The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.
|
Organization and Basis of Presentation
|
The Boston Beer Company, Inc. and certain subsidiaries (the
Company) are engaged in the business of brewing and selling alcohol beverages throughout the United States and in selected international markets, under the trade names, The Boston Beer Company, Twisted Tea Brewing
Company, Angry Orchard Cider Company and Hard Seltzer Beverage Company. The Companys Samuel Adams
®
beers are produced and sold under the trade name
The Boston Beer Company. A&S Brewing Collaborative LLC, d/b/a A&S Brewing (A&S), a wholly-owned subsidiary of the Company, sells beer under various trade names including The Traveler Beer Company and
Coney Island Brewing Company.
The accompanying unaudited consolidated balance sheet as of September 24, 2016, and the consolidated
statements of comprehensive income and consolidated statements of cash flows for the interim periods ended September 24, 2016 and September 26, 2015 have been prepared by the Company in accordance with U.S. generally accepted accounting
principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with
U.S generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Companys Annual Report on Form 10-K for
the year ended December 26, 2015.
In the opinion of the Companys management, the Companys unaudited consolidated balance sheet as of
September 24, 2016 and the results of its consolidated operations and consolidated cash flows for the interim periods ended September 24, 2016 and September 26, 2015, reflect all adjustments (consisting only of normal and recurring
adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
Inventories consist of raw materials, work in process and finished goods. Raw materials,
which principally consist of hops, apple juice, other brewing materials and packaging, are stated at the lower of cost, determined on the first-in, first-out basis, or market. The Companys goal is to maintain on hand a supply of at least one
year for essential hop varieties, in order to limit the risk of an unexpected reduction in supply. Inventories are generally classified as current assets. The Company classifies hops inventory in excess of two years of forecasted usage in other long
term assets. The cost elements of work in process and finished goods inventory consist of raw materials, direct labor and manufacturing overhead. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 24,
|
|
|
December 26,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
41,354
|
|
|
$
|
42,123
|
|
Work in process
|
|
|
10,201
|
|
|
|
8,876
|
|
Finished goods
|
|
|
10,602
|
|
|
|
8,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,157
|
|
|
|
59,260
|
|
Less portion in other long term assets
|
|
|
(4,925
|
)
|
|
|
(2,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,232
|
|
|
$
|
56,462
|
|
|
|
|
|
|
|
|
|
|
6
The Company calculates net income per share using the two-class method, which
requires the Company to allocate net income to its Class A Common Shares, Class B Common Shares and unvested share-based payment awards that participate in dividends with common stock, in the calculation of net income per share.
The Class A Common Stock has no voting rights, except (1) as required by law, (2) for the election of Class A Directors, and (3) that
the approval of the holders of the Class A Common Stock is required for (a) certain future authorizations or issuances of additional securities which have rights senior to Class A Common Stock, (b) certain alterations of rights
or terms of the Class A or Class B Common Stock as set forth in the Articles of Organization of the Company, (c) other amendments of the Articles of Organization of the Company, (d) certain mergers or consolidations with, or
acquisitions of, other entities, and (e) sales or dispositions of any significant portion of the Companys assets.
The Class B Common Stock has
full voting rights, including the right to (1) elect a majority of the members of the Companys Board of Directors and (2) approve all (a) amendments to the Companys Articles of Organization, (b) mergers or
consolidations with, or acquisitions of, other entities, (c) sales or dispositions of any significant portion of the Companys assets, and (d) equity-based and other executive compensation and other significant corporate matters. The
Companys Class B Common Stock is not listed for trading. Each share of the Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of any Class B holder, and participates equally in dividends.
The Companys unvested share-based payment awards include unvested shares (1) issued under the Companys investment share program, which
permits employees who have been with the Company for at least one year to purchase shares of Class A Common Stock and to purchase those shares at a discount ranging from 20% to 40% below market value based on years of employment starting after
two years of employment, and (2) awarded as restricted stock awards at the discretion of the Companys Board of Directors. The investment shares and restricted stock awards generally vest over five years in equal number of shares. The
unvested shares participate equally in dividends. See Note I for a discussion of the current year unvested stock awards and issuances.
Included in the
computation of net income per diluted common share are dilutive outstanding stock options that are vested or expected to vest. At its discretion, the Board of Directors grants stock options to senior management and certain key employees. The terms
of the employee stock options are determined by the Board of Directors at the time of grant. To date, stock options granted to employees vest over various service periods and/or based on the attainment of certain performance criteria and generally
expire after ten years. The Company also grants stock options to its non-employee directors upon election or re-election to the Board of Directors. The number of option shares granted to non-employee directors is calculated based on a defined
formula and these stock options vest immediately upon grant and expire after ten years.
7
Net Income per Common Share - Basic
The following table sets forth the computation of basic net income per share using the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
September 24,
|
|
|
September 26,
|
|
|
September 24,
|
|
|
September 26,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Net Income
|
|
$
|
31,530
|
|
|
$
|
38,624
|
|
|
$
|
65,183
|
|
|
$
|
82,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of net income for basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
$
|
22,841
|
|
|
$
|
28,286
|
|
|
$
|
47,465
|
|
|
$
|
59,963
|
|
Class B Common Stock
|
|
|
8,529
|
|
|
|
10,159
|
|
|
|
17,390
|
|
|
|
21,951
|
|
Unvested participating shares
|
|
|
160
|
|
|
|
179
|
|
|
|
328
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,530
|
|
|
$
|
38,624
|
|
|
$
|
65,183
|
|
|
$
|
82,299
|
|
Weighted average number of shares for basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
|
9,018
|
|
|
|
9,655
|
|
|
|
9,191
|
|
|
|
9,667
|
|
Class B Common Stock*
|
|
|
3,367
|
|
|
|
3,467
|
|
|
|
3,367
|
|
|
|
3,539
|
|
Unvested participating shares
|
|
|
63
|
|
|
|
61
|
|
|
|
64
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,448
|
|
|
|
13,183
|
|
|
|
12,622
|
|
|
|
13,268
|
|
Net income per share for basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
$
|
2.53
|
|
|
$
|
2.93
|
|
|
$
|
5.16
|
|
|
$
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock
|
|
$
|
2.53
|
|
|
$
|
2.93
|
|
|
$
|
5.16
|
|
|
$
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Change in Class B Common Stock resulted from the conversion of 100,000 shares to Class A Common Stock on October 26, 2015 and 150,000 shares to Class A common Stock on May 6, 2015, with the thirteen
and thirty-nine week number of shares reflecting the weighted average for the periods.
|
8
Net Income per Common Share - Diluted
The Company calculates diluted net income per share for common stock using the more dilutive of (1) the treasury stock method, or (2) the two-class
method, which assumes the participating securities are not exercised.
The following table sets forth the computation of diluted net income per share,
assuming the conversion of all Class B Common Stock into Class A Common Stock and using the two-class method for unvested participating shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
|
|
September 24, 2016
|
|
|
September 26, 2015
|
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
|
(in thousands, except per share data)
|
|
As reported - basic
|
|
$
|
22,841
|
|
|
|
9,018
|
|
|
$
|
2.53
|
|
|
$
|
28,286
|
|
|
|
9,655
|
|
|
$
|
2.93
|
|
Add: effect of dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
385
|
|
|
|
|
|
Class B Common Stock
|
|
|
8,529
|
|
|
|
3,367
|
|
|
|
|
|
|
|
10,159
|
|
|
|
3,467
|
|
|
|
|
|
Net effect of unvested participating shares
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - diluted
|
|
$
|
31,373
|
|
|
|
12,641
|
|
|
$
|
2.48
|
|
|
$
|
38,450
|
|
|
|
13,507
|
|
|
$
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
|
|
September 24, 2016
|
|
|
September 26, 2015
|
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
Earnings to
Common
Shareholders
|
|
|
Common
Shares
|
|
|
EPS
|
|
|
|
(in thousands, except per share data)
|
|
As reported - basic
|
|
$
|
47,465
|
|
|
|
9,191
|
|
|
$
|
5.16
|
|
|
$
|
59,963
|
|
|
|
9,667
|
|
|
$
|
6.20
|
|
Add: effect of dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards
|
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
396
|
|
|
|
|
|
Class B Common Stock
|
|
|
17,390
|
|
|
|
3,367
|
|
|
|
|
|
|
|
21,951
|
|
|
|
3,539
|
|
|
|
|
|
Net effect of unvested participating shares
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - diluted
|
|
$
|
64,862
|
|
|
|
12,853
|
|
|
$
|
5.05
|
|
|
$
|
81,925
|
|
|
|
13,602
|
|
|
$
|
6.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
During the thirteen and thirty-nine weeks ended September 24, 2016, weighted-average stock options to
purchase approximately 740,000 and 704,000 shares, respectively, of Class A Common Stock were outstanding but not included in computing diluted income per common share because their effects were anti-dilutive. During the thirteen and
thirty-nine weeks ended September 26, 2015, weighted-average stock options to purchase approximately 17,000 and 10,000 shares, respectively, of Class A Common Stock were outstanding but not included in computing diluted income per common
share because their effects were anti-dilutive. Additionally, performance-based stock options to purchase 35,000 and 37,000 shares of Class A Common Stock were outstanding as of September 24, 2016 and September 26, 2015, respectively,
but not included in computing diluted income per common share because the performance criteria of these stock options was not met as of the end of the reporting period.
Of the performance-based stock options to purchase 35,000 shares of Class A Common Stock that were excluded from computing diluted net income per common
share as of September 24, 2016, 30,000 shares were granted in 2016 to two key employees. The vesting of these shares requires annual depletions, or sales by distributors to retailers, of certain of the Companys brands to attain various
thresholds during the period from 2016 to 2023. The remaining 5,000 shares were granted in 2016 to executive officers and the vesting of these shares requires annual depletions to attain various thresholds during 2016.
Furthermore, performance-based stock options to purchase 15,000 shares of Class A Common Stock were not included in computing diluted income per share
because the performance criteria of these stock options were not met and the options were cancelled during the thirty-nine weeks ended September 24, 2016. Service-based stock options to purchase 27,000 shares of Class A Common Stock were
not included in computing diluted income per share because the option holders terminated employment prior to vesting and the options were cancelled during the thirty-nine weeks ended September 24, 2016.
D.
|
Comprehensive Income or Loss
|
Comprehensive income or loss represents net income or loss, plus defined
benefit plans liability adjustment, net of tax effect and foreign currency translation adjustment. The defined benefit plans liability and foreign currency translation adjustments for the interim periods ended September 24, 2016 and
September 26, 2015 were not material.
E.
|
Commitments and Contingencies
|
Contract Obligations
The Company had outstanding total non-cancelable contract obligations of $207.1 million at September 24, 2016. These obligations are made up of hops,
barley and wheat totaling $94.3 million, apples and other ingredients of $39.9 million, advertising contracts of $26.8 million, equipment and machinery of $18.3 million, operating leases of $16.1 million, glass bottles of $5.6 million, and other
commitments of $6.1 million.
The Company has entered into contracts for the supply of a portion of its hops requirements. These purchase contracts extend
through crop year 2022 and specify both the quantities and prices, denominated in U.S. Dollars, Euros and New Zealand Dollars, to which the Company is committed. Hops purchase commitments outstanding at September 24, 2016 totaled $65.0 million,
based on the exchange rates on that date. The Company does not use forward currency exchange contracts and intends to purchase future hops using the exchange rate at the time of purchase.
Currently, the Company has entered into contracts for barley and wheat with two major suppliers. The contracts include crop year 2015 and 2016 and cover the
Companys barley, wheat, and malt requirements for 2016 and part of 2017. These purchase commitments outstanding at September 24, 2016 totaled $29.3 million.
The Company sources some of its glass bottles needs pursuant to a Glass Bottle Supply Agreement with Anchor Glass Container Corporation (Anchor),
under which Anchor is the supplier of certain glass bottles for the Companys Cincinnati Brewery and its Pennsylvania Brewery. This agreement also establishes the terms on which Anchor may supply glass bottles to other breweries where the
Company brews its beers. Under the agreement with Anchor, the Company has minimum purchase commitments that are based on Company-provided production estimates which, under normal business conditions, are expected to be fulfilled. Minimum purchase
commitments under the agreement, assuming the supplier is unable to replace lost production capacity cancelled by the Company, as of September 24, 2016 totaled $5.6 million.
The Company has various operating lease agreements for facilities and equipment as of September 24, 2016. Terms of these leases include, in some
instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2021. The contractual obligation on these lease agreements as of September 24,
2016 totaled $16.1 million.
10
Currently, the Company brews and packages more than 95% of its volume at Company-owned breweries. In the normal
course of its business, the Company has historically entered into various production arrangements with other brewing companies. Pursuant to these arrangements, the Company purchases the liquid produced by those brewing companies, including the raw
materials that are used in the liquid, at the time such liquid goes into fermentation. The Company is required to repurchase all unused raw materials purchased by the brewing company specifically for the Companys beers at the brewing
companys cost upon termination of the production arrangement. The Company is also obligated to meet annual volume requirements in conjunction with certain production arrangements. These requirements are not material to the Companys
operations.
Litigation
The Company is not a party
to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect upon its financial condition or the results of its operations. In general, while the Company believes it conducts its business
appropriately in accordance with laws, regulations and industry guidelines, claims, whether or not meritorious, could be asserted against the Company that might adversely impact the Companys results.
As of September 24, 2016 and December 26, 2015, the Company had approximately
$0.5 million and $0.5 million, respectively, of unrecognized income tax benefits.
The Companys practice is to classify interest and penalties
related to income tax matters in income tax expense. As of September 24, 2016 and December 26, 2015, the Company had $0.3 million and $0.4 million, respectively, accrued for interest and penalties.
During the first quarter of 2016, the Company received a $12.0 million refund from the Internal Revenue Service of an overpayment of its 2015 estimated tax.
The refund resulted from the
Protecting Americans from Tax Hikes Act of 2015
, which was enacted after payment of 2015 corporate estimated tax payments that were due on December 15, 2015 and allowed the Company to claim accelerated tax
depreciation on qualified property, plant, and equipment additions, and a research & development tax credit on the 2015 federal corporate income tax return.
The Companys federal and state income tax returns remain subject to examination for three or four years depending on the states statute of
limitations. The Company is being audited by two states as of September 24, 2016. In addition, the Company is generally obligated to report changes in taxable income arising from federal income tax audits.
Line of Credit
The Company has a credit facility in place that provides for a $150.0 million revolving line of credit which expires on March 31, 2019. As of
September 24, 2016, the Company was not in violation of any of its covenants to the lender under the credit facility and there were no borrowings outstanding, so that the line of credit was fully available to the Company for borrowing.
The Company defines fair value as the price that would be received to sell an asset
or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and
bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
11
|
|
|
Level 1 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
|
|
Level 2 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has
a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
|
Level 3 Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
|
All financial assets or liabilities that are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate
level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets or liabilities measured at fair value on a recurring basis are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 24, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
75,919
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
75,919
|
|
|
|
|
|
As of December 26, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
88,108
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
88,108
|
|
The Companys cash equivalents listed above represent money market funds and are classified within Level 1 of the fair
value hierarchy because they are valued using quoted market prices. The money market funds were invested substantially in United States Treasury and government securities. The Company does not adjust the quoted market price for such financial
instruments.
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents held in money
market funds. At September 24, 2016 and December 26, 2015, the Company had money market funds with a Triple A rated money market fund. The Company considers the Triple A rated money market fund to be a large,
highly-rated investment-grade institution. As of September 24, 2016 and December 26, 2015, our cash and cash equivalents balance was $77.3 million and $94.2 million, respectively, including money market funds amounting to $75.9 million and
$88.1 million, respectively.
Cash, certificates of deposit, receivables and payables are carried at their cost, which approximates fair value, because of
their short-term nature. Financial instruments not recorded at fair value in the consolidated financial statements are summarized in the table below (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 24, 2016
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|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Note payable
|
|
$
|
|
|
|
$
|
400
|
|
|
$
|
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2015
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|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Note payable
|
|
$
|
|
|
|
$
|
458
|
|
|
$
|
|
|
|
$
|
458
|
|
12
I.
|
Common Stock and Stock-Based Compensation
|
Option Activity
Information related to stock options under the Employee Equity Incentive Plan and the Stock Option Plan for Non-Employee Directors is summarized as follows:
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Weighted-
Average
Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual Term
in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Shares
|
|
|
|
|
(in thousands)
|
|
Outstanding at December 26, 2015
|
|
|
1,127,162
|
|
|
$
|
63.99
|
|
|
|
|
|
|
|
|
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Granted
|
|
|
765,112
|
|
|
|
199.05
|
|
|
|
|
|
|
|
|
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Forfeited
|
|
|
(40,352
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)
|
|
|
196.86
|
|
|
|
|
|
|
|
|
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Expired
|
|
|
(1,712
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)
|
|
|
241.79
|
|
|
|
|
|
|
|
|
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Exercised
|
|
|
(496,930
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)
|
|
|
77.31
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Outstanding at September 24, 2016
|
|
|
1,353,280
|
|
|
$
|
138.45
|
|
|
|
6.44
|
|
|
$
|
56,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Exercisable at September 24, 2016
|
|
|
236,947
|
|
|
$
|
79.25
|
|
|
|
3.79
|
|
|
$
|
18,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Vested and expected to vest at September 24, 2016
|
|
|
1,297,464
|
|
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$
|
137.91
|
|
|
|
6.42
|
|
|
$
|
54,200
|
|
|
|
|
|
|
|
|
|
|
|
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Of the total options outstanding at September 24, 2016, 94,860 shares were performance-based options.
On January 1, 2016, the Company granted the Chief Executive Officer an option to purchase 574,507 shares of its Class A Common Stock, which vests
over a five-year period, commencing on January 1, 2019, at the rate of 20% per year. The exercise price is determined by multiplying $201.91 by the aggregate percentage change in the DJ Wilshire 5000 Index from and after January 1,
2016 through the close of business on the trading date next preceding each date on which the option is exercised, plus an additional 1.5 percentage points per annum, prorated for partial years. The exercise price will not be less than $201.91 per
share and the excess of the fair value of the Companys Class A Common Stock over the exercise price cannot exceed $150.00 per share. The Company is accounting for this award as a market-based award which was valued utilizing the Monte
Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair
value per share to be $39.16. At September 24, 2016, the stock option remained unexercised as to 574,507 shares. If the stock option had been exercised on September 24, 2016, the exercise price would have been $217.53 per share.
Additionally, on January 1, 2016, the Company granted options to purchase an aggregate of 88,629 shares of the Companys Class A Common Stock
to senior management with a weighted average fair value of $96.29 per share, of which 70,502 shares relate to other special long-term service-based retention stock options and 18,127 shares relate to performance-based stock options.
On February 23, 2016, the Company granted options to purchase an aggregate of 67,255 shares of the Companys Class A Common Stock with a
weighted average fair value of $89.21. These shares relate to long-term service-based stock options issued to newly hired members of senior management.
On April 26, 2016, the Company granted options to purchase an aggregate of 20,681 shares of the Companys Class A Common Stock with a weighted
average fair value of $72.53. These shares relate to performance-based stock options issued to a newly hired member of senior management.
On May 25,
2016, the Company granted options to purchase an aggregate of 14,040 shares of the Companys Class A Common Stock to the Companys non-employee Directors. These options have a weighted average fair value of $73.70 per share. All of
the options vested immediately on the date of the grant.
13
On January 1, 2008, the Company granted the Chief Executive Officer a stock option to purchase 753,864
shares of its Class A Common Stock, which vests over a five-year period, commencing on January 1, 2014, at the rate of 20% per year. The exercise price is determined by multiplying $42.00 by the aggregate change in the DJ Wilshire
5000 Index from and after January 1, 2008 through the close of business on the trading date next preceding each date on which the option is exercised. The exercise price will not be less than $37.65 per share and the excess of the fair value of
the Companys Class A Common Stock over the exercise price cannot exceed $70.00 per share. At September 24, 2016 and September 26, 2015, the stock option remained unexercised as to 301,546 shares and 452,319 shares, respectively.
If the stock option had been exercised on September 24, 2016, the exercise price would have been $82.30 per share. If the stock option had been exercised on September 26, 2015, the exercise price would have been $147.48 per share.
Non-Vested Shares Activity
The following table
summarizes vesting activities of shares issued under the investment share program and restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Fair
Value
|
|
Non-vested at December 26, 2015
|
|
|
60,922
|
|
|
$
|
150.03
|
|
Granted
|
|
|
27,221
|
|
|
|
161.39
|
|
Vested
|
|
|
(19,740
|
)
|
|
|
114.12
|
|
Forfeited
|
|
|
(6,322
|
)
|
|
|
154.30
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 24, 2016
|
|
|
62,081
|
|
|
$
|
166.00
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2016, the Company granted 8,921 shares of restricted stock awards to certain senior managers and key
employees of which all shares vest ratably over service periods of five years. On January 1, 2016, employees elected to purchase 9,199 shares under the investment share program. The weighted average fair value of the restricted stock awards and
investment shares, which are sold to employees at discount under its investment share program, was $201.91 and $91.55 per share, respectively.
On
February 23, 2016 the Company granted 9,101 shares of restricted stock awards to newly hired members of senior management of which all shares vest ratably over service periods of three years. The weighted average fair value of these restricted
stock awards was $192.26.
Stock-Based Compensation
Stock-based compensation expense related to share-based awards recognized in the thirteen and thirty-nine weeks ended September 24, 2016 was $2.4 million
and $8.1 million, respectively, and was calculated based on awards expected to vest. Stock-based compensation expense related to share-based awards recognized in the thirteen and thirty-nine weeks ended September 26, 2015 was $1.6 million and
$5.2 million, respectively, and was calculated based on awards expected to vest.
J.
|
Recent Accounting Pronouncements
|
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
. ASU 2014-09 will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that
reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 is to be applied retrospectively either to
each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company will elect to apply the
impact (if any) of applying ASU 2014-09 to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings.
In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. ASU 2015-14
defers the effective date of ASU 2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. The Company is currently evaluating the impact ASU 2014-09 and has
preliminarily concluded that it will not significantly affect how revenue for contracts with customers is recognized.
14
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330), Simplifying the Measurement of
Inventory
. ASU 2015-11 is part of the FASBs initiative to simplify accounting standards. The guidance requires an entity to recognize inventory within scope of the standard at the lower of cost or net realizable value. Net realizable value
is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. ASU 2015-11 will be effective prospectively for the year beginning January 1, 2017. The Company is
currently evaluating the impact ASU 2015-11 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 will be effective retrospectively
for the year beginning December 30, 2018, with early adoption permitted. Contractual obligation on lease agreements as of September 24, 2016 totaled $16.1 million.
In March, 2016, the FASB issued ASU No. 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
. ASU
2016-09 is part of the FASBs initiative to simplify accounting standards. The guidance impacts several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes and forfeitures, as well as
classification in the statement of cash flows. Under ASU 2016-09, excess tax benefits and deficiencies as a result of stock option exercises and restricted stock vesting are to be recognized as discrete items within income tax expense or benefit in
the statement of operations in the reporting period in which they occur. Additionally, under ASU 2016-09, excess tax benefits and deficiencies should be classified along with other income tax cash flows as an operating activity. ASU 2016-09 will be
effective for the year beginning January 1, 2017 and may be applied retrospectively or prospectively. The impact ASU 2016-09 will have on the Companys consolidated financial statements will mainly depend on unpredictable future events,
including the timing and value realized upon exercise of stock options versus the fair value when those options were granted. The excess tax benefit from stock-based compensation arrangements was $12.4 million and $13.1 million for the thirty-nine
weeks ended September 24, 2016 and September 26, 2015, respectively.
On October 6, 2016, the Board of Directors approved an increase of $180.0
million to the previously approved $601.0 million share buyback expenditure limit for a new limit of $781.0 million.
On October 17, 2016, the
Company sold 52.7 acres of vacant land in Freetown, Massachusetts for $4.3 million, net of closing costs. The Company purchased the land for $6.0 million during 2007 and subsequently reduced the lands carrying value to reflect perceived market
conditions. As of September 24, 2016, this land was included in property, plant and equipment on the consolidated balance sheet at a book value of $3.3 million. The $1.0 million accounting gain related to this sale will be recognized on the
consolidated statement of income and comprehensive income in the fourth quarter.
The Company evaluated subsequent events occurring after the balance
sheet date, September 24, 2016, and concluded that there were no other events of which management was aware that occurred after the balance sheet date that would require any adjustment to or disclosure in the accompanying consolidated financial
statements.
15