | |||
Accounts receivable and prepaid expenses |
| $ | 17,539 |
| $ | (6,827) |
| $ | 10,712 |
Net cash provided by operating activities |
|
| 14,632 |
|
| (6,827) |
|
| 7,805 |
Net increase (decreases) in cash and cash equivalents |
|
| (2,358) |
|
| (6,827) |
|
| (9,185) |
Cash and cash equivalents at beginning of year |
|
| 14,653 |
|
| 32,165 |
|
| 46,818 |
Cash and cash equivalents at end of period |
| $ | 12,295 |
| $ | 25,338 |
| $ | 37,633 |
(8) Related Party Transactions
On January 16, 2018, the Company purchased a parcel of land from Central Properties, Inc. in which Jonathan H. Weis and his immediate family members have a material beneficial ownership interest. An independent market value appraisal was prepared prior to the determination of the purchase price of $1.1 million. The purchase was approved by the Company’s Executive Committee in accordance with Company policy and regulatory guidelines and reviewed and approved by the Board of Directors in accordance with the Company’s Code of Business Conduct and Ethics, the Code of Ethics for CEO and CFO, the Audit Committee Charter and the Company’s Related Party Transaction policy.
(9) Income Taxes
The Company reflected the effects of the Tax Cuts and Jobs Act (The Act), in its 2017 financial statements. This included the effects of the change in the US Corporate tax rate from 35% to 21% on deferred tax assets and liabilities. The Company’s tax expense for the period ended March 31, 2018 includes the reduction in the U.S. federal tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The Company’s tax provision also reflects other changes as a result of the Act, including the impact of changes effecting the deductibility of certain executive compensation and immediate expensing of qualified assets placed into service after September 27, 2017.
89
WEIS MARKETS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONCONDIDTION AND RESULTS OF OPERATIONS
The following discussion and analysis of Weis Markets, Inc.’s (the “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 31, 2016,30, 2017, filed with the U.S. Securities and Exchange Commission, as well as the cautionary statement captioned "Forward-Looking Statements" immediately following this analysis.
Company Summary
Weis Markets is a conventional supermarket chain that operates 204205 retail stores with a total ofover 23,000 associates located in Pennsylvania and six surrounding states: Delaware, Maryland, New Jersey, New York, Virginia and West Virginia. Its products sold includeThe Company's retail food stores sell 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 including natural, gluten-free and theorganic varieties.
The Company advertises its products and promotes its brand through weekly newspaper circulars; radio ads; e-mail blasts; and on-line via its web site, social media and mobile applications. Printed circulars are used extensively on a weekly basis to advertise featured items. The Company promotes by using Everyday LowLower Price, Low Price Guarantee and Loyalty programs. The Loyaltyutilizes a loyalty marketing program, includes“Weis Club Preferred Shopper,” which enables customers to receive discounts, promotions and in-store and fuel rewards that may be redeemed at the Company’s fuel stations or one of its third party fuel station partners.rewards.
Utilizing its own centrally located distribution center and transportation fleet, Weis Markets self distributes approximately 67%66% 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 fresh meat products.products primarily for the Company’s stores but serve other companies as well. 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,To date and during 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,first quarter of 2018, the acquired store group is providing a positive cash flow for the Company as management continues to develop the stores using its business model. As the acquired stores assimilate, management anticipates the adverse impact of those stores on costs to lessen. 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 utilizeis utilizing them where appropriate in other stores.
910
WEIS MARKETS, INC.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONCONDIDTION AND RESULTS OF OPERATIONS
(continued)
Results of Operations
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|
|
|
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| ||||
Analysis of Consolidated Statements of Income |
|
|
|
|
|
|
| Analysis of Consolidated Statements of Income | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Percentage Changes | ||
|
|
|
|
|
|
| Percentage Changes | 13 Weeks Ended | 2018 vs. 2017 | |||||||||
| 13 Weeks Ended | 2017 vs. 2016 | ||||||||||||||||
(dollars in thousands except per share amounts) | April 1, 2017 | March 26, 2016 | 13 Weeks Ended | March 31, 2018 | April 1, 2017 | 13 Weeks Ended | ||||||||||||
Net sales | $ | 852,229 |
| $ | 738,204 |
|
| 15.4 | % | $ | 876,106 |
| $ | 852,229 |
|
| 2.8 | % |
Cost of sales, including warehousing and distribution expenses |
| 622,433 |
|
| 531,092 |
|
| 17.2 |
| |||||||||
Cost of sales, including advertising, warehousing and distribution expenses |
| 641,199 |
|
| 623,193 |
|
| 2.9 |
| |||||||||
Gross profit on sales |
| 229,796 |
|
| 207,112 |
|
| 11.0 |
|
| 234,907 |
|
| 229,036 |
|
| 2.6 |
|
Gross profit margin |
| 27.0 | % |
| 28.1 | % |
|
|
|
| 26.8 | % |
| 26.9 | % |
|
|
|
Operating, general and administrative expenses |
| 209,546 |
|
| 175,842 |
|
| 19.2 |
|
| 212,068 |
|
| 208,786 |
|
| 1.6 |
|
O, G & A, percent of net sales |
| 24.6 | % |
| 23.8 | % |
|
|
|
| 24.2 | % |
| 24.5 | % |
|
|
|
Income from operations |
| 20,250 |
|
| 31,270 |
|
| (35.2) |
|
| 22,839 |
|
| 20,250 |
|
| 12.8 |
|
Operating margin |
| 2.4 | % |
| 4.2 | % |
|
|
|
| 2.6 | % |
| 2.4 | % |
|
|
|
Investment income and interest expense |
| 824 |
|
| 637 |
|
| 29.4 |
|
| (532) |
|
| 824 |
|
| (164.6) |
|
Investment income and interest expense, percent of net sales |
| 0.1 | % |
| 0.1 | % |
|
|
|
| (0.1) | % |
| 0.1 | % |
|
|
|
Income before provision for income taxes |
| 21,074 |
|
| 31,907 |
|
| (34.0) |
|
| 22,307 |
|
| 21,074 |
|
| 5.9 |
|
Income before provision for income taxes, percent of net sales |
| 2.5 | % |
| 4.3 | % |
|
|
|
| 2.5 | % |
| 2.5 | % |
|
|
|
Provision for income taxes |
| 9,238 |
|
| 11,778 |
|
| (21.6) |
|
| 6,116 |
|
| 9,238 |
|
| (33.8) |
|
Effective income tax rate |
| 43.8 | % |
| 36.9 | % |
|
|
|
| 27.4 | % |
| 43.8 | % |
|
|
|
Net income | $ | 11,836 |
| $ | 20,129 |
|
| (41.2) | % | $ | 16,191 |
| $ | 11,836 |
|
| 36.8 | % |
Net income, percent of net sales |
| 1.4 | % |
| 2.7 | % |
|
|
|
| 1.8 | % |
| 1.4 | % |
|
|
|
Basic and diluted earnings per share | $ | 0.44 |
| $ | 0.75 |
|
| (41.3) | % | $ | 0.60 |
| $ | 0.44 |
|
| 36.4 | % |
10
WEIS MARKETS, INC.ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
Results of Operations (continued)
Net Sales
Analysis of Sales
|
|
|
|
| Percentage Changes | ||
|
| ||
March 31, 2018 | 13 Weeks | ||
Net |
|
| % |
Net sales, excluding fuel sales |
|
| |
|
| ||
|
|
| |
Comparable store sales, adjusted for holiday impact |
|
|
|
Comparable store sales, adjusted for holiday impact, excluding fuel sales |
|
| |
|
| ||
|
| % |
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.
The Company’s first quarter 2016 sales benefited from the Easter and New Year holiday periods, which fell inshift, since the first quarter last year. In 2016, Easter sales week occurredfell 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 salesand the slow selling week and Easterafterwards fell in the second quarter of 2017.this year. Last year both weeks fell in the second quarter. Management estimates the incremental holiday sales impact was approximately $10.1 million.$10.0 million and has excluded it from the 2018 comparable store sales. The shift will adversly affect the second quarter 2018 comparisons to 2017 by the same amount.
11
WEIS MARKETS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDIDTION AND RESULTS OF OPERATIONS
(continued)
Results of Operations (continued)
Net Sales (continued)
Analysis of Sales (continued)
According to the latest U.S. Bureau of Labor Statistics’ report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index decreased 1.5%increased 0.4% compared to an increasea decrease of 0.3%1.5% 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. According to the U.S. Department of Energy, the thirteen13 week average price of gasoline in the Central Atlantic States increased 22.2%9.3% or $0.47$0.24 per gallon in the first quarter of 20172018 compared to the same quarter in 2016.2017.
The Company experienced deflation forComparable store sales increased in the first quarter of 2017 in its core sales compared to the same quarter last year, particularly in its meat, produce, dairy and seafood departments. It2018. The Company was partially able to offsetachieve this through targeted, tactical marketing programs in key regional markets along with its chain wide sales-driving promotional programs such as its loyalty card. In conjunction with its marketing initiatives the impactCompany continues to add additional product offerings and customer conveniences such as “Weis 2 Go Online” currently offered in 79 store locations. “Weis 2 Go Online” allows the customer to order on-line and then pick their order up at a drive thru location at the store. The Company continues to expand this offering. With the aforementioned offerings and programs, the Company experienced inflation in some of deflation by increasing the number of units sold. Pharmacy sales increased as script counts grew proportionally.its fresh categories most notably eggs, fruits and vegetables. Fuel sales benefited from inflation as comparable fuel sales rose 18.8%. In addition to deflation, management estimates winter weather events negatively impacted11.5% during the sales comparison between quarters by approximately $7 million on a comparable store basis.first quarter of 2018.
Although the Company experienced retail inflation and deflation in various commodities for the quartersyears 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), net advertising costs, distribution center and transportation costs, as well as manufacturing facility operations. Almost all of the increase in cost of sales in 20172018 as compared to 20162017 is due to the increased sales volume in 2017.2018. Both direct product cost and distribution cost increase when sales volume increases.
11
WEIS MARKETS, INC.ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF 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 quarter13 weeks of 20172018 decreased less than 0.1% compared to the first quarter of 2016. In addition,same period in 2017, remaining virtually 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 besame. Improved inventory management and fresh department sell-through during winter weather events offset by the increased fuel costs in transportation costs due to the distance of the acquired stores.and LIFO charges.
Non-cash LIFO inventory valuation adjustments changed from income of $85 thousand in the first 13 weeks of 2017, to expense of $0.7 million for the first quarter of 2016 to income of $0.1 million during$750 thousand in the same quarterperiod of 2018. Although costs are currently stagnant, management is anticipating some annualized product cost inflation, most notably in 2017, accounting for 0.1% of the gross margin increase in 2017 versus 2016.its pharmacy department.
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.
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WEIS MARKETS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDIDTION AND RESULTS OF OPERATIONS
(continued)
Results of Operations (continued)
Operating, General and Administrative Expenses
The majority of the increase in operating, general and administrative expenses was driven by increased sales volume.
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A breakdown of the material increases (decreases) as a percent of sales in "Operating, general and administrative expenses" is as follows: | ||||
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| 13 Weeks Ended | |||
(dollars in thousands) | Increase | Increase (Decrease) | ||
March 31, 2018 | (Decrease) | as a % of sales | ||
Employee-related expenses | $ | 1,099 | (0.3) | % |
Depreciation and amortization |
| 1,584 | 0.1 |
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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%decreased 0.3% in the first quarter of 20172018 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 2016.2017. The Company continues to monitor store labor efficiencies and develop labor standards to reduce cost while maintaining the Company’s customer service expectations. Not accounting for labor savings entirely, multiple winter weather events in the Company’s trade area contributed to labor savings by having periods of very high sales volume followed by low or no volume.
The Company’s self-insured health care benefit expenses decreased $476,000increased $1.1 million or 8.4%0.1%, as a percent of sales, in the first quarter of 20172018 compared to the samefirst quarter last year.of 2017. The variance is mainly attributed to a decreasean increase in the number of claims and prescription 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 charged to “Operating, general and administrative expenses” was $22.7 million, or 2.6% of net sales during the first quarter of 2018 compared to $20.9 million or 2.5% of net sales forduring the first quarter of 2017 compared to $18.4 million or 2.5% of net sales for the first quarter of 2016.2017. 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.program. See the Liquidity and Capital Resources section for further information regarding the Company’s capital expansion program.
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A breakdown of the material increases (decreases) as a percent of sales in "Operating, general and administrative expenses" is as follows: | ||||
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| 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 |
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Utility expense |
| 2,041 | 0.1 |
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Rent expense |
| 2,642 | 0.2 |
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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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WEIS MARKETS, INC.ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
Results of Operations (continued)
Provision for Income Taxes
The effective income tax rate was 43.8%27.4% and 36.9%43.8% for the first quarter of 20172018 and 2016,2017, respectively. The increasedecrease in the effective income tax rate is primarily due to a discrete item recorded in the first quarter of 2017 and an increase in the state tax expense.Federal statutory rate reduced from 35% to 21%. Historically, the effective income tax rate differed from the federal statutory rate, primarily due to the effect of state taxes, net of permanent differences. On December 22, 2017, the U.S. Government enacted the Tax Cuts and Jobs Act (the ”Tax Reform”). The Tax Reform significantly impacted the Company’s effective income tax rate by reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and allowing immediate expensing of qualified assets placed into service after September 27, 2017. Other elements of the Tax Reform have minor impacts, however the above mentioned decreased deferred income tax by $49.3 million in 2017.
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WEIS MARKETS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDIDTION AND RESULTS OF OPERATIONS
(continued)
Liquidity and Capital Resources
The primary sources of cash are cash flows generated from operations and borrowings under the 2016 revolving credit agreement from Wells Fargo Bank, NA. The Company’s revolving credit agreement has a principal amount of $100.0 million with an additional discretionary availability of $50.0 million. On March 13, 2017, the Company was approved to access $20.0 million of the discretionary amount bringing the Company’s immediate borrowing capacity to $120.0 million. As of April 1, 2017March 31, 2018 the Company’s unused availability under the revolving credit agreement was $32.4$63.9 million with $70.9$17.9 million of borrowings outstanding and $16.7$18.2 million of letters of credit outstanding. The revolving credit agreement matures on September 1, 2019. 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’s investment portfolio consists of marketable securities, which currently includes municipal bonds and equity securities. As of April 1, 2017,March 31, 2018, the portfolio totaled $64.3$61.2 million. Management anticipates maintaining the investment portfolio, but has the 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 $90.0$85.5 million in its capital expansion program in 2017.2018.
The Company expects that cash generated from operations and cash 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,March 31, 2018, 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$0.30 per share, payable on May 22, 201721, 2018 to shareholders of record on May 8, 2017.7, 2018. 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'SMANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONCONDIDTION AND RESULTS OF OPERATIONS
(continued)
Liquidity and Capital Resources (continued)
Cash Flow Information
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| 13 Weeks Ended | 2017 vs. 2016 | 13 Weeks Ended |
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(dollars in thousands) | April 1, 2017 | March 26, 2016 | 13 Weeks Ended | March 31, 2018 | April 1, 2017 | 2018 vs. 2017 | ||||||||||||
Net cash provided by (used in): |
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Operating activities | $ | 14,632 |
| $ | 38,069 |
| $ | (23,437) |
| $ | 50,787 |
| $ | 7,805 |
| $ | 42,982 |
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Investing activities |
| (15,318) |
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| (17,194) |
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| 1,876 |
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| (23,343) |
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| (15,318) |
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| (8,025) |
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Financing activities | $ | (1,672) |
| $ | (8,070) |
| $ | 6,398 |
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| (25,146) |
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| (1,672) |
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| (23,474) |
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Operating
Cash flows from operating activities decreasedincreased $43.0 million in the first quarter13 weeks of 2017 mainly as a result of decreased operating income2018 compared to the first quarter13 weeks of 2016. In addition, long-term2017. Higher profits, lower inventories and lower management incentive payments to associates of $11.8 million were issued duringpayouts accounted for the quarter.increase in cash provided.
Investing
Property and equipment purchases during the first quarter13 weeks of 20172018 totaled $17.1$21.8 million compared to $29.9$17.1 million in the first 13 weeks of 2017. The current increase in capital expenditures is primarily due to two new stores, one of which has opened in Nottingham, Md in the second quarter of 2016. The decrease of $12.9 million was partially attributable to the Company purchasing four properties in the first quarter of 2016.2018. As a percentage of sales, capital expenditures including the acquisitions were 2.0%2.5% and 4.1%2.0% in the first quarter13 weeks of 20172018 and 2016,2017, respectively. In 2016,2018, the Company sold $15.2 million ofplans to maintain its marketable securities as it prepared to finance future acquisitions.portfolio at its current level.
Financing
The Company paid a dividenddividends of $8.1 million forin the first quarters13 weeks of both 20172018 and 2016.2017. In 2017, proceeds from long-term debt offset2018, payments on the dividend thereby reducingrevolving credit agreement increased net cash used in financing activities by $6.4 million.$23.5 million as the Company borrowed on the revolver in 2017.
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 20162017 Annual Report on Form 10-K. There have been notwo changes to the Significant Accounting Policies and three new accounting standards adopted since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2016.30, 2017, which are summarized in Notes 2 and 7 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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.
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 monthsfiscal quarter ended April 1, 2017.March 31, 2018. 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 31, 201630, 2017 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 31, 201630, 2017 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 April 1, 2017.March 31, 2018. 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 April 1, 2017,March 31, 2018, 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.
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
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| WEIS MARKETS, INC. | |
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| (Registrant) | |
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| 5/10/2018 |
| /S/Jonathan H. Weis |
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| Jonathan H. Weis | |
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| Chairman, | |
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| President and Chief Executive Officer | |
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| (Principal Executive Officer) | |
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| 5/10/2018 |
| /S/Scott F. Frost |
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| Scott F. Frost | |
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| Senior Vice President, Chief Financial Officer | |
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| and Treasurer | |
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| (Principal Financial Officer) | |
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