Notes to Consolidated Financial Statements
December 25, 2016
and
December 27, 2015
(Dollar amounts in thousands, except per share amounts)
(1) Nature of Business and Summary of Significant Accounting Policies
References in these financial statement footnotes to “company”, “we”, “us”, and “our” refer to the business of Buffalo Wild Wings, Inc. and its wholly and majority owned subsidiaries. We operate Buffalo Wild Wings
®
, R Taco
®
, and PizzaRev
®
restaurants, as well as sell Buffalo Wild Wings and R Taco restaurant franchises. In exchange for initial and continuing franchise fees, we give franchisees the right to use the brand names. We operate as a single segment for reporting purposes.
We have company-owned or franchised restaurants in all
50
states and
2
Canadian provinces. Our franchised restaurants also operate in Mexico, Saudi Arabia, Philippines, Panama and United Arab Emirates.
At
December 25, 2016
,
December 27, 2015
, and
December 28, 2014
, we operated
631
,
596
, and
491
company-owned restaurants, respectively, and had
609
,
579
, and
591
franchised restaurants, respectively.
Certain amounts as of December 27, 2015 have been reclassified to conform to the current year presentation. The Company reclassified amounts previously presented separately on the Consolidated Balance Sheets as amounts due to restricted funds into our system-wide payables, to which they were related. Also, the Company previously classified depreciation and amortization separately on the Consolidated Statements of Cash Flows. The changes in classification do not affect previously reported cash flows from operations, investing or financing activities in the Consolidated Statement of Cash Flows, or the previously reported Consolidated Statements of Earnings for any period presented.
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(b)
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Principles of Consolidation
|
The consolidated financial statements include the accounts of Buffalo Wild Wings, Inc. and its wholly and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Our franchise and license arrangements provide our franchisee and licensee entities the power to direct the activities that most significantly impact their economic performance; therefore, we do not consider ourselves to be the primary beneficiary of any variable interest entities affiliated with our franchise and license arrangements.
The renewal option terms in certain of our operating lease agreements give us a variable interest in the lessor entity, however we have concluded that we do not have the power to direct the activities that most significantly impact the lessor entities’ economic performance and as a result do not consider ourselves to be the primary beneficiary of such entities.
We have a minority equity investment in Pie Squared Holdings, LLC. We do not consider ourselves to the be the primary beneficiary of this entity as we do not have the power to direct the activities that most significantly impact their economic performance.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples include, but are not limited to, estimates for valuation of long-lived assets, goodwill, business combinations, self-insurance liability, stock-based compensation and lessee involvement in construction. Actual results could differ from those estimates.
We utilize a 52- or 53-week accounting period that ends on the last Sunday in December. Each of the fiscal years ended
December 25, 2016
,
December 27, 2015
, and
December 28, 2014
were comprised of 52 weeks. Our next 53-week year will be the fiscal year ended December 31, 2017.
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(e)
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Cash and Cash Equivalents
|
Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
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(f)
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Marketable Securities
|
Marketable securities consist of available-for-sale securities and trading securities that are carried at fair value.
Available-for-sale securities are classified as current assets based upon our intent and ability to use any and all of the securities as necessary to satisfy the operational requirements of our business. Realized gains and losses from the sale of available-for-sale securities were not material for fiscal
2016
,
2015
, and
2014
. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary.
Trading securities are stated at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings as investment income. We have funded a deferred compensation plan using trading assets in a marketable equity portfolio. These assets are classified as other assets in the accompanying Consolidated Balance Sheets. This portfolio is held to generate returns that seek to offset changes in liabilities related to the equity market risk of certain deferred compensation arrangements. These deferred compensation liabilities were
$9,014
and
$8,958
as of
December 25, 2016
and
December 27, 2015
, respectively, and are included in accrued compensation and benefits in the accompanying Consolidated Balance Sheets.
Accounts receivable consists primarily of credit card receivables, franchise royalties, contractually-determined receivables for leasehold improvements, and vendor allowances. The allowance for doubtful accounts is the estimate of the probable credit losses in the Company’s accounts receivable based on a review of account balances. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.
Inventories are stated at the lower of cost and net realizable value. Cost is determined by the first-in, first-out (FIFO) method. Cash flows related to inventory sales are classified in net cash provided by operating activities in the Consolidated Statements of Cash Flows.
We purchase products from a number of suppliers and believe there are alternative suppliers. We have minimum purchase commitments from some of our vendors but the terms of the contracts and nature of the products are such that purchase requirements do not create a market risk. The primary food product used by company-owned and franchised restaurants is traditional chicken wings. The price we pay for traditional chicken wings is determined based on the average of the previous month’s wing market plus mark-up for processing and distribution. If the monthly average exceeds an upper threshold or falls below a lower threshold set in the contract, we split the impact with our suppliers, reducing our risk related to wing price fluctuations. For fiscal
2016
,
2015
, and
2014
, traditional chicken wings were
27%
,
25%
, and
23%
, respectively, of cost of sales.
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(i)
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Property and Equipment
|
Property and equipment are recorded at cost. Leasehold improvements, which include the cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line method over the lesser of the term of the lease, without consideration of renewal options, or the estimated useful lives of the assets, which typically range from
five
to
ten
years. Leasehold improvements related to remodels are depreciated using the straight-line method over the estimated useful life, which is typically
five
years. Buildings are depreciated using the straight-line method over the estimated useful life, which ranges from
20
to
40
years. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from
two
to
eight
years. Maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the respective accounts and the related gains or losses are credited or charged to earnings.
We review property and equipment, along with other long-lived assets, quarterly to determine if triggering events have occurred which would require a test to determine whether the carrying value of these assets will be recoverable based on
estimated future undiscounted cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is the individual restaurant level. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined by estimated discounted future cash flows.
In certain leases, due to our involvement in the construction of leased assets, we are considered the deemed accounting owner of a construction project. In addition, we recognize a deemed landlord financing obligation for construction costs incurred by our landlords. Once construction is complete, we complete an assessment to determine if we are deemed to have continuing involvement in the construction project. In certain leases, due to unreimbursed construction costs, we are deemed to have continuing involvement and are precluded from de-recognizing the asset and associated financing obligation. In these cases, we continue to account for the landlord’s asset as if we are the legal owner.
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(j)
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Goodwill, Reacquired Franchise Rights, and Other Assets
|
Goodwill represents the excess of cost over the fair value of identified net assets of businesses acquired. Goodwill is subject to an annual impairment analysis. We may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If it is more likely than not the fair value of the reporting unit is less than its carrying amount, we identify potential impairments of goodwill by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a market approach. If the fair value of the reporting unit exceeds the carrying amount, the assets are not impaired. If the carrying amount exceeds the fair value, this is an indication that impairment may exist. We calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. The fair value of the reporting unit in excess of the value of the assets and liabilities is the implied fair value of the goodwill. If this amount is less than the carrying amount of goodwill, impairment is recognized for the difference. No goodwill impairment charges were recognized during fiscal years
2016
,
2015
, and
2014
.
Reacquired franchise rights are amortized over the life of the related franchise agreement. We evaluate reacquired franchise rights in conjunction with our impairment evaluation of long-lived assets.
Other assets consist primarily of liquor licenses, investments in affiliates, deferred compensation plan trading securities and internal use software. Liquor licenses are either amortized over their renewal period or, if transferable, are carried at the lower of fair value or cost. We identify potential impairments for transferable liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the fair value of the asset is less than the carrying amount, an impairment is recorded. The carrying amount of the transferable liquor licenses not subject to amortization as of
December 25, 2016
and
December 27, 2015
was
$10,412
and
$8,876
, respectively.
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(k)
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Fair Value of Financial Instruments
|
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs that prioritizes the information used to develop our assumptions regarding fair value. Fair value measurements are separately disclosed by level within the fair value hierarchy.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate fair value because of their short-term maturity.
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(l)
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Asset Retirement Obligations
|
An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in the period incurred or when it becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. We must recognize a liability for the fair value of a conditional asset retirement obligation when incurred, if the liability’s fair value can be reasonably estimated. Conditional asset retirement obligations are legal obligations to perform asset retirement activities when the timing and/or method of settlement are conditional on a future event or may not be within our control. Asset retirement costs are depreciated over the useful life of the related asset. As of
December 25, 2016
and
December 27, 2015
, we had asset retirement obligations of
$939
and
$690
, respectively.
Our reporting currency is the U.S. dollar, while the functional currency of our Canadian operations is the Canadian dollar. Our assets and liabilities denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues, costs and expenses, and cash flows are translated using the average exchange rate for the period. Collection of royalties from our international franchise partners is received in U.S. dollars.
Franchise agreements have initial terms ranging from
10
to
20
years. These agreements also include multiple extension terms of
five
or
ten
years, depending on contract terms if certain conditions are met. We provide the use of the Buffalo Wild Wings and R Taco trademarks, system, training, pre-opening assistance, and restaurant operating assistance in exchange for area development fees, initial franchise fees, and royalties of
5%
of a restaurant’s sales.
Revenue from initial franchises fees from individual franchise sales is recognized upon the opening of the franchised restaurant when we have performed all of our material obligations and initial services. Area development fees are dependent upon the number of restaurants in the territory, as are our obligations under the area development agreement. Consequently, as our obligations are met, area development fees are recognized in relation to the opening of each new restaurant and any royalty-free periods. Royalties are recognized as earned each period based on reported franchisees’ sales.
Sales from company-owned restaurant revenues are recognized as revenue at the point of the delivery of meals and services. All sales taxes are presented on a net basis and are excluded from revenue.
We enter into franchise agreements with unrelated third parties to build and operate restaurants using the Buffalo Wild Wings brand within a defined geographical area. We believe that franchising is an effective and efficient means to expand the Buffalo Wild Wings brand. The franchisee is required to operate its restaurants in compliance with its franchise agreement that includes adherence to operating and quality control procedures established by us. We have not provided loans, leases, or guarantees to the franchisee or the franchisee’s employees and vendors. If a franchisee became financially distressed, we have not provided financial assistance. If financial distress leads to a franchisee’s noncompliance with the franchise agreement and we elect to terminate the franchise agreement, we have the right but not the obligation to acquire the assets of the franchisee at fair value as determined by an independent appraiser. We have financial exposure for the collection of the royalty payments. U.S. franchisees generally remit royalty payments weekly for the prior week’s sales and international franchisees generally remit royalty payments within one month, which substantially minimizes our financial exposure. Historically, we have experienced insignificant write-offs of franchisee royalties. Initial franchise and area development fees are paid upon the signing of the related agreements. We also enter into franchise agreements with unrelated third parties to build and operate restaurants using the R Taco
®
brand.
Contributions to the national advertising fund and other advertising cooperatives related to company-owned restaurants are expensed as contributed and local advertising costs for company-owned restaurants are expensed as incurred. These costs totaled
$66,111
,
$59,991
, and
$52,780
, in fiscal years
2016
,
2015
, and
2014
, respectively.
Costs associated with the opening of new company-owned restaurants are expensed as incurred.
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(r)
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Payments Received from Vendors
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Vendor allowances include allowances and other funds received from vendors. Certain of these funds are determined based on various quantitative contract terms. We also receive vendor allowances from certain manufacturers and distributors calculated based upon purchases made by franchisees. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction of the related expense. Amounts that represent a reduction of inventory purchase costs are recorded as a reduction of inventoriable costs. We record an estimate of earned vendor allowances based upon monthly purchases. We generally receive payment from vendors approximately 30 to 60 days from the end of a month for that month’s purchases. During fiscal
2016
,
2015
, and
2014
, vendor allowances were recorded as a reduction in inventoriable costs, and cost of sales was reduced by
$11,718
,
$10,938
, and
$11,186
, respectively.
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(s)
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Restricted Assets and System-wide Payables
|
We have a national advertising fund that provides system-wide marketing and advertising for our U.S. Buffalo Wild Wings locations. Company-owned and franchised restaurants are required to remit a designated portion of restaurant sales to the national advertising fund that is used for marketing and advertising efforts throughout the system. That amount was
2.75%
to
3.15%
of restaurant sales in fiscal years 2016 and 2015, and
3%
in fiscal year 2014. Certain payments received from various vendors are also deposited into the national advertising fund. These funds are used for development and implementation of brand initiatives and programs. As of
December 25, 2016
and
December 27, 2015
, the national advertising fund liability was
$24,303
and
$21,967
, respectively.
We have a system-wide gift card fund that consists of a cash balance, which is restricted to funding of future gift card redemptions and gift card related costs, receivables from retail gift card partners, and a corresponding liability for those outstanding gift cards which we believe will be redeemed in the future. As of
December 25, 2016
and
December 27, 2015
, the gift card liability was
$84,510
and
$79,110
, respectively. Income recognized for gift cards not redeemed, or breakage, is transferred to the national advertising fund.
We account for the assets and liabilities of these funds as “restricted assets” and “system-wide payables” on our accompanying consolidated balance sheets. The restricted assets of these funds are classified as current as they are expected to be utilized to fund short-term obligations of the national advertising and system-wide gift card funds.
Contributions from franchisees related to the national advertising fund constitute agency transactions and are not recognized as revenues and expenses. Related advertising obligations are accrued and the costs expensed at the same time the related contributions are recognized. These advertising fees are recorded as a liability against which specific costs are charged.
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(t)
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Earnings Per Common Share
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Basic earnings per common share excludes dilution and is computed by dividing the net earnings attributable to Buffalo Wild Wings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include dilutive common stock equivalents consisting of stock options determined by the treasury stock method. Restricted stock units are contingently issuable shares subject to vesting based on performance and service criteria. Vesting typically occurs in the fourth quarter of the year when income targets have been met. Upon vesting, the shares to be issued are included in the diluted earnings per share calculation as of the beginning of the period in which the vesting conditions are satisfied. Restricted stock units included in diluted earnings per share are net of the required minimum employee withholding taxes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the balance sheet carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effects of changes in income tax rates or law changes are included in the provision for income taxes in the period enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
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(v)
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Deferred Lease Credits
|
Deferred lease credits consist of reimbursement of costs of leasehold improvements from our lessors and adjustments to recognize rent expense on a straight-line basis. Reimbursements are amortized on a straight-line basis over the term of the applicable lease. Leases typically have an initial lease term of between
10
and
15
years, and generally contain renewal options under which we may extend the terms for
five
years. Certain leases contain rent escalation clauses that require higher rental payments in later years. Leases may also contain rent holidays, or free rent periods, during the lease term. Rent expense is recognized on a straight-line basis over the term of the lease commencing at the start of our construction period for the restaurant, without consideration of renewal options, unless renewals are reasonably assured because failure to renew would result in an economic penalty.
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(w)
|
Stock-Based Compensation
|
We maintain an equity incentive plan under which we may grant non-qualified stock options, incentive stock options, and restricted stock units to employees and non-employee directors. We also have an employee stock purchase plan (ESPP).
Stock-based compensation expense is recognized in the consolidated financial statements for granted, modified, or settled stock options, and for expense related to the ESPP since the related purchase discounts exceeded the amount allowed for non-compensatory treatment. Restricted stock units vesting upon the achievement of certain performance targets are expensed based on the fair value on the date of grant, net of estimated forfeitures. The fair value for restricted stock units granted is estimated using the stock price on the date of grant. All stock-based compensation is recognized as general and administrative expense in our Consolidated Statement of Earnings.
Total stock-based compensation expense recognized in the consolidated statement of earnings for fiscal year
2016
was
$325
before income taxes and consisted of restricted stock units, stock options, ESPP, and stock appreciation rights expense of
$(1,953)
,
$1,521
,
$831
, and
$(74)
respectively. The related total tax detriment recognized in
2016
was
$425
.
Total stock-based compensation expense recognized in the consolidated statement of earnings for fiscal year
2015
was
$13,647
before income taxes and consisted of restricted stock units, stock options, ESPP, and stock appreciation rights expense of
$11,510
,
$1,393
,
$726
, and
$56
, respectively. The related total tax benefit recognized in
2015
was
$4,639
.
Total stock-based compensation expense recognized in the consolidated statement of earnings for fiscal year
2014
was
$14,253
before income taxes and consisted of restricted stock units, stock options, and ESPP expense of
$12,474
,
$1,054
,
$705
, and
$20
, respectively. The related total tax benefit recognized in
2014
was
$4,917
.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the following assumptions:
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Stock Options
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|
December 25,
2016
|
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December 27,
2015
|
|
December 28,
2014
|
Expected dividend yield
|
0.0%
|
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0.0%
|
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0.0%
|
Expected stock price volatility
|
34.1%
|
|
34.3%
|
|
35.7%
|
Risk-free interest rate
|
1.4%
|
|
1.4%
|
|
1.7%
|
Expected life of options
|
4.7
|
|
5
|
|
5
|
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Employee Stock Purchase Plan
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|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Expected dividend yield
|
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|
0.0
|
%
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
0.0
|
%
|
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|
Expected stock price volatility
|
29.3
|
|
|
—
|
|
35.3%
|
|
31.1
|
|
|
—
|
|
37.9%
|
|
45.5
|
|
|
—
|
|
45.9%
|
Risk-free interest rate
|
|
|
0.50
|
%
|
|
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
0.05
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%
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|
Expected life of options
|
|
|
0.5
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|
|
|
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|
0.5
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|
|
|
|
0.5
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The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of our stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. We have not paid dividends in the past.
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(x)
|
Self Insurance Liability
|
We are self-insured for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, and employee health benefits. The accrued liabilities associated with these programs are based on our estimate of the ultimate costs to settle known claims as well as claims that may have arisen but have not yet been reported to us as of the balance sheet date. Our estimated liabilities are not discounted and are based on information provided by our insurance brokers
and insurers. As of
December 25, 2016
and
December 27, 2015
we accrued
$5,322
and
$5,474
, respectively of the estimated liability in accrued compensation and benefits and
$2,354
and
$484
, respectively of the estimated liability in accrued expenses in the consolidated balance sheet. State assessments for workers’ compensation are paid monthly.
As part of our publicly announced program, the Company repurchased shares through open market transactions at market value. Shares repurchased are immediately retired and are classified as authorized and unissued. The value of the shares repurchased are allocated between common stock and retained earnings at the weighted average of the original stock issuance price.
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(z)
|
Recent Accounting Pronouncements
|
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue with Contracts from Customers (Topic 606).” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products.” ASU 2016-04 provides specific guidance for the derecognition of prepaid stored-value product liabilities. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 provides specific guidance to determine whether an entity is providing a specified good or service itself or is arranging for the good or service to be provided by another party. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” ASU 2016-10 provides clarification on the subjects of identifying performance obligations and licensing implementation guidance. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU 2016-20 provides corrections or improvements on 13 issues that affect narrow aspects of the guidance issued in Topic 606.
The requirements for these standards relating to Topic 606 will be effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company expects to adopt these standards upon their effective date. We do not believe the new revenue recognition standard will materially impact our recognition of restaurant sales from company-owned restaurants or our recognition of continuing royalty fees from franchisees. We believe adoption of the new revenue recognition standard will impact our accounting for other fees charged to franchisees and transactions involving our advertising fund and gift card fund. We are currently unable to estimate the impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires for lease arrangements spanning more than 12 months, an entity to recognize an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We believe the adoption of ASU 2016-02 will materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. We are currently unable to estimate the impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation: Improvement to Employee Share-Based Payment Accounting.” ASU 2016-09 provides guidance intended to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. The Company will adopt this standard at the beginning of fiscal year 2017. We are currently evaluating the impact of the updated guidance and believe the adoption of the guidance will impact our accounting for excess tax benefits and deficiencies as all excess tax benefits and deficiencies will be recognized in our income tax expense line item in our Consolidated Statement of Earnings in the period in which they occur. We are in the process of determining the financial statement impact and are currently unable to estimate the impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Payments.” ASU 2016-15 provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice. The guidance is effective for interim and and annual periods beginning after December 15, 2017. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the impact of the guidance, but do not believe it will materially impact our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 provide guidance on the income tax consequences of an intra-entity transfer of an asset other than inventory. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for any entity as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. We are currently evaluating the impact of the guidance, but do not believe it will materially impact our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash.” ASU 2016-18 provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the impact of the guidance, but do not believe it will materially impact our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements and concluded they are not applicable or not expected to be significant to our operations.
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(aa)
|
Recently Adopted Accounting Standards
|
We adopted each of the following four standards as of December 28, 2015, which did not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, “Consolidation: Amendments to the Consolidation Analysis.” ASU 2015-02 modifies the analysis that must be performed to determine whether a reporting entity should consolidate certain types of legal entities. The updated guidance was effective for interim and annual periods beginning after December 15, 2015.
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 provides guidance related to a customer's accounting for fees paid in a cloud computing arrangement. The updated guidance was effective for interim and annual periods beginning after December 15, 2015. We adopted this guidance prospectively. Fees that meet the criteria of a software license are capitalized and included in other assets on our consolidated balance sheets. Amortization expense is recognized over the term of the arrangement and is included in depreciation and amortization expense on our consolidated statements of earnings.
In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” ASU 2015-11 changed the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. The guidance requires prospective application for the reporting periods beginning after December 15, 2016 and permits adoption in an earlier period. The Company elected early adoption of this guidance as of December 28, 2015.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 removes the requirement to retrospectively account for adjustments to preliminary amounts recognized in a business combination. The guidance requires the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should be either presented separately on the face of the income statement or disclosed in the notes. The guidance was effective for interim and annual reporting periods beginning after December 15, 2015.
(2) Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under Accounting Standards Codification 820 are described as follows:
|
|
•
|
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
|
•
|
Level 2 – Inputs to the valuation methodology include:
|
|
|
◦
|
Quoted prices for similar assets or liabilities in active markets
|
|
|
◦
|
Quoted prices for identical or similar assets or liabilities in inactive markets
|
|
|
◦
|
Inputs other than quoted prices that are observable for the asset or liability
|
|
|
◦
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
•
|
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of
December 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Deferred Compensation - Mutual Funds
|
$
|
9,134
|
|
|
—
|
|
|
—
|
|
|
9,134
|
|
Contingent Consideration
|
—
|
|
|
—
|
|
|
2,140
|
|
|
2,140
|
|
Liabilities
|
|
|
|
|
|
|
|
Deferred Compensation - Mutual Funds
|
9,014
|
|
|
—
|
|
|
—
|
|
|
9,014
|
|
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of
December 27, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Deferred Compensation - Mutual Funds
|
9,043
|
|
|
—
|
|
|
—
|
|
|
9,043
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent Consideration
|
—
|
|
|
—
|
|
|
1,551
|
|
|
1,551
|
|
Deferred Compensation - Mutual Funds
|
8,958
|
|
|
—
|
|
|
—
|
|
|
8,958
|
|
Our deferred compensation assets and liabilities were composed of investments held for future needs of our non-qualified deferred compensation plan and are reported at fair market value, using the “market approach” valuation method. The “market approach” valuation method uses prices and other relevant information observable in market transactions involving identical assets and is a Level 1 approach. Our contingent consideration assets and liabilities represent amounts due and owed in association with a fiscal year 2015 acquisition. These assets and liabilities were valued using a Level 3 approach that utilizes the projected future performance of certain restaurants we acquired. The future performance of these acquired restaurants will ultimately determine the settlement amount of these assets and liabilities. Estimates of fair value are inherently uncertain and represent only management's reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results.
The following table summarizes the activity within Level 3 instruments:
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25, 2016
|
|
December 27, 2015
|
Beginning balance
|
(1,551
|
)
|
|
—
|
|
Mark to market adjustment
|
3,691
|
|
|
(1,551
|
)
|
Ending balance
|
2,140
|
|
|
(1,551
|
)
|
Adjustments to the contingent consideration assets and liabilities are recognized in interest and other expense on the consolidated statements of earnings.
There were no significant transfers between the levels of the fair value hierarchy during the fiscal years ended
December 25, 2016
and
December 27, 2015
.
Our financial assets and liabilities requiring a fair-value measurement on a non-recurring basis were not significant as of
December 25, 2016
or
December 27, 2015
.
Non-financial assets and liabilities that are measured at fair value on a recurring basis
At
December 25, 2016
, we did not have any significant non-financial assets or liabilities that required a fair-value measurement on a recurring basis.
Non-financial assets and liabilities that are measured at fair value on a non-recurring basis
In regards to our impairment analysis, we generally estimate long-lived asset fair values, including property, plant and equipment and leasehold improvements, using the income approach. The inputs used to determine fair value relate primarily to future assumptions regarding restaurant sales and profitability and our discount rate assumption. These inputs are categorized as Level 3 inputs. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.
During
2016
and
2015
, we recorded an impairment charge of
$2,830
and
$1,458
, respectively, for our underperforming restaurants.
In regards to our goodwill analysis, the fair value of the reporting unit is calculated using a market approach. The primary input used to determine fair value is the Company's stock price, which is an unadjusted quoted price in and active market that the Company has the ability to access. This inputs is categorized as a Level 1 input. During
2016
and
2015
, we did not record any goodwill impairment charges.
Certain of our financial assets and liabilities are recorded at their carrying amounts which approximate fair value, based on their short-term nature or variable interest rate. These financial assets and liabilities include cash, accounts receivable, accounts payable, long-term debt, and other current assets and liabilities.
(3) Marketable Securities
Marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
December 25,
2016
|
|
December 27,
2015
|
Trading
|
|
|
|
Mutual funds
|
—
|
|
|
9,043
|
|
Total
|
$
|
—
|
|
|
9,043
|
|
Purchases of available-for-sale securities totaled
$12,301
and sales totaled
$23,300
in
2015
.
Purchases of available-for-sale securities totaled
$22,991
and sales totaled
$12,000
in
2014
.
Trading securities represent investments held for future needs of our non-qualified deferred compensation plan. As of December 25, 2016, the Company reclassified amounts previously presented on the Consolidated Balance Sheets as marketable securities to other assets. The amounts represent investments held in our non-qualified deferred compensation plan. We concluded that prior period balances were immaterial to current assets and total assets on our Consolidated Balance Sheet and therefore, we did not reclassify the marketable securities balance in prior periods.
4) Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
December 25,
2016
|
|
December 27,
2015
|
Construction in process
|
$
|
19,120
|
|
|
18,662
|
|
Buildings
|
100,974
|
|
|
92,603
|
|
Capital leases and buildings under deemed landlord financing
|
29,840
|
|
|
25,105
|
|
Furniture, fixtures, and equipment
|
386,233
|
|
|
369,344
|
|
Leasehold improvements
|
614,307
|
|
|
553,736
|
|
Property and equipment, gross
|
1,150,474
|
|
|
1,059,450
|
|
Less accumulated depreciation
|
(557,668
|
)
|
|
(454,738
|
)
|
Property and equipment, net
|
$
|
592,806
|
|
|
604,712
|
|
As of
December 25, 2016
and
December 27, 2015
, we recorded assets under capital lease of
$22,074
and
$21,770
, respectively and related accumulated amortization of
$3,422
and
$1,412
, respectively. Amortization expense under capital leases is included within depreciation and amortization on the Consolidated Statement of Earnings.
Depreciation expense for
2016
,
2015
, and
2014
was $
133,846
,
$120,060
, and
$93,773
, respectively.
(5) Goodwill and Other Intangible Assets
Goodwill is summarized below:
|
|
|
|
|
|
|
|
|
December 25,
2016
|
|
December 27,
2015
|
Beginning of year
|
$
|
114,101
|
|
|
38,106
|
|
Additions
|
1,723
|
|
|
76,062
|
|
Adjustments
|
1,404
|
|
|
(67
|
)
|
End of year
|
$
|
117,228
|
|
|
114,101
|
|
Goodwill is not subject to amortization but nearly all is deductible for tax purposes.
Amortization expense primarily related to amortization of reacquired franchise rights, and also included amortization of capital lease assets and software licenses. Amortization expense for
2016
,
2015
, and
2014
was
$18,294
,
$7,443
, and
$4,681
, respectively.
Reacquired franchise rights consisted of the following:
|
|
|
|
|
|
|
|
|
December 25,
2016
|
|
December 27,
2015
|
Reacquired franchise rights
|
$
|
153,870
|
|
|
152,070
|
|
Accumulated amortization
|
(34,897
|
)
|
|
(22,788
|
)
|
Reacquired franchise rights, net
|
$
|
118,973
|
|
|
129,282
|
|
Amortization expense related to reacquired franchise rights for
2016
,
2015
, and
2014
was
$12,109
,
$7,301
, and
$4,652
, respectively.
The weighted average amortization period is
14.1 years
. Estimated future amortization expense related to reacquired franchise rights as of
December 25, 2016
was as follows:
|
|
|
|
|
Fiscal year ending:
|
|
2017
|
$
|
13,251
|
|
2018
|
12,009
|
|
2019
|
10,994
|
|
2020
|
10,076
|
|
2021
|
10,216
|
|
Thereafter
|
62,427
|
|
Total future amortization expense
|
$
|
118,973
|
|
(6) Investments in Affiliates
We have a minority equity investment in Pie Squared Holdings, LLC, a California-based restaurant concept which had a balance of
$3,920
and
$6,726
for the fiscal years ended
December 25, 2016
and
December 27, 2015
, respectively. As of
December 25, 2016
, Pie Squared Holdings operated
19
and franchised
26
PizzaRev fast-casual pizza restaurants, including
2
restaurants operated by us. We also have the right to open company-owned locations in certain states. Investments in affiliates is included in other assets in our Consolidated Balance Sheets.
(7) Lease Commitments
We have operating leases related to the majority of our restaurants and corporate offices that have various expiration dates. We have capital leases related to some of our restaurants and we also have certain leases where we are the deemed accounting owner and record the transaction as deemed landlord financing. Most of these leases contain renewal options. In addition to base rents, leases typically require us to pay our share of common area maintenance, insurance, real estate taxes, and other operating costs. Certain leases also include provisions for contingent rentals based upon sales.
Future minimum rental payments due under noncancelable operating leases, capital leases, deemed landlord financings and commitments for restaurants under development as of
December 25, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
Capital leases
|
|
Deemed landlord financing
|
|
Restaurants
under
development
|
Fiscal year ending:
|
|
|
|
|
|
|
|
2017
|
$
|
85,498
|
|
|
4,949
|
|
|
1,483
|
|
|
1,104
|
|
2018
|
83,540
|
|
|
5,003
|
|
|
1,497
|
|
|
1,835
|
|
2019
|
78,283
|
|
|
5,063
|
|
|
1,510
|
|
|
1,841
|
|
2020
|
70,997
|
|
|
4,966
|
|
|
1,518
|
|
|
1,846
|
|
2021
|
61,184
|
|
|
4,841
|
|
|
1,574
|
|
|
1,852
|
|
Thereafter
|
328,846
|
|
|
21,541
|
|
|
7,134
|
|
|
17,302
|
|
Total future minimum lease payments
|
$
|
708,348
|
|
|
46,363
|
|
|
14,716
|
|
|
25,780
|
|
Less amounts representing interest
|
—
|
|
|
(14,426
|
)
|
|
(10,097
|
)
|
|
—
|
|
Present value of obligations
|
—
|
|
|
31,937
|
|
|
4,619
|
|
|
—
|
|
In
2016
,
2015
, and
2014
, we rented office space and restaurant space under operating leases. Rent expense, excluding our proportionate share of real estate taxes and building operating expenses, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Minimum rents
|
$
|
84,658
|
|
|
75,515
|
|
|
61,286
|
|
Percentage rents
|
1,468
|
|
|
1,409
|
|
|
1,019
|
|
Total
|
$
|
86,126
|
|
|
76,924
|
|
|
62,305
|
|
Equipment and auto leases
|
$
|
2,011
|
|
|
1,411
|
|
|
1,194
|
|
(8) Long-Term Debt and Capital Lease Obligations
The detail of our long-term debt and capital lease obligations as of
December 25, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the 12 months ended December 25, 2016
|
|
Maturity
|
|
December 25,
2016
|
|
December 27,
2015
|
Revolving credit facility
|
1.5%
|
|
October 2021
|
|
170,000
|
|
|
34,530
|
|
Capital lease and deemed landlord financing obligations
|
7.6%
|
|
Various through November 2030
|
|
39,057
|
|
|
38,571
|
|
Total debt and capital lease obligations
|
|
|
|
|
209,057
|
|
|
73,101
|
|
Less: current maturities
|
|
|
|
|
(3,745
|
)
|
|
(2,147
|
)
|
Total long-term debt and capital lease obligations
|
|
|
|
|
205,312
|
|
|
70,954
|
|
On October 6, 2016, we terminated our existing revolving credit facility and entered into a new credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association and other lenders. The Credit Agreement provides the Company with a committed
$500,000
unsecured revolving credit facility, which expires on October 6, 2021. The revolving credit facility includes a letter of credit subfacility of
$40,000
and a swingline loan subfacility of
$20,000
. Amounts borrowed on the revolving credit facility bear interest at either a base rate as set forth in the Credit Agreement plus an applicable margin ranging between
0.00%
and
0.75%
, or a LIBOR rate plus an applicable margin ranging between
1.00%
and
1.75%
, at the Company's option. The applicable margins are based on our consolidated total leverage ratio. We also pay a commitment fee ranging from
0.125%
to
0.250%
on the average unused portion of the facility at a rate per annum based on our consolidated total leverage ratio. As of
December 25, 2016
, our consolidated total leverage ratio was
0.67
to
1.00
.
The Credit Agreement also contains covenants that require us to maintain certain financial ratios, including consolidated coverage and consolidated total leverage. The Credit agreement also contains other customary affirmative and negative covenants.
Maturities of long-term debt and capital lease obligations as of
December 25, 2016
are as follows:
|
|
|
|
|
|
Fiscal year ending:
|
|
|
2017
|
|
$
|
3,745
|
|
2018
|
|
2,639
|
|
2019
|
|
2,917
|
|
2020
|
|
3,246
|
|
2021
|
|
173,450
|
|
Thereafter
|
|
23,060
|
|
Total future maturities of long-term debt and capital lease obligations
|
|
$
|
209,057
|
|
(9) Income Taxes
The components of earnings (loss) before taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
United States
|
$
|
136,935
|
|
|
140,737
|
|
|
142,352
|
|
Foreign
|
(2,931
|
)
|
|
(4,596
|
)
|
|
(6,945
|
)
|
Total earnings before taxes
|
$
|
134,004
|
|
|
136,141
|
|
|
135,407
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
35,097
|
|
|
34,764
|
|
|
37,168
|
|
State
|
6,693
|
|
|
6,782
|
|
|
8,036
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(288
|
)
|
|
1,192
|
|
|
799
|
|
State
|
(756
|
)
|
|
(1,253
|
)
|
|
(3,294
|
)
|
Foreign
|
(955
|
)
|
|
(220
|
)
|
|
(1,357
|
)
|
Total income tax expense
|
$
|
39,791
|
|
|
41,265
|
|
|
41,352
|
|
The following is a reconciliation of the expected federal income taxes (benefits) at the statutory rate of
35%
to the actual provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Expected federal income tax expense
|
$
|
46,901
|
|
|
47,650
|
|
|
47,392
|
|
State income tax expense, net of federal effect
|
3,852
|
|
|
3,377
|
|
|
4,399
|
|
General business credits
|
(12,399
|
)
|
|
(11,094
|
)
|
|
(9,418
|
)
|
Other, net
|
1,437
|
|
|
1,332
|
|
|
(1,021
|
)
|
Total income tax expense
|
$
|
39,791
|
|
|
41,265
|
|
|
41,352
|
|
Temporary differences comprising the net deferred tax assets and liabilities on the accompanying consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
December 25,
2016
|
|
December 27,
2015
|
Deferred tax assets:
|
|
|
|
Unearned revenue
|
$
|
4,466
|
|
|
4,386
|
|
Accrued compensation and benefits
|
5,892
|
|
|
5,339
|
|
Deferred lease credits
|
17,020
|
|
|
15,718
|
|
Stock-based compensation
|
252
|
|
|
4,030
|
|
Advertising costs
|
3,245
|
|
|
3,159
|
|
Insurance reserves
|
6,874
|
|
|
1,349
|
|
Capital lease and deemed landlord financing
|
14,532
|
|
|
14,659
|
|
Capitalized costs
|
1,135
|
|
|
1,167
|
|
State credits
|
1,679
|
|
|
1,848
|
|
Foreign tax credits
|
505
|
|
|
—
|
|
Cumulative translation adjustment
|
1,751
|
|
|
2,003
|
|
Foreign net operating loss/Other
|
7,204
|
|
|
6,248
|
|
Other
|
4,132
|
|
|
3,172
|
|
Total
|
$
|
68,687
|
|
|
63,078
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
$
|
67,670
|
|
|
69,002
|
|
Goodwill and other amortization
|
10,044
|
|
|
8,098
|
|
Prepaid expenses
|
2,925
|
|
|
1,398
|
|
Accrued bonus
|
1,029
|
|
|
2,058
|
|
Contingent consideration
|
1,403
|
|
|
—
|
|
Future taxes on foreign earnings
|
7,204
|
|
|
6,248
|
|
Total
|
$
|
90,275
|
|
|
86,804
|
|
|
|
|
|
Net deferred tax liability
|
$
|
21,588
|
|
|
$
|
23,726
|
|
A valuation allowance is established when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Since we believe sufficient future taxable income will be generated to utilize the benefits of the deferred tax assets, a valuation allowance has not been recognized. Our foreign net operating losses, foreign tax credits, and state tax credits begin expiring in 2030, 2023, and 2022, respectively.
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
Beginning of year
|
$
|
1,128
|
|
|
$
|
598
|
|
Additions based on tax positions related to the current year
|
493
|
|
|
476
|
|
Additions based on tax positions related to prior years
|
218
|
|
|
108
|
|
Reductions based on settlements with tax authorities
|
(29
|
)
|
|
(6
|
)
|
Reductions based on expiration of statute of limitations
|
(55
|
)
|
|
(48
|
)
|
End of year
|
$
|
1,755
|
|
|
$
|
1,128
|
|
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal
2016
,
2015
, and
2014
, interest and penalties of
$64
,
$13
, and
($25)
, respectively, were included in income tax expense. As of
December 25, 2016
, and
December 27, 2015
, interest and penalties related to unrecognized tax benefits totaled
$155
and
$51
, respectively. Included in the balance at
December 25, 2016
and
December 27, 2015
, are unrecognized tax benefits of
$1,141
and
$733
, respectively, which if recognized, would affect the annual effective tax rate. The difference between these amounts and the amount reflected in the reconciliation above relates to the deferred U.S. federal income tax benefit on unrecognized tax benefits related to U.S. state income taxes.
The major jurisdictions in which the Company files income tax returns include the U.S. federal jurisdiction, Canada, Netherlands, and all states in the U.S. that have an income tax. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before fiscal
2013
, state and local income tax examinations by tax authorities for fiscal years before 2012, and non-U.S. income tax examinations by tax authorities for fiscal years before 2011.
We regularly assess and reevaluate tax uncertainties by considering changes in current tax law, recent court decisions, and changes in the business. We do not anticipate total unrecognized tax benefits will significantly change due to settlement of audits and the expiration of statutes of limitations prior to December 31, 2017.
(10) Stockholders’ Equity
We have
1.6 million
shares of common stock reserved for issuance under the current Equity Incentive Plan (Plan) for our employees, officers, and directors. The Plan has
641,933
shares available for grant as of
December 25, 2016
.
The exercise price for stock options issued under the Plan is to be not less than the fair market value on the date of grant with respect to incentive and nonqualified stock options. Incentive stock options become exercisable in
four
equal installments from the date of the grant and have a contractual life of
seven
years. Nonqualified stock options issued pursuant to the Plan have a
four
-year vesting period and have a contractual life of
seven
years. Incentive stock options may be granted under this plan until March 12, 2022. We issue new shares of common stock upon exercise of stock options. Option activity is summarized for the year ended
December 25, 2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
Weighted
average
exercise price
|
|
Average
remaining
contractual
life (years)
|
|
Aggregate
Intrinsic Value
|
Outstanding, December 27, 2015
|
131,248
|
|
|
$
|
113.12
|
|
|
4.0
|
|
$
|
7,051
|
|
Granted
|
42,889
|
|
|
152.03
|
|
|
|
|
|
|
Exercised
|
(22,033
|
)
|
|
65.79
|
|
|
|
|
|
|
Forfeited
|
(5,280
|
)
|
|
152.01
|
|
|
|
|
|
|
Expired
|
(1,200
|
)
|
|
167.17
|
|
|
|
|
|
Outstanding, December 25, 2016
|
145,624
|
|
|
$
|
129.89
|
|
|
4.1
|
|
$
|
5,076
|
|
Exercisable, December 25, 2016
|
95,878
|
|
|
114.54
|
|
|
3.4
|
|
4,692
|
|
The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of
$160.10
as of the last business day of the year ended
December 25, 2016
, which would have been received by the optionees had all options been exercised on that date. As of
December 25, 2016
, total unrecognized stock-based compensation expense related to nonvested stock options was approximately
$2,256
, which is expected to be recognized over a weighted average period of approximately
2.3
years. During
2016
,
2015
, and
2014
, the total intrinsic value of stock options exercised was
$1,863
,
$7,021
, and
$3,029
, respectively. During
2016
,
2015
, and
2014
, the total fair value of options vested was
$1,521
,
$1,361
, and
$1,138
, respectively. During
2016
,
2015
, and
2014
, the weighted average grant date fair value of options granted was
$46.80
,
$59.11
, and
$50.23
, respectively.
The following table summarizes our stock options outstanding at
December 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Options exercisable
|
Range
|
|
Shares
|
|
Average
remaining
contractual
life (years)
|
|
Weighted
average
exercise
price
|
|
Shares
|
|
Weighted
average
exercise
price
|
$
|
53.75
|
|
—
|
53.75
|
|
13,466
|
|
|
1.0
|
|
$
|
53.75
|
|
|
13,466
|
|
|
$
|
53.75
|
|
87.53
|
|
—
|
94.42
|
|
42,159
|
|
|
2.6
|
|
90.06
|
|
|
42,159
|
|
|
90.06
|
|
147.52
|
|
—
|
147.55
|
|
55,031
|
|
|
5.2
|
|
147.54
|
|
|
24,437
|
|
|
147.53
|
|
169.15
|
|
—
|
182.97
|
|
34,968
|
|
|
5.3
|
|
179.46
|
|
|
15,816
|
|
|
180.59
|
|
|
|
|
|
145,624
|
|
|
|
|
|
|
|
95,878
|
|
|
|
|
|
|
(b)
|
Restricted Stock Units
|
Restricted stock units are granted annually under the Plan at the discretion of the Compensation Committee of the Board of Directors.
In
2016
,
2015
, and
2014
, we granted restricted stock units subject to
three
-year cliff vesting and a cumulative
three
-year earnings target. The number of units which vest at the end of the
three
-year period is based on performance against the target. These restricted stock units are subject to forfeiture if they have not vested at the end of the
three
-year period. Stock-based compensation is recognized for the number of units expected to vest at the end of the period and is expensed beginning on the grant date through the end of the performance period.
For each grant, restricted stock units meeting the performance criteria will vest as of the end of our fiscal year. The distribution of vested restricted stock units as common stock typically occurs in March of the following year. The common stock is issued to participants net of the number of shares needed for the required minimum employee withholding taxes. We issue new shares of common stock upon the disbursement of restricted stock units. Restricted stock units are contingently issuable shares, and the activity for fiscal
2016
is as follows:
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
Weighted
average
grant date
fair value
|
Outstanding, December 27, 2015
|
190,120
|
|
|
$
|
161.06
|
|
|
|
|
|
Granted
|
130,881
|
|
|
148.31
|
|
Vested
|
(95,068
|
)
|
|
145.66
|
|
Cancelled
|
(23,886
|
)
|
|
161.24
|
|
Outstanding, December 25, 2016
|
202,047
|
|
|
$
|
160.03
|
|
As of
December 25, 2016
, the stock-based compensation expense related to nonvested awards not yet recognized was
$929
, which is expected to be recognized over a weighted average period of
1.8
years. During fiscal years
2016
and
2015
the total grant date fair value of shares vested was
$13,848
and
$14,157
, respectively. The weighted average grant date fair value of restricted stock units granted during
2016
,
2015
, and
2014
was
$148.31
,
$180.60
, and
$147.46
, respectively. During
2016
,
2015
, and
2014
, we recognized
$(1,953)
,
$11,454
, and
$12,474
respectively, of stock-based compensation expense related to restricted stock units. The
twelve
-month period ended
December 25, 2016
included reversals of
$(3,222)
of previously recognized expenses as we revised our estimate of financial performance.
|
|
(c)
|
Employee Stock Purchase Plan
|
We have reserved
600,000
shares of common stock for issuance under the ESPP. The ESPP is available to substantially all employees subject to employment eligibility requirements. Participants may purchase our common stock at
85%
of the beginning or ending closing price, whichever is lower, for each six-month period ending in May and November. During
2016
,
2015
, and
2014
, we issued
24,619
,
18,510
, and
17,040
shares, respectively, of common stock. As of
December 25, 2016
, we had
161,139
shares available for future issuance under the ESPP.
(11) Earnings Per Common Share
The following is a reconciliation of basic and fully diluted earnings per common share for fiscal
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 25, 2016
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
Net earnings attributable to Buffalo Wild Wings
|
$
|
94,745
|
|
|
|
|
|
Earnings per common share
|
94,745
|
|
|
18,445,172
|
|
|
$
|
5.14
|
|
Effect of dilutive securities – stock options
|
—
|
|
|
32,102
|
|
|
|
|
Effect of dilutive securities – restricted stock units
|
—
|
|
|
13,745
|
|
|
|
|
Earnings per common share – assuming dilution
|
$
|
94,745
|
|
|
18,491,019
|
|
|
$
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 27, 2015
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
Net earnings attributable to Buffalo Wild Wings
|
$
|
95,069
|
|
|
|
|
|
Earnings per common share
|
95,069
|
|
|
19,013,426
|
|
|
$
|
5.00
|
|
Effect of dilutive securities – stock options
|
—
|
|
|
69,219
|
|
|
|
|
Effect of dilutive securities – restricted stock units
|
—
|
|
|
48,849
|
|
|
|
|
Earnings per common share – assuming dilution
|
$
|
95,069
|
|
|
19,131,494
|
|
|
$
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 28, 2014
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
Net earnings attributable to Buffalo Wild Wings
|
$
|
94,094
|
|
|
|
|
|
|
|
Earnings per common share
|
94,094
|
|
|
18,907,801
|
|
|
$
|
4.98
|
|
Effect of dilutive securities – stock options
|
—
|
|
|
74,519
|
|
|
|
|
Effect of dilutive securities – restricted stock units
|
—
|
|
|
19,211
|
|
|
|
|
Earnings per common share – assuming dilution
|
$
|
94,094
|
|
|
19,001,531
|
|
|
$
|
4.95
|
|
The following is a summary of those securities outstanding at the end of the respective periods, which have been excluded from the fully diluted calculations because the effect on net earnings per common share would have been anti-dilutive or were performance-granted shares for which the performance criteria had not yet been met:
|
|
|
|
|
|
|
|
|
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Stock options
|
88,630
|
|
|
47,764
|
|
|
25,035
|
|
Restricted stock units
|
188,302
|
|
|
141,270
|
|
|
246,778
|
|
(12) Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28, 2014
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes
|
$
|
20,796
|
|
|
47,150
|
|
|
48,988
|
|
Interest
|
3,850
|
|
|
1,634
|
|
|
152
|
|
Noncash financing and investing transactions:
|
|
|
|
|
|
Property and equipment not yet paid for
|
(3,438
|
)
|
|
1,986
|
|
|
(46
|
)
|
Tax withholding for restricted stock units
|
2,676
|
|
|
7,613
|
|
|
4,600
|
|
Issuance of note payable for investment in subsidiary
|
—
|
|
|
—
|
|
|
2,375
|
|
Increase in asset retirement obligation and liability
|
89
|
|
|
1,146
|
|
|
—
|
|
Increase in deemed landlord financing assets and obligations
|
3,954
|
|
|
4,945
|
|
|
—
|
|
Increase in other assets and liabilities from hosted software arrangements
|
1,550
|
|
|
—
|
|
|
—
|
|
Increase in contingent consideration liability
|
—
|
|
|
1,551
|
|
|
—
|
|
(13) Loss on Asset Disposals and Impairment
In
2016
,
2015
, and
2014
, we closed restaurants resulting in a charge to earnings for remaining lease obligations, utilities, and other related costs. These charges were recognized as a part of the loss on asset disposals and impairment on our accompanying consolidated statements of earnings.
The following is a rollforward of the store closing reserve:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Beginning reserve balance
|
$
|
—
|
|
|
28
|
|
|
13
|
|
Store closing costs incurred
|
298
|
|
|
503
|
|
|
315
|
|
Costs paid
|
(168
|
)
|
|
(531
|
)
|
|
(300
|
)
|
Ending reserve balance
|
$
|
130
|
|
|
—
|
|
|
28
|
|
During
2016
, we recorded an impairment charge for the assets of
three
underperforming restaurants. An impairment charge of
$2,830
was recorded to the extent that the carrying amount of the assets was not considered recoverable based on estimated discounted future cash flows and the underlying fair value of the assets. We recorded an impairment charge of
$1,458
in
2015
for
three
underperforming restaurants. We recorded an impairment charge of
$1,661
in
2014
for
three
underperforming restaurants.
The following is a summary of the loss on asset disposals and impairment charges recognized by us:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
|
December 28,
2014
|
Store closing charges
|
$
|
298
|
|
|
503
|
|
|
315
|
|
Long-lived asset impairment
|
2,830
|
|
|
1,458
|
|
|
1,661
|
|
Remodels and other miscellaneous asset write-offs
|
5,306
|
|
|
5,501
|
|
|
1,851
|
|
Loss on asset disposals and impairment
|
$
|
8,434
|
|
|
7,462
|
|
|
3,827
|
|
(14) Defined Contribution Plans
We have a defined contribution 401(k) plan whereby eligible employees may contribute pretax wages in accordance with the provisions of the plan. We match
100%
of the first
3%
and
50%
of the next
2%
of contributions made by eligible employees. Matching contributions of approximately
$3,190
,
$2,823
, and
$2,907
were made by us during fiscal
2016
,
2015
, and
2014
, respectively.
Under our Management Deferred Compensation Plan, our executive officers and certain other individuals are entitled to receive an amount equal to a percentage of their base salary ranging from
5.0%
to
12.5%
which is credited on a monthly basis to their deferred compensation account. Cash contributions of
$583
,
$669
, and
$610
were made by us during
2016
,
2015
, and
2014
, respectively. Such amounts are subject to certain vesting provisions, depending on length of employment and circumstances of employment termination. In addition, individuals may elect to defer a portion or all of their cash compensation.
(15) Related Party Transactions
It is our policy that all related party transactions must be disclosed and approved by the disinterested directors. We had no significant related party transactions in
2016
,
2015
or
2014
.
(16) Contingencies
We have a limited guarantee of the borrowings of Pie Squared Pizza, LLC, a subsidiary of Pie Squared Holdings, LLC, in the amount of
$575
. We do not believe that payment under this guarantee is probable as of
December 25, 2016
.
Litigation
On June 2, 2015,
two
of our former employees (the “plaintiffs”) filed a collective action under the Fair Labor Standards Act (“FLSA”) and putative class action under New York state law against us in the United States District Court for the Western District of New York. The claim alleges that we have a policy or procedure requiring employees who receive compensation in part through tip credits to perform work that is ineligible for tip credit compensation at a tip credit rate in violation of the FLSA and New York state law. On September 27, 2016, the plaintiffs amended their complaint to include putative class action claims under the laws of seven additional states: Arizona, Colorado, Florida, Illinois, Iowa, Pennsylvania and Wisconsin. We intend to vigorously defend this lawsuit. We believe there is a reasonable possibility of loss related to these claims, however, given the early stage of the case, we are currently unable to determine the potential range of exposure, if any.
In addition to the litigation described above, we are involved in various other legal matters arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
(17)
Acquisitions of Businesses
During
2016
, we acquired
1
existing Buffalo Wild Wings restaurant. During
2015
, we acquired
54
Buffalo Wild Wings franchised restaurants through
5
acquisitions. We also acquired
1
R Taco franchised restaurant and
4
Buffalo Wild Wings restaurants under construction through these acquisitions.The total purchase price in
2016
and
2015
was
$3,862
and
$205,193
, respectively, and was primarily paid in cash funded by cash from operations, the sale of marketable securities and proceeds from our revolving credit facility. The acquisitions were accounted for as business combinations. The assets acquired and liabilities assumed were recorded based on their fair values at the time of the acquisitions as detailed below:
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 25,
2016
|
|
December 27,
2015
|
Inventory, prepaids, and other assets
|
$
|
38
|
|
|
$
|
4,821
|
|
Property and equipment
|
224
|
|
|
58,123
|
|
Lease and other liabilities
|
(14
|
)
|
|
2,274
|
|
Reacquired franchise rights
|
1,890
|
|
|
99,040
|
|
Goodwill
|
1,724
|
|
|
76,062
|
|
Capital lease obligations
|
—
|
|
|
(34,424
|
)
|
Liabilities
|
—
|
|
|
(703
|
)
|
Total purchase price
|
$
|
3,862
|
|
|
$
|
205,193
|
|
The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill.
The results of operations of these locations are included in our consolidated statements of earnings as of the date of acquisition. The acquisitions had an immaterial impact on net earnings for the fiscal years ended
December 25, 2016
and
December 27, 2015
. Pro forma results are not presented, as the acquisitions were not considered material to our consolidated results of operations.
The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a Level 3 fair value measurement. Fair value measurements for reacquired franchise rights were determined using the income approach. Fair value measurements for property and equipment were determined using the cost approach. Fair value measurements for capital lease obligations were determined using the market approach.
(18)
Subsequent Event
On January 23, 2017, the board of directors approved a
$400,000
increase in the Company’s share repurchase program, authorizing the repurchase of up to a total of
$775,000
under the current program. The share repurchase program is now scheduled to expire on December 30, 2018.