The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
The Boston
Beer Company, Inc. and certain subsidiaries (the Company) are engaged in the business of brewing and selling alcohol beverages throughout the United States and in selected international markets, under the trade names, The Boston
Beer Company, Twisted Tea Brewing Company, Angry Orchard Cider Company and Hard Seltzer Beverage Company. The Companys Samuel Adams
®
beers are
produced and sold under the trade name The Boston Beer Company. A&S Brewing Collaborative LLC, d/b/a A&S Brewing (A&S), a wholly-owned subsidiary of the Company, sells beer under various trade names including
The Traveler Beer Company, Coney Island Brewing Company, Angel City Brewery and Concrete Beach Brewery.
The accompanying unaudited consolidated balance sheet as of September 30, 2017, and the consolidated statements of comprehensive income and consolidated
statements of cash flows for the interim periods ended September 30, 2017 and September 24, 2016 have been prepared by the Company in accordance with U.S. generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with U.S generally accepted accounting principles have
been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Companys Annual Report on Form
10-K
for the year
ended December 31, 2016.
In the opinion of the Companys management, the Companys unaudited consolidated balance sheet as of
September 30, 2017 and the results of its consolidated operations and consolidated cash flows for the interim periods ended September 30, 2017 and September 24, 2016, reflect all adjustments (consisting only of normal and recurring
adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
B. Inventories
Inventories consist of raw materials,
work in process and finished goods. Raw materials, which principally consist of hops, apple juice, other brewing materials and packaging, are stated at the lower of cost, determined on the
first-in,
first-out
basis, or net realizable value. The Companys goal is to maintain on hand a supply of at least one year for essential hop varieties, in order to limit the risk of an unexpected reduction in supply.
Inventories are generally classified as current assets. The Company classifies hops inventory in excess of two years of forecasted usage in other long term assets. The cost elements of work in process and finished goods inventory consist of raw
materials, direct labor and manufacturing overhead. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Current inventory:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
34,267
|
|
|
$
|
35,314
|
|
Work in process
|
|
|
8,687
|
|
|
|
8,131
|
|
Finished goods
|
|
|
11,989
|
|
|
|
9,054
|
|
|
|
|
|
|
|
|
|
|
Total current inventory
|
|
|
54,943
|
|
|
|
52,499
|
|
Long term inventory
|
|
|
13,202
|
|
|
|
6,316
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
68,145
|
|
|
$
|
58,815
|
|
|
|
|
|
|
|
|
|
|
6
The Company calculates net income per share using the
two-class
method, which requires
the Company to allocate net income to its Class A Common Shares, Class B Common Shares and unvested share-based payment awards that participate in dividends with common stock, in the calculation of net income per share.
The Class A Common Stock has no voting rights, except (1) as required by law, (2) for the election of Class A Directors, and (3) that
the approval of the holders of the Class A Common Stock is required for (a) certain future authorizations or issuances of additional securities which have rights senior to Class A Common Stock, (b) certain alterations of rights
or terms of the Class A or Class B Common Stock as set forth in the Articles of Organization of the Company, (c) other amendments of the Articles of Organization of the Company, (d) certain mergers or consolidations with, or
acquisitions of, other entities, and (e) sales or dispositions of any significant portion of the Companys assets.
The Class B Common
Stock has full voting rights, including the right to (1) elect a majority of the members of the Companys Board of Directors and (2) approve all (a) amendments to the Companys Articles of Organization, (b) mergers or
consolidations with, or acquisitions of, other entities, (c) sales or dispositions of any significant portion of the Companys assets, and (d) equity-based and other executive compensation and other significant corporate matters. The
Companys Class B Common Stock is not listed for trading. Each share of the Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of the respective Class B holder, and participates
equally in dividends.
The Companys unvested share-based payment awards include unvested shares (1) issued under the Companys investment
share program, which permits employees who have been with the Company for at least one year to purchase shares of Class A Common Stock and to purchase those shares at a discount ranging from 20% to 40% below market value based on years of
employment starting after two years of employment, and (2) awarded as restricted stock awards at the discretion of the Companys Board of Directors. The investment shares and restricted stock awards generally vest over five years in equal
number of shares. The unvested shares participate equally in dividends. See Note I for a discussion of the current year unvested stock awards and issuances.
Included in the computation of net income per diluted common share are dilutive outstanding stock options that are vested or expected to vest. At its
discretion, the Board of Directors grants stock options to senior management and certain key employees. The terms of the employee stock options are determined by the Board of Directors at the time of grant. To date, stock options granted to
employees vest over various service periods and/or based on the attainment of certain performance criteria and generally expire after ten years. The Company also grants stock options to its
non-employee
directors upon election or
re-election
to the Board of Directors. The number of option shares granted to
non-employee
directors is calculated based on a defined formula
and these stock options vest immediately upon grant and expire after ten years.
7
Net Income per Common Share Basic
The following table sets forth the computation of basic net income per share using the
two-class
method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Net income
|
|
$
|
33,683
|
|
|
$
|
31,530
|
|
|
$
|
68,519
|
|
|
$
|
65,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of net income for basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
$
|
24,772
|
|
|
$
|
22,841
|
|
|
$
|
50,647
|
|
|
$
|
47,465
|
|
Class B Common Stock
|
|
|
8,730
|
|
|
|
8,529
|
|
|
|
17,493
|
|
|
|
17,390
|
|
Unvested participating shares
|
|
|
181
|
|
|
|
160
|
|
|
|
379
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,683
|
|
|
$
|
31,530
|
|
|
$
|
68,519
|
|
|
$
|
65,183
|
|
Weighted average number of shares for basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
|
8,789
|
|
|
|
9,018
|
|
|
|
9,037
|
|
|
|
9,191
|
|
Class B Common Stock*
|
|
|
3,097
|
|
|
|
3,367
|
|
|
|
3,122
|
|
|
|
3,367
|
|
Unvested participating shares
|
|
|
65
|
|
|
|
63
|
|
|
|
67
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,951
|
|
|
|
12,448
|
|
|
|
12,226
|
|
|
|
12,622
|
|
Net income per share for basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
$
|
2.82
|
|
|
$
|
2.53
|
|
|
$
|
5.60
|
|
|
$
|
5.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock
|
|
$
|
2.82
|
|
|
$
|
2.53
|
|
|
$
|
5.60
|
|
|
$
|
5.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Change in Class B Common Stock resulted from the conversion of 100,000 shares to Class A Common Stock on
March 7, 2017, 45,000 shares to Class A Common Stock on November 30, 2016 and 125,000 shares to Class A Common Stock on November 4, 2016, with the ending number of shares reflecting the weighted average for the periods.
8
Net Income per Common Share Diluted
The Company calculates diluted net income per share for common stock using the more dilutive of (1) the treasury stock method, or (2) the
two-class
method, which assumes the participating securities are not exercised.
The following table sets forth the
computation of diluted net income per share, assuming the conversion of all Class B Common Stock into Class A Common Stock and using the
two-class
method for unvested participating shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
September 30, 2017
|
|
|
September 24, 2016
|
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
|
(in thousands, except per share data)
|
|
As reported basic
|
|
$
|
24,772
|
|
|
|
8,789
|
|
|
$
|
2.82
|
|
|
$
|
22,841
|
|
|
|
9,018
|
|
|
$
|
2.53
|
|
Add: effect of dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
Class B Common Stock
|
|
|
8,730
|
|
|
|
3,097
|
|
|
|
|
|
|
|
8,529
|
|
|
|
3,367
|
|
|
|
|
|
Net effect of unvested participating shares
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$
|
33,504
|
|
|
|
12,037
|
|
|
$
|
2.78
|
|
|
$
|
31,373
|
|
|
|
12,641
|
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
|
|
September 30, 2017
|
|
|
September 24, 2016
|
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
|
(in thousands, except per share data)
|
|
As reported basic
|
|
$
|
50,647
|
|
|
|
9,037
|
|
|
$
|
5.60
|
|
|
$
|
47,465
|
|
|
|
9,191
|
|
|
$
|
5.16
|
|
Add: effect of dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
|
|
Class B Common Stock
|
|
|
17,493
|
|
|
|
3,122
|
|
|
|
|
|
|
|
17,390
|
|
|
|
3,367
|
|
|
|
|
|
Net effect of unvested participating shares
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$
|
68,144
|
|
|
|
12,299
|
|
|
$
|
5.54
|
|
|
$
|
64,862
|
|
|
|
12,853
|
|
|
$
|
5.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the thirteen and thirty-nine weeks ended September 30, 2017, weighted-average stock options to purchase
approximately 791,000 and 800,000 shares, respectively, of Class A Common Stock were outstanding but not included in computing diluted income per common share because their effects were anti-dilutive. During the thirteen and thirty-nine weeks
ended September 24, 2016, weighted-average stock options to purchase approximately 740,000 and 704,000 shares, respectively, of Class A Common Stock were outstanding but not included in computing diluted income per common share because
their effects were anti-dilutive. Additionally, performance-based stock options to purchase approximately 36,000 and 35,000 shares of Class A Common Stock were outstanding as of September 30, 2017 and September 24, 2016, respectively,
but not included in computing diluted income per common share because the performance criteria of these stock options was not met as of the end of the reporting period.
Of the performance-based stock options to purchase approximately 36,000 shares of Class A Common Stock that were excluded from computing diluted net
income per common share as of September 30, 2017, 31,000 shares were granted in 2016 to two key employees. The vesting of these shares requires annual depletions, or sales by distributors to retailers, of certain of the Companys brands to
attain various thresholds during the period from 2017 to 2023. The remaining 5,000 shares were granted in 2017 to executive officers and the vesting of these shares requires annual depletions to attain certain thresholds in 2019.
Furthermore, stock options to purchase approximately 12,000 shares of Class A Common Stock were not included in computing diluted income per share
because these stock options were cancelled during the thirty-nine weeks ended September 30, 2017, due to performance criteria not being met or employee termination prior to vesting.
9
D. Comprehensive Income or Loss
Comprehensive income or loss represents net income or loss, plus defined benefit plans liability adjustment, net of tax effect and foreign currency translation
adjustment. The defined benefit plans liability and foreign currency translation adjustments for the interim periods ended September 30, 2017 and September 24, 2016 were not material.
E. Commitments and Contingencies
Contract Obligations
The Company had outstanding total
non-cancelable
contract obligations of $171.6 million at
September 30, 2017. These obligations are made up of hops, barley and wheat totaling $59.5 million, advertising contracts of $40.7 million, other ingredients of $32.0 million, operating leases of $13.5 million, equipment and
machinery of $13.4 million, glass bottles of $2.6 million and other commitments of $9.9 million.
The Company has entered into contracts
for the supply of a portion of its hops requirements. These purchase contracts extend through crop year 2022 and specify both the quantities and prices, denominated in U.S. Dollars, Euros and New Zealand Dollars, to which the Company is committed.
Hops purchase commitments outstanding at September 30, 2017 totaled $44.0 million, based on the exchange rates on that date. The Company does not use forward currency exchange contracts and intends to purchase future hops using the
exchange rate at the time of purchase.
Currently, the Company has entered into contracts for barley and wheat with two major suppliers. The contracts
include crop year 2017 and cover the Companys barley, wheat, and malt requirements for 2017 and part of 2018. These purchase commitments outstanding at September 30, 2017 totaled $15.5 million.
The Company sources some of its glass bottles needs pursuant to a Glass Bottle Supply Agreement with Anchor Glass Container Corporation (Anchor),
under which Anchor is the supplier of certain glass bottles for the Companys Cincinnati Brewery and its Pennsylvania Brewery. This agreement also establishes the terms on which Anchor may supply glass bottles to other breweries where the
Company brews its beers. Under the agreement with Anchor, the Company has minimum purchase commitments that are based on Company-provided production estimates which, under normal business conditions, are expected to be fulfilled. Minimum purchase
commitments under the agreement, assuming the supplier is unable to replace production cancelled by the Company, as of September 30, 2017 totaled $2.6 million.
The Company has various operating lease agreements for facilities and equipment as of September 30, 2017. Terms of these leases include, in some
instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2022. The contractual obligation on these lease agreements as of September 30,
2017 totaled $13.5 million.
Currently, the Company brews and packages more than 90% of its volume at Company-owned breweries. In the normal course
of its business, the Company has historically entered into various production arrangements with other brewing companies. Pursuant to these arrangements, the Company purchases the liquid produced by those brewing companies, including the raw
materials that are used in the liquid, at the time such liquid goes into fermentation. The Company is required to repurchase all unused raw materials purchased by the brewing company specifically for the Companys beers at the brewing
companys cost upon termination of the production arrangement. The Company is also obligated to meet annual volume requirements in conjunction with certain production arrangements. These requirements are not material to the Companys
operations.
Litigation
The Company is not a party
to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect upon its financial condition or the results of its operations. In general, while the Company believes it conducts its business
appropriately in accordance with laws, regulations and industry guidelines, claims, whether or not meritorious, could be asserted against the Company that might adversely impact the Companys results.
10
F. Income Taxes
As of September 30, 2017 and December 31, 2016, the Company had approximately $0.4 million and $0.5 million, respectively, of unrecognized
income tax benefits.
The Companys practice is to classify interest and penalties related to income tax matters in income tax expense. As of
September 30, 2017 and December 31, 2016, the Company had $0.3 million and $0.3 million, respectively, accrued for interest and penalties.
In September 2017, the Internal Revenue Service commenced an examination of the Companys 2015 consolidated corporate income tax return. The examination
was still in process as of September 30, 2017. The Companys state income tax returns remain subject to examination for three or four years depending on the states statute of limitations. The Company is being audited by two states as
of September 30, 2017. In addition, the Company is generally obligated to report changes in taxable income arising from federal income tax audits.
The following table provides a summary of the income tax provision for the thirteen and thirty-nine weeks ended September 30, 2017 and September 24,
2016:
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
September 30,
|
|
|
September 24,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Summary of income tax provision
|
|
|
|
|
|
|
|
|
Tax provision based on net income
|
|
$
|
18,753
|
|
|
$
|
18,632
|
|
Impact of adoption of ASU 2016-09
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
18,220
|
|
|
$
|
18,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
|
|
September 30,
|
|
|
September 24,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Summary of income tax provision
|
|
|
|
|
|
|
|
|
Tax provision based on net income
|
|
$
|
37,189
|
|
|
$
|
37,622
|
|
Impact of adoption of ASU 2016-09
|
|
|
(4,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
32,927
|
|
|
$
|
37,622
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate for the thirteen weeks ended September 30, 2017 decreased to 35.1% from 37.1% for
the thirteen weeks ended September 24, 2016. The Companys effective tax rate for the thirty-nine weeks ended September 30, 2017 decreased to 32.5% from 36.6% for the thirty-nine weeks ended September 24, 2016. These decreases
were primarily due to the tax benefit resulting from the adoption of ASU
2016-09,
which was effective for the Company on January 1, 2017.
11
G. Revolving Line of Credit
The Company has a credit facility in place that provides for a $150.0 million revolving line of credit which expires on March 31, 2019. As of
September 30, 2017, the Company was not in violation of any of its financial covenants to the lender under the credit facility and there were no borrowings outstanding, so that the line of credit was fully available to the Company for
borrowing.
H. Fair Value Measures
The Company
defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which
prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
|
|
|
Level 1 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
|
|
Level 2 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has
a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
|
Level 3 Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
|
All financial assets or liabilities that are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate
level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets or liabilities measured at fair value on a recurring basis are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents
|
|
$
|
67,521
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
67,521
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents
|
|
$
|
89,966
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
89,966
|
|
The Companys cash equivalents listed above represent money market funds and are classified within Level 1 of the
fair value hierarchy because they are valued using quoted market prices. The money market funds were invested substantially in United States Treasury and government securities. The Company does not adjust the quoted market price for such
financial instruments.
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents held in
money market funds. At September 30, 2017 and December 31, 2016, the Company had money market funds which have been deemed Triple A rated. The Company considers the Triple A rated money market funds to be a large,
highly-rated investment-grade institution. As of September 30, 2017 and December 31, 2016, the Companys cash and cash equivalents balance was $70.0 million and $91.0 million, respectively, including money market funds
amounting to $67.5 million and $90.0 million, respectively.
Cash, certificates of deposit, receivables and payables are carried at their cost,
which approximates fair value, because of their short-term nature. Financial instruments not recorded at fair value in the consolidated financial statements are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Note payable
|
|
$
|
|
|
|
$
|
340
|
|
|
$
|
|
|
|
$
|
340
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Note payable
|
|
$
|
|
|
|
$
|
400
|
|
|
$
|
|
|
|
$
|
400
|
|
12
I. Common Stock and Stock-Based Compensation
Option Activity
Information related to stock options
under the Employee Equity Incentive Plan and the Stock Option Plan for
Non-Employee
Directors is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2016
|
|
|
1,348,233
|
|
|
$
|
141.98
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
15,373
|
|
|
|
150.10
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(12,208
|
)
|
|
|
160.47
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(190,401
|
)
|
|
|
79.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,160,997
|
|
|
$
|
176.25
|
|
|
|
6.55
|
|
|
$
|
24,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
186,242
|
|
|
$
|
98.55
|
|
|
|
4.01
|
|
|
$
|
11,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2017
|
|
|
566,478
|
|
|
$
|
123.65
|
|
|
|
5.75
|
|
|
$
|
24,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total options outstanding at September 30, 2017, 35,885 shares were performance-based options for which the
performance criteria had yet to be achieved.
On January 1, 2017, the Company granted options to purchase an aggregate of 5,185 shares of the
Companys Class A Common Stock to senior management with a weighted average fair value of $81.95 per share, of which all shares relate to performance-based stock options.
On May 18, 2017, the Company granted options to purchase an aggregate of 10,188 shares of the Companys Class A Common Stock to the
Companys non-employee Directors. These options have a weighted average fair value of $67.72 per share. All of the options vested immediately on the date of the grant.
On August 1, 2017, the Company modified the performance criteria for performance-based options that were originally granted on April 26, 2016. This
modification was accounted for in accordance with ASC
718-20-35.
The number of shares of the Companys Class A Common Stock granted as options remained
unchanged from the original grant at 20,681 while the weighted average fair value decreased from $72.53 per share to $67.92 per share.
On January 1,
2008, the Company granted the Chief Executive Officer a stock option to purchase 753,864 shares of its Class A Common Stock, which vests over a five-year period, commencing on January 1, 2014, at the rate of 20% per year. The exercise
price is determined by multiplying $42.00 by the aggregate change in the DJ Wilshire 5000 Index from and after January 1, 2008 through the close of business on the trading date next preceding each date on which the option is exercised. The
exercise price will not be less than $37.65 per share and the excess of the fair value of the Companys Class A Common Stock over the exercise price cannot exceed $70.00 per share over the exercise price. At September 30, 2017 and
September 24, 2016, the stock option remained unexercised as to 150,773 shares and 301,546 shares, respectively. If the stock option had been exercised on September 30, 2017, the exercise price would have been $86.20 per share. If the
stock option had been exercised on September 24, 2016, the exercise price would have been $82.30 per share. The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model,
which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value per share to be $8.41.
13
On January 1, 2016, the Company granted the Chief Executive Officer an option to purchase 574,507 shares of
its Class A Common Stock, which vests over a five-year period, commencing on January 1, 2019, at the rate of 20% per year. The exercise price is determined by multiplying $201.91 by the aggregate percentage change in the DJ Wilshire 5000
Index from and after January 1, 2016 through the close of business on the trading date next preceding each date on which the option is exercised, plus an additional 1.5 percentage points per annum, prorated for partial years. The exercise price
will not be less than $201.91 per share and the excess of the fair value of the Companys Class A Common Stock cannot exceed $150 per share over the exercise price. At September 30, 2017 and September 24, 2016, the stock option
remained unexercised as to 574,507 shares. If the stock option had been exercised on September 30, 2017, the exercise price would have been $229.53 per share. If the stock option had been exercised on September 24, 2016, the exercise price
would have been $217.53 per share. The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair
value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value per share to be $39.16. As a result of the Chief Executive Officers planned retirement in 2018, the
Company estimated a 100% forfeiture rate related to this grant.
Non-Vested
Shares Activity
The following table summarizes vesting activities of shares issued under the investment share program and restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Fair
Value
|
|
Non-vested at December 31, 2016
|
|
|
64,968
|
|
|
$
|
166.29
|
|
Granted
|
|
|
25,946
|
|
|
|
132.88
|
|
Vested
|
|
|
(21,003
|
)
|
|
|
150.04
|
|
Forfeited
|
|
|
(5,980
|
)
|
|
|
184.25
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2017
|
|
|
63,931
|
|
|
$
|
156.39
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2017, the Company granted 12,358 shares of restricted stock awards to certain senior managers and key
employees, of which all shares vest ratably over service periods of five years. On January 1, 2017, employees elected to purchase 10,146 shares under the investment share program. The weighted average fair value of the restricted stock awards
and investment shares, which are sold to employees at discount under its investment share program, was $169.85 and $78.74 per share, respectively.
On
March 3, 2017, the Company granted 2,167 shares of restricted stock awards to a newly hired key employee, of which all shares vest ratably over a service period of five years. The weighted average fair value of the restricted stock award was
$161.45.
On August 1, 2017, the Company granted 1,275 shares of restricted stock awards to a newly hired key employee, of which all shares vest
ratably over a service period of five years. The weighted average fair value of the restricted stock award was $156.80.
Stock-Based Compensation
Stock-based compensation expense related to share-based awards recognized in the thirteen and thirty-nine weeks ended September 30, 2017 was
$1.2 million and $4.6 million, respectively, and was calculated based on awards expected to vest. Stock-based compensation expense related to share-based awards recognized in the thirteen and thirty-nine weeks ended September 24, 2016
was $2.4 million and $8.1 million, respectively, and was calculated based on awards expected to vest.
14
J. Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In March 2016,
the FASB issued ASU
No. 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
. ASU
2016-09
is part of the
FASBs initiative to simplify accounting standards. The guidance impacted several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes and forfeitures, as well as classification in the
consolidated statements of cash flows. Under ASU
2016-09,
excess tax benefits and deficiencies as a result of stock option exercises and restricted stock vesting are to be recognized as discrete items within
income tax expense or benefit in the consolidated statements of comprehensive income in the reporting period in which they occur. Additionally, under ASU
2016-09,
excess tax benefits and deficiencies should be
classified along with other income tax cash flows as an operating activity in the consolidated statements of cash flows. The Company adopted this new accounting standard prospectively in the first quarter of 2017. Prior periods have not been
adjusted. Under this new accounting standard, for the thirteen and thirty-nine weeks ended September 30, 2017, $0.5 million and $4.3 million, respectively, in excess tax benefit from stock-based compensation arrangements was
recognized within income tax provision in the consolidated statement of comprehensive income and classified as an operating activity in the consolidated statement of cash flow. The Company will maintain the current forfeiture policy to estimate
forfeitures expected to occur to determine stock-based compensation expense.
In November 2015, the FASB issued ASU
No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU
2015-17
as part of the FASBs initiative to simplify accounting standards. The guidance
required an entity to present deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet. The Company adopted this new accounting standard retrospectively in the first quarter of 2017. As of September 30,
2017 and December 31, 2016, the Company had $4.7 million and $7.4 million, respectively, of current deferred tax assets that are now classified as noncurrent on the consolidated balance sheets under this new accounting standard.
In July 2015, the FASB issued ASU
No. 2015-11,
Inventory (Topic 330), Simplifying the Measurement of
Inventory
. ASU
2015-11
is part of the FASBs initiative to simplify accounting standards. The guidance required an entity to recognize inventory within scope of the standard at the lower of cost or
net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The Company adopted this new accounting standard
prospectively in the first quarter of 2017. This new accounting standard did not have a significant impact on the consolidated financial statements.
Accounting Pronouncements Not Yet Effective
In May 2014,
the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU
2014-09
will supersede virtually all existing revenue guidance. Under
this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to
use more judgment and make more estimates than under the current guidance. ASU
2014-09
is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to
the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company will elect to apply the impact (if any) of applying ASU
2014-09
to
the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU
No. 2015-14,
Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date
. ASU
2015-14
defers the effective date of ASU
2014-09
for one year, making it effective for the
Companys fiscal year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. The Company currently expects to adopt ASU
2014-09
in the first quarter of 2018. The
Company expects that the adoption of ASU
2014-09
will require earlier recognition of variable customer promotional discount programs which will result in recording through retained earnings in the first
quarter of 2018, an additional liability currently expected to be less than $2 million. The Company does not expect this change to have a material impact on its consolidated financial statements with the exception of the one time retained
earnings impact in the first quarter of 2018. The Company is currently preparing to implement changes to accounting policies and controls to support the new revenue recognition and disclosure requirements.
15
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic
842)
. The guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU
2016-02
will be
effective retrospectively for the year beginning December 30, 2018, with early adoption permitted. The Company currently expects to adopt ASU
2016-02
in the first quarter of 2019. As of September 30,
2017 and December 31, 2016, the Company had $13.5 million and $15.9 million, respectively, of contractual obligation on lease agreements, the present value of which, would be included on the consolidated balance sheets under the new
guidance.
In January 2017, the FASB issued ASU
No. 2017-04,
Intangibles Goodwill and Other (Topic
350): Simplfying the Test for Goodwill Impairment
, which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU
2017-04
will be effective for all impairment tests performed
beginning December 29, 2019. The Company does not expect adoption of ASU
2017-04
to have a material impact on its consolidated financial statements.
K. Subsequent Events
On October 5, 2017, the Board
of Directors approved an increase of $150.0 million to the previously approved $781.0 million share buyback expenditure limit for a new limit of $931.0 million.
The Company evaluated subsequent events occurring after the balance sheet date, September 30, 2017, and concluded that there were no other events of
which management was aware that occurred after the balance sheet date that would require any adjustment to or disclosure in the accompanying consolidated financial statements.
16