ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Our revenues are derived from Company-owned net bakery-cafe sales, fresh dough and other product sales to franchisees, and franchise royalties and fees. Fresh dough and other product sales to franchisees are primarily comprised of sales of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. Franchise royalties and fees include royalty income and franchise fees, which include fees for development and real estate services and information technology services. The cost of food and paper products, labor, occupancy, and other operating expenses relate primarily to Company-owned net bakery-cafe sales. The cost of fresh dough and other product sales to franchisees relates primarily to the sale of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. General and administrative, depreciation and amortization, and pre-opening expenses relate to all areas of revenue generation.
Our fiscal year ends on the last Tuesday in December. Each of our fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014 had 52 weeks.
We include in this report information on Company-owned, franchise-operated, and system-wide comparable net bakery-cafe sales percentages. Bakery-cafes in our comparable net bakery-cafe sales percentages include those bakery-cafes with an open date prior to the first day of our prior fiscal year, which we refer to as our base store bakery-cafes. Company-owned comparable net bakery-cafe sales percentages are based on net sales from Company-owned base store bakery-cafes. Franchise-operated comparable net bakery-cafe sales percentages are based on net sales from franchise-operated base store bakery-cafes, as reported by franchisees. System-wide comparable net bakery-cafe sales percentages are based on net sales at Company-owned and franchise-operated base store bakery-cafes. Acquired Company-owned and franchise-operated bakery-cafes and other restaurant or bakery-cafe concepts are included in our comparable net bakery-cafe sales percentages only if we or our franchisee previously held or acquired a 100 percent ownership interest prior to the first day of our prior fiscal year. Comparable net bakery-cafe sales exclude closed locations.
We do not record franchise-operated net bakery-cafe sales as revenues. However, royalty revenues are calculated based on a percentage of franchise-operated net bakery-cafe sales, as reported by franchisees. We use franchise-operated and system-wide sales information internally in connection with store development decisions, planning, and budgeting analyses. We believe franchise-operated and system-wide sales information is useful in assessing consumer acceptance of our brand, facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income, helps us appreciate the effectiveness of our advertising and marketing initiatives, to which our franchisees also contribute based on a percentage of their net sales, and provides information that is relevant for comparison within the industry.
We also include in this report information on Company-owned, franchise-operated, and system-wide average weekly net sales. Average weekly net sales are calculated by dividing total net sales in the period by operating weeks in the period. Accordingly, year-over-year results reflect sales for all locations, whereas comparable net bakery-cafe sales exclude closed locations and are based on sales only from our base store bakery-cafes. New stores typically experience an opening “honeymoon” period during which they generate higher average weekly net sales in the first 12 to 16 weeks after opening, after which customers “settle-in” to normal usage patterns. On average, average weekly net sales during the “settle-in” period are 5 percent to 10 percent less than during the “honeymoon” period. As a result, year-over-year results of average weekly net sales are generally lower than the results in comparable net bakery-cafe sales. This results from the relationship of the number of bakery-cafes in the “honeymoon” period, the number of bakery-cafes in the “settle-in” period, and the number of bakery-cafes in the comparable bakery-cafe base.
Executive Summary of Results
Overview
|
|
•
|
Total revenues increased
4.2 percent
to
$2,795 million
in fiscal 2016 compared to
$2,682 million
in fiscal 2015.
|
|
|
•
|
Fiscal 2016 Company-owned comparable net bakery-cafe growth of
4.2 percent
comprised of year-over-year average check growth of 4.1 percent and transaction growth of 0.1 percent.
|
|
|
•
|
Earnings per diluted share for fiscal 2016 was
$6.18
compared to earnings per diluted share of $5.79 in fiscal 2015. Included in earnings per diluted share for fiscal 2016 were charges related to our refranchising initiative of $0.35 per diluted share and amounts reserved for legal matters of $0.21 per diluted share. Included in earnings per diluted share for fiscal 2015 were charges related to our refranchising initiative of $0.42 per diluted share.
|
|
|
•
|
We returned
$371 million
to our stockholders in fiscal 2016 through share repurchases.
|
Consolidated Statements of Income Margin Analysis
The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our Consolidated Statements of Income for the periods indicated. Percentages may not add due to rounding:
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Revenues:
|
|
|
|
|
|
Bakery-cafe sales, net
|
87.1
|
%
|
|
88.0
|
%
|
|
88.2
|
%
|
Franchise royalties and fees
|
5.6
|
|
|
5.2
|
|
|
4.9
|
|
Fresh dough and other product sales to franchisees
|
7.4
|
|
|
6.9
|
|
|
6.9
|
|
Total revenue
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
Bakery-cafe expenses (1):
|
|
|
|
|
|
Cost of food and paper products
|
29.1
|
%
|
|
30.3
|
%
|
|
30.0
|
%
|
Labor
|
32.5
|
|
|
32.0
|
|
|
30.7
|
|
Occupancy
|
6.9
|
|
|
7.2
|
|
|
7.2
|
|
Other operating expenses
|
14.8
|
|
|
14.2
|
|
|
14.1
|
|
Total bakery-cafe expenses
|
83.3
|
|
|
83.7
|
|
|
82.1
|
|
Fresh dough and other product cost of sales to franchisees (2)
|
86.6
|
|
|
87.2
|
|
|
86.9
|
|
Depreciation and amortization
|
5.5
|
|
|
5.0
|
|
|
4.9
|
|
General and administrative expenses
|
6.4
|
|
|
5.3
|
|
|
5.5
|
|
Pre-opening expenses
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
Refranchising loss
|
0.3
|
|
|
0.6
|
|
|
—
|
|
Total costs and expenses
|
91.4
|
|
|
91.0
|
|
|
89.1
|
|
Operating profit
|
8.6
|
|
|
9.0
|
|
|
10.9
|
|
Interest expense
|
0.3
|
|
|
0.1
|
|
|
0.1
|
|
Other (income) expense, net
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Income before income taxes
|
8.2
|
|
|
8.8
|
|
|
11.0
|
|
Income taxes
|
3.0
|
|
|
3.3
|
|
|
3.9
|
|
Net income
|
5.2
|
|
|
5.6
|
|
|
7.1
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
Net income attributable to Panera Bread Company
|
5.2
|
%
|
|
5.6
|
%
|
|
7.1
|
%
|
|
|
(1)
|
As a percentage of net bakery-cafe sales.
|
|
|
(2)
|
As a percentage of fresh dough and other product sales to franchisees.
|
Bakery-cafe Composition
The following table sets forth certain bakery-cafe data relating to Company-owned and franchise-operated bakery-cafes for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Number of bakery-cafes:
|
|
|
|
|
|
Company-owned:
|
|
|
|
|
|
Beginning of period
|
901
|
|
|
925
|
|
|
867
|
|
Bakery-cafes opened
|
48
|
|
|
57
|
|
|
65
|
|
Bakery-cafes closed
|
(20
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Bakery-cafes refranchised (1)
|
(27
|
)
|
|
(75
|
)
|
|
—
|
|
End of period (2)
|
902
|
|
|
901
|
|
|
925
|
|
Franchise-operated:
|
|
|
|
|
|
Beginning of period
|
1,071
|
|
|
955
|
|
|
910
|
|
Bakery-cafes opened
|
45
|
|
|
55
|
|
|
49
|
|
Bakery-cafes closed
|
(9
|
)
|
|
(14
|
)
|
|
(4
|
)
|
Bakery-cafes refranchised (1)
|
27
|
|
|
75
|
|
|
—
|
|
End of period
|
1,134
|
|
|
1,071
|
|
|
955
|
|
System-wide:
|
|
|
|
|
|
Beginning of period
|
1,972
|
|
|
1,880
|
|
|
1,777
|
|
Bakery-cafes opened
|
93
|
|
|
112
|
|
|
114
|
|
Bakery-cafes closed
|
(29
|
)
|
|
(20
|
)
|
|
(11
|
)
|
End of period (3)
|
2,036
|
|
|
1,972
|
|
|
1,880
|
|
|
|
(1)
|
In March 2015, we refranchised one bakery-cafe to an existing franchisee. In July 2015, we refranchised 29 bakery-cafes to an existing franchisee. In October 2015, we refranchised 45 bakery-cafes to a new franchisee. In May 2016, we refranchised 15 bakery-cafes to an existing franchisee. In September 2016, we refranchised 12 bakery-cafes to a new franchisee.
|
|
|
(2)
|
Excluded from the number of Company-owned bakery-cafes were six Tatte units as of the fiscal year ended December 27, 2016 and five Tatte units as of the fiscal year ended December 29, 2015.
|
|
|
(3)
|
Excluded from the number of total bakery-cafes were
28
catering-only units, referred to as delivery hubs, for each of the fiscal years ended December 27, 2016 and December 29, 2015, and
22
delivery hubs as of the fiscal year ended December 30, 2014.
|
Comparable Net Bakery-cafe Sales
Comparable net bakery-cafe sales growth for the periods indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014 (1)
|
Company-owned
|
4.2
|
%
|
|
3.0
|
%
|
|
1.4
|
%
|
Franchise-operated
|
0.7
|
%
|
|
1.0
|
%
|
|
0.9
|
%
|
System-wide
|
2.4
|
%
|
|
1.9
|
%
|
|
1.1
|
%
|
(1) Comparable net bakery-cafe sales for fiscal 2014 reflects a calendar basis comparison. We believe that calendar basis comparable net bakery-cafe sales percentages better reflects the performance of the business as it eliminates the impact of the extra week in fiscal 2013 and compares consistent calendar weeks.
Historically, we have disaggregated comparable net bakery-cafe sales growth into change in transactions and change in average check, with change in average check further disaggregated into change in price and change in mix. We refer to this disaggregation method as the “Historical View.” However, the Company does not believe that this view serves investors well as its business is undergoing structural change in channel mix. Digitally enabled, larger-party sized channels, such as delivery, catering, and Rapid Pick-Up have larger checks and more entrées per transaction and are growing disproportionately quicker.
To ease the confusion, and to reflect the growth of digitally-enabled, larger party-size channels, we have, in this report, also disaggregated comparable net bakery-cafe sales growth into change in price, change in entrées sold (a measure of customers served), and change in mix, and will continue to do so in the future. We refer to this disaggregation method as the “Omni-Channel View” and believe it is currently the best representation of comparable net bakery-cafe sales.
The following table summarizes the composition of Company-owned comparable net bakery-cafe sales growth for the periods indicated using the Historical View:
|
|
|
|
|
|
|
|
|
|
|
Historical composition for the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Price
|
2.3
|
%
|
|
1.9
|
%
|
|
1.0
|
%
|
Mix
|
1.8
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
Average check
|
4.1
|
%
|
|
2.2
|
%
|
|
1.3
|
%
|
|
|
|
|
|
|
Transactions
|
0.1
|
%
|
|
0.8
|
%
|
|
0.1
|
%
|
Company-owned comparable net bakery-cafe sales growth
|
4.2
|
%
|
|
3.0
|
%
|
|
1.4
|
%
|
Transactions increased slightly in fiscal 2016 as momentum from our strategic initiatives was largely offset by a continued challenging consumer environment. Price growth in fiscal 2016 was
2.3 percent
, as retail prices were adjusted in anticipation of labor and food cost inflation. The increase in mix during fiscal 2016 was primarily due to more entrées per transaction as a result of strategic initiatives.
The following table summarizes the composition of Company-owned comparable net bakery-cafe sales growth for the periods indicated using the Omni-Channel View:
|
|
|
|
|
|
|
|
|
|
|
Omni-channel composition for the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Entrée Growth
|
2.0
|
%
|
|
1.3
|
%
|
|
1.7
|
%
|
Price
|
2.3
|
%
|
|
1.9
|
%
|
|
1.0
|
%
|
Mix
|
(0.1
|
)%
|
|
(0.2
|
)%
|
|
(1.3
|
)%
|
Company-owned comparable net bakery-cafe sales growth
|
4.2
|
%
|
|
3.0
|
%
|
|
1.4
|
%
|
Entrée growth during the fiscal year ended December 27, 2016 reflects the sale of more entrées per transaction through digitally-enabled, larger party-size channels, such as delivery, catering, and Rapid Pick-Up. Price growth in fiscal 2016 was
2.3 percent
, as retail prices were adjusted in anticipation of labor and food cost inflation.
Fiscal 2017 Outlook
We are targeting non-GAAP diluted earnings per share growth of 11 percent to 14 percent for the fiscal year ended December 26, 2017, or fiscal 2017. The non-GAAP diluted earnings per share growth target range is based on anticipated Company-owned comparable net bakery-cafe sales growth for fiscal 2017 of 3.5 percent to 4.5 percent. For fiscal 2017, we expect non-GAAP operating margin will be flat to up 50 basis points when compared to fiscal 2016. We also anticipate opening 70 to 80 bakery-cafes system-wide and expect average weekly net sales for new Company-owned bakery-cafes of $47,000 to $49,000.
The non-GAAP diluted earnings per share growth target range and non-GAAP operating margin growth target range for fiscal 2017 are financial measures not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP. We exclude certain items from the non-GAAP diluted earnings per share growth target range and non-GAAP operating margin growth target range, such as our refranchising charges, to provide additional information, facilitate the comparison of past and present operations, and analyze future periods. A reconciliation of non-GAAP diluted earnings per share and non-GAAP operating margin to the most comparable GAAP financial measures on a forward-looking basis is not available without unreasonable effort due to the uncertainty and variability of the nature and amount of these future charges and costs.
Results of Operations
Revenues
The following table summarizes revenues for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Bakery-cafe sales, net
|
$
|
2,433,945
|
|
|
$
|
2,358,794
|
|
|
$
|
2,230,370
|
|
|
3.2
|
%
|
|
5.8
|
%
|
Franchise royalties and fees
|
155,271
|
|
|
138,563
|
|
|
123,686
|
|
|
12.1
|
%
|
|
12.0
|
%
|
Fresh dough and other product sales to franchisees
|
206,149
|
|
|
184,223
|
|
|
175,139
|
|
|
11.9
|
%
|
|
5.2
|
%
|
Total revenue
|
$
|
2,795,365
|
|
|
$
|
2,681,580
|
|
|
$
|
2,529,195
|
|
|
4.2
|
%
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
System-wide average weekly net sales
|
$
|
49,508
|
|
|
$
|
48,357
|
|
|
$
|
47,655
|
|
|
2.4
|
%
|
|
1.5
|
%
|
The growth in total revenues in fiscal
2016
compared to the prior fiscal year was primarily due to the opening of
93
new bakery-cafes system-wide and the
2.4 percent
increase in system-wide comparable net bakery-cafe sales in fiscal
2016
, partially offset by the closure of
29
bakery-cafes system-wide and the refranchising of 27 bakery-cafes in fiscal 2016.
The growth in total revenues in fiscal
2015
compared to the prior fiscal year was primarily due to the opening of
112
new bakery-cafes system-wide and the
1.9 percent
increase in system-wide comparable net bakery-cafe sales in fiscal
2015
, partially offset by the refranchising of 75 bakery-cafes and the closure of
20
bakery-cafes system-wide in fiscal
2015
.
Bakery-cafe sales, net
The following table summarizes net bakery-cafe sales for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Bakery-cafe sales, net
|
$
|
2,433,945
|
|
|
$
|
2,358,794
|
|
|
$
|
2,230,370
|
|
|
3.2
|
%
|
|
5.8
|
%
|
As a percentage of total revenue
|
87.1
|
%
|
|
88.0
|
%
|
|
88.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned average weekly net sales
|
$
|
51,416
|
|
|
$
|
49,090
|
|
|
$
|
48,114
|
|
|
4.7
|
%
|
|
2.0
|
%
|
Company-owned number of operating weeks
|
47,127
|
|
|
48,041
|
|
|
46,356
|
|
|
(1.9
|
)%
|
|
3.6
|
%
|
The
increase
in net bakery-cafe sales in fiscal
2016
compared to the prior fiscal year was primarily due to the opening of
48
new Company-owned bakery-cafes and the
4.2 percent
increase in Company-owned comparable net bakery-cafe sales in fiscal
2016
, partially offset by the refranchising of 27 bakery-cafes and the closure of
20
Company-owned bakery-cafes in fiscal 2016.
The
increase
in net bakery-cafe sales in fiscal
2015
compared to the prior fiscal year was primarily due to the opening of
57
new Company-owned bakery-cafes and the
3.0 percent
increase in Company-owned comparable net bakery-cafe sales in fiscal
2015
, partially offset by the refranchising of 75 bakery-cafes and the closure of
six
Company-owned bakery-cafes in fiscal
2015
.
The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2016 compared to the prior fiscal year was primarily due to the impact of new marketing initiatives and price increases in fiscal
2016
.
The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2015 compared to the prior fiscal year was primarily due to the impact of new marketing initiatives and price increases in fiscal 2015, partially offset by modestly lower average weekly sales in fiscal 2015 for bakery-cafes opened in fiscal 2014.
Franchise royalties and fees
The following table summarizes franchise royalties and fees for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Franchise royalties
|
$
|
153,102
|
|
|
$
|
134,576
|
|
|
$
|
120,125
|
|
|
13.8
|
%
|
|
12.0
|
%
|
Franchise fees
|
2,169
|
|
|
3,987
|
|
|
3,561
|
|
|
(45.6
|
)%
|
|
12.0
|
%
|
Total
|
$
|
155,271
|
|
|
$
|
138,563
|
|
|
$
|
123,686
|
|
|
12.1
|
%
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Franchise-operated average weekly net sales
|
$
|
47,938
|
|
|
$
|
47,680
|
|
|
$
|
47,215
|
|
|
0.5
|
%
|
|
1.0
|
%
|
Franchise-operated number of operating weeks
|
57,237
|
|
|
51,970
|
|
|
48,327
|
|
|
10.1
|
%
|
|
7.5
|
%
|
The
increase
in franchise royalty and fee revenues in fiscal
2016
compared to the prior fiscal year was primarily due to the opening of
45
franchise-operated bakery-cafes, the refranchising of 27 bakery-cafes, increased information technology service revenues, and the
0.7 percent
increase in franchise-operated comparable net bakery-cafe sales in fiscal
2016
, partially offset by the closure of
nine
franchise-operated bakery-cafes in fiscal 2016.
The
increase
in franchise royalty and fee revenues in fiscal
2015
compared to the prior fiscal year was primarily due to the opening of
55
franchise-operated bakery-cafes, the refranchising of 75 bakery-cafes, increased information technology service revenues, and the
1.0 percent
increase in franchise-operated comparable net bakery-cafe sales in fiscal
2015
, partially offset by the closure of 14 franchise-operated bakery-cafes in fiscal 2015.
As of
December 27, 2016
, there were
1,134
franchise-operated bakery-cafes open and we have received commitments to open
153
additional franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are established in their respective Area Development Agreements, or ADAs, with franchisees, which provide for the majority of these bakery-cafes to open within the next five years. An ADA requires a franchisee to develop a specified number of bakery-cafes by specified dates. If a franchisee fails to develop bakery-cafes on the schedule set forth in the ADA, we have the right to terminate the ADA and develop Company-owned locations or develop locations through new franchisees in that market. We may exercise one or more alternative remedies to address defaults by franchisees, including not only development defaults, but also defaults in complying with our operating and brand standards and other covenants included in the ADAs and franchise agreements. We may waive compliance with certain requirements under its ADAs and franchise agreements if we determine that such action is warranted under the particular circumstances.
Fresh dough and other product sales to franchisees
The following table summarizes fresh dough and other product sales to franchisees for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Fresh dough and other product sales to franchisees
|
$
|
206,149
|
|
|
$
|
184,223
|
|
|
$
|
175,139
|
|
|
11.9
|
%
|
|
5.2
|
%
|
The
increase
in fresh dough and other product sales to franchisees in fiscal
2016
compared to the prior fiscal year was primarily due to the opening of
45
franchise-operated bakery-cafes, the refranchising of 27 bakery-cafes, and the
0.7 percent
increase in franchise-operated comparable net bakery-cafe sales in fiscal 2016, partially offset by the closure of
nine
franchise-operated bakery-cafes in fiscal 2016.
The
increase
in fresh dough and other product sales to franchisees in fiscal
2015
compared to the prior fiscal year was primarily due to the opening of 55 franchise-operated bakery-cafes, the refranchising of 75 bakery-cafes, and the 1.0 percent increase in franchise-operated comparable net bakery-cafe sales in fiscal 2015, partially offset by the closure of 14 franchise-operated bakery-cafes in fiscal 2015.
Costs and Expenses
The cost of food and paper products includes the costs associated with our fresh dough and other product operations that sell fresh dough and other products to Company-owned bakery-cafes, as well as the cost of food and paper products supplied by third-party vendors and distributors. The costs associated with our fresh dough and other product operations that sell fresh dough and other products to the franchise-operated bakery-cafes are excluded from the cost of food and paper products and are shown separately as fresh dough and other product cost of sales to franchisees in the Consolidated Statements of Income.
Cost of food and paper products
The following table summarizes cost of food and paper products for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Cost of food and paper products
|
$
|
709,251
|
|
|
$
|
715,502
|
|
|
$
|
669,860
|
|
|
(0.9
|
)%
|
|
6.8
|
%
|
As a percentage of bakery-cafe sales, net
|
29.1
|
%
|
|
30.3
|
%
|
|
30.0
|
%
|
|
|
|
|
The
decrease
in the cost of food and paper products in fiscal
2016
as a percentage of net bakery-cafe sales was primarily due to improved leverage from higher comparable net bakery-cafe sales, benign food cost inflation, and margin improvement efforts.
The
increase
in the cost of food and paper products in fiscal
2015
as a percentage of net bakery-cafe sales was primarily due to food cost inflation and a shift in product mix towards higher ingredient cost products, partially offset by improved leverage of our fresh dough manufacturing costs due to an increase in bakery-cafes per fresh dough facility.
Labor
The following table summarizes labor expense for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Labor expense
|
$
|
790,238
|
|
|
$
|
754,646
|
|
|
$
|
685,576
|
|
|
4.7
|
%
|
|
10.1
|
%
|
As a percentage of bakery-cafe sales, net
|
32.5
|
%
|
|
32.0
|
%
|
|
30.7
|
%
|
|
|
|
|
The
increase
in labor expense in fiscal
2016
as a percentage of net bakery-cafe sales was primarily a result of structural wage increases and increased labor supporting ongoing operational initiatives, partially offset by improved leverage from higher comparable net bakery-cafe sales.
The
increase
in labor expense in fiscal
2015
as a percentage of net bakery-cafe sales was primarily a result of increased labor supporting ongoing operational initiatives and wage inflation.
Occupancy
The following table summarizes occupancy cost for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Occupancy
|
$
|
167,717
|
|
|
$
|
169,998
|
|
|
$
|
159,794
|
|
|
(1.3
|
)%
|
|
6.4
|
%
|
As a percentage of bakery-cafe sales, net
|
6.9
|
%
|
|
7.2
|
%
|
|
7.2
|
%
|
|
|
|
|
The decrease in occupancy costs in fiscal 2016 as a percentage of net bakery-cafe sales was primarily the result of improved leverage from higher comparable net bakery-cafe sales.
Occupancy costs in fiscal 2015 as a percentage of net bakery-cafe sales remained consistent compared to fiscal 2014 as modestly higher common area maintenance costs were offset by improved leverage from higher comparable net bakery-cafe sales.
Other operating expenses
The following table summarizes other operating expenses for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Other operating expenses
|
$
|
359,609
|
|
|
$
|
334,635
|
|
|
$
|
314,879
|
|
|
7.5
|
%
|
|
6.3
|
%
|
As a percentage of bakery-cafe sales, net
|
14.8
|
%
|
|
14.2
|
%
|
|
14.1
|
%
|
|
|
|
|
The
increase
in other operating expenses in fiscal
2016
as a percentage of net bakery-cafe sales was primarily the result of losses from asset disposals and impairments recorded during fiscal 2016 and increased other controllable expenses, partially offset by lower utility costs.
The
increase
in other operating expenses in fiscal
2015
as a percentage of net bakery-cafe sales was primarily the result of increased credit card processing expenses, partially offset by a recovery received from a vendor.
Fresh dough and other product cost of sales to franchisees
The following table summarizes fresh dough and other product cost of sales to franchisees for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Fresh dough and other product cost of sales to franchisees
|
$
|
178,585
|
|
|
$
|
160,706
|
|
|
$
|
152,267
|
|
|
11.1
|
%
|
|
5.5
|
%
|
As a percentage of fresh dough and other product sales to franchisees
|
86.6
|
%
|
|
87.2
|
%
|
|
86.9
|
%
|
|
|
|
|
The
decrease
in fresh dough and other product cost of sales to franchisees in fiscal
2016
as a percentage of fresh dough and other product sales to franchisees was primarily the result of lower wheat and fuel costs.
The
increase
in fresh dough and other product cost of sales to franchisees in fiscal
2015
as a percentage of fresh dough and other product sales to franchisees was primarily the result of higher year-over-year sales of zero margin fresh produce to franchisees, partially offset by modestly lower wheat and fuel costs.
Depreciation and amortization
The following table summarizes depreciation and amortization for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Depreciation and amortization
|
$
|
154,355
|
|
|
$
|
135,398
|
|
|
$
|
124,109
|
|
|
14.0
|
%
|
|
9.1
|
%
|
As a percentage of total revenues
|
5.5
|
%
|
|
5.0
|
%
|
|
4.9
|
%
|
|
|
|
|
The
increase
in depreciation and amortization in fiscal 2016 as a percentage of total revenues was primarily the result of increased depreciation on investments in bakery-cafes and support centers, inclusive of technology, to support ongoing operational initiatives.
The
increase
in depreciation and amortization as a percentage of total revenues in fiscal 2015 was primarily the result of increased depreciation on investments in bakery-cafes and support centers, inclusive of technology, to support ongoing operational initiatives, partially offset by the cessation of depreciation on assets classified as held for sale.
General and administrative expenses
The following table summarizes general and administrative expenses for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
General and administrative expenses
|
$
|
179,876
|
|
|
$
|
142,904
|
|
|
$
|
138,060
|
|
|
25.9
|
%
|
|
3.5
|
%
|
As a percentage of total revenues
|
6.4
|
%
|
|
5.3
|
%
|
|
5.5
|
%
|
|
|
|
|
The
increase
in general and administrative expenses in fiscal
2016
as a percentage of total revenues was primarily a result of higher incentive compensation expense, amounts reserved for legal matters, and increased costs to support ongoing strategic initiatives.
The decrease in general and administrative expenses in fiscal 2015 as a percentage of total revenues was primarily a result of lower corporate overhead expenses reflecting our previously announced initiative to reduce core general and administrative expenses in fiscal 2015.
Refranchising loss
In February 2015, we announced a plan to refranchise approximately 50 to 150 bakery-cafes. As of
December 27, 2016
, we had completed the refranchising of 102 Company-owned bakery-cafes.
The following table summarizes activity for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
Loss on assets held for sale
|
$
|
6,112
|
|
|
$
|
10,999
|
|
Lease termination costs and impairment of long-lived assets
|
2,858
|
|
|
5,461
|
|
Professional fees, severance, and other
|
795
|
|
|
1,088
|
|
Loss (gain) on sale of bakery-cafes
|
(693
|
)
|
|
(440
|
)
|
Refranchising loss
|
$
|
9,072
|
|
|
$
|
17,108
|
|
During fiscal 2016, we recognized lease termination costs totaling $1.8 million and impairment losses of $1.1 million. On May 3, 2016, we sold substantially all of the assets of 15 bakery-cafes for a purchase price of approximately $15.2 million, which resulted in a gain on sale of approximately $0.5 million. On September 13, 2016, Panera International Holdings, Inc., a subsidiary of Panera Bread Company, sold all of its shares of stock of Panera Bread Ltd., as successor to Panera Bread ULC, a Canadian subsidiary, to a new franchisee for a purchase price of approximately $5.0 million, which resulted in a gain on sale of approximately $0.2 million. Prior to the sale of the shares of stock of Panera Bread Ltd., we recognized a $6.1 million loss on assets held for sale related to the 12 bakery-cafes in Ontario, Canada whose ownership transferred in the sale.
During fiscal 2015, we recorded losses on assets held for sale of $11.0 million. We also recognized impairment losses and lease termination costs totaling $5.5 million during fiscal 2015 related to certain under-performing bakery-cafes. On March 3, 2015, we sold substantially all of the assets of one bakery-cafe to an existing franchisee for a purchase price of approximately $3.2 million, which resulted in a gain on sale of approximately $2.6 million. On July 14, 2015, we sold substantially all of the assets of 29 bakery-cafes in the Boston market to an existing franchisee for a purchase price of approximately $19.6 million, including $0.5 million for inventory on hand, with $2.0 million held in escrow for certain holdbacks, and recognized a loss on sale of approximately $0.6 million. On October 7, 2015, we sold substantially all of the assets of 45 bakery-cafes in the Seattle and Northern California markets to a new franchisee for a purchase price of approximately $26.8 million, including $0.9 million for inventory on hand, and recognized a loss on sale of $1.6 million.
Other (income) expense, net
Other (income) expense, net was
$1.4 million
of
expense
in fiscal
2016
compared to
$1.2 million
of
expense
in fiscal
2015
. Other (income) expense, net for both fiscal
2016
and fiscal 2015 was primarily comprised of immaterial items.
Other (income) expense, net was
$1.2 million
of
expense
in fiscal 2015 compared to $3.2 million of income in fiscal 2014. Other (income) expense, net for fiscal 2015 was primarily comprised of immaterial items. Other (income) expense, net for fiscal 2014 was primarily comprised of a $3.2 million benefit from a favorable resolution of an insurance coverage matter and other immaterial items, partially offset by a goodwill impairment charge of $2.1 million.
Income taxes
The following table summarizes income taxes for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
|
% Change in 2016
|
|
% Change in 2015
|
Income taxes
|
$
|
84,258
|
|
|
$
|
87,247
|
|
|
$
|
98,001
|
|
|
(3.4
|
)%
|
|
(11.0
|
)%
|
Effective tax rate
|
36.7
|
%
|
|
36.9
|
%
|
|
35.3
|
%
|
|
|
|
|
The
decrease
in the effective tax rate from fiscal
2015
to fiscal
2016
was primarily a result of an increased charitable deduction as a result of the Tax Relief Extension Act of 2015, partially offset by the recognition of $7.0 million of refranchising charges for which we cannot currently realize the associated tax benefit.
The increase in the effective tax rate from fiscal 2014 to fiscal 2015 was primarily driven by certain discrete income tax benefits reported during fiscal 2014 related to additional federal and state tax credits and an increased deduction for domestic production activities.
Liquidity and Capital Resources
Cash and cash equivalents were
$105.5 million
at
December 27, 2016
compared to
$241.9 million
at
December 29, 2015
. This
$136.4 million
decrease
was primarily a result of the use of
$377.2 million
to repurchase shares of our Class A common stock and capital expenditures of
$200.1 million
, partially offset by cash generated from operations of
$387.5 million
, proceeds from borrowings under our revolving credit facility of
$40 million
, and proceeds from refranchising, sale-leaseback transactions, and the sale of property and equipment totaling $25.3 million. We finance our activities through cash flow generated through operations and term loan borrowings. We also have the ability to borrow up to
$250 million
under a revolving credit facility, as described below. Historically, our principal requirements for cash have primarily resulted from the cost of food and paper products, employee labor, the repurchase of shares of our Class A common stock, and our capital expenditures for the development of new Company-owned bakery-cafes, for maintaining or remodeling existing Company-owned bakery-cafes, for purchasing existing franchise-operated bakery-cafes or ownership interests in other restaurant or bakery-cafe concepts, for developing, maintaining, or remodeling fresh dough facilities, and for other capital needs such as enhancements to information systems and other infrastructure to support ongoing operational initiatives.
We had negative working capital of
$136.9 million
as of
December 27, 2016
compared to positive working capital of
$43.1 million
as of
December 29, 2015
, excluding assets held for sale and liabilities associated with assets held for sale as of December 29, 2015. The
decrease
in working capital resulted primarily from the previously described
decrease
in cash and cash equivalents of
$136.4 million
, an increase in accrued expenses of
$49.2 million
, partially offset by an increase in prepaid expenses and other of
$9.7 million
. We believe that cash provided by our operations, term loan borrowings, and available borrowings under our existing revolving credit facility will be sufficient to fund our cash requirements for the foreseeable future. We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients.
A summary of our cash flows, for the periods indicated, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
Cash provided by (used in):
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Operating activities
|
|
$
|
387,541
|
|
|
$
|
318,045
|
|
|
$
|
335,079
|
|
Investing activities
|
|
(174,516
|
)
|
|
(165,415
|
)
|
|
(211,317
|
)
|
Financing activities
|
|
(349,382
|
)
|
|
(107,237
|
)
|
|
(52,514
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(136,357
|
)
|
|
$
|
45,393
|
|
|
$
|
71,248
|
|
Operating Activities
Cash provided by operating activities was
$387.5 million
,
$318.0 million
, and
$335.1 million
in fiscal 2016, fiscal 2015, and fiscal 2014, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, and the net change in operating assets and liabilities.
Cash provided by operating activities in fiscal 2016 consisted primarily of net income adjusted for non-cash expenses, including charges related to our refranchising initiative, and an increase in accrued expenses, partially offset by an increase in prepaid expenses and other. The increase in accrued expenses was primarily due to an increase in accrued compensation and related employment taxes, an increase in the balance of outstanding gift cards, and an increase in accrued advertising. The increase in prepaid expenses was primarily due to an increase in prepaid insurance amounts.
Cash provided by operating activities in fiscal 2015 consisted primarily of net income adjusted for non-cash expenses, including charges related to our refranchising initiative, and an increase in accrued expenses, partially offset by a decrease in the net deferred income tax liability and an increase in prepaid expenses and other. The increase in accrued expenses was primarily due to an increase in the balance of outstanding gift cards. The decrease in the net deferred income tax liability relates primarily to tax depreciation. The increase in prepaid expenses was primarily due to an increase in prepaid insurance amounts.
Cash provided by operating activities in fiscal 2014 consisted primarily of net income adjusted for non-cash expenses and an increase in accrued expenses, partially offset by an increase in trade and other accounts receivable. The increase in accrued expenses was primarily due to an increase in the balance of outstanding gift cards. The increase in trade and other accounts receivable was primarily due to an increase in refundable income taxes due to the timing of payments and an increase in other receivables.
Investing Activities
Cash used in investing activities was
$174.5 million
,
$165.4 million
, and
$211.3 million
in fiscal 2016, fiscal 2015, and fiscal 2014, respectively. Investing activities consists primarily of capital expenditures, proceeds from the refranchising of Company-owned bakery-cafes, the sale and leaseback of bakery-cafes, and the sale of property and equipment.
Capital Expenditures
Capital expenditures are the largest ongoing component of our investing activities. New and existing bakery-cafe expenditures include costs related to the opening of bakery-cafes and delivery hubs, to remodel and maintain bakery-cafes, and to upgrade systems and equipment in bakery-cafes. Fresh dough facility expenditures include costs related to the opening of new fresh dough facilities and costs to expand, remodel and maintain existing facilities. Support center expenditures primarily include investments in technology infrastructure to create the capabilities needed to support ongoing operational initiatives and costs related to enterprise systems and other capital needs. Capital expenditures, for the periods indicated, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
New bakery-cafes
|
|
$
|
84,001
|
|
|
$
|
115,552
|
|
|
$
|
109,941
|
|
Existing bakery-cafes
|
|
63,190
|
|
|
59,081
|
|
|
57,915
|
|
Fresh dough facilities
|
|
13,793
|
|
|
12,175
|
|
|
12,178
|
|
Support centers and IT infrastructure
|
|
39,079
|
|
|
37,124
|
|
|
44,183
|
|
Total
|
|
$
|
200,063
|
|
|
$
|
223,932
|
|
|
$
|
224,217
|
|
Our capital requirements have been and will continue to be significant. Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations, the nature of the arrangements negotiated with landlords, and the extent of operational initiatives. We believe that cash provided by our operations, our term loan borrowings, and available borrowings under our credit facility will be sufficient to fund our capital requirements in both our short-term and long-term future. We currently anticipate capital expenditures of $200 million to $225 million in fiscal 2017.
Sale-Leaseback Transactions
During fiscal 2016, fiscal 2015, and fiscal 2014, we completed sale-leaseback transactions for three, four, and six Company-owned bakery-cafes, respectively, resulting in cash proceeds of
$8.9 million
,
$10.1 million
, and
$12.9 million
, respectively.
Financing Activities
Cash used in financing activities was
$349.4 million
,
$107.2 million
, and
$52.5 million
in fiscal 2016, fiscal 2015, and fiscal 2014, respectively. Financing activities in fiscal 2016 consisted primarily of
$377.2 million
used to repurchase shares of our Class A common stock, partially offset by $40.0 million of proceeds from borrowings under our revolving credit facility. Financing activities in fiscal 2015 consisted primarily of
$405.5 million
used to repurchase shares of our Class A common stock, partially offset by
$299.1 million
of proceeds from term loan borrowings. Financing activities in fiscal 2014 consisted primarily of
$159.5 million
used to repurchase shares of our Class A common stock, partially offset by $100.0 million of proceeds from term loan borrowings.
Share Repurchases
On August 23, 2012, our Board of Directors approved a three year share repurchase authorization of up to
$600 million
of our Class A common stock, which we refer to as the 2012 repurchase authorization, pursuant to which we repurchased shares on the open market under a Rule 10b5-1 plan. On June 5, 2014, our Board terminated the 2012 repurchase authorization.
On June 5, 2014, our Board of Directors approved a three year share repurchase authorization of up to
$600 million
of our Class A common stock, which we refer to as the 2014 repurchase authorization, pursuant to which we repurchased shares on the open market under a Rule 10b5-1 plan. On April 15, 2015, our Board approved an increase of the 2014 repurchase authorization to
$750 million
. On May 19, 2016, our Board terminated the 2014 repurchase authorization.
On May 19, 2016, our Board of Directors approved a new three year share repurchase authorization of up to $600 million of our Class A common stock, which we refer to as the 2016 repurchase authorization, pursuant to which we may repurchase shares from time to time on the open market or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by the Company as treasury stock. The 2016 repurchase authorization may be modified, suspended, or discontinued by our Board at any time. There was approximately
$397.7 million
available under the 2016 repurchase authorization as of December 27, 2016.
The following table summarizes share repurchase activity for fiscal 2016, fiscal 2015, and fiscal 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27,
2016
|
|
December 29,
2015
|
|
December 30,
2014
|
2016 Repurchase Authorization
|
|
|
|
|
|
Shares repurchased
|
975,673
|
|
|
|
|
|
Average price per share
|
$
|
207.31
|
|
|
|
|
|
Aggregate purchase price (in millions)
|
$
|
202.3
|
|
|
|
|
|
2014 Repurchase Authorization
|
|
|
|
|
|
Shares repurchased
|
839,759
|
|
|
2,201,719
|
|
|
427,521
|
|
Average price per share
|
$
|
201.15
|
|
|
$
|
181.65
|
|
|
$
|
155.78
|
|
Aggregate purchase price (in millions)
|
$
|
168.9
|
|
|
$
|
399.9
|
|
|
$
|
66.6
|
|
2012 Repurchase Authorization
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
514,357
|
|
Average price per share
|
|
|
|
|
$
|
170.15
|
|
Aggregate purchase price (in millions)
|
|
|
|
|
$
|
87.5
|
|
Total
|
|
|
|
|
|
Shares repurchased
|
1,815,432
|
|
|
2,201,719
|
|
|
941,878
|
|
Average price per share
|
$
|
204.46
|
|
|
$
|
181.65
|
|
|
$
|
163.62
|
|
Aggregate purchase price (in millions)
|
$
|
371.2
|
|
|
$
|
399.9
|
|
|
$
|
154.1
|
|
In addition to repurchases under the 2016 repurchase authorization, 2014 repurchase authorization, and 2012 repurchase authorization, we have historically repurchased shares of our Class A common stock from participants of the Panera Bread 2006 Stock Incentive Plan, as amended, and the Panera Bread 2015 Stock Incentive Plan, or collectively, the Plans, through a share repurchase authorization approved by our Board. Repurchased shares are netted and surrendered as payment for applicable tax withholding on the vesting of participants’ restricted stock. During fiscal 2016, we repurchased
27,478
shares of Class A common stock surrendered by participants of the Plans at an average price of
$216.42
per share for an aggregate purchase price of approximately
$5.9 million
. During fiscal 2015, we repurchased 28,018 shares of Class A common stock surrendered by participants of the Plans at an average price of $196.78 per share for an aggregate purchase price of approximately $5.5 million. During fiscal 2014, we repurchased 35,461 shares of Class A common stock surrendered by participants of the Plans at an average price of $151.17 per share for an aggregate purchase price of approximately $5.4 million. These share repurchases were made pursuant to the terms of the Plans and the applicable award agreements and were not made pursuant to publicly announced share repurchase authorizations.
Term Loans
On June 11, 2014, we entered into a term loan agreement, or the 2014 Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2014 Term Loan Agreement provides for an unsecured term loan in the amount of $100 million, or the 2014 Term Loan. The 2014 Term Loan is scheduled to mature on June 11, 2019, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2014 Term Loan Agreement. The 2014 Term Loan Agreement also allows us from time to time to request that the 2014 Term Loan be further increased by an amount not to exceed, in the aggregate, $150 million, subject to the arrangement of additional commitments with financial institutions acceptable to us and Bank of America and other customary terms and conditions.
On July 16, 2015, we entered into a term loan agreement, or the 2015 Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2015 Term Loan Agreement provides for an unsecured term loan in the amount of $300 million, or the 2015 Term Loan. The 2015 Term Loan is scheduled to mature on July 16, 2020, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2015 Term Loan Agreement.
On February 1, 2017, we entered into a term loan agreement, or the 2017 Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2017 Term Loan Agreement provides for up to two unsecured drawdowns of a term loan in the aggregate principal amount of up to $200 million, or the 2017 Term Loan. The 2017 Term Loan is scheduled to mature on February 1, 2022, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2017 Term Loan Agreement. On February 1, 2017, we made a $100 million drawdown on the 2017 Term Loan.
Each of the 2014 Term Loan, 2015 Term Loan, and 2017 Term Loan bears interest at a rate equal to, at our option, (1) the Eurodollar rate plus a margin ranging from 1.00 percent to 1.50 percent depending on our consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus 0.50 percent or (c) the Eurodollar rate plus 1.00 percent, plus a margin ranging from 0.00 percent to 0.50 percent depending on our consolidated leverage ratio. Our obligations under the 2014 Term Loan Agreement and the 2015 Term Loan Agreement are guaranteed by certain of our direct and indirect subsidiaries. As of December 27, 2016, there was $100.0 million and
$281.3 million
outstanding under the 2014 Term Loan Agreement and 2015 Term Loan Agreement, respectively.
The weighted-average interest rate for the 2014 Term Loan, including the amortization of lender fees and issuance costs and the impact of our interest rate swaps, was
2.24 percent
,
1.21 percent
, and 1.15 percent for fiscal
2016
, fiscal
2015
, and fiscal 2014, respectively. The weighted-average interest rate for the 2015 Term Loan, including the amortization of lender fees and issuance costs and the impact of our interest rate swaps, was
2.02 percent
and
1.33 percent
for fiscal
2016
and fiscal 2015, respectively. As of
December 27, 2016
, the carrying amounts of the 2014 Term Loan and 2015 Term Loan approximate fair value as the interest rates approximate current market rates (Level 2 inputs).
On July 16, 2015, in order to hedge the variability in cash flows from changes in benchmark interest rates, we entered into two forward-starting interest rate swap agreements with an aggregate initial notional value of $242.5 million. On January 9, 2017, we entered into consecutive forward-starting interest rate swaps agreements with an initial notional value of $200 million. The forward-starting interest rate swaps have been designated as cash flow hedging instruments.
Installment Payment Agreement
On September 15, 2015, we entered into a Master Installment Payment Agreement, or the Master IPA, with PNC Equipment Finance, LLC, or PNC, pursuant to which PNC financed our purchase of hardware, software, and services associated with new storage virtualization and disaster recovery systems. The Master IPA provides for a secured note payable in the amount of $12.7 million, or the 2015 Note Payable, payable in five annual installments beginning November 1, 2015 and each September 1st thereafter. As of December 27, 2016, there was
$7.6 million
outstanding under the Master IPA.
Revolving Credit Agreement
On July 16, 2015, we entered into a credit agreement, or the 2015 Credit Agreement, with Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and each lender from time to time party thereto. The 2015 Credit Agreement provides for an unsecured revolving credit facility of $250 million that will become due on July 16, 2020, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2015 Credit Agreement. We may select interest rates under the credit facility equal to, at our option, (1) the Eurodollar rate plus a margin ranging from 1.00 percent to 1.50 percent depending on our consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus 0.50 percent or (c) the Eurodollar rate plus 1.00 percent, plus a margin ranging from 0.00 percent to 0.50 percent depending on our consolidated leverage ratio. Our obligations under the 2015 Credit Agreement are guaranteed by certain of our direct and indirect subsidiaries. The 2015 Credit Agreement allows us from time to time to request that the credit facility be further increased by an amount not to exceed, in the aggregate, $150 million, subject to the arrangement of additional commitments with financial institutions acceptable to us and Bank of America. As of December 27, 2016, we had $40.0 million outstanding under the 2015 Credit Agreement.
The 2014 Term Loan Agreement, 2015 Term Loan Agreement, 2015 Credit Agreement, and 2017 Term Loan Agreement contain customary affirmative and negative covenants, including covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, such term loan and credit agreements contain various financial covenants that, among other things, require us to satisfy two financial covenants at the end of each fiscal quarter: (1) a consolidated leverage ratio less than or equal to 3.00 to 1.00, and (2) a consolidated fixed charge coverage ratio of greater than or equal to 2.00 to 1.00. As of December 27, 2016, we were, and expect to remain, in compliance with all covenant requirements.
Critical Accounting Policies & Estimates
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP. The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.
We have chosen accounting policies we believe are appropriate to report accurately and fairly our consolidated operating results and financial position, and we apply those accounting policies in a consistent manner. We consider our policies on accounting for revenue recognition, valuation of goodwill, self-insurance, income taxes, lease obligations, and impairment of long-lived assets to be the most critical in the preparation of the consolidated financial statements because they involve the most difficult, subjective, or complex judgments and estimates about the effect of matters that are inherently uncertain. There have been no material changes to our application of critical accounting policies and significant judgments and estimates that occurred during fiscal
2016
.
Revenue Recognition
We recognize revenues from net bakery-cafe sales upon delivery of the related food and other products to the customer. Revenues from fresh dough and other product sales to franchisees are recorded upon delivery of the fresh dough and other products to franchisees. Sales of branded products sold outside our bakery-cafes are recognized upon delivery to customers. Royalties are generally paid weekly based on a percentage of net franchisee sales specified in each ADA (generally five percent of net sales). Royalties are recognized as revenue in the period in which the sales are reported to have occurred based on contractual royalty rates applied to the net franchise sales. Franchise fees are generally the result of the sale of area development rights and the sale of individual franchise locations to third parties. The initial franchise fee is typically
$35,000
per bakery-cafe to be developed under the ADA. Of this fee,
$5,000
is generally paid at the time of signing of the ADA and is recognized as revenue when it is received as it is non-refundable and we have to perform no other service to earn this fee. The remainder of the fee is paid at the
time an individual franchise agreement is signed and is recognized as revenue upon the opening of the corresponding bakery-cafe. Franchise fees also include information technology-related fees for access to and the usage of proprietary systems.
We maintain a customer loyalty program through which customers earn rewards based on registration in the program and purchases at our bakery-cafes. We record the full retail value of loyalty program rewards as a reduction of net bakery-cafe sales and a liability is established within accrued expenses as rewards are earned while considering historical redemption rates. Fully earned rewards generally expire if unredeemed after 60 days. Partially earned awards generally expire if inactive for a period of one year. Costs associated with coupons are classified as a reduction of net bakery-cafe sales in the period in which the coupon is redeemed.
We sell gift cards which do not expire and from which we do not deduct non-usage fees from outstanding gift card balances. Gift cards are redeemable at both Company-owned and franchise-operated bakery-cafes. Gift cards sold by either Company-owned bakery-cafes or through wholesalers and redeemed at franchise-operated bakery-cafes reduce our gift card liability but do not result in the recognition of revenue. When gift cards are redeemed at Company-owned bakery-cafes, we recognize revenue and reduce the gift card liability. When we determine the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”), based upon our specific historical redemption patterns, and there is no legal obligation to remit the unredeemed gift card balance in the relevant jurisdiction, gift card breakage is recorded as a reduction of general and administrative expenses in the Consolidated Statements of Income; however, such gift cards will continue to be honored. We recognized gift card breakage as a reduction of general and administrative expenses of
$11.2 million
for fiscal
2016
,
$6.9 million
for fiscal
2015
, and
$4.9 million
for fiscal
2014
. Incremental direct costs related to the sale of gift cards are deferred until the associated gift card is redeemed or breakage is deemed appropriate. These deferred incremental direct costs are reflected as a reduction of the unredeemed gift card liability, net which is a component of accrued expenses in the Consolidated Balance Sheets and, when recognized, as a component of other operating expenses in the Consolidated Statements of Income.
Valuation of Goodwill
We evaluate goodwill for impairment on an annual basis during our fourth quarter, or more frequently if circumstances indicate impairment might exist. Goodwill is evaluated for impairment through the comparison of fair value of our reporting units to their carrying values. When evaluating goodwill for impairment, we may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. If, based on the review of the qualitative factors, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we bypass the required two-step impairment test. If we do not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely- than-not greater than its carrying value, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, there is an indication that impairment may exist. The amount of impairment is determined by comparing the implied fair value of the reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment loss for the difference.
During the fourth quarter of fiscal 2016, we performed an assessment of qualitative factors to determine if the fair value of our reporting units was more-likely-than-not greater than their carrying amounts, evaluating factors including, but not limited to, macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, share price fluctuations, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the operational stability and the overall financial performance of the reporting units. We concluded it is more-likely-than-not that the fair value of our reporting units was greater than their carrying amounts on a reporting unit basis. Accordingly, we did not recognize any impairment charges during fiscal 2016.
Self-Insurance
We are self-insured for a significant portion of our workers’ compensation, group health, and general, auto, and property liability insurance, with varying levels of deductibles of as much as
$0.8 million
of individual claims, depending on the type of claim. We also purchase aggregate stop-loss and/or layers of loss insurance in many categories of loss. We utilize third party actuarial experts’ estimates of expected losses based on statistical analyses of our actual historical data and historical industry data to determine required self-insurance reserves. The assumptions are closely reviewed, monitored, and adjusted when warranted by changing circumstances. These estimated liabilities could be affected if actual experience related to the number of claims and cost per claim differs from these assumptions and historical trends. Based on information known at
December 27, 2016
, we believe we have provided adequate reserves for our self-insurance exposure. We held self-insurance reserves of
$41.7 million
as of
December 27, 2016
and
$37.2 million
as of December 29, 2015, which were included in accrued expenses in the Consolidated Balance Sheets.
Income Taxes
We are subject to income taxes in the United States and Canada. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We assess the income tax position and record the liabilities for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.
Our provision for income taxes is determined in accordance with the accounting guidance for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if we determine it is more likely than not that all or some portion of the deferred tax asset will not be recognized. Based on this assessment, we have recorded a valuation allowance of $11.3 million and $5.3 million as of December 27, 2016 and December 29, 2015, respectively, against all Canadian deferred tax assets, including the net operating loss carryforwards of our Canadian operations.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact our provision for income taxes in the period in which such determination is made. Our provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
Our effective tax rates have differed from the statutory tax rate primarily due to the impact of state taxes, partially offset by favorable U.S. rules related to donations of inventory to charitable organizations and domestic manufacturing. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets, or changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the routine examination of our income tax returns and other tax filings by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our reserve for income taxes.
Lease Obligations
We lease nearly all of our bakery-cafes, fresh dough facilities and trucks, and support centers. Each lease is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.
For leases that contain rent escalations, we record the total rent payable during the lease term, as described above, on a straight-line basis over the term of the lease, and record the difference between the minimum rent paid and the straight-line rent as a lease obligation. Many of our leases contain provisions that require additional rental payments based upon net bakery-cafe sales volume, which we refer to as contingent rent. Contingent rent is accrued each period as the liability is incurred, in addition to the straight-line rent expense noted above. This results in variability in occupancy expense over the term of the lease in bakery-cafes where we pay contingent rent.
In addition, we record landlord allowances and incentives received as deferred rent in the Consolidated Balance Sheets based on their short-term or long-term nature. These landlord allowances are amortized over the reasonably assured lease term as a reduction of rent expense. Additionally, payments made by us and reimbursed by the landlord for improvements deemed to be lessor assets have no impact on the Statements of Income. We consider improvements to be a lessor asset if all of the following criteria are met:
|
|
•
|
the lease specifically requires the lessee to make the improvement;
|
|
|
•
|
the improvement is fairly generic;
|
|
|
•
|
the improvement increases the fair value of the property to the lessor; and
|
|
|
•
|
the useful life of the improvement is longer than the lease term.
|
We report the period to period change in the landlord receivable within the operating activities section of the Consolidated Statements of Cash Flows.
Management makes judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as capital or operating, the rent holiday, and/or escalations in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements for each bakery-cafe, fresh dough facility, and support center is amortized. These judgments may produce materially different amounts of depreciation, amortization, and rent expense than would be reported if different assumed lease terms were used.
Impairment of Long-Lived Assets
We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. When appropriate, we compare anticipated undiscounted cash flows from the related long-lived assets of a bakery-cafe or fresh dough facility with their respective carrying values to determine if the long-lived assets are recoverable. If the sum of the anticipated undiscounted cash flows for the long-lived assets is less than their carrying value, an impairment loss would be recognized for the difference between the anticipated discounted cash flows, which approximates fair value, and the carrying value of the long-lived assets. Our estimates of cash flow were based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions. Our estimates of cash flow may differ from actual cash flow due to, among other things, economic conditions, changes to our business model or changes in operating performance. The long-term financial forecasts that we utilize represent the best estimate that we have at this time and we believe that its underlying assumptions are reasonable.
We recognized impairment losses of
$4.0 million
,
$3.8 million
, and $0.9 million during fiscal 2016, fiscal 2015, and fiscal 2014, respectively, related to distinct under-performing Company-owned bakery-cafes. For fiscal 2016, $2.9 million of the impairment losses were recorded in other operating expenses and $1.1 million of the impairment losses were recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2015, the impairment losses were recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2014, the impairment losses were recorded in other operating expenses in the Consolidated Statements of Income.
Contractual Obligations and Other Commitments
In addition to our planned capital expenditure requirements, we have certain other contractual and committed cash obligations. Our contractual cash obligations consist of non-cancelable operating leases for our bakery-cafes, fresh dough facilities and trucks, and support centers; principal and interest payments related to term loan borrowings and borrowings under our revolving credit agreement; capital leases; purchase obligations primarily for certain commodities; and uncertain tax positions. Lease terms for our trucks are generally for five to seven years. The reasonably assured lease terms for most bakery-cafe and support center leases is the initial non-cancelable lease term plus one renewal option period, which generally equates to an aggregate of 15 years. The reasonably assured lease term for most fresh dough facilities is the initial non-cancelable lease term plus one to two renewal periods, which generally equates to an aggregate of 20 years. Lease terms generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Certain bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts, scheduled rent increases during the lease terms, and/or rental payments commencing at a date other than the date of initial occupancy. As of
December 27, 2016
, we expect cash expenditures under these lease obligations, purchase obligations, term loan borrowings, and uncertain tax positions to be as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
Total
|
Operating leases (1)
|
|
$
|
157,659
|
|
|
$
|
296,589
|
|
|
$
|
256,056
|
|
|
$
|
601,572
|
|
|
$
|
1,311,876
|
|
Capital lease obligations (1)
|
|
358
|
|
|
762
|
|
|
642
|
|
|
1,863
|
|
|
3,625
|
|
Purchase obligations (2)
|
|
249,947
|
|
|
4,124
|
|
|
31
|
|
|
—
|
|
|
254,102
|
|
Long-term debt (3)
|
|
17,536
|
|
|
135,072
|
|
|
276,250
|
|
|
—
|
|
|
428,858
|
|
Interest payments (4)
|
|
7,434
|
|
|
13,191
|
|
|
2,641
|
|
|
—
|
|
|
23,266
|
|
Uncertain tax positions (5)
|
|
3,450
|
|
|
1,959
|
|
|
1,335
|
|
|
173
|
|
|
6,917
|
|
Total
|
|
$
|
436,384
|
|
|
$
|
451,697
|
|
|
$
|
536,955
|
|
|
$
|
603,608
|
|
|
$
|
2,028,644
|
|
|
|
(1)
|
See
Note 13
, Commitments and Contingencies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our operating and capital leases. Future minimum lease payments exclude contingent payments and have not been reduced by minimum sublease rentals to be received in the future under non-cancelable subleases. In total, sublease rentals are approximately $8.2 million for operating subleases.
|
|
|
(2)
|
Relates to certain commodity and service agreements pursuant to which we are committed as of
December 27, 2016
to purchase a fixed quantity over a contracted time period.
|
|
|
(3)
|
See
Note 10
, Debt, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our term loan borrowings and installment payment agreement.
|
|
|
(4)
|
Represents estimated interest payments on the term loan borrowings. Interest payments are calculated based on Eurodollar plus the applicable margin in effect at December 27, 2016. The actual interest rates on our term loan borrowings could vary from that used to compute the above interest payments. See
Note 10
, Debt, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our term loan borrowings.
|
|
|
(5)
|
See
Note 14
, Income Taxes, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our uncertain tax positions.
|
Off-Balance Sheet Arrangements
As of
December 27, 2016
, we have guaranteed the operating leases of
98
franchisee locations, which we account for in accordance with the accounting requirements for guarantees. These guarantees are primarily a result of the sales of Company-owned bakery-cafes to franchisees, pursuant to which we exercised our right to assign the lease for the bakery-cafe but remain liable to the landlord for the remaining lease term in the event of a default by the assignee. These guarantees expire on various dates from
July 15, 2020
to
February 28, 2049
, with a maximum potential amount of future rental payments of approximately
$294.8 million
as of
December 27, 2016
. Our obligation from these leases will decrease over time as these operating leases expire. We have not recorded a liability for these guarantees because the fair value of these lease guarantees was determined by us to be insignificant individually, and in the aggregate, based on an analysis of the facts and circumstances of each such lease and each such assignee's performance, and we did not believe it was probable we would be required to perform under any guarantees at the time the guarantees were issued. We have not had to make any payments related to any of these guaranteed leases. Applicable assignees continue to have primary obligation for these operating leases. As of
December 27, 2016
, future commitments under these leases were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
Total
|
Lease Guarantees (1)
|
|
$
|
15,027
|
|
|
$
|
31,100
|
|
|
$
|
31,705
|
|
|
$
|
216,924
|
|
|
$
|
294,756
|
|
|
|
(1)
|
Represents aggregate maximum requirement — see
Note 13
, Commitments and Contingencies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our lease guarantees.
|
Employee Commitments
We have confidential and proprietary information and non-competition agreements, referred to as non-compete agreements, with certain employees. These non-compete agreements contain a provision whereby employees would be due a certain number of weeks of their salary if their employment was terminated by us as specified in the non-compete agreement. We have not recorded a liability for these amounts potentially due to employees. Rather, we will record a liability for these amounts when an amount becomes due to an employee in accordance with the appropriate authoritative literature. As of
December 27, 2016
, the total amount potentially owed employees under these non-compete agreements was
$24.2 million
.
Impact of Inflation
Our profitability depends in part on our ability to anticipate and react to changes in food, supply, labor, occupancy, and other costs. In the past, we have been able to recover a significant portion of inflationary costs and commodity price increases, including price increases in fuel, proteins, dairy, wheat, tuna, and cream cheese among others, through increased menu prices. There have been, and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit our ability to recover such cost increases in their entirety. Historically, the effects of inflation on our consolidated results of operations have not been materially adverse. However, inherent volatility experienced in certain commodity markets, such as those for wheat, proteins, including chicken raised without antibiotics, and fuel may have an adverse effect on us in the future. The extent of the impact will depend on our ability and timing to increase food prices.
A majority of our associates are paid hourly rates regulated by federal and state minimum wage laws. Although we have and will continue to attempt to pass along any increased labor costs through food price increases, there can be no assurance that all such increased labor costs can be reflected in our prices or that increased prices will be absorbed by consumers without diminishing to some degree consumer spending at the bakery-cafes.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. This update requires the income tax impact of an intra-entity sale or transfer of an asset other than inventory to be recognized when the sale or transfer occurs, rather than when the asset has been sold to an outside party. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This update addresses how certain cash inflows and outflows are classified in the statement of cash flows to eliminate existing diversity in practice. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update simplifies 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. This update is effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the overall impact that ASU 2016-09 will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This update will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Based on a preliminary assessment, we expect the standard to have a material impact on our assets and liabilities due to the recognition of right-of-use assets and lease liabilities on our Consolidated Balance Sheets at the beginning of the earliest period presented. We are continuing our assessment, which may identify additional impacts this standard will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. We early adopted ASU 2015-17 during fiscal 2016 on a retrospective basis. As a result of the retrospective adoption, we reclassified current deferred income tax assets of
$34.5 million
as of December 29, 2015 to long-term deferred income tax liabilities in the Consolidated Balance Sheets. Adoption of this standard did not impact our results of operations or cash flows in either the current or previous interim and annual reporting periods.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. This update eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. This update is effective for annual and interim reporting periods beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments for provisional amounts that occur after the effective date with early adoption permitted for financial statements that have not been issued. The adoption of this guidance did not have a material effect on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. This update provides guidance on the subsequent measurement of inventory, which changes the measurement from lower of cost or market to lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires our management to evaluate whether there is substantial doubt about our ability to continue as a going concern. We adopted ASU 2014-15 during the
thirteen weeks ended December 27, 2016. The adoption of ASU 2014-15 did not impact our consolidated financial statements or disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, delaying the effective date for adoption. The update is now effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The update permits the use of either the retrospective or cumulative effect transition method.
The FASB has also issued several standards which provide additional clarification and implementation guidance on the previously issued ASU 2014-09 and have the same effective date as the original standard.
We are currently evaluating the overall impact that ASU 2014-09 will have on our consolidated financial statements, as well as the expected timing and method of adoption. Based on a preliminary assessment, we have determined that the adoption will change the timing of recognition of gift card breakage income, which is currently recognized using the remote method. The new guidance will require application of the proportional method. We are continuing our assessment, which may identify additional impacts this standard will have on our consolidated financial statements and related disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are included in response to this item:
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of Panera Bread Company:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of changes in equity and redeemable noncontrolling interest, and of cash flows
present fairly, in all material respects, the financial position of Panera Bread Company and its subsidiaries at
December 27, 2016
and
December 29, 2015
, and the results of their operations and their cash flows for each of the three years in the period ended
December 27, 2016
in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2016, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
February 22, 2017
PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
105,529
|
|
|
$
|
241,886
|
|
Trade accounts receivable, net
|
53,519
|
|
|
38,211
|
|
Other accounts receivable
|
59,404
|
|
|
77,575
|
|
Inventories
|
23,775
|
|
|
22,482
|
|
Prepaid expenses and other
|
69,194
|
|
|
59,457
|
|
Assets held for sale
|
—
|
|
|
28,699
|
|
Total current assets
|
311,421
|
|
|
468,310
|
|
Property and equipment, net
|
802,759
|
|
|
776,248
|
|
Other assets:
|
|
|
|
Goodwill
|
122,377
|
|
|
121,791
|
|
Other intangible assets, net
|
54,819
|
|
|
63,877
|
|
Deposits and other
|
10,235
|
|
|
10,613
|
|
Total other assets
|
187,431
|
|
|
196,281
|
|
Total assets
|
$
|
1,301,611
|
|
|
$
|
1,440,839
|
|
Liabilities, Redeemable Noncontrolling Interest, and Stockholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
22,455
|
|
|
$
|
19,805
|
|
Accrued expenses
|
408,637
|
|
|
359,464
|
|
Current portion of long-term debt
|
17,229
|
|
|
17,229
|
|
Liabilities associated with assets held for sale
|
—
|
|
|
2,945
|
|
Total current liabilities
|
448,321
|
|
|
399,443
|
|
Long-term debt
|
410,594
|
|
|
388,971
|
|
Deferred rent
|
63,369
|
|
|
62,610
|
|
Deferred income taxes
|
32,301
|
|
|
35,968
|
|
Other long-term liabilities
|
54,636
|
|
|
52,566
|
|
Total liabilities
|
1,009,221
|
|
|
939,558
|
|
Commitments and contingencies (Note 13)
|
|
|
|
Redeemable noncontrolling interest
|
3,603
|
|
|
3,981
|
|
Stockholders' equity:
|
|
|
|
Common stock, $.0001 par value per share:
|
|
|
|
Class A, 112,500,000 shares authorized; 30,910,395 shares issued and 21,577,004 shares outstanding at December 27, 2016 and 30,836,669 shares issued and 23,346,188 shares outstanding at December 29, 2015
|
3
|
|
|
3
|
|
Class B, 10,000,000 shares authorized; 1,381,730 shares issued and outstanding at December 27, 2016 and December 29, 2015, respectively
|
—
|
|
|
—
|
|
Treasury stock, carried at cost; 9,333,391 shares at December 27, 2016 and 7,490,481 shares at December 29, 2015
|
(1,488,779
|
)
|
|
(1,111,586
|
)
|
Preferred stock, $.0001 par value per share; 2,000,000 shares authorized and no shares issued or outstanding at December 27, 2016 and December 29, 2015
|
—
|
|
|
—
|
|
Additional paid-in capital
|
257,594
|
|
|
235,393
|
|
Accumulated other comprehensive income (loss)
|
(4,124
|
)
|
|
(5,029
|
)
|
Retained earnings
|
1,524,093
|
|
|
1,378,519
|
|
Total stockholders' equity
|
288,787
|
|
|
497,300
|
|
Total liabilities, redeemable noncontrolling interest, and stockholders' equity
|
$
|
1,301,611
|
|
|
$
|
1,440,839
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Revenues:
|
|
|
|
|
|
Bakery-cafe sales, net
|
$
|
2,433,945
|
|
|
$
|
2,358,794
|
|
|
$
|
2,230,370
|
|
Franchise royalties and fees
|
155,271
|
|
|
138,563
|
|
|
123,686
|
|
Fresh dough and other product sales to franchisees
|
206,149
|
|
|
184,223
|
|
|
175,139
|
|
Total revenues
|
$
|
2,795,365
|
|
|
$
|
2,681,580
|
|
|
$
|
2,529,195
|
|
Costs and expenses:
|
|
|
|
|
|
Bakery-cafe expenses:
|
|
|
|
|
|
Cost of food and paper products
|
$
|
709,251
|
|
|
$
|
715,502
|
|
|
$
|
669,860
|
|
Labor
|
790,238
|
|
|
754,646
|
|
|
685,576
|
|
Occupancy
|
167,717
|
|
|
169,998
|
|
|
159,794
|
|
Other operating expenses
|
359,609
|
|
|
334,635
|
|
|
314,879
|
|
Total bakery-cafe expenses
|
2,026,815
|
|
|
1,974,781
|
|
|
1,830,109
|
|
Fresh dough and other product cost of sales to franchisees
|
178,585
|
|
|
160,706
|
|
|
152,267
|
|
Depreciation and amortization
|
154,355
|
|
|
135,398
|
|
|
124,109
|
|
General and administrative expenses
|
179,876
|
|
|
142,904
|
|
|
138,060
|
|
Pre-opening expenses
|
6,899
|
|
|
9,089
|
|
|
8,707
|
|
Refranchising loss
|
9,072
|
|
|
17,108
|
|
|
—
|
|
Total costs and expenses
|
2,555,602
|
|
|
2,439,986
|
|
|
2,253,252
|
|
Operating profit
|
239,763
|
|
|
241,594
|
|
|
275,943
|
|
Interest expense
|
8,884
|
|
|
3,830
|
|
|
1,824
|
|
Other (income) expense, net
|
1,380
|
|
|
1,192
|
|
|
(3,175
|
)
|
Income before income taxes
|
229,499
|
|
|
236,572
|
|
|
277,294
|
|
Income taxes
|
84,258
|
|
|
87,247
|
|
|
98,001
|
|
Net income
|
$
|
145,241
|
|
|
$
|
149,325
|
|
|
$
|
179,293
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
(333
|
)
|
|
(17
|
)
|
|
—
|
|
Net income attributable to Panera Bread Company
|
$
|
145,574
|
|
|
$
|
149,342
|
|
|
$
|
179,293
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$
|
6.21
|
|
|
$
|
5.81
|
|
|
$
|
6.67
|
|
Diluted
|
$
|
6.18
|
|
|
$
|
5.79
|
|
|
$
|
6.64
|
|
|
|
|
|
|
|
Weighted average shares of common and common equivalent shares outstanding:
|
|
|
|
|
|
Basic
|
23,444
|
|
|
25,685
|
|
|
26,881
|
|
Diluted
|
23,565
|
|
|
25,788
|
|
|
26,999
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27,
2016
|
|
December 29,
2015
|
|
December 30,
2014
|
Net income
|
$
|
145,241
|
|
|
$
|
149,325
|
|
|
$
|
179,293
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
(333
|
)
|
|
(17
|
)
|
|
—
|
|
Net income attributable to Panera Bread Company
|
$
|
145,574
|
|
|
$
|
149,342
|
|
|
$
|
179,293
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedging instruments
|
(1,163
|
)
|
|
(2,552
|
)
|
|
—
|
|
Tax (expense) benefit
|
460
|
|
|
1,009
|
|
|
—
|
|
Reclassification adjustment for net (gains) losses realized in earnings on cash flow hedging instruments
|
1,499
|
|
|
—
|
|
|
—
|
|
Tax expense (benefit)
|
(593
|
)
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustment
|
702
|
|
|
(2,126
|
)
|
|
(1,027
|
)
|
Other comprehensive income (loss) attributable to Panera Bread Company
|
905
|
|
|
(3,669
|
)
|
|
(1,027
|
)
|
Comprehensive income attributable to Panera Bread Company
|
$
|
146,479
|
|
|
$
|
145,673
|
|
|
$
|
178,266
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
145,241
|
|
|
$
|
149,325
|
|
|
$
|
179,293
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
154,355
|
|
|
135,398
|
|
|
124,109
|
|
Stock-based compensation expense
|
15,662
|
|
|
15,086
|
|
|
10,077
|
|
Tax benefit from stock-based compensation
|
(2,456
|
)
|
|
(2,057
|
)
|
|
(3,089
|
)
|
Deferred income taxes
|
(3,800
|
)
|
|
(10,991
|
)
|
|
10,459
|
|
Refranchising loss
|
7,212
|
|
|
12,942
|
|
|
—
|
|
Other
|
10,551
|
|
|
3,505
|
|
|
4,617
|
|
Changes in operating assets and liabilities, excluding the effect of acquisitions and dispositions:
|
|
|
|
|
|
Trade and other accounts receivable, net
|
66
|
|
|
(3,605
|
)
|
|
(22,139
|
)
|
Inventories
|
(977
|
)
|
|
(1,698
|
)
|
|
(895
|
)
|
Prepaid expenses and other
|
(9,923
|
)
|
|
(7,191
|
)
|
|
(8,524
|
)
|
Deposits and other
|
1,625
|
|
|
(455
|
)
|
|
239
|
|
Accounts payable
|
2,650
|
|
|
(183
|
)
|
|
1,978
|
|
Accrued expenses
|
63,531
|
|
|
31,169
|
|
|
35,288
|
|
Deferred rent
|
366
|
|
|
3,751
|
|
|
1,067
|
|
Other long-term liabilities
|
3,438
|
|
|
(6,951
|
)
|
|
2,599
|
|
Net cash provided by operating activities
|
387,541
|
|
|
318,045
|
|
|
335,079
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Additions to property and equipment
|
(200,063
|
)
|
|
(223,932
|
)
|
|
(224,217
|
)
|
Repayment of promissory note
|
216
|
|
|
—
|
|
|
—
|
|
Proceeds from refranchising
|
15,649
|
|
|
46,869
|
|
|
—
|
|
Proceeds from sale of property and equipment
|
742
|
|
|
1,553
|
|
|
—
|
|
Proceeds from sale-leaseback transactions
|
8,940
|
|
|
10,095
|
|
|
12,900
|
|
Net cash used in investing activities
|
(174,516
|
)
|
|
(165,415
|
)
|
|
(211,317
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayments of long-term debt
|
(18,683
|
)
|
|
(6,301
|
)
|
|
—
|
|
Proceeds from issuance of long-term debt
|
—
|
|
|
299,070
|
|
|
100,000
|
|
Proceeds from borrowings under revolving credit facility
|
40,000
|
|
|
—
|
|
|
—
|
|
Capitalized debt issuance costs
|
—
|
|
|
(363
|
)
|
|
(193
|
)
|
Payment of deferred acquisition holdback
|
—
|
|
|
—
|
|
|
(270
|
)
|
Repurchase of common stock
|
(377,193
|
)
|
|
(405,513
|
)
|
|
(159,503
|
)
|
Exercise of employee stock options
|
381
|
|
|
288
|
|
|
1,116
|
|
Tax benefit from stock-based compensation
|
2,456
|
|
|
2,057
|
|
|
3,089
|
|
Proceeds from issuance of common stock under employee benefit plans
|
3,702
|
|
|
3,525
|
|
|
3,247
|
|
Distribution to redeemable noncontrolling interest
|
(45
|
)
|
|
—
|
|
|
—
|
|
Net cash used in financing activities
|
(349,382
|
)
|
|
(107,237
|
)
|
|
(52,514
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(136,357
|
)
|
|
45,393
|
|
|
71,248
|
|
Cash and cash equivalents at beginning of period
|
241,886
|
|
|
196,493
|
|
|
125,245
|
|
Cash and cash equivalents at end of period
|
$
|
105,529
|
|
|
$
|
241,886
|
|
|
$
|
196,493
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
Redeemable Noncontrolling Interest
|
|
Class A
|
|
Class B
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Total
|
|
|
Balance, December 31, 2013
|
26,290
|
|
|
$
|
3
|
|
|
1,382
|
|
|
$
|
—
|
|
|
4,283
|
|
|
$
|
(546,570
|
)
|
|
$
|
196,908
|
|
|
$
|
1,049,884
|
|
|
$
|
(333
|
)
|
|
$
|
699,892
|
|
|
|
$
|
—
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
179,293
|
|
|
—
|
|
|
179,293
|
|
|
|
—
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,027
|
)
|
|
(1,027
|
)
|
|
|
—
|
|
Issuance of common stock
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,247
|
|
|
—
|
|
|
—
|
|
|
3,247
|
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,077
|
|
|
—
|
|
|
—
|
|
|
10,077
|
|
|
|
—
|
|
Repurchase of common stock
|
(978
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
978
|
|
|
(159,503
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(159,503
|
)
|
|
|
—
|
|
Tax benefit from exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,089
|
|
|
—
|
|
|
—
|
|
|
3,089
|
|
|
|
—
|
|
Other
|
108
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,116
|
|
|
—
|
|
|
—
|
|
|
1,116
|
|
|
|
—
|
|
Balance, December 30, 2014
|
25,443
|
|
|
$
|
3
|
|
|
1,382
|
|
|
$
|
—
|
|
|
5,261
|
|
|
$
|
(706,073
|
)
|
|
$
|
214,437
|
|
|
$
|
1,229,177
|
|
|
$
|
(1,360
|
)
|
|
$
|
736,184
|
|
|
|
$
|
—
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
149,342
|
|
|
—
|
|
|
149,342
|
|
|
|
(17
|
)
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,669
|
)
|
|
(3,669
|
)
|
|
|
—
|
|
Issuance of common stock
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,527
|
|
|
—
|
|
|
—
|
|
|
3,527
|
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,086
|
|
|
—
|
|
|
—
|
|
|
15,086
|
|
|
|
—
|
|
Repurchase of common stock
|
(2,229
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,229
|
|
|
(405,513
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(405,513
|
)
|
|
|
—
|
|
Tax benefit from exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,057
|
|
|
—
|
|
|
—
|
|
|
2,057
|
|
|
|
—
|
|
Redeemable noncontrolling interest resulting from acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
3,998
|
|
Other
|
109
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
286
|
|
|
—
|
|
|
—
|
|
|
286
|
|
|
|
—
|
|
Balance, December 29, 2015
|
23,346
|
|
|
$
|
3
|
|
|
1,382
|
|
|
$
|
—
|
|
|
7,490
|
|
|
$
|
(1,111,586
|
)
|
|
$
|
235,393
|
|
|
$
|
1,378,519
|
|
|
$
|
(5,029
|
)
|
|
$
|
497,300
|
|
|
|
$
|
3,981
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
145,574
|
|
|
—
|
|
|
145,574
|
|
|
|
(333
|
)
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
905
|
|
|
905
|
|
|
|
—
|
|
Issuance of common stock
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,702
|
|
|
—
|
|
|
—
|
|
|
3,702
|
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,662
|
|
|
—
|
|
|
—
|
|
|
15,662
|
|
|
|
—
|
|
Repurchase of common stock
|
(1,843
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,843
|
|
|
(377,193
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(377,193
|
)
|
|
|
—
|
|
Tax benefit from exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,456
|
|
|
—
|
|
|
—
|
|
|
2,456
|
|
|
|
—
|
|
Distribution to redeemable noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(45
|
)
|
Other
|
52
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
381
|
|
|
—
|
|
|
—
|
|
|
381
|
|
|
|
—
|
|
Balance, December 27, 2016
|
21,577
|
|
|
$
|
3
|
|
|
1,382
|
|
|
$
|
—
|
|
|
9,333
|
|
|
$
|
(1,488,779
|
)
|
|
$
|
257,594
|
|
|
$
|
1,524,093
|
|
|
$
|
(4,124
|
)
|
|
$
|
288,787
|
|
|
|
$
|
3,603
|
|
The accompanying notes are an integral part of the consolidated financial statements.
1. Nature of Business
Panera Bread Company and its subsidiaries (the “Company”) operate a retail bakery-cafe business and franchising business under the concept names Panera Bread
®
, Saint Louis Bread Co.
®
, and Paradise Bakery & Café
®
. As of
December 27, 2016
, retail operations consisted of
902
Company-owned bakery-cafes and
1,134
franchise-operated bakery-cafes. The Company specializes in meeting consumer dining needs by providing high-quality food, including the following: fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, pasta dishes, salads, and cafe beverages, and targets urban and suburban dwellers and workers by offering a premium specialty bakery-cafe experience with a neighborhood emphasis. Bakery-cafes are located in urban, suburban, strip mall and regional mall locations and currently operate in the United States and Canada. Bakery-cafes use fresh dough for their artisan and sourdough breads and bagels. In addition to the in-bakery-cafe dining experience, the Company offers Panera Catering, a nation-wide catering service that provides breakfast assortments, sandwiches, salads, soups, pasta dishes, drinks, and bakery items using the same high-quality, fresh ingredients enjoyed in bakery-cafes. As of
December 27, 2016
, the Company’s fresh dough and other product operations, which supply fresh dough, produce, tuna, and cream cheese items daily to most Company-owned and franchise-operated bakery-cafes, consisted of
22
Company-owned and
two
franchise-operated fresh dough facilities.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (the “SEC”). The consolidated financial statements consist of the accounts of Panera Bread Company, its wholly owned direct and indirect subsidiaries and investees it controls. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the fiscal 2016 presentation.
Fiscal Year
The Company's fiscal year ends on the last Tuesday in December. Each of the fiscal years ended December 27, 2016 (“fiscal 2016”), December 29, 2015 (“fiscal 2015”), and December 30, 2014 (“fiscal 2014”) had 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity at the time of purchase of three months or less to be cash equivalents. The Company maintains cash balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances and believes credit risk to be minimal.
Trade Accounts Receivable, net and Other Accounts Receivable
Trade accounts receivable, net consists primarily of amounts due to the Company from its franchisees for purchases of fresh dough and other products from the Company’s fresh dough facilities, royalties due to the Company from franchisee sales, information technology services provided to franchisees, and receivables from credit card and catering on-account sales.
As of
December 27, 2016
, other accounts receivable consisted primarily of
$30.9 million
due from wholesalers of the Company’s gift cards,
$9.8 million
due from income tax refunds, and tenant allowances due from landlords of
$6.1 million
. As of
December 29, 2015
, other accounts receivable consisted primarily of
$29.8 million
due from income tax refunds,
$29.5 million
due from wholesalers of the Company’s gift cards, and tenant allowances due from landlords of
$11.8 million
.
The Company does not require collateral and maintains reserves for potential uncollectible accounts based on historical losses and existing economic conditions, when relevant. The allowance for doubtful accounts at
December 27, 2016
and
December 29, 2015
was
$0.2 million
and
$0.1 million
, respectively.
Inventories
Inventories, which consist of food products, paper goods, and supplies, are valued at the lower of cost or market, with cost determined under the first-in, first-out method.
Property and Equipment, net
Property, equipment, leasehold improvements, and land are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated using the straight-line method over the shorter of their estimated useful lives or the related reasonably assured lease term. Costs incurred in connection with the development of internal-use software are capitalized in accordance with the accounting standard for internal-use software, and are amortized over the expected useful life of the software. The estimated useful lives used for financial statement purposes are:
|
|
|
|
|
|
Leasehold improvements
|
15
|
-
|
20
|
years
|
Machinery and equipment
|
3
|
-
|
15
|
years
|
Furniture and fixtures
|
2
|
-
|
7
|
years
|
Computer hardware and software
|
3
|
-
|
5
|
years
|
Interest, to the extent it is incurred in connection with the construction of new locations or facilities, is capitalized. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Interest incurred for such purposes was
$0.3 million
,
$0.2 million
, and
$0.1 million
for fiscal
2016
, fiscal
2015
, and fiscal 2014, respectively.
Upon retirement or sale, the cost of assets disposed and their related accumulated depreciation are removed from the Company’s accounts. Any resulting gain or loss is credited or charged to operations. Maintenance and repairs are charged to expense when incurred, while certain improvements are capitalized. The total amounts expensed for maintenance and repairs was
$72.7 million
,
$67.3 million
, and
$62.0 million
, for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
Goodwill
The Company evaluates goodwill for impairment on an annual basis during our fourth quarter, or more frequently if circumstances indicate impairment might exist. Goodwill is evaluated for impairment through the comparison of fair value of our reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. If, based on the review of the qualitative factors, the Company determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the Company bypasses the required two-step impairment test. If the Company does not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely- than-not greater than its carrying value, the Company performs a quantitative assessment and calculates the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, there is an indication that impairment may exist. The amount of impairment is determined by comparing the implied fair value of the reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment loss for the difference.
The fair value of a reporting unit is the price a willing buyer would pay for the reporting unit and is estimated using a discounted cash flow model. The discounted cash flow estimate is based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions.
No goodwill impairment charges were recorded during fiscal 2016 and fiscal 2015. The Company recorded a goodwill impairment charge of
$2.1 million
during fiscal 2014. This charge was recorded in other (income) expense, net in the Consolidated Statements of Income.
Other Intangible Assets, net
Other intangible assets, net consist primarily of favorable lease agreements, re-acquired territory rights, and trademarks. The Company amortizes the fair value of favorable lease agreements over the remaining related lease terms at the time of the acquisition, which ranged from approximately
four
years to
19
years as of
December 27, 2016
. The fair value of re-acquired territory rights was based on the present value of the acquired bakery-cafe cash flows. The Company amortizes the fair value of re-acquired territory rights over the remaining contractual terms of the re-acquired territory rights at the time of the acquisition, which ranged from approximately
seven
years to
20
years as of
December 27, 2016
. The fair value of trade names and trademarks is amortized over their estimated useful life of
eight
years and
22
years, respectively.
The Company reviews intangible assets with finite lives for impairment when events or circumstances indicate these assets might be impaired. When warranted, the Company tests intangible assets with finite lives for impairment using historical cash flows and other relevant facts and circumstances as the primary basis for an estimate of future cash flows. The Company recognized a
$0.3 million
impairment loss in fiscal 2016 related to re-acquired territory rights in a market the Company exited. There were
no
other intangible asset impairment losses recorded during fiscal 2015 and fiscal 2014. There can be no assurance that future intangible asset impairment tests will not result in a charge to earnings.
Impairment of Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The Company compares anticipated undiscounted cash flows from the related long-lived assets of a bakery-cafe or fresh dough facility with their respective carrying values to determine if the long-lived assets are recoverable. If the sum of the anticipated undiscounted cash flows for the long-lived assets is less than their carrying value, an impairment loss is recognized for the difference between the anticipated discounted cash flows, which approximates fair value, and the carrying value of the long-lived assets. In performing this analysis, management estimates cash flows based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions. Estimates of cash flow may differ from actual cash flow due to, among other things, economic conditions, changes to the Company's business model or changes in operating performance. The long-term financial forecasts that management utilizes represent the best estimate that management has at this time and management believes that the underlying assumptions are reasonable.
The Company recognized impairment losses of
$4.0 million
,
$3.8 million
, and
$0.9 million
during fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively, related to distinct, under-performing Company-owned bakery-cafes. For fiscal 2016,
$2.9 million
of the impairment losses were recorded in other operating expenses and
$1.1 million
of the impairment losses were recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2015, the impairment losses were recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2014, the impairment losses were recorded in other operating expenses in the Consolidated Statements of Income.
Self-Insurance Reserves
The Company is self-insured for a significant portion of its workers’ compensation, group health, and general, auto, and property liability insurance with varying deductibles of as much as
$0.8 million
for individual claims, depending on the type of claim. The Company also purchases aggregate stop-loss and/or layers of loss insurance in many categories of loss. The Company utilizes third party actuarial experts’ estimates of expected losses based on statistical analyses of the Company's actual historical data and historical industry data to determine required self-insurance reserves. The assumptions are closely reviewed, monitored, and adjusted when warranted by changing circumstances. The estimated accruals for these liabilities could be affected if actual experience related to the number of claims and cost per claim differs from these assumptions and historical trends. Based on information known at
December 27, 2016
, the Company believes it has provided adequate reserves for its self-insurance exposure. As of
December 27, 2016
and
December 29, 2015
, self-insurance reserves were
$41.7 million
and
$37.2 million
, respectively, and were included in accrued expenses in the Consolidated Balance Sheets. The total amounts expensed for self-insurance were
$49.2 million
,
$54.3 million
, and
$50.7 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if the Company determines
it is more likely than not that all or some portion of the deferred tax asset will not be recognized. As of
December 27, 2016
and
December 29, 2015
, the Company had recorded a valuation allowance related to deferred tax assets of the Company's Canadian operations of
$11.3 million
and
$5.3 million
, respectively.
In accordance with the authoritative guidance on income taxes, the Company establishes additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more likely than not to be sustained upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. In the normal course of business, the Company and its subsidiaries are examined by various federal, state, foreign, and other tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. The Company routinely assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known. The Company classifies estimated interest and penalties related to the unrecognized tax benefits as a component of the provision for income taxes in the Consolidated Statements of Income.
Capitalization of Certain Development Costs
The Company accounts for construction costs in accordance with the accounting standard for real estate in the Company’s consolidated financial statements. The Company capitalizes direct costs clearly associated with the acquisition, development, design, and construction of bakery-cafe locations and fresh dough facilities as these costs have a future benefit to the Company. The types of specifically identifiable costs capitalized by the Company include primarily payroll and payroll related taxes and benefit costs incurred by those individuals directly involved in development activities, including the acquisition, development, design, and construction of bakery-cafes and fresh dough facilities. The Company does not consider for capitalization payroll or payroll-related costs incurred by individuals that do not directly support the acquisition, development, design, and construction of bakery-cafes and fresh dough facilities. The Company uses an activity-based methodology to determine the amount of costs incurred for Company-owned projects, which are capitalized, and those for franchise-operated projects and general and administrative activities, which both are expensed as incurred. If the Company subsequently makes a determination that sites for which development costs have been capitalized will not be acquired or developed, any previously capitalized development costs are expensed and included in general and administrative expenses in the Consolidated Statements of Income.
The Company capitalized
$9.9 million
,
$9.8 million
, and
$10.4 million
of direct costs related to the development of Company-owned bakery-cafes during fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively. The Company amortizes capitalized development costs for each bakery-cafe and fresh dough facility using the straight-line method over the shorter of their estimated useful lives or the related reasonably assured lease term and includes such amounts in depreciation and amortization in the Consolidated Statements of Income. In addition, the Company assesses the recoverability of capitalized costs through the performance of impairment analyses on an individual bakery-cafe and fresh dough facility basis pursuant to the accounting standard for property and equipment, net specifically related to the accounting for the impairment or disposal of long-lived assets.
Deferred Financing Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense based on the related debt agreement using the straight-line method, which approximates the effective interest method.
Revenue Recognition
The Company records revenues from bakery-cafe sales upon delivery of the related food and other products to the customer. Revenues from fresh dough and other product sales to franchisees are recorded upon delivery to the franchisees. Sales of branded products outside of the Company's bakery-cafes are recognized upon delivery to customers.
Franchise royalties are generally paid weekly based on the percentage of franchisee sales specified in each Area Development Agreement (“ADA”) (generally
five percent
of net sales). Royalties are recognized as revenue in the period in which the sales are reported to have occurred based on contractual royalty rates applied to the net franchise sales. Franchise royalties also include certain information technology-related fees for access to and the usage of proprietary systems. Royalties were
$153.1 million
,
$134.6 million
, and
$120.1 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively. Franchise fees are the result of the sale of area development rights and the sale of individual franchise locations to third parties. The initial franchise fee is generally
$35,000
per bakery-cafe to be developed under the ADA. Of this fee,
$5,000
is generally paid at the time of the signing of the ADA and is recognized as revenue when it is received as it is non-refundable and the Company has to perform no other service to earn this fee. The remainder of the fee is paid at the time an individual franchise agreement is signed and is recognized as revenue upon the opening of the bakery-cafe. Franchise fees were
$2.2 million
,
$4.0 million
, and
$3.6 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
The Company sells gift cards that do not have an expiration date and from which the Company does not deduct non-usage fees from outstanding gift card balances. Gift cards are redeemable at both Company-owned and franchise-operated bakery-cafes. Gift cards sold by either Company-owned bakery-cafes or through wholesalers and redeemed at franchise-operated bakery-cafes reduce the Company's gift card liability but do not result in the recognition of revenue. When gift cards are redeemed at Company-owned bakery-cafes, the Company recognizes revenue and reduces the gift card liability. When the Company determines the likelihood of the gift card being redeemed by the customer is remote ("gift card breakage"), based upon Company-specific historical redemption patterns, and there is no legal obligation to remit the unredeemed gift card balance in the relevant jurisdiction, gift card breakage is recorded as a reduction of general and administrative expenses in the Consolidated Statements of Income; however, such gift cards will continue to be honored. During fiscal
2016
, fiscal
2015
, and fiscal
2014
, the Company recognized gift card breakage as a reduction of general and administrative expenses of
$11.2 million
,
$6.9 million
, and
$4.9 million
, respectively. Incremental direct costs related to the sale of gift cards are deferred until the associated gift card is redeemed or breakage is deemed appropriate. These deferred incremental direct costs are reflected as a reduction of the unredeemed gift card liability, net which is a component of accrued expenses in the Consolidated Balance Sheets and, when recognized, as a component of other operating expenses in the Consolidated Statements of Income.
The Company maintains a customer loyalty program referred to as MyPanera in which customers earn rewards based on registration in the program and purchases within Panera Bread bakery-cafes. The Company records the full retail value of loyalty program rewards as a reduction of net bakery-cafe sales and a liability is established within accrued expenses in the Consolidated Balance Sheets as rewards are earned while considering historical redemption rates. Fully earned rewards generally expire if unredeemed after
60
days. Partially earned awards generally expire if inactive for a period of one year. The accrued liability related to the Company’s loyalty program was
$3.2 million
and
$2.7 million
as of
December 27, 2016
and
December 29, 2015
, respectively. Costs associated with coupons are classified as a reduction of net bakery-cafe sales in the period in which the coupon is redeemed.
Advertising Costs
National advertising fund and marketing administration contributions received from franchise-operated bakery-cafes are consolidated with those from the Company in the Company’s consolidated financial statements. Liabilities for unexpended funds received from franchisees are included in accrued expenses in the Consolidated Balance Sheets. The Company’s contributions to the national advertising and marketing administration funds are recorded as part of other operating expenses and general and administrative expenses in the Consolidated Statements of Income, while the Company’s own local bakery-cafe media costs are recorded as part of other operating expenses in the Consolidated Statements of Income. The Company records advertising costs as expense in the period in which the costs are incurred. The Company’s advertising costs include national, regional, and local expenditures utilizing primarily radio, billboards, social networking, Internet, television, and print. The total amounts recorded as advertising expense were
$71.6 million
,
$68.5 million
, and
$65.5 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
Pre-Opening Expenses
Pre-opening expenses directly associated with the opening of new bakery-cafe locations, which consists primarily of pre-opening rent expense, labor, and food costs incurred during in-store training and preparation for opening, but exclude manager training costs which are included in labor expense in the Consolidated Statements of Income, are expensed when incurred.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term as defined in the accounting standard for leases. The reasonably assured lease term for most bakery-cafe leases is the initial non-cancelable lease term plus
one
renewal option period, which generally equates to an aggregate of
15
years. The reasonably assured lease term on most fresh dough facility leases is the initial non-cancelable lease term plus
one
to
two
renewal option periods, which generally equates to an aggregate of
20
years. In addition, certain of the Company’s lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing at a date other than the date of initial occupancy. The Company includes any rent escalations and construction period and other rent holidays in its determination of straight-line rent expense. Therefore, rent expense for new locations is charged to expense beginning on the date at which the Company has the right to control the use of the property. Many of the Company's lease agreements also contain provisions that require additional rental payments based upon net bakery-cafe sales volume, which the Company refers to as contingent rent. Contingent rent is accrued each period as the liability is incurred, in addition to the straight-line rent expense noted above. This results in variability in occupancy expense over the term of the lease in bakery-cafes where the Company pays contingent rent.
The Company records landlord allowances and incentives received as deferred rent in the Consolidated Balance Sheets based on their short-term or long-term nature. This deferred rent is amortized on a straight-line basis over the reasonably assured lease term as a reduction of rent expense. Additionally, payments made by the Company and reimbursed by the landlord for improvements
deemed to be lessor assets have no impact on the Consolidated Statements of Income. The Company considers improvements to be a lessor asset if all of the following criteria are met:
|
|
•
|
the lease specifically requires the lessee to make the improvement;
|
|
|
•
|
the improvement is fairly generic;
|
|
|
•
|
the improvement increases the fair value of the property to the lessor; and
|
|
|
•
|
the useful life of the improvement is longer than the lease term.
|
The Company reports the period to period change in the landlord receivable within the operating activities section of its Consolidated Statements of Cash Flows.
Earnings Per Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the fiscal year. Diluted earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding and dilutive securities outstanding during the year.
Foreign Currency Translation
The Company has
one
Company-owned bakery-cafe,
one
Company-owned fresh dough facility, and
18
franchise-operated bakery-cafes in Canada which use the Canadian Dollar as their functional currency. Assets and liabilities are translated into U.S. dollars using the current exchange rate in effect at the balance sheet date, while revenues and expenses are translated at the weighted-average exchange rate during the fiscal period. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets and Consolidated Statements of Changes in Equity and Redeemable Noncontrolling Interest. Gains and losses resulting from foreign currency transactions have not historically been significant and are included in other (income) expense, net in the Consolidated Statements of Income.
Derivative Instruments
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company does not enter into derivative instruments for trading purposes. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the derivative's gain or loss is reported as component of other comprehensive income and recorded in accumulated other comprehensive income, net of tax in the Consolidated Balance Sheets. The gain or loss is subsequently reclassified into earnings when the hedged exposure affects earnings. To the extent that the change in the fair value of the contract corresponds to the change in the value of the anticipated transaction, the hedge is considered effective. The remaining change in fair value of the contract represents the ineffective portion, which is immediately recorded in the Consolidated Statements of Income. Once established, cash flow hedges generally remain designated as such until the hedged item impacts earnings, or the anticipated transaction is no longer likely to occur.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, and other accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. The fair value of the Company's interest rate swaps are determined based on a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis reflects the contractual terms of the derivatives and uses observable market-based inputs, including interest rate curves and credit spreads.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the accounting standard for stock-based compensation, which requires the Company to measure and record compensation expense in the Company’s consolidated financial statements for all stock-based compensation awards using a fair value method. The Company maintains several stock-based incentive plans under which the Company may grant incentive stock options, non-statutory stock options and stock settled appreciation rights (collectively, “option awards”) and restricted stock and restricted stock units to certain directors, officers, employees and consultants. The Company also offers a stock purchase plan where employees may purchase the Company’s common stock each calendar quarter through payroll deductions at
85 percent
of market value on the purchase date and the Company recognizes compensation expense on the
15 percent
discount.
For option awards, fair value is determined using the Black-Scholes option pricing model, while restricted stock is valued using the closing stock price on the date of grant. The Black-Scholes option pricing model requires the input of subjective assumptions. These assumptions include estimating the expected term until the option awards are either exercised or canceled; the expected volatility of the Company’s stock price, for a period approximating the expected term; the risk-free interest rate with a maturity that approximates the option awards expected term; and the dividend yield based on the Company’s anticipated dividend payout over the expected term of the option awards. These assumptions are evaluated and revised, as necessary, to reflect market conditions and historical experience. Stock-based compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on historical experience. The fair value of the awards expected to vest is amortized over the vesting period. Options and restricted stock generally vest
25 percent
after two years and thereafter
25 percent
each year for the next three years and options generally have a
six
-year term. Stock-based compensation expense is included in general and administrative expenses in the Consolidated Statements of Income.
Asset Retirement Obligations
The Company recognizes the future cost to comply with lease obligations at the end of a lease as it relates to tangible long-lived assets in accordance with the accounting standard for the asset retirement and environmental obligations (“ARO”) in the Company’s consolidated financial statements. Most lease agreements require the Company to restore the leased property to its original condition, including removal of certain long-lived assets the Company has installed, at the end of the lease. A liability for the fair value of an asset retirement obligation along with a corresponding increase to the carrying value of the related long-lived asset is recorded at the time a lease agreement is executed. The Company amortizes the amount added to property and equipment, net and recognizes accretion expense in connection with the discounted liability over the reasonably assured lease term. The estimated liability is based on the Company’s historical experience in closing bakery-cafes, fresh dough facilities, and support centers and the related external cost associated with these activities. Revisions to the liability could occur due to changes in estimated retirement costs or changes in lease terms. As of
December 27, 2016
and
December 29, 2015
, the net ARO asset included in property and equipment, net was
$8.9 million
and
$10.3 million
, respectively, and the net ARO liability included in other long-term liabilities was
$20.4 million
and
$19.5 million
, respectively. ARO accretion expense was
$0.8 million
,
$1.0 million
, and
$0.6 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
Variable Interest Entities
The Company applies relevant accounting standards for variable interest entities (“VIE”), which defines the process for how an enterprise determines which party consolidates a VIE. The enterprise that consolidates the VIE (the primary beneficiary) is defined as the enterprise with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The Company does not possess any ownership interests in franchise entities or other affiliates. The franchise agreements are designed to provide the franchisee with key decision-making ability to enable it to oversee its operations and to have a significant impact on the success of the franchise, while the Company’s decision-making rights are related to protecting its brand. Based upon its analysis of all the relevant facts and considerations of the franchise entities and other affiliates, the Company has concluded that these entities are not variable interest entities and they have not been consolidated as of
December 27, 2016
. The Company also evaluated all of the applicable criteria for an entity subject to consolidation and concluded its interest in Tatte Holdings, LLC (“Tatte”) is a VIE requiring consolidation. See
Note 3
, Business Combinations and Divestitures, for further information on the Tatte acquisition.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the effect this standard will have on the Company's consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. This update requires the income tax impact of an intra-entity sale or transfer of an asset other than inventory to be recognized when the sale or transfer occurs, rather than when the asset has been sold to an outside party. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the effect this standard will have on the Company's consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This update addresses how certain cash inflows and outflows are classified in the statement of cash flows
to eliminate existing diversity in practice. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the effect this standard will have on the Company's consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update simplifies 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. This update is effective for annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating the overall impact that ASU 2016-09 will have on the Company's consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This update will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Based on a preliminary assessment, the Company expects the standard to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its Consolidated Balance Sheets at the beginning of the earliest period presented. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company early adopted ASU 2015-17 during fiscal 2016 on a retrospective basis. As a result of the retrospective adoption, the Company reclassified current deferred income tax assets of
$34.5 million
as of December 29, 2015 to long-term deferred income tax liabilities in the Consolidated Balance Sheets. Adoption of this standard did not impact the Company's results of operations or cash flows in either the current or previous interim and annual reporting periods.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. This update eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. This update is effective for annual and interim reporting periods beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments for provisional amounts that occur after the effective date with early adoption permitted for financial statements that have not been issued. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. This update provides guidance on the subsequent measurement of inventory, which changes the measurement from lower of cost or market to lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. The Company adopted ASU 2014-15 during the thirteen weeks ended December 27, 2016. The adoption of ASU 2014-15 did not impact the Company's consolidated financial statements or disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, delaying the effective date for adoption. The update is now effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The update permits the use of either the retrospective or cumulative effect transition method.
The FASB has also issued the several standards which provide additional clarification and implementation guidance on the previously issued ASU 2014-09 and have the same effective date as the original standard.
The Company is currently evaluating the overall impact that ASU 2014-09 will have on the Company's consolidated financial statements, as well as the expected timing and method of adoption. Based on a preliminary assessment, the Company has determined that the adoption will change the timing of recognition of gift card breakage income, which is currently recognized using the
remote method. The new guidance will require application of the proportional method. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
3. Business Combinations and Divestitures
In February 2015, the Company announced a plan to refranchise approximately
50
to
150
Company-owned bakery-cafes. As of December 27, 2016, the Company had completed the sale of
102
Company-owned bakery-cafes.
The Company did not classify any assets or liabilities as held for sale as of December 27, 2016. As of December 29, 2015, the Company classified as held for sale the assets and certain liabilities of
35
Company-owned bakery-cafes the Company expected to sell during the next 12 months. The Company classifies assets as held for sale and ceases depreciation of the assets when those assets meet the held for sale criteria, as defined in GAAP. The following summarizes the financial statement carrying amounts of assets and liabilities associated with the bakery-cafes classified as held for sale (in thousands):
|
|
|
|
|
|
December 29, 2015
|
Inventories
|
$
|
738
|
|
Property and equipment, net
|
26,462
|
|
Goodwill
|
1,499
|
|
Assets held for sale
|
$
|
28,699
|
|
|
|
Deferred rent
|
$
|
2,410
|
|
Asset retirement obligation
|
535
|
|
Liabilities associated with assets held for sale
|
$
|
2,945
|
|
Assets held for sale were valued using Level 3 inputs, primarily representing information obtained from signed letters of intent. Costs to sell are considered in the estimates of fair value for those assets included in assets held for sale in the Company's Consolidated Balance Sheets.
The following summarizes activity associated with the refranchising initiative recorded in the caption entitled refranchising loss in the Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
Loss on assets held for sale (1)
|
$
|
6,112
|
|
|
$
|
10,999
|
|
Lease termination costs and impairment of long-lived assets (1)
|
2,858
|
|
|
5,461
|
|
Professional fees, severance, and other
|
795
|
|
|
1,088
|
|
Loss (gain) on sale of bakery-cafes (1)
|
(693
|
)
|
|
(440
|
)
|
Refranchising loss
|
$
|
9,072
|
|
|
$
|
17,108
|
|
|
|
(1)
|
Certain of the amounts for the fiscal years ended December 27, 2016 and December 29, 2015 are included in the caption entitled refranchising loss in the Consolidated Statements of Cash Flows as a non-cash adjustment to reconcile net income to net cash provided by operating activities.
|
Refranchising Initiative - Fiscal 2016
During the thirteen weeks ended March 29, 2016,
20
Company-owned bakery-cafes that the Company concluded no longer met all of the criteria required to be classified as held for sale were reclassified to held and used at their fair value.
On May 3, 2016, the Company sold substantially all of the assets of
15
bakery-cafes in the Portland, Oregon market to an existing franchisee for a purchase price of approximately
$15.2 million
, which resulted in a gain on sale of approximately
$0.5 million
.
On September 13, 2016, Panera International Holdings, Inc., a subsidiary of Panera Bread Company, sold all of its shares of stock of Panera Bread Ltd., as successor to Panera Bread ULC, a Canadian subsidiary, to a new franchisee for a purchase price of approximately
$5.0 million
, with
$0.5 million
payable in cash and
$4.5 million
payable in the form of a promissory note. The promissory note bears interest at the Wall Street Journal prime rate plus
2.00 percent
and is payable in equal quarterly installments
over five years. As of December 27, 2016, the carrying amount of the promissory note approximates fair value as its interest rate approximates current market rates (Level 2 inputs).
The sale of Panera Bread Ltd. transferred ownership of substantially all of the assets of
12
bakery-cafes in the Ontario, Canada market to the new franchisee. The Company recorded a gain on the sale of approximately
$0.2 million
during the thirteen weeks ended September 27, 2016. During the thirteen weeks ended June 28, 2016, prior to the sale of the shares of stock of Panera Bread Ltd., the Company recognized a
$6.1 million
loss on assets held for sale related to the
12
bakery-cafes in Ontario, Canada whose ownership transferred in the sale. Following the close of the sale on September 13, 2016, the Panera Bread Ltd. operations are no longer being consolidated as a subsidiary in the Company's consolidated financial statements.
Refranchising Initiative - Fiscal 2015
On March 3, 2015, the Company sold substantially all of the assets of
one
bakery-cafe to an existing franchisee for cash proceeds of approximately
$3.2 million
, which resulted in a gain on sale of approximately
$2.6 million
.
The Company recognized impairment losses of
$3.8 million
during the thirteen weeks ended March 31, 2015 related to certain under-performing bakery-cafes in one of the refranchised markets for which the Company had signed letters of intent, which were excluded from the proposed sale.
On July 14, 2015, the Company sold substantially all of the assets of
29
bakery-cafes in the Boston market to an existing franchisee for a purchase price of approximately
$19.6 million
, including
$0.5 million
for inventory on hand, with
$2.0 million
held in escrow for certain holdbacks, and recognized a loss on sale of
$0.6 million
. The holdback amount is primarily to satisfy any indemnification obligations of the Company and will be held in escrow until
July 14, 2017
, the two-year anniversary of the transaction closing date, with the remaining balance of the holdback amount reverting to the Company.
On October 7, 2015, the Company sold substantially all of the assets of
45
bakery-cafes in the Seattle and Northern California markets to a new franchisee for a purchase price of approximately
$26.8 million
, including
$0.9 million
for inventory on hand, and recognized a loss on sale of
$1.6 million
.
During the thirteen weeks ended December 29, 2015,
eight
Company-owned bakery-cafes that the Company concluded no longer met all of the criteria required to be classified as held for sale were reclassified to held and used at their depreciated carrying value, assuming depreciation had not ceased while classified as held for sale.
Tatte Acquisition
On December 7, 2015, the Company acquired a
50.01 percent
interest in Tatte, for a cash contribution of
$4.0 million
(the “Tatte Acquisition”). Tatte is a bakery-cafe concept with locations in the Boston area. The Company evaluated all of the applicable criteria for an entity subject to consolidation under the provisions of the variable interest model and concluded that Tatte is a VIE requiring consolidation. See
Note 15
, Redeemable Noncontrolling Interest, for further information on the Company's accounting for the noncontrolling interest. The pro-forma impact of the Tatte Acquisition on prior periods is not presented, as the impact is not material to reported results.
4. Fair Value Measurements
The following summarizes assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
December 27, 2016:
|
Interest rate swaps
|
$
|
2,216
|
|
|
$
|
—
|
|
|
$
|
2,216
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
2,216
|
|
|
$
|
—
|
|
|
$
|
2,216
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
December 29, 2015:
|
Cash equivalents
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
2,552
|
|
|
$
|
—
|
|
|
$
|
2,552
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
2,552
|
|
|
$
|
—
|
|
|
$
|
2,552
|
|
|
$
|
—
|
|
The fair value of the Company's cash equivalents is based on quoted market prices for identical securities. The fair value of the Company's interest rate swaps are determined based on a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis reflects the contractual terms of the derivatives and uses observable market-based inputs, including interest rate curves and credit spreads.
5. Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
Food:
|
|
|
|
Fresh dough facilities:
|
|
|
|
Raw materials
|
$
|
3,697
|
|
|
$
|
3,561
|
|
Finished goods
|
266
|
|
|
446
|
|
Bakery-cafes:
|
|
|
|
Raw materials
|
16,378
|
|
|
14,819
|
|
Paper goods
|
3,434
|
|
|
3,656
|
|
Total
|
$
|
23,775
|
|
|
$
|
22,482
|
|
6. Property and Equipment, net
Major classes of property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
Leasehold improvements
|
$
|
753,827
|
|
|
$
|
683,296
|
|
Machinery and equipment
|
365,207
|
|
|
338,500
|
|
Computer hardware and software
|
252,950
|
|
|
192,521
|
|
Furniture and fixtures
|
170,692
|
|
|
159,653
|
|
Construction in progress
|
66,290
|
|
|
97,416
|
|
Smallwares
|
33,910
|
|
|
29,056
|
|
Land
|
5,601
|
|
|
1,604
|
|
|
1,648,477
|
|
|
1,502,046
|
|
Less: accumulated depreciation
|
(845,718
|
)
|
|
(725,798
|
)
|
Property and equipment, net
|
$
|
802,759
|
|
|
$
|
776,248
|
|
The Company recorded depreciation expense related to these assets of
$145.7 million
,
$126.7 million
, and
$115.4 million
during fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
7. Goodwill
The following is a reconciliation of the beginning and ending balances of the Company’s goodwill by reportable segment at
December 27, 2016
and
December 29, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Bakery-
Cafe Operations
|
|
Franchise
Operations
|
|
Fresh Dough and Other Product Operations
|
|
Total
|
Balance as of December 30, 2014
|
$
|
117,149
|
|
|
$
|
1,934
|
|
|
$
|
1,695
|
|
|
$
|
120,778
|
|
Acquisition of Tatte
|
2,512
|
|
|
—
|
|
|
—
|
|
|
2,512
|
|
Goodwill classified as held for sale
|
(1,499
|
)
|
|
—
|
|
|
—
|
|
|
(1,499
|
)
|
Balance as of December 29, 2015
|
$
|
118,162
|
|
|
$
|
1,934
|
|
|
$
|
1,695
|
|
|
$
|
121,791
|
|
Reclassifications (1)
|
586
|
|
|
—
|
|
|
—
|
|
|
586
|
|
Balance as of December 27, 2016
|
$
|
118,748
|
|
|
$
|
1,934
|
|
|
$
|
1,695
|
|
|
$
|
122,377
|
|
|
|
(1)
|
During fiscal 2016, the Company concluded that
20
bakery-cafes no longer met all of the criteria required to be classified as held for sale. The assets and liabilities associated with the bakery-cafes, including goodwill allocated to the bakery-cafes, were reclassified to held and used.
|
The Company did not record a goodwill impairment charge in either fiscal 2016 or fiscal 2015. The Company recorded a
$2.1 million
full impairment charge of goodwill for the Canadian bakery-cafe operations reporting unit during fiscal 2014.
8. Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Trademark
|
$
|
7,080
|
|
|
$
|
(2,720
|
)
|
|
$
|
4,360
|
|
|
$
|
7,080
|
|
|
$
|
(2,283
|
)
|
|
$
|
4,797
|
|
Re-acquired territory rights
|
97,865
|
|
|
(48,724
|
)
|
|
49,141
|
|
|
97,865
|
|
|
(40,432
|
)
|
|
57,433
|
|
Favorable leases
|
5,012
|
|
|
(3,694
|
)
|
|
1,318
|
|
|
5,012
|
|
|
(3,365
|
)
|
|
1,647
|
|
Total other intangible assets
|
$
|
109,957
|
|
|
$
|
(55,138
|
)
|
|
$
|
54,819
|
|
|
$
|
109,957
|
|
|
$
|
(46,080
|
)
|
|
$
|
63,877
|
|
Amortization expense on these intangible assets for fiscal
2016
, fiscal
2015
, and fiscal
2014
, was approximately
$8.6 million
,
$8.7 million
, and
$8.7 million
, respectively. Future amortization expense on these intangible assets as of
December 27, 2016
is estimated to be approximately:
$8.7 million
in fiscal
2017
,
$8.6 million
in fiscal
2018
,
$8.2 million
in fiscal
2019
,
$7.2 million
in fiscal
2020
,
$6.0 million
in fiscal
2021
and
$16.1 million
thereafter.
9. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27,
2016
|
|
December 29,
2015
|
Unredeemed gift cards, net
|
$
|
134,291
|
|
|
$
|
123,363
|
|
Compensation and related employment taxes
|
77,742
|
|
|
64,882
|
|
Insurance
|
41,720
|
|
|
37,208
|
|
Capital expenditures
|
39,679
|
|
|
53,914
|
|
Taxes, other than income tax
|
23,269
|
|
|
20,206
|
|
Advertising
|
13,362
|
|
|
5,242
|
|
Occupancy costs
|
9,694
|
|
|
8,594
|
|
Fresh dough and other product operations
|
9,594
|
|
|
10,854
|
|
Deferred revenue
|
6,642
|
|
|
5,690
|
|
Utilities
|
5,057
|
|
|
4,581
|
|
Loyalty program
|
3,239
|
|
|
2,653
|
|
Other
|
44,348
|
|
|
22,277
|
|
Total
|
$
|
408,637
|
|
|
$
|
359,464
|
|
10. Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
2014 Term Loan
|
$
|
100,000
|
|
|
$
|
100,000
|
|
2015 Term Loan
|
281,250
|
|
|
296,250
|
|
Borrowings under the 2015 Credit Agreement
|
40,000
|
|
|
—
|
|
2015 Note Payable
|
7,608
|
|
|
10,144
|
|
Debt assumed in Tatte acquisition
|
—
|
|
|
1,147
|
|
Aggregate unamortized lender fees and issuance costs
|
(1,035
|
)
|
|
(1,341
|
)
|
Total carrying amount
|
427,823
|
|
|
406,200
|
|
Current portion of long-term debt
|
17,229
|
|
|
17,229
|
|
Long-term debt
|
$
|
410,594
|
|
|
$
|
388,971
|
|
The following table summarizes the Company's long-term debt maturities as of
December 27, 2016
by fiscal year (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Total
|
$
|
17,536
|
|
|
17,536
|
|
|
117,536
|
|
|
276,250
|
|
|
$
|
428,858
|
|
Term Loans
On June 11, 2014, the Company entered into a term loan agreement (the “2014 Term Loan Agreement”) with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2014 Term Loan Agreement provides for an unsecured term loan in the amount of
$100 million
(the “2014 Term Loan”). The 2014 Term Loan is scheduled to mature on
July 11, 2019
, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the 2014 Term Loan Agreement. The Company incurred lender fees and issuance costs totaling
$0.2 million
in connection with the issuance of the 2014 Term Loan. The lender fees and issuance costs are being amortized to expense over the term of the 2014 Term Loan.
On July 16, 2015, the Company entered into a term loan agreement (the “2015 Term Loan Agreement”) with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2015 Term Loan Agreement provides for an unsecured term loan in the amount of
$300 million
(the “2015 Term Loan”). The 2015 Term Loan is scheduled to mature on
July 16, 2020
, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the 2015 Term Loan Agreement, and is amortized in equal quarterly installments in an amount equal to
1.25 percent
of the original principal amount of the 2015 Term Loan. The Company incurred lender fees and issuance costs totaling
$1.4 million
in connection with the issuance of the 2015 Term Loan. The lender fees and issuance costs are being amortized to expense over the term of the 2015 Term Loan. As of December 27, 2016,
$14.7 million
of the 2015 Term Loan's carrying amount is presented as the current portion of long-term debt in the Consolidated Balance Sheets.
On February 1, 2017, the Company entered into a term loan agreement (the “2017 Term Loan Agreement”) with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2017 Term Loan Agreement provides for up to two unsecured drawdowns of a term loan in the aggregate principal amount of up to
$200 million
(the “2017 Term Loan”). The 2017 Term Loan is scheduled to mature on
February 1, 2022
, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the 2017 Term Loan Agreement. On February 1, 2017, the Company made a
$100 million
drawdown on the 2017 Term Loan.
Each of the 2014 Term Loan, 2015 Term Loan, and 2017 Term Loan bears interest at a rate equal to, at the Company's option, (1) the Eurodollar rate plus a margin ranging from
1.00 percent
to
1.50 percent
depending on the Company’s consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus
0.50 percent
or (c) the Eurodollar rate plus
1.00 percent
, plus a margin ranging from
0.00 percent
to
0.50 percent
depending on the Company’s consolidated leverage ratio. The Company’s obligations under the 2014 Term Loan Agreement, 2015 Term Loan Agreement, and 2017 Term Loan Agreement are guaranteed by certain of its direct and indirect subsidiaries.
The weighted-average interest rate for the 2014 Term Loan, including the amortization of lender fees and issuance costs and the impact of the Company's interest rate swaps, was
2.24 percent
,
1.21 percent
, and
1.15 percent
for fiscal
2016
, fiscal
2015
, and fiscal 2014, respectively. The weighted-average interest rate for the 2015 Term Loan, including the amortization of lender fees and issuance costs and the impact of the Company's interest rate swaps, was
2.02 percent
and
1.33 percent
for fiscal
2016
and fiscal 2015, respectively. As of
December 27, 2016
, the carrying amounts of the 2014 Term Loan and 2015 Term Loan approximate fair value as the interest rates approximate current market rates (Level 2 inputs).
On July 16, 2015, in order to hedge the variability in cash flows from changes in benchmark interest rates, the Company entered into two forward-starting interest rate swap agreements with an aggregate initial notional value of
$242.5 million
. On January 9, 2017, the Company entered into consecutive forward-starting interest rate swaps agreements with an initial notional value of
$200 million
. The forward-starting interest rate swaps have been designated as cash flow hedging instruments. See
Note 11
, Derivative Financial Instruments, for information on the Company's interest rate swaps.
Installment Payment Agreement
On
September 15, 2015
, the Company entered into a Master Installment Payment Agreement (the “Master IPA”) with PNC Equipment Finance, LLC (“PNC”) pursuant to which PNC financed the Company's purchase of hardware, software, and services associated with new storage virtualization and disaster recovery systems. The Master IPA provides for a secured note payable in the amount of
$12.7 million
(the “2015 Note Payable”), payable in
five
annual installments beginning November 1, 2015 and each September 1st thereafter. As of
December 27, 2016
, there was
$7.6 million
outstanding under the Master IPA, and
$2.5 million
of the Master IPA is presented as the current portion of long-term debt in the Consolidated Balance Sheets.
Revolving Credit Agreement
On July 16, 2015, the Company entered into a credit agreement (the “2015 Credit Agreement”), with Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and each lender from time to time party thereto. The 2015 Credit Agreement provides for an unsecured revolving credit facility of
$250 million
that will become due on
July 16, 2020
, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the 2015 Credit Agreement. The 2015 Credit Agreement provides that the Company may select interest rates under the credit facility equal to, at the Company's option, (1) the Eurodollar rate plus a margin ranging from
1.00 percent
to
1.50 percent
depending on the Company’s consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus
0.50 percent
or (c) the Eurodollar rate plus
1.00 percent
, plus a margin ranging from
0.00 percent
to
0.50 percent
depending on the Company’s consolidated leverage ratio. As of
December 27, 2016
, the Company had
$40 million
outstanding under the 2015 Credit Agreement. The weighted-average interest rate for borrowings under the 2015 Credit Agreement was
1.68 percent
for fiscal 2016.
The 2014 Term Loan Agreement, 2015 Term Loan Agreement, 2015 Credit Agreement, and 2017 Term Loan Agreement contain customary affirmative and negative covenants, including covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, such term loan and credit agreements contain various financial covenants that, among other things, require the Company to satisfy two financial covenants at the end of each fiscal quarter: (1) a consolidated leverage ratio less than or equal to
3.00
to
1.00
, and (2) a consolidated fixed charge coverage ratio of greater than or equal to
2.00
to
1.00
. As of
December 27, 2016
, the Company was in compliance with all covenant requirements.
11. Derivative Financial Instruments
The Company enters into derivative instruments solely for risk management purposes. To the extent the Company's cash-flow hedging instruments are effective in offsetting the variability in the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria
,
changes in the derivatives' fair value are not included in current earnings but are included in AOCI. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. By using these instruments, the Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. The Company minimizes this credit risk by entering into transactions with high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from changes in interest rates. The Company minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
On July 16, 2015, the Company entered into two forward-starting interest rate swap agreements with an aggregate initial notional value of
$242.5 million
to hedge a portion of the cash flows of its term loan borrowings. On January 9, 2017, the Company entered into consecutive forward-starting interest rate swaps agreements with an initial notional value of
$200 million
to hedge a portion of the cash flows of its term loan borrowings. For each of the swaps, the Company has agreed to exchange with a counterparty the difference between fixed and variable interest amounts calculated by reference to an agreed-upon principal amount.
The following table summarizes the Company's interest rate swaps as of
December 27, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Date
|
|
Effective Date
|
|
Term (in Years)
|
|
Initial Notional Amount (in thousands)
|
|
Fixed Rate
|
July 16, 2015
|
|
July 11, 2016
|
|
4
|
|
$
|
100,000
|
|
|
1.75
|
%
|
July 16, 2015
|
|
July 18, 2016
|
|
5
|
|
142,500
|
|
|
1.97
|
%
|
The notional amount for the interest rate swap with an effective date of
July 18, 2016
decreases quarterly by
$1.9 million
over the five-year term of the interest rate swap beginning in September 2016.
The interest rate swaps, which have been designated and qualify as cash flow hedges, are recorded at fair value in the Consolidated Balance Sheets. The following table summarizes the estimated fair value of the Company's interest rate swaps as of December 27, 2016 and December 29, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
December 27, 2016
|
|
December 29, 2015
|
Accrued expenses
|
$
|
2,078
|
|
|
$
|
—
|
|
Other long-term liabilities
|
138
|
|
|
2,552
|
|
Total
|
$
|
2,216
|
|
|
$
|
2,552
|
|
Changes in fair value of the interest rate swaps are recorded as a component of AOCI in the Consolidated Balance Sheets. The Company reclassifies the effective gain or loss from AOCI to interest expense in the Consolidated Statements of Income at the time of the forecasted transaction. The following table presents pre-tax gains and losses on the interest rate swaps recognized in other comprehensive income (“OCI”) and reclassified from AOCI to earnings for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27,
2016
|
|
December 29,
2015
|
|
December 30,
2014
|
Net gains (losses) recognized in OCI before reclassifications
|
$
|
(703
|
)
|
|
$
|
(1,543
|
)
|
|
$
|
—
|
|
Net (gains) losses reclassified from AOCI to earnings
|
906
|
|
|
—
|
|
|
—
|
|
A net of tax loss of approximately
$1.3 million
is expected to be reclassified from AOCI to earnings within the next twelve months. The Company did not recognize a gain or loss due to hedge ineffectiveness during fiscal 2016, fiscal 2015, or fiscal 2014.
The Company does not hold or use derivative instruments for trading purposes. The Company does not have any derivatives that are not designated as hedging instruments and has not designated any non-derivatives as hedging instruments.
12. Share Repurchase Authorization
On August 23, 2012, the Company's Board of Directors approved a three year share repurchase authorization of up to
$600 million
of the Company's Class A common stock (the “2012 repurchase authorization”), pursuant to which the Company repurchased shares on the open market under a Rule 10b5-1 plan. On June 5, 2014, the Company's Board of Directors terminated the 2012 repurchase authorization.
On June 5, 2014, the Company's Board of Directors approved a three year share repurchase authorization of up to
$600 million
of the Company's Class A common stock (the “2014 repurchase authorization”), pursuant to which the Company repurchased shares on the open market under a Rule 10b5-1 plan. On April 15, 2015, the Company's Board of Directors approved an increase of the 2014 repurchase authorization to
$750 million
. On May 19, 2016, the Company's Board of Directors terminated the 2014 repurchase authorization.
On May 19, 2016, the Company's Board of Directors approved a new three year share repurchase authorization of up to
$600 million
of the Company's Class A common stock (the “2016 repurchase authorization”), pursuant to which the Company may repurchase shares from time to time on the open market or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by the Company as treasury stock. The 2016 repurchase authorization may be modified, suspended, or discontinued by the Company's Board of Directors at any time. There was approximately
$397.7 million
available under the 2016 repurchase authorization as of December 27, 2016.
The following table summarizes share repurchase activity for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27,
2016
|
|
December 29,
2015
|
|
December 30,
2014
|
2016 Repurchase Authorization
|
|
|
|
|
|
Shares repurchased
|
975,673
|
|
|
|
|
|
Average price per share
|
$
|
207.31
|
|
|
|
|
|
Aggregate purchase price (in millions)
|
$
|
202.3
|
|
|
|
|
|
2014 Repurchase Authorization
|
|
|
|
|
|
Shares repurchased
|
839,759
|
|
|
2,201,719
|
|
|
427,521
|
|
Average price per share
|
$
|
201.15
|
|
|
$
|
181.65
|
|
|
$
|
155.78
|
|
Aggregate purchase price (in millions)
|
$
|
168.9
|
|
|
$
|
399.9
|
|
|
$
|
66.6
|
|
2012 Repurchase Authorization
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
514,357
|
|
Average price per share
|
|
|
|
|
$
|
170.15
|
|
Aggregate purchase price (in millions)
|
|
|
|
|
$
|
87.5
|
|
Total
|
|
|
|
|
|
Shares repurchased
|
1,815,432
|
|
|
2,201,719
|
|
|
941,878
|
|
Average price per share
|
$
|
204.46
|
|
|
$
|
181.65
|
|
|
$
|
163.62
|
|
Aggregate purchase price (in millions)
|
$
|
371.2
|
|
|
$
|
399.9
|
|
|
$
|
154.1
|
|
In addition to repurchases under the 2016 repurchase authorization, 2014 repurchase authorization, and 2012 repurchase authorization, the Company has repurchased shares of its Class A common stock through a share repurchase authorization approved by its Board of Directors from participants of the Panera Bread 2006 Stock Incentive Plan and the Panera Bread 2015 Stock Incentive Plan, which are netted and surrendered as payment for applicable tax withholding on the vesting of their restricted stock. Shares surrendered by the participants are repurchased by the Company pursuant to the terms of those plans and the applicable award agreements and not pursuant to publicly announced share repurchase authorizations. See
Note 16
, Stockholders' Equity, for further information with respect to the Company’s repurchase of the shares.
13. Commitments and Contingencies
Lease Commitments
The Company is obligated under operating leases for its bakery-cafes, fresh dough facilities and trucks, and support centers. Lease terms for its trucks are generally for
five
to
seven
years. The reasonably assured lease term for most bakery-cafe and support center leases is the initial non-cancelable lease term plus one renewal option period, which generally equates to an aggregate of
15 years
. The reasonably assured lease term for most fresh dough facility leases is the initial non-cancelable lease term plus one to two renewal periods, which generally equates to an aggregate of
20 years
. Lease terms generally require the Company to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. Certain bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts, scheduled rent increases during the lease terms, and/or rental payments commencing at a date other than the date of initial occupancy.
Aggregate minimum requirements under non-cancelable operating leases, excluding contingent payments and income from subleases, as of
December 27, 2016
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
$
|
157,659
|
|
|
152,397
|
|
|
144,192
|
|
|
133,532
|
|
|
122,524
|
|
|
601,572
|
|
|
$
|
1,311,876
|
|
Rental expense under operating leases was approximately
$142.6 million
,
$146.6 million
, and
$138.0 million
in fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively, which included contingent (i.e., percentage rent) expense of
$2.3 million
,
$2.0 million
, and
$1.5 million
, respectively.
The Company complies with lease obligations at the end of a lease as it relates to tangible long-lived assets, in accordance with the accounting guidance for asset retirement obligations. The liability as of
December 27, 2016
and
December 29, 2015
was
$20.4 million
and
$19.5 million
, respectively, and is included in other long-term liabilities in the Consolidated Balance Sheets.
In connection with the Company’s relocation of its St. Louis, Missouri support center in fiscal 2010, it simultaneously entered into a capital lease for certain personal property and purchased municipal industrial revenue bonds of a similar amount from St. Louis County, Missouri. As of
December 27, 2016
and
December 29, 2015
, the Company held industrial revenue bonds and had recorded a capital lease of
$0.7 million
and
$0.9 million
in the Consolidated Balance Sheets, respectively.
The following table summarizes sale-leaseback transactions for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Number of bakery-cafes sold and leased back
|
3
|
|
|
4
|
|
|
6
|
|
Proceeds from sale-leaseback transactions
|
$
|
8,940
|
|
|
$
|
10,095
|
|
|
$
|
12,900
|
|
The leases have been classified as either capital or operating leases, depending on the substance of the transaction, and have initial terms of
15 years
, with renewal options of up to
20 years
. The Company realized gains on these sales totaling
$0.1 million
,
$0.4 million
, and
$0.3 million
during fiscal 2016, fiscal 2015, and fiscal 2014, respectively, which have been deferred and are being recognized on a straight-line basis over the reasonably assured lease term for the leases.
Lease Guarantees
As of
December 27, 2016
, the Company has guaranteed the operating leases of
98
franchisee locations, which the Company accounted for in accordance with the accounting requirements for guarantees. These guarantees are primarily a result of the Company's sales of Company-owned bakery-cafes to franchisees, pursuant to which the Company exercised its right to assign the lease for the bakery-cafe but remain liable to the landlord for the remaining lease term in the event of a default by the assignee. These guarantees expire on various dates from
July 15, 2020
to
February 28, 2049
, with a maximum potential amount of future rental payments of approximately
$294.8 million
as of
December 27, 2016
. The obligation from these leases will decrease over time as these operating leases expire. The Company has not recorded a liability for these guarantees because the fair value of these lease guarantees was determined by the Company to be insignificant individually, and in the aggregate, based on an analysis of the facts and circumstances of each such lease and each such assignee’s performance, and the Company did not believe it was probable that it would be required to perform under any guarantees at the time the guarantees were issued. The Company has not had to make any payments related to any of these guaranteed leases. Applicable assignees continue to have primary liability for these operating leases. As of
December 27, 2016
, future commitments under these leases were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
$
|
15,027
|
|
|
15,454
|
|
|
15,646
|
|
|
15,781
|
|
|
15,924
|
|
|
216,924
|
|
|
$
|
294,756
|
|
Employee Commitments
The Company has executed confidential and proprietary information and non-competition agreements (“non-compete agreements”) with certain employees. These non-compete agreements contain a provision whereby employees would be due a certain number of weeks of their salary if their employment was terminated by the Company as specified in the non-compete agreement. The Company has not recorded a liability for these amounts potentially due employees. Rather, the Company will record a liability for these amounts when an amount becomes due to an employee in accordance with the appropriate authoritative literature. As of
December 27, 2016
, the total amount potentially owed employees under these non-compete agreements was
$24.2 million
.
Legal Proceedings
On July 2, 2014, a purported class action lawsuit was filed against one of the Company's subsidiaries by Jason Lofstedt, a former employee of one of the Company's subsidiaries. The lawsuit was filed in the California Superior Court, County of Riverside. The complaint alleges, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest periods, and violations of California's Unfair Competition Law. The complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper. In addition, several other purported class action lawsuits based on similar claims and seeking similar relief were filed against the subsidiary: on October 30, 2015 in the California Superior Court, County of San Bernardino
by Jazmin Dabney, a former subsidiary employee; on November 3, 2015 in the United States District Court, Eastern District of California by Clara Manchester, a former subsidiary employee; and on November 30, 2015 in the California Superior Court, County of Yolo by Tanner Maginnis, a current subsidiary assistant manager. On May 6, 2016, the parties of all four pending cases reached a Memorandum of Understanding For Three Settlement Classes regarding the class action lawsuits. Under the terms of the agreement, we agreed to pay an immaterial amount to purported class members, plaintiffs' attorneys' fees, Private Attorney General Act payments, and costs of administering the settlement. The Memorandum of Agreement contains no admission of wrongdoing. The terms and conditions of the parties’ settlement agreement have received preliminary approval from California Superior Courts. The Company maintained an appropriate accrual in accrued expenses for this settlement in the Company's Consolidated Balance Sheets as of December 27, 2016.
On June 26, 2016, a purported class action lawsuit was filed against the Company by Jacqueline Friscia, an employee of one of the Company’s subsidiaries. The lawsuit was filed in the United States District Court for the District of New Jersey. The complaint alleges, among other things, violations of the Fair Labor Standards Act and the New Jersey Wage and Hour Law on behalf of the plaintiff and all similarly situated non-exempt assistant managers. The complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper. The Company has retained counsel to represent it in this matter and believes that it has meritorious defenses to the allegations asserted in the case.
In addition to the legal matters described above, the Company is subject to various legal proceedings, claims, and litigation that arise in the ordinary course of its business. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation, including the matter described above, is inherently uncertain. The Company believes accruals for these matters are adequately provided for in its consolidated financial statements. The Company does not believe the ultimate resolution of these actions will have a material adverse effect on its consolidated financial statements. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than is currently anticipated, could materially and adversely affect its consolidated financial statements.
Other
The Company is subject to on-going federal and state income tax audits and sales and use tax audits. The Company does not believe the ultimate resolution of these actions will have a material adverse effect on its consolidated financial statements. However, a significant increase in the number of these audits, or one or more audits under which the Company incurs greater liabilities than is currently anticipated, could materially and adversely affect its consolidated financial statements. The Company believes accruals for these matters are adequately provided for in its consolidated financial statements.
14. Income Taxes
The components of income (loss) before income taxes, by tax jurisdiction, were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
United States
|
$
|
240,843
|
|
|
$
|
242,860
|
|
|
$
|
285,564
|
|
Canada
|
(11,344
|
)
|
|
(6,288
|
)
|
|
(8,270
|
)
|
Income before income taxes
|
$
|
229,499
|
|
|
$
|
236,572
|
|
|
$
|
277,294
|
|
The provision for income taxes consisted of the following for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Current taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
72,757
|
|
|
$
|
83,005
|
|
|
$
|
73,234
|
|
U.S. state and local
|
15,169
|
|
|
16,242
|
|
|
14,306
|
|
Total current taxes
|
87,926
|
|
|
99,247
|
|
|
87,540
|
|
Deferred taxes:
|
|
|
|
|
|
U.S. federal
|
(3,062
|
)
|
|
(9,737
|
)
|
|
9,609
|
|
U.S. state and local
|
(606
|
)
|
|
(2,263
|
)
|
|
950
|
|
Foreign
|
—
|
|
|
—
|
|
|
(98
|
)
|
Total deferred taxes
|
$
|
(3,668
|
)
|
|
$
|
(12,000
|
)
|
|
$
|
10,461
|
|
Total provision for income taxes
|
$
|
84,258
|
|
|
$
|
87,247
|
|
|
$
|
98,001
|
|
A reconciliation of the statutory U.S. federal income tax rate to the Company's effective tax rate is as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Statutory U.S. federal rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S. state and local income taxes, net of federal tax benefit
|
4.1
|
|
|
4.1
|
|
|
4.1
|
|
U.S. federal tax credits
|
(1.9
|
)
|
|
(1.8
|
)
|
|
(1.4
|
)
|
Other, including discrete tax items
|
(0.5
|
)
|
|
(0.4
|
)
|
|
(2.4
|
)
|
Effective tax rate
|
36.7
|
%
|
|
36.9
|
%
|
|
35.3
|
%
|
The
decrease
in the effective tax rate from fiscal
2015
to fiscal
2016
was primarily a result of an increased charitable deduction as a result of the Tax Relief Extension Act of 2015, partially offset by the recognition of
$7.0 million
of refranchising charges for which the Company cannot currently realize the associated tax benefit.
The increase in the effective tax rate for fiscal 2016 and 2015 as compared to fiscal 2014 was primarily due to the discrete income tax benefits reported during fiscal 2014 related to additional federal and state tax credits and an increased deduction for domestic production activities.
The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
Deferred tax assets:
|
|
|
|
Accrued expenses
|
$
|
83,411
|
|
|
$
|
75,360
|
|
Capital loss carryforward
|
10,968
|
|
|
—
|
|
Stock-based compensation
|
5,739
|
|
|
4,705
|
|
Other
|
1,926
|
|
|
2,160
|
|
Foreign net operating loss carryforward
|
358
|
|
|
4,938
|
|
Less: valuation allowance
|
(11,326
|
)
|
|
(5,299
|
)
|
Total deferred tax assets
|
$
|
91,076
|
|
|
$
|
81,864
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
$
|
(96,437
|
)
|
|
$
|
(92,580
|
)
|
Goodwill and other intangibles
|
(26,940
|
)
|
|
(25,252
|
)
|
Total deferred tax liabilities
|
$
|
(123,377
|
)
|
|
$
|
(117,832
|
)
|
Net deferred tax liability
|
$
|
(32,301
|
)
|
|
$
|
(35,968
|
)
|
In assessing the realization of deferred tax assets, the Company considers the generation of future taxable income and utilizes a more likely than not standard to determine if deferred tax assets will be realized. Based on this assessment, the Company has recorded a valuation allowance of
$11.3 million
and
$5.3 million
as of December 27, 2016 and December 29, 2015, respectively, as a full valuation allowance against all Canadian deferred tax assets, including the net operating loss carryforwards of the Company's Canadian operations. The Company’s capital loss carryforwards expire in 2021 and the Canadian net operating loss carryforwards expire in 2036.
As of December 27, 2016 and December 29, 2015, the amount of unrecognized tax benefits that, if recognized in full, would be recorded as a reduction of income tax expense was
$6.9 million
and
$6.1 million
, inclusive of applicable interest and penalties and net of federal tax benefits, respectively. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense in the Consolidated Statements of Income. These amounts were expense of
$0.2 million
, income of
$0.2 million
, and expense of
$0.3 million
, during fiscal 2016, fiscal 2015, and fiscal 2014, respectively. Accrued interest and penalties were
$1.1 million
and
$0.9 million
as of December 27, 2016 and December 29, 2015, respectively.
The following is a rollforward of the Company’s liability for unrecognized tax benefits for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Beginning balance
|
$
|
6,668
|
|
|
$
|
6,455
|
|
|
$
|
2,999
|
|
Tax positions related to the current year:
|
|
|
|
|
|
Additions
|
1,131
|
|
|
1,339
|
|
|
1,536
|
|
Tax positions related to prior years:
|
|
|
|
|
|
Additions
|
422
|
|
|
—
|
|
|
2,671
|
|
Reductions
|
—
|
|
|
(483
|
)
|
|
—
|
|
Settlements
|
(113
|
)
|
|
(200
|
)
|
|
(131
|
)
|
Expiration of statutes of limitations
|
(556
|
)
|
|
(443
|
)
|
|
(620
|
)
|
Ending balance
|
$
|
7,552
|
|
|
$
|
6,668
|
|
|
$
|
6,455
|
|
The U.S. Internal Revenue Service has completed exams of the Company’s U.S. federal tax returns for fiscal years 2012 and prior. While certain state returns in fiscal years 2002 through 2012 may be subject to future assessment by taxing authorities, the Company is no longer subject to examination in Canada and most states in fiscal years prior to 2013.
It is reasonably possible that the Company’s liability for unrecognized tax benefits with respect to the Company’s uncertain tax positions will increase or decrease during the next twelve months; however, an estimate of the amount or range of the change cannot be made at this time.
15. Redeemable Noncontrolling Interest
On December 7, 2015, the Company acquired a
50.01 percent
interest in Tatte, for a cash contribution of
$4.0 million
. The Company evaluated all of the applicable criteria for an entity subject to consolidation under the provisions of the variable interest model and concluded that Tatte is a VIE requiring consolidation.
The
49.99 percent
noncontrolling interest holder holds a written put option which allows them to sell their noncontrolling interest to the Company upon the occurrence of certain events. In addition, the Company holds a call option to acquire the noncontrolling interest upon the occurrence of certain events. Under each of these alternatives, the exercise price will be based on a contractually defined multiple of cash flows, subject to certain limitations (the “redemption value”), which is not a fair value measurement and is payable in cash. As the exercise of the written put option is not solely within the Company's control, the noncontrolling interest in Tatte is classified as temporary equity and reflected in redeemable noncontrolling interest between the Liabilities and Stockholders' Equity sections of the Company's Consolidated Balance Sheets.
The noncontrolling interest is adjusted each period for comprehensive income attributable to the noncontrolling interest and changes in the Company's ownership interest in Tatte, if any. If it is considered probable the noncontrolling interest will become redeemable, an additional adjustment to the carrying value of the noncontrolling interest may be required if the redemption value exceeds the current carrying value. Changes in the carrying value of the noncontrolling interest related to a change in the redemption value will be recorded against permanent equity and will not affect net income. While there is no impact on net income, the redeemable noncontrolling interest will impact the Company's calculation of earnings per share. Utilizing the two-class method, the Company will adjust the numerator of the earnings per share calculation to reflect the changes in the excess, if any, of the noncontrolling interest's redemption value over the noncontrolling interest carrying amount. As of December 27, 2016, the Company has not recorded any such adjustments as it is not considered probable that the noncontrolling interest will become redeemable.
16. Stockholders’ Equity
Common Stock
The holders of Class A common stock are entitled to
one
vote for each share owned. The holders of Class B common stock are entitled to
three
votes for each share owned. Each share of Class B common stock has the same dividend and liquidation rights as each share of Class A common stock. Each share of Class B common stock is convertible, at the stockholder’s option, into Class A common stock on a
one
-for-one basis. At
December 27, 2016
, the Company had reserved
3,175,433
shares of its Class A common stock for issuance upon exercise of awards granted under the Company’s 1992 Equity Incentive Plan, 2001 Employee, Director, and Consultant Stock Option Plan, the 2006 Stock Incentive Plan, and the 2015 Stock Incentive Plan, and upon conversion of Class B common stock.
Registration Rights
At
December 27, 2016
,
94.9 percent
of the outstanding Class B common stock was owned by the Company’s Chairman of the Board and Chief Executive Officer (the “Chairman”). Pursuant to stock subscription agreements, certain holders of Class B common stock, including the Chairman, can require the Company under certain circumstances to register their shares under the Securities Act of 1933, or have included in certain registrations all or part of such shares at the Company’s expense.
Preferred Stock
The Company is authorized to issue
2,000,000
shares of Class B preferred stock with a par value of
$0.0001
. The voting, redemption, dividend, liquidation rights, and other terms and conditions are determined by the Board of Directors upon approval of issuance. There were
no
shares issued or outstanding in fiscal
2016
and
2015
.
Treasury Stock
Pursuant to the terms of the Panera Bread 2006 Stock Incentive Plan and the Panera Bread 2015 Stock Incentive Plan, and the applicable award agreements, the Company repurchased
27,478
shares of Class A common stock at a weighted-average cost of
$216.42
per share during fiscal
2016
,
28,018
shares of Class A common stock at a weighted-average cost of
$196.78
per share during fiscal
2015
, and
35,461
shares of Class A common stock at a weighted-average cost of
$151.17
per share during fiscal
2014
, as were surrendered by participants as payment of applicable tax withholdings on the vesting of restricted stock and SSARs.
Shares so surrendered by the participants are repurchased by the Company at fair market value pursuant to the terms of those plans and the applicable award agreements and not pursuant to publicly announced share repurchase authorizations. The shares surrendered to the Company by participants and repurchased by the Company are currently held by the Company as treasury stock.
Share Repurchase Authorization
During fiscal
2016
, fiscal
2015
, and fiscal
2014
, the Company purchased shares of Class A common stock under authorized share repurchase authorizations. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by the Company as treasury stock. See
Note 12
, Share Repurchase Authorization, for further information with respect to the Company’s share repurchase authorizations.
Accumulated Other Comprehensive Income (Loss)
AOCI reported on the Company's Consolidated Balance Sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on derivative instruments designated and qualifying as cash flow hedges.
The following tables summarize changes in accumulated other comprehensive income (loss), net of tax, for fiscal 2016 and fiscal 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Cash Flow Hedging Instruments
|
|
Total
|
December 27, 2016
|
|
|
|
|
|
Net gains (losses), beginning of period
|
$
|
(3,486
|
)
|
|
$
|
(1,543
|
)
|
|
$
|
(5,029
|
)
|
Net gains (losses) recognized in OCI before reclassifications
|
702
|
|
|
(703
|
)
|
|
(1
|
)
|
Net (gains) losses reclassified from AOCI to earnings
|
—
|
|
|
906
|
|
|
906
|
|
Other comprehensive income (loss), net of tax
|
702
|
|
|
203
|
|
|
905
|
|
Net gains (losses), end of period
|
$
|
(2,784
|
)
|
|
$
|
(1,340
|
)
|
|
$
|
(4,124
|
)
|
|
|
|
|
|
|
December 29, 2015
|
|
|
|
|
|
Net gains (losses), beginning of period
|
$
|
(1,360
|
)
|
|
$
|
—
|
|
|
$
|
(1,360
|
)
|
Net gains (losses) recognized in OCI before reclassifications
|
(2,126
|
)
|
|
(1,543
|
)
|
|
(3,669
|
)
|
Net (gains) losses reclassified from AOCI to earnings
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
(2,126
|
)
|
|
(1,543
|
)
|
|
(3,669
|
)
|
Net gains (losses), end of period
|
$
|
(3,486
|
)
|
|
$
|
(1,543
|
)
|
|
$
|
(5,029
|
)
|
17. Stock-Based Compensation
As of
December 27, 2016
, the Company had one active stock-based compensation plan, the 2015 Stock Incentive Plan (the “2015 Plan”), and had incentive stock options, non-statutory stock options and stock settled appreciation rights (collectively “option awards”) and restricted stock outstanding (but can make no future grants) under three other stock-based compensation plans, the 1992 Equity Incentive Plan (the “1992 Plan”), the 2006 Stock Incentive plan (the "2006 Plan"), and the 2001 Employee, Director, and Consultant Stock Option Plan (the “2001 Plan”).
2015 Stock Incentive Plan
In fiscal 2015, the Company’s Board of Directors adopted the 2015 Plan, which was approved by the Company’s stockholders in May 2015. The 2015 Plan provides for the grant of up to
1,750,000
shares of the Company’s Class A common stock (subject to adjustment in the event of stock splits or other similar events) as option awards, restricted stock, restricted stock units, and other stock-based awards. As a result of stockholder approval of the 2015 Plan, effective as of May 21, 2015, the Company no longer grants stock options, restricted stock or other awards under the 2006 Plan. The Company’s Board of Directors administers the 2015 Plan and has sole discretion to grant awards under the 2015 Plan. The Company’s Board of Directors has delegated the authority to grant awards under the 2015 Plan, other than to the Company’s Chairman of the Board and Chief Executive Officer, to the Company’s Compensation and Management Development Committee (the “Compensation Committee”).
Long-Term Incentive Program
In fiscal 2005, the Company adopted the 2005 Long Term Incentive Plan (the “2005 LTIP”) as a sub-plan under the 2001 Employee, Director, and Consultant Stock Option Plan (the “2001 Plan”) and the 1992 Equity Incentive Plan (the “1992 Plan”). In May 2006, the Company amended the 2005 LTIP to provide that the 2005 LTIP is a sub-plan under the 2006 Plan. In August 2015, the Company further amended the 2005 LTIP to provide that the 2005 LTIP is a sub-plan under the 2015 Plan. Under the amended 2005 LTIP, certain directors, officers, employees, and consultants, subject to approval by the Compensation Committee, may be selected as participants eligible to receive a percentage of their annual salary in future years, subject to the terms of the 2006 Plan. This percentage is based on the participant's level in the Company. In addition, the payment of this incentive can be made in several forms based on the participant's level including performance awards (payable in cash or common stock or some combination of cash and common stock as determined by the Compensation Committee), restricted stock, choice awards of restricted stock and/or stock settled appreciation rights (“SSARs”) (or, if determined by the Compensation Committee, stock options), or deferred annual bonus match awards. The Compensation Committee may consider the Company’s performance relative to the performance of its peers in determining the payout of performance awards, as further discussed below.
For fiscal
2016
, fiscal
2015
and fiscal
2014
, compensation expense related to performance awards, restricted stock, options, SSARs, and deferred annual bonus match was
$18.1 million
,
$16.4 million
, and
$11.1 million
, respectively, net of capitalized compensation expense of
$1.7 million
,
$1.5 million
, and
$1.1 million
, respectively.
Performance awards under the 2005 LTIP are earned by participants based on achievement of performance goals established by the Compensation Committee. The performance period relating to the performance awards is a
three
-fiscal-year period. The performance goals, including each performance metric, weighting of each metric, and award levels for each metric, for such awards are communicated to each participant and are based on various predetermined earnings metrics. The performance awards are earned based on achievement of predetermined earnings performance metrics at the end of the
three
-fiscal-year performance period, assuming continued employment, and after the Compensation Committee’s consideration of the Company’s performance relative to the performance of its peers. The performance awards range from
0 percent
to
300 percent
of the participant's salary based on their level in the Company and the level of achievement of each performance metric. However, the actual award payment will be adjusted, based on the Company’s performance over a
three
-consecutive fiscal year measurement period, and any other factors as determined by the Compensation Committee. The actual award payment for the performance award component could double the individual’s targeted award payment, if the Company achieves maximum performance in all of its performance metrics, subject to any adjustments as determined by the Compensation Committee. The performance awards have generally been paid
100 percent
in cash but may be paid in some other combination of cash and common stock as determined by the Compensation Committee. In fiscal 2015, in lieu of a performance award, the Compensation Committee granted a restricted stock award and a choice award, each which will vest in full on the third anniversary of the grant date in an aggregate amount having a value at the time of grant equal to the participant's targeted performance award payment. For fiscal 2016, fiscal 2015, and fiscal 2014, compensation expense related to the performance awards was
$4.1 million
,
$2.0 million
, and
$1.2 million
, respectively, net of capitalized compensation expense of
$0.2 million
,
$0.1 million
, and
$0.1 million
, respectively.
Restricted stock of the Company under the 2005 LTIP is granted at no cost to participants. While participants are generally entitled to voting rights with respect to their respective shares of restricted stock, participants are generally not entitled to receive accrued cash dividends, if any, on restricted stock unless and until such shares have vested. The Company does not currently pay a dividend, and has no current plans to do so. For awards of restricted stock granted to date under the 2005 LTIP, restrictions generally limit the sale or transfer of these shares during a
five
year period whereby the restrictions lapse on
25 percent
of these shares after
two
years and thereafter
25 percent
each year for the next
three
years, subject to continued employment with the Company. In the event a participant is no longer employed by the Company, any unvested shares of restricted stock held by that participant will be forfeited. Upon issuance of restricted stock under the 2005 LTIP, unearned compensation is recorded at fair value on the date of grant to stockholders’ equity and subsequently amortized to expense over the
five
year restriction period. The fair value of restricted stock is based on the market value of the Company’s stock on the grant date. As of
December 27, 2016
, there was
$43.8 million
of total unrecognized compensation cost related to restricted stock included in additional paid-in capital in the Consolidated Balance Sheets. This unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately
3.4
years. The Company uses historical data to estimate pre-vesting forfeiture rates. For fiscal
2016
, fiscal
2015
, and fiscal
2014
, restricted stock expense was
$12.8 million
,
$12.6 million
, and
$8.3 million
, respectively, net of capitalized compensation expense of
$1.4 million
,
$1.3 million
, and
$0.9 million
, respectively. For fiscal
2016
, fiscal
2015
, and fiscal
2014
, the income tax benefit related to restricted stock expense was
$5.1 million
,
$5.0 million
, and
$3.3 million
, respectively.
A summary of the status of the Company’s restricted stock activity is set forth below:
|
|
|
|
|
|
|
|
|
Restricted
Stock
(in thousands)
|
|
Weighted
Average
Grant-Date
Fair Value
|
Non-vested at December 29, 2015
|
348
|
|
|
$
|
166.15
|
|
Granted
|
90
|
|
|
214.32
|
|
Vested
|
(79
|
)
|
|
145.32
|
|
Forfeited
|
(43
|
)
|
|
180.42
|
|
Non-vested at December 27, 2016
|
316
|
|
|
$
|
183.25
|
|
Under the deferred annual bonus match award portion of the 2005 LTIP, eligible participants received an additional
50 percent
of their annual bonus, which was to be paid
three
years after the date of the original bonus payment provided the participant was still employed by the Company. For fiscal
2016
, fiscal
2015
, and fiscal
2014
, compensation expense related to deferred annual bonus match awards was
$0.4 million
,
$1.1 million
, and
$1.3 million
, net of capitalized compensation expense of less than
$0.1 million
,
$0.1 million
, and
$0.1 million
, respectively, and was included in general and administrative expenses in the Consolidated Statements of Income. The Company determined that it would no longer grant the deferred annual bonus match award portion under the 2005 LTIP beginning with the 2014 measurement year. Compensation expense related to deferred annual bonus match awards for years prior to fiscal 2014 was recognized through fiscal 2016.
Stock options under the 2005 LTIP are granted with an exercise price equal to the quoted market value of the Company’s common stock on the date of grant. In addition, stock options generally vest
25 percent
after
two years
from the date of grant and thereafter
25 percent
each year for the next
three years
and have a
six
-year term. The Company uses historical data to estimate pre-vesting forfeiture rates. As of
December 27, 2016
, there was
no
unrecognized compensation cost related to non-vested options. For fiscal
2016
, fiscal
2015
, and fiscal
2014
, stock-based compensation expense related to stock options charged to general and administrative expenses was
$0.2 million
,
$0.2 million
, and
$0.1 million
, respectively.
The following table summarizes the Company’s stock option activity under its stock-based compensation plans during fiscal
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Contractual Term
Remaining
(Years)
|
|
Aggregate
Intrinsic
Value (1)
(in thousands)
|
Outstanding at December 29, 2015
|
15
|
|
|
$
|
146.79
|
|
|
|
|
|
Granted
|
3
|
|
|
195.19
|
|
|
|
|
|
Exercised
|
(4
|
)
|
|
103.64
|
|
|
|
|
381
|
|
Cancelled
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 27, 2016
|
14
|
|
|
$
|
169.46
|
|
|
3.1
|
|
573
|
|
Exercisable at December 27, 2016
|
14
|
|
|
$
|
169.46
|
|
|
3.1
|
|
$
|
573
|
|
|
|
(1)
|
Intrinsic value for activities other than exercises is defined as the difference between the grant price and the market value on the last day of fiscal
2016
of
$210.40
for those stock options where the market value is greater than the exercise price. For exercises, intrinsic value is defined as the difference between the grant price and the market value on the date of exercise.
|
Cash received from the exercise of stock options in fiscal
2016
, fiscal
2015
, and fiscal
2014
was
$0.4 million
,
$0.3 million
, and
$1.1 million
, respectively. Windfall tax benefits realized from stock-based compensation in fiscal
2016
, fiscal
2015
, and fiscal
2014
were
$2.5 million
,
$2.1 million
, and
$3.1 million
, respectively, and were included as cash flows from financing activities in the Consolidated Statements of Cash Flows.
A SSAR is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of the Company’s Class A common stock between the date the award was granted and the conversion date for the number of shares vested. SSARs under the 2005 LTIP are granted with an exercise price equal to the quoted market value of the Company’s common stock on the date of grant. In addition, SSARs generally vest
25 percent
after
two years
from the date of grant and thereafter
25 percent
each year for the next
three years
and have a
six
-year term. As of
December 27, 2016
, the total unrecognized compensation cost related to non-vested SSARs was
$1.4 million
, and is expected to be recognized over a weighted-average period of
approximately
2.4
years. The Company uses historical data to estimate pre-vesting forfeiture rates. For fiscal
2016
, fiscal
2015
, and fiscal 2014, stock-based compensation expense related to SSARs was
$0.6 million
,
$0.5 million
, and
$0.2 million
, respectively, net of capitalized compensation expense of less than
$0.1 million
, respectively, and was included in general and administrative expenses in the Consolidated Statements of Income.
The following table summarizes the Company’s SSAR activity under its stock-based compensation plan during fiscal
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted
Average
Conversion Price (1)
|
|
Weighted Average
Contractual Term
Remaining
(Years)
|
|
Aggregate
Intrinsic
Value (2)
(in thousands)
|
Outstanding at December 29, 2015
|
57
|
|
|
$
|
165.54
|
|
|
4.5
|
|
$
|
1,814
|
|
Granted
|
8
|
|
|
210.55
|
|
|
|
|
|
Converted
|
(4
|
)
|
|
125.38
|
|
|
|
|
|
Cancelled
|
(6
|
)
|
|
177.98
|
|
|
|
|
|
Outstanding at December 27, 2016
|
55
|
|
|
$
|
173.44
|
|
|
3.9
|
|
$
|
2,060
|
|
Convertible at December 27, 2016
|
11
|
|
|
$
|
160.60
|
|
|
2.4
|
|
$
|
541
|
|
|
|
(1)
|
Conversion price is defined as the price from which SSARs are measured and is equal to the market value on the date of issuance.
|
|
|
(2)
|
Intrinsic value for activities other than conversions is defined as the difference between the grant price and the market value on the last day of fiscal
2016
of
$210.40
for those SSARs where the market value is greater than the conversion price. For conversions, intrinsic value is defined as the difference between the grant price and the market value on the date of conversion.
|
All SSARs outstanding at
December 27, 2016
have a conversion price ranging from
$99.30
to
$215.78
and are expected to be recognized over a weighted-average period of approximately
3.9
years.
The fair value for both stock options and SSARs (collectively “option awards”) is estimated on the grant date using the Black-Scholes option pricing model. The assumptions used to calculate the fair value of option awards are evaluated and revised, as necessary, to reflect market conditions and historical experience.
The weighted-average fair value of option awards granted and assumptions used for the Black-Scholes option pricing model were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Fair value per option awards
|
$
|
53.04
|
|
|
$
|
47.56
|
|
|
$
|
46.01
|
|
Assumptions:
|
|
|
|
|
|
Expected term (years)
|
5
|
|
|
5
|
|
|
5
|
|
Expected volatility
|
26.4
|
%
|
|
27.6
|
%
|
|
28.8
|
%
|
Risk-free interest rate
|
1.3
|
%
|
|
1.6
|
%
|
|
1.6
|
%
|
Dividend yield
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
|
•
|
Expected term
— The expected term of the option awards represents the period of time between the grant date of the option awards and the date the option awards are either exercised or canceled, including an estimate for those option awards still outstanding, and is derived from historical terms and other factors.
|
|
|
•
|
Expected volatility
— The expected volatility is based on an average of the historical volatility of the Company’s stock price, for a period approximating the expected term, and the implied volatility of externally traded options of the Company’s stock that were entered into during the period.
|
|
|
•
|
Risk-free interest rate
— The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximates the option awards expected term.
|
|
|
•
|
Dividend yield
— The dividend yield is based on the Company’s anticipated dividend payout over the expected term of the option awards.
|
The amounts presented for the weighted-average fair value of option awards granted are before the estimated effect of forfeitures, which reduce the amount of stock-based compensation expense recorded in the Consolidated Statements of Income.
1992 Equity Incentive Plan
The Company adopted the 1992 Plan in May 1992. A total of
8,600,000
shares of Class A common stock were authorized for issuance under the 1992 Plan as awards, which could have been in the form of stock options (both qualified and non-qualified), stock appreciation rights, performance shares, restricted stock, or stock units, to employees and consultants. As a result of stockholder approval of the 2006 Plan, effective as of May 25, 2006, the Company no longer grants stock options, restricted stock, or other awards under the 1992 Plan.
2001 Employee, Director, and Consultant Stock Option Plan
The Company adopted the 2001 Plan in June 2001. A total of
3,000,000
shares of Class A common stock were authorized for issuance under the 2001 Plan as awards, which could have been in the form of stock options to employees, directors, and consultants. As a result of stockholder approval of the 2006 Plan, effective as of May 25, 2006, the Company no longer grants stock options under the 2001 Plan.
1992 Employee Stock Purchase Plan
In May 1992, the Company adopted the 1992 Employee Stock Purchase Plan (the “ESPP”). The ESPP was subsequently amended in years prior to fiscal 2014 to increase the number of shares of the Company's Class A common stock authorized for issuance to
950,000
. The ESPP gives eligible employees the option to purchase Class A common stock (total purchases in a year may not exceed
10 percent
of an employee’s current year compensation) at
85 percent
of the fair market value of the Class A common stock at the end of each calendar quarter. There were approximately
22,000
,
24,000
, and
23,000
shares purchased with a weighted-average fair value of purchase rights of
$30.20
,
$26.21
, and
$24.71
during fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively. For fiscal
2016
, fiscal
2015
, and fiscal
2014
, the Company recognized expense of approximately
$0.7 million
,
$0.6 million
, and
$0.6 million
in each of the respective years related to stock purchase plan discounts. Effective
June 5, 2014
, the Plan was amended to further increase the number of the Company’s Class A common stock shares authorized for issuance to
1,050,000
. Cumulatively, there were approximately
947,000
shares issued under this plan as of
December 27, 2016
,
925,000
shares issued under this plan as of
December 29, 2015
, and
901,000
shares issued under this plan as of
December 30, 2014
.
18. Defined Contribution Benefit Plan
The Panera Bread Company 401(k) Savings Plan (the “Plan”) was formed under Section 401(k) of the Internal Revenue Code (“the Code”). The Plan covers substantially all employees who meet certain service requirements. Participating employees may elect to defer a percentage of his or her salary on a pre-tax basis, subject to the limitations imposed by the Plan and the Code. The Plan provides for a matching contribution by the Company equal to
50 percent
of the first
three
percent of the participant’s eligible pay. All employee contributions vest immediately. Company matching contributions vest beginning in the second year of employment at
25 percent
per year, and are fully vested after
five
years. The Company contributed
$2.7 million
,
$2.3 million
, and
$2.2 million
to the Plan in fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
19. Business Segment Information
The Company operates
three
business segments. The Company Bakery-Cafe Operations segment is comprised of the operating activities of the bakery-cafes owned directly and indirectly by the Company. The Company-owned bakery-cafes conduct business under the Panera Bread
®
, Saint Louis Bread Co.
®
or Paradise Bakery & Café
®
names. These bakery-cafes offer some or all of the following: fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, pasta dishes, custom roasted coffees, and other complementary products through on-premise sales, as well as catering.
The Franchise Operations segment is comprised of the operating activities of the franchise business unit, which licenses qualified operators to conduct business under the Panera Bread or Paradise Bakery & Café names and also monitors the operations of these bakery-cafes. Under the terms of most of the agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Panera Bread or Paradise Bakery & Café names.
The Fresh Dough and Other Product Operations segment supplies fresh dough, produce, tuna, cream cheese, and indirectly supplies proprietary sweet goods items through a contract manufacturing arrangement, to Company-owned and franchise-operated bakery-cafes. The fresh dough is sold to a number of both Company-owned and franchise-operated bakery-cafes at a delivered cost generally not to exceed
27 percent
of the retail value of the end product. The sales and related costs to the franchise-operated
bakery-cafes are separately stated line items in the Consolidated Statements of Income. The sales, costs, and operating profit related to the sales to Company-owned bakery-cafes are eliminated in consolidation in the Consolidated Statements of Income.
The accounting policies applicable to each segment are consistent with those described in
Note 2
, Summary of Significant Accounting Policies. Segment information related to the Company’s three business segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27,
2016
|
|
December 29,
2015
|
|
December 30,
2014
|
Revenues:
|
|
|
|
|
|
Company bakery-cafe operations
|
$
|
2,433,945
|
|
|
$
|
2,358,794
|
|
|
$
|
2,230,370
|
|
Franchise operations
|
155,271
|
|
|
138,563
|
|
|
123,686
|
|
Fresh dough and other product operations
|
407,644
|
|
|
382,110
|
|
|
370,004
|
|
Intercompany sales eliminations
|
(201,495
|
)
|
|
(197,887
|
)
|
|
(194,865
|
)
|
Total revenues
|
$
|
2,795,365
|
|
|
$
|
2,681,580
|
|
|
$
|
2,529,195
|
|
Segment profit:
|
|
|
|
|
|
Company bakery-cafe operations (1)
|
$
|
398,058
|
|
|
$
|
366,905
|
|
|
$
|
400,261
|
|
Franchise operations
|
150,123
|
|
|
133,449
|
|
|
117,770
|
|
Fresh dough and other product operations
|
27,564
|
|
|
23,517
|
|
|
22,872
|
|
Total segment profit
|
$
|
575,745
|
|
|
$
|
523,871
|
|
|
$
|
540,903
|
|
|
|
|
|
|
|
Depreciation and amortization
|
$
|
154,355
|
|
|
$
|
135,398
|
|
|
$
|
124,109
|
|
Unallocated general and administrative expenses
|
174,728
|
|
|
137,790
|
|
|
132,144
|
|
Pre-opening expenses
|
6,899
|
|
|
9,089
|
|
|
8,707
|
|
Interest expense
|
8,884
|
|
|
3,830
|
|
|
1,824
|
|
Other (income) expense, net
|
1,380
|
|
|
1,192
|
|
|
(3,175
|
)
|
Income before income taxes
|
$
|
229,499
|
|
|
$
|
236,572
|
|
|
$
|
277,294
|
|
Depreciation and amortization:
|
|
|
|
|
|
Company bakery-cafe operations
|
$
|
115,579
|
|
|
$
|
105,535
|
|
|
$
|
103,239
|
|
Fresh dough and other product operations
|
9,768
|
|
|
9,367
|
|
|
8,613
|
|
Corporate administration
|
29,008
|
|
|
20,496
|
|
|
12,257
|
|
Total depreciation and amortization
|
$
|
154,355
|
|
|
$
|
135,398
|
|
|
$
|
124,109
|
|
Capital expenditures:
|
|
|
|
|
|
Company bakery-cafe operations
|
$
|
147,191
|
|
|
$
|
174,633
|
|
|
$
|
167,856
|
|
Fresh dough and other product operations
|
13,793
|
|
|
12,175
|
|
|
12,178
|
|
Corporate administration
|
39,079
|
|
|
37,124
|
|
|
44,183
|
|
Total capital expenditures
|
$
|
200,063
|
|
|
$
|
223,932
|
|
|
$
|
224,217
|
|
|
|
(1)
|
Includes refranchising losses of
$9.1 million
and
$17.1 million
for the fiscal years ended December 27, 2016 and December 29, 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
|
December 29, 2015
|
Segment assets:
|
|
|
|
Company bakery-cafe operations
|
$
|
942,653
|
|
|
$
|
953,717
|
|
Franchise operations
|
18,301
|
|
|
13,049
|
|
Fresh dough and other product operations
|
87,199
|
|
|
75,634
|
|
Total segment assets
|
$
|
1,048,153
|
|
|
$
|
1,042,400
|
|
|
|
|
|
Unallocated cash and cash equivalents
|
$
|
105,529
|
|
|
$
|
241,886
|
|
Unallocated trade and other accounts receivable
|
6,691
|
|
|
2,968
|
|
Unallocated property and equipment
|
117,178
|
|
|
107,333
|
|
Unallocated deposits and other
|
5,285
|
|
|
6,660
|
|
Other unallocated assets
|
18,775
|
|
|
39,592
|
|
Total assets
|
$
|
1,301,611
|
|
|
$
|
1,440,839
|
|
“Unallocated cash and cash equivalents” relates primarily to corporate cash and cash equivalents, “unallocated trade and other accounts receivable” relates primarily to rebates and interest receivable, “unallocated property and equipment” relates primarily to corporate fixed assets, “unallocated deposits and other” relates primarily to insurance deposits, and “other unallocated assets” relates primarily to refundable income taxes.
20. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Amounts used for basic and diluted per share calculations:
|
|
|
|
|
|
Net income attributable to Panera Bread Company
|
$
|
145,574
|
|
|
$
|
149,342
|
|
|
$
|
179,293
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding — basic
|
23,444
|
|
|
25,685
|
|
|
26,881
|
|
Effect of dilutive stock-based employee compensation awards
|
121
|
|
|
103
|
|
|
118
|
|
Weighted average number of shares outstanding — diluted
|
23,565
|
|
|
25,788
|
|
|
26,999
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$
|
6.21
|
|
|
$
|
5.81
|
|
|
$
|
6.67
|
|
Diluted
|
$
|
6.18
|
|
|
$
|
5.79
|
|
|
$
|
6.64
|
|
For each of fiscal 2016, fiscal 2015, and fiscal 2014, weighted-average outstanding stock options, restricted stock, and stock-settled appreciation rights of approximately
0.1 million
shares were excluded in calculating diluted earnings per share as the exercise price exceeded fair market value and the inclusion of such shares would have been antidilutive.
21. Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
December 27, 2016
|
|
December 29, 2015
|
|
December 30, 2014
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
$
|
8,031
|
|
|
$
|
3,073
|
|
|
$
|
773
|
|
Income taxes
|
64,919
|
|
|
92,964
|
|
|
91,187
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Change in accrued property and equipment purchases
|
$
|
(14,235
|
)
|
|
$
|
(2,894
|
)
|
|
$
|
15,479
|
|
Promissory note received upon sale of subsidiary
|
(4,482
|
)
|
|
—
|
|
|
—
|
|
Financed property and equipment purchases
|
—
|
|
|
12,680
|
|
|
—
|
|
Asset retirement obligations
|
615
|
|
|
635
|
|
|
9,341
|
|
22. Selected Quarterly Financial Data (unaudited)
The following table presents selected unaudited quarterly financial data for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 - quarters ended (1)
|
|
March 29
|
|
June 28
|
|
September 27
|
|
December 27
|
Revenues
|
$
|
685,153
|
|
|
$
|
698,900
|
|
|
$
|
684,206
|
|
|
$
|
727,106
|
|
Operating profit
|
56,631
|
|
|
60,231
|
|
|
52,221
|
|
|
70,680
|
|
Net income attributable to Panera Bread Company
|
35,088
|
|
|
34,501
|
|
|
31,975
|
|
|
44,010
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.46
|
|
|
$
|
1.46
|
|
|
$
|
1.37
|
|
|
$
|
1.93
|
|
Diluted
|
$
|
1.45
|
|
|
$
|
1.46
|
|
|
$
|
1.37
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 - quarters ended (1)
|
|
March 31
|
|
June 30
|
|
September 29
|
|
December 29
|
Revenues
|
$
|
648,504
|
|
|
$
|
676,657
|
|
|
$
|
664,654
|
|
|
$
|
691,765
|
|
Operating profit
|
51,197
|
|
|
68,412
|
|
|
52,102
|
|
|
69,883
|
|
Net income attributable to Panera Bread Company
|
31,860
|
|
|
41,929
|
|
|
32,393
|
|
|
43,160
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.20
|
|
|
$
|
1.60
|
|
|
$
|
1.28
|
|
|
$
|
1.75
|
|
Diluted
|
$
|
1.20
|
|
|
$
|
1.60
|
|
|
$
|
1.27
|
|
|
$
|
1.74
|
|
|
|
(1)
|
Fiscal quarters may not sum to the fiscal year reported amounts due to rounding.
|