NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies utilized in preparing the Company’s Consolidated Financial Statements:
(a) Description of Business
Weis Markets, Inc. is a Pennsylvania business corporation formed in 1924. The Company is engaged principally in the retail sale of food in Pennsylvania and surrounding states. The Company’s operations are reported as a single reportable segment. There was no material change in the nature of the Company's business during fiscal 2020.
(b) Definition of Fiscal Year
The Company’s fiscal year ends on the last Saturday in December. Fiscal 2020 was comprised of 52 weeks, ending on December 26, 2020. Fiscal 2019 was comprised of 52 weeks, ending on December 28, 2019. Fiscal 2018 was comprised of 52 weeks, ending on December 29, 2018. References to years in this Annual Report relate to fiscal years.
(c) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(d) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company maintains its cash balances in the form of core checking accounts and money market accounts. The Company maintains cash deposits with banks that at times exceed applicable insurance limits. The Company reduces its exposure to credit risk by maintaining such deposits with high quality financial institutions that management believes are creditworthy.
The Company considers investments with an original maturity of three months or less to be cash equivalents. Investment amounts classified as cash equivalents as of December 26, 2020 and December 28, 2019 totaled $95.9 million and $32.9 million, respectively.
Consumer electronic payments accepted at the point of sale, including all credit card, debit card and electronic benefits transfer transactions that process in three days or less are classified as cash equivalents. Consumer electronic payment amounts classified as cash equivalents as of December 26, 2020 and December 28, 2019 totaled $41.7 million and $23.1 million, respectively.
(f) Marketable Securities
Marketable securities consist of corporate and municipal bonds and equity securities. The Company invests primarily in high-grade marketable debt securities. The Company classifies all of its marketable securities as available-for-sale.
Available-for-sale securities are recorded at fair value as determined by quoted market price based on national markets. Unrealized holding gains and losses, net of the related tax effect, on corporate and municipal bonds are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. Unrealized holding gains and losses on equity securities are recorded in investment income (loss) and interest expense. A decline in the fair value below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities.
Equity securities are measured at fair value and the unrealized holding gains and losses are recorded in investment income (loss) and interest expense. The Company recognized a $1.8 million loss in 2020 and a $2.0 million gain in 2019.
(g) Accounts Receivable
Accounts receivable are stated net of an allowance for uncollectible accounts of $2.4 million and $2.8 million as of December 26, 2020 and December 28, 2019, respectively. The reserve balance relates to amounts due from pharmacy third party providers, retail customer returned checks, manufacturing customers, vendors and tenants. The Company maintains an allowance for the amount of receivables deemed to be uncollectible and calculates this amount based upon historical collection activity adjusted for current conditions.
Note 1 Summary of Significant Accounting Policies (continued)
(h) Inventories
Inventories are valued at the lower of cost or net realizable value, using both the retail inventory and average cost methods. The retail inventory method is commonly used by retail companies to determine cost and calculate gross margin based on applying a cost-to-retail ratio to each similar merchandise category’s ending retail value. The Company’s center store and pharmacy inventories are valued using last in, first out (LIFO). The Company’s fresh inventories are valued using average cost. The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts and to provide for estimated shortages from the last physical count to the financial statement date.
(i) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the cost of buildings and improvements and equipment using the straight-line method.
Leasehold improvements are amortized using the straight-line method over the terms of the leases or the useful lives of the assets, whichever is shorter.
Maintenance and repairs are expensed and renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the assets and accumulated depreciation are removed from the respective accounts and any profit or loss on the disposition is credited or charged to “Operating, general and administrative expenses.”
(j) Leases
The Company leases approximately 51% of its open store facilities under operating leases that expire at various dates through 2036, with the remaining store facilities being owned. These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus variable lease costs related to real estate taxes and insurance as well as contingent rentals based on a percentage of annual sales or increases periodically based on inflation. These variable lease costs are not included in the measurement of the operating lease right-to-use assets or lease liabilities and are charged to the related expense category included in “Operating, general and administrative expenses.” Most of the leases contain multiple renewal options, under which the Company may extend the lease terms from 5 to 20 years. Additionally, the Company has operating leases for certain transportation and other equipment. The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.”
(k) Goodwill and Intangible Assets
Goodwill is not amortized but tested for impairment on an annual basis and between annual tests when indicators of impairment are identified. Intangible assets with an indefinite useful life are not amortized until their useful life is determined to be no longer indefinite and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The Company’s intangible assets and related accumulated amortization at December 26, 2020 and December 28, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
|
|
|
December 28, 2019
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Accumulated
|
|
|
(dollars in thousands)
|
|
Gross
|
Amortization
|
|
Net
|
|
Gross
|
Amortization
|
|
Net
|
Liquor licenses
|
$
|
15,032
|
$
|
-
|
$
|
15,032
|
$
|
14,905
|
$
|
-
|
$
|
14,905
|
Asset acquisitions and other
|
|
5,083
|
|
3,345
|
|
1,738
|
|
5,083
|
|
2,888
|
|
2,195
|
Total
|
$
|
20,115
|
$
|
3,345
|
$
|
16,770
|
$
|
19,988
|
$
|
2,888
|
$
|
17,100
|
Intangible assets with a definite useful life are generally amortized on a straight-line basis over periods up to 10 years for customer lists. Estimated amortization expense for the next five fiscal years is approximately $444 thousand in 2021, $320 thousand in 2022, $310 thousand in 2023, $310 thousand in 2024 and $147 thousand in 2025. As of December 26, 2020, the Company’s intangible assets with indefinite lives consisted of goodwill and liquor licenses.
Note 1 Summary of Significant Accounting Policies (continued)
(l) Impairment of Long-Lived Assets
The Company periodically evaluates the period of depreciation or amortization for long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. The Company completes an impairment test annually. The Company also reviews its property and equipment for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset. An impairment loss would be recorded for the excess of net book value over the fair value of the asset impaired. The fair value is estimated based on current market values or expected discounted future cash flows.
With respect to owned property and equipment associated with closed stores, the value of the property and equipment would be adjusted to reflect recoverable values if current economic conditions and estimated fair values of the property was less than the net book value.
In accordance with Accounting Standards Codification No. 360, Property, Plant and Equipment, the Company recorded a pre-tax charge of $1.5 million in the fourth quarter of 2018 for the impairment of long-lived assets, including equipment and leasehold improvements. The charge was a result of management determining that the net book value of this property was less than the recoverable value. This charge was included as a component of "Operating, general and administrative expenses." Management determined that no assets met the impairment criteria as of December 26, 2020 and December 28, 2019.
The results of impairment tests are subject to management’s estimates and assumptions of projected cash flows and operating results. The Company believes that, based on current conditions, materially different reported results are not likely to result from long-lived asset impairments. However, a change in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
(m) Self-Insurance
The Company is self-insured for a majority of its workers’ compensation, general liability, vehicle accident and associate medical benefit claims. The self-insurance liability for most of the medical benefit claims is determined based on historical data and an estimate of claims incurred but not reported. The other self-insurance liabilities including workers’ compensation are determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company is self-insured for certain healthcare claims and stop-loss coverage is maintained for occurrences exceeding a $500 thousand specific deductible with a $450 thousand aggregating deductible. The Company is liable for workers' compensation claims ranging from $1.0 million to $2.0 million per claim. Property and casualty insurance coverage is maintained with outside carriers at deductible or retention levels ranging from $100 thousand to $1.0 million. Significant assumptions used in the development of the actuarial estimates include reliance on the Company’s historical claims data including average monthly claims and average lag time between incurrence and reporting of the claim.
(n) 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 bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in the Consolidated Financial Statements. Refer to Note 9 to the Consolidated Financial Statements for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts are accrued and classified as a component of income tax expense.
Note 1 Summary of Significant Accounting Policies (continued)
(o) Earnings Per Share
Earnings per share are based on the weighted-average number of common shares outstanding.
(p) Revenue Recognition
Revenue from the sale of products to the Company’s customers is recognized at the point of sale. Discounts provided to customers at the point of sale through the Weis Club Preferred Shopper loyalty program are recognized as a reduction in sales as products are sold. Periodically, the Company will run a point-based sales incentive program that rewards customers with future sales discounts. The Company makes reasonable and reliable estimates of the amount of future discounts based upon historical experience and its customer data tracking software. Sales are reduced rationally and systematically by these estimates over the life of the program. Discounts to customers at the point of sale provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the discounts are redeemable at any retailer that accepts those discounts. The Company records “Deferred revenue” for the sale of gift cards and revenue is recognized in “Net sales” at the time of customer redemption for products. Gift card breakage income is recognized in “Operating, general and administrative expenses” based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote. Sales tax is excluded from “Net sales.” The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. Merchandise return activity is immaterial to revenues due to products being returned quickly and the relatively low unit cost.
(q) Cost of Sales, Including Advertising, Warehousing and Distribution Expenses
“Cost of sales, including advertising, warehousing and distribution expenses” consists of direct product costs (net of discounts and allowances), advertising (net of vendor paid cooperative advertising credits), distribution center and transportation costs, as well as manufacturing facility operations. Advertising costs, net of vendor paid cooperative advertising credits, are expensed as incurred which are primarily funded by vendor cooperative advertising credits and occur in the same period as the product is sold.
(r) Vendor Allowances
Vendor allowances related to the Company's buying and merchandising activities are recorded as a reduction of cost of sales as they are earned, in accordance with the underlying agreement. Off-invoice and bill-back allowances are used to reduce direct product costs upon the receipt of goods. Promotional rebates and credits are accounted for as a reduction in the cost of inventory and recognized when the related inventory is sold. Volume incentive discounts are realized as a reduction of cost of sales at the time it is deemed probable and reasonably estimable that the incentive target will be reached. Long-term contract incentives, which require an exclusive vendor relationship, are allocated over the life of the contract. Promotional allowance funds for specific vendor-sponsored programs are recognized as a reduction of cost of sales as the program occurs and the funds are earned per the agreement. Cash discounts for prompt payment of invoices are realized in cost of sales as invoices are paid. Warehouse and back-haul allowances provided by suppliers for distributing their product through the Company’s distribution system are recorded in cost of sales offsetting costs incurred. Warehouse slotting allowances are recorded in cost of sales when new items are initially set up in the Company's distribution system, which is when the related expenses are incurred and performance under the agreement is complete. Swell allowances for damaged goods are realized in cost of sales as provided by the supplier, helping to offset product shrink losses also recorded in cost of sales.
Vendor allowances recorded as credits in cost of sales totaled $133.5 million in 2020, $130.4 million in 2019 and $132.0 million in 2018. Vendor paid cooperative advertising credits totaled $21.7 million in 2020, $24.8 million in 2019 and $19.4 million in 2018. These credits were netted against advertising costs within “Cost of Sales, including Advertising, Warehousing and Distribution expenses.” The Company had accounts receivable due from vendors of $886 thousand and $1.0 million for earned advertising credits and $8.6 million and $9.5 million for earned promotional discounts as of December 26, 2020 and December 28, 2019, respectively. The Company had $3.3 million and $5.4 million in unearned income included in accrued liabilities for unearned vendor programs under long-term contracts for display and shelf space allocation as of December 26, 2020 and December 28, 2019, respectively.
(s) Operating, General and Administrative Expenses
Business operating costs including expenses generated from administration and purchasing functions, are recorded in “Operating, general and administrative expenses” in the Consolidated Statements of Income. Business operating costs include items such as wages, benefits, utilities, repairs and maintenance, rent, insurance, depreciation, leasehold amortization and costs for outside provided services.
(t) Advertising Costs
The Company expenses advertising costs as incurred. The Company recorded advertising expense, before vendor paid cooperative advertising credits, of $24.5 million in 2020, $30.3 million in 2019 and $30.5 million in 2018 in “Cost of Sales, including Advertising, Warehousing and Distribution Expenses.”
Note 1 Summary of Significant Accounting Policies (continued)
(u) Rental and Commission Income
The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.” All leases are operating leases. Refer to Note 5 to the Consolidated Financial Statements for further disclosure on operating leases and rental income.
The Company provides a variety of services to its customers, including but not limited to lottery, money orders, third-party gift cards, and third-party bill pay services. Commission income earned from these services are recorded when earned as a component of “Operating, general and administrative expenses.” The Company recorded commission income of $17.7 million in 2020, $18.3 million in 2019 and $17.9 million in 2018.
(v) Current Relevant Accounting Standards
The Company regularly monitors recently issued accounting standards and assesses their applicabilty and impact. The Company believes that there are no accounting standard updates that have or will have a material or significant impact on the Company’s accounting policies.
Note 2 Marketable Securities
The Company’s marketable securities are all classified as available-for-sale within “Current Assets” in the Company’s Consolidated Balance Sheets. FASB has established three levels of inputs that may be used to measure fair value:
Level 1 Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and
Level 3 Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s marketable securities valued using Level 1 inputs include three public company equity securities, for which quoted market prices are available. The Company’s bond portfolio is valued using Level 2 inputs. The Company’s corporate and municipal bonds are valued using a combination of pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs, which are considered Level 2 inputs.
For Level 2 investment valuation, the Company utilizes standard pricing procedures of its investment advisory firm(s), which include various third-party pricing services. These procedures also require specific price monitoring practices as well as pricing review reports, valuation oversight and pricing challenge procedures to maintain the most accurate representation of investment fair market value.
The Company accrues interest on its bond portfolio throughout the life of each bond held. Dividends from the equity securities are recognized as received. Both interest and dividends are recognized in “Investment income and interest expense” on the Company’s Consolidated Statements of Income. The Company recognized investment income of $536 thousand, $4.1 million and investment loss of $234 thousand which included an unrealized loss in equity securities of $1.8 million, an unrealized gain in equity securities of $2.0 million and an unrealized loss in equity securities of $1.6 million in the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018, respectively.
Marketable securities, as of December 26, 2020 and December 28, 2019, consisted of:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
(dollars in thousands)
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
December 26, 2020
|
Cost
|
|
Holding Gains
|
|
Holding Losses
|
|
Value
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
$
|
7,410
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and municipal bonds
|
$
|
99,861
|
|
$
|
5,723
|
|
$
|
(1,139)
|
|
|
104,445
|
|
$
|
99,861
|
|
$
|
5,723
|
|
$
|
(1,139)
|
|
$
|
111,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
(dollars in thousands)
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
December 28, 2019
|
Cost
|
|
Holding Gains
|
|
Holding Losses
|
|
Value
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
$
|
9,201
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and municipal bonds
|
$
|
52,264
|
|
$
|
2,091
|
|
$
|
(18)
|
|
|
54,337
|
|
$
|
52,264
|
|
$
|
2,091
|
|
$
|
(18)
|
|
$
|
63,538
|
Maturities of marketable securities classified as available-for-sale at December 26, 2020, were as follows:
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
(dollars in thousands)
|
|
Cost
|
|
|
Value
|
Available-for-sale:
|
|
|
|
|
|
Due within one year
|
$
|
9,146
|
|
$
|
9,233
|
Due after one year through five years
|
|
44,030
|
|
|
45,788
|
Due after five years through ten years
|
|
46,685
|
|
|
49,424
|
|
$
|
99,861
|
|
$
|
104,445
|
Note 2 Marketable Securities (continued)
SERP Investments
The Company also maintains a non-qualified supplemental executive retirement plan for certain of its associates which allows them to defer income to future periods. Participants in the plans earn a return on their deferrals based on mutual fund investments. The Company chooses to invest in the underlying mutual fund investments to offset the liability associated with the non-qualified deferred compensation plans. Such investments are reported on the Company’s Consolidated Balance Sheets as “SERP investment,” are classified as trading securities and are measured at fair value using Level 1 inputs with gains and losses included in “Investment income and interest expense” on the Company’s Consolidated Statements of Income. The Company recognized investment income of $3.3 million, $3.0 million, and investment loss of $931 thousand in fiscal years ended December, 26, 2020, December 28, 20219, and December 29, 2018 The changes in the underlying liability to the associates are recorded in “Other income (expense).”
Note 3 Inventories
Merchandise inventories, as of December 26, 2020 and December 28, 2019, were valued as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
LIFO
|
$
|
191,051
|
$
|
204,043
|
Average cost
|
|
77,973
|
|
75,763
|
|
$
|
269,024
|
$
|
279,806
|
Management believes the use of the LIFO method for valuing certain inventories represents the most appropriate matching of costs and revenues in the Company’s circumstances. If all inventories were valued on the average cost method, which approximates current cost, total inventories would have been $70.4 million and $70.7 million higher than as reported on the above methods as of December 26, 2020 and December 28, 2019, respectively. During 2020 and 2019, the Company had certain decrements in its LIFO pools, which had an insignificant impact on the cost of sales.
Note 4 Property and Equipment
Property and equipment, as of December 26, 2020 and December 28, 2019, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
|
|
(dollars in thousands)
|
(in years)
|
|
2020
|
|
2019
|
Land
|
|
$
|
137,890
|
$
|
137,977
|
Buildings and improvements
|
10-60
|
|
779,927
|
|
736,812
|
Equipment
|
3-12
|
|
1,159,084
|
|
1,096,252
|
Leasehold improvements
|
5-20
|
|
225,393
|
|
217,664
|
Total, at cost
|
|
|
2,302,294
|
|
2,188,705
|
Less accumulated depreciation and amortization
|
|
|
1,377,865
|
|
1,301,777
|
|
|
$
|
924,429
|
$
|
886,928
|
Note 5 Lease Commitments
The adoption of ASU 2016-02 Leases (Topic 842) had a significant impact on the Company’s Consolidated Balance Sheets, resulting in operating lease right-to-use assets of $202 million and lease liabilities of $211 million as of December 30, 2018. The difference between the operating lease right-to-use assets and lease liabilities represents prepaid and accrued rents, unfavorable lease obligations, favorable lease assets and deferred tenant allowances associated with operating leases as of December 30, 2018 and reclassified against the operating lease right-to-use asset upon adoption.
The following is a schedule of the lease costs included in “Operating, general and administrative expenses” for the fiscal year ended December 26, 2020.
|
|
|
|
|
|
(dollars in thousands)
|
2020
|
|
2019
|
Operating lease cost
|
$
|
46,283
|
|
$
|
46,063
|
Variable lease cost
|
|
11,167
|
|
|
10,998
|
Lease or sublease income
|
|
(8,636)
|
|
|
(7,749)
|
Net lease cost
|
$
|
48,814
|
|
$
|
49,312
|
The following is a schedule by years of the future minimum rental payments required under operating leases and total minimum sublease and lease rental income to be received as of December 26, 2020.
|
|
|
|
(dollars in thousands)
|
|
Leases
|
Subleases
|
2021
|
$
|
46,631
|
(3,683)
|
2022
|
|
41,800
|
(3,126)
|
2023
|
|
37,108
|
(2,462)
|
2024
|
|
31,925
|
(1,696)
|
2025
|
|
23,953
|
(1,336)
|
Thereafter
|
|
59,734
|
(4,846)
|
Total Lease Payments
|
$
|
241,151
|
(17,149)
|
Less: Interest
|
|
32,922
|
-
|
Present value of lease liabilities
|
|
208,229
|
(17,149)
|
The following is a schedule of weighted-average remaining lease terms and weighted-average discount rates as of December 26, 2020 and December 28, 2019.
|
|
|
|
|
Lease Term and Discount Rate
|
|
December 26, 2020
|
|
December 28, 2019
|
Weighted-average remaining lease term
|
|
4.06
|
|
4.44
|
Weighted-average discount rate
|
|
3.36%
|
|
3.47%
|
Prior to the adoption of the ASU, leases generally provide for fixed annual rentals, minimum annual rentals, contingent rentals and sublease income.
Rent expense and income on all leases for the fiscal year ended December 29, 2018 consisted of:
|
|
|
(dollars in thousands)
|
2018
|
Minimum annual rentals
|
$
|
47,253
|
Contingent rentals
|
|
419
|
Lease or sublease income
|
|
(7,757)
|
|
$
|
39,915
|
Note 6 Retirement Plans
The Company has a qualified retirement savings plan, the Weis Markets, Inc. Retirement Savings Plan, covering substantially all associates. The plan has a contributory component as well as a noncontributory profit-sharing component for certain associates. The noncontributory component covers eligible associates which included certain salaried associates, store management and administrative support personnel. The Company also has a non-qualified supplemental retirement plan covering highly compensated employees of the Company. The Company’s policy is to fund retirement plan costs as accrued, with the exception of the deferred compensation plan. Employer contributions to the qualified retirement plan are made at the sole discretion of the Company.
Retirement plan costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Retirement savings plan
|
|
4,949
|
|
3,434
|
|
3,525
|
Deferred compensation plan
|
|
806
|
|
801
|
|
508
|
Supplemental executive retirement plan
|
|
463
|
|
498
|
|
390
|
|
$
|
6,218
|
$
|
4,733
|
$
|
4,423
|
The Company maintains a non-qualified deferred compensation plan for the payment of specific amounts of annual retirement benefits to certain officers or their beneficiaries over an actuarially computed normal life expectancy. Currently, there are no active officers in the plan. The expected payments under the plan provisions were determined through actuarial calculations dependent on the age of the recipient, using an assumed discount rate. The plan is unfunded and accounted for on an accrual basis. The recorded liability at December 26, 2020 is $4.0 million which is based on expected payments to be made over the remaining lives of the beneficiaries. This amount is included in “Accrued expenses” and “Postretirement benefit obligations” in the Consolidated Balance Sheets. The expected payment amounts are approximately $1.0 million for 2021 and for the years thereafter dependent on the lives of the beneficiaries.
The Company also maintains a non-qualified supplemental executive retirement plan for certain of its associates. This plan is designed to provide retirement benefits and salary deferral opportunities because of limitations imposed by the Internal Revenue Code and the Regulations implemented by the Internal Revenue Service. This plan is unfunded and accounted for on an accrual basis. Participants in this plan are excluded from participation in the profit sharing portion of the Weis Markets, Inc. Retirement Savings Plan once their yearly earnings exceed the IRS highly compensated threshold. The Board of Directors annually determines the amount of the allocation to the plans at its sole discretion. The allocation among the various plan participants is made in both flat dollar amounts and in relationship to their compensation. Plan participants are 100% vested in their accounts after three years of service with the Company. Benefits are distributed among participants upon termination or retirement. Substantial risk of benefit forfeiture does exist for participants in this plan. The present value of accumulated benefits amounted to $22.8 million and $19.0 million at December 26, 2020 and December 28, 2019, respectively, and is included in “Postretirement benefit obligations” in the Consolidated Balance Sheets.
Note 7 Revenue Recognition
The Chief Operating Officer, the Company’s chief operating decision maker, analyzed store operational revenues by geographical area but each area offers customers similar product, has similar distribution methods, and supported by centralized management processes. The Company’s operations are reported as a single reportable segment.
The following table represents net sales by type of product for years ending December 26, 2020, December 28, 2019 and December 29, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended
|
(dollars in thousands)
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Grocery
|
$
|
3,627,898
|
|
88.2
|
%
|
|
$
|
3,068,754
|
|
86.6
|
%
|
|
$
|
3,063,218
|
|
87.3
|
%
|
Pharmacy
|
|
356,630
|
|
8.7
|
|
|
|
337,233
|
|
9.5
|
|
|
|
314,584
|
|
9.0
|
|
Fuel
|
|
117,800
|
|
2.9
|
|
|
|
127,828
|
|
3.6
|
|
|
|
125,993
|
|
3.6
|
|
Manufacturing
|
|
10,273
|
|
0.2
|
|
|
|
9,484
|
|
0.3
|
|
|
|
5,475
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
$
|
4,112,601
|
|
100.0
|
%
|
|
$
|
3,543,299
|
|
100.0
|
%
|
|
$
|
3,509,270
|
|
100.0
|
%
|
Note 8 Accumulated Other Comprehensive Income
All balances in accumulated other comprehensive income are related to available-for-sale marketable securities. The following table sets forth the balance of the Company’s accumulated other comprehensive income, net of tax.
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
on Available-for-Sale
|
(dollars in thousands)
|
|
Marketable Securities
|
Accumulated other comprehensive income balance as of December 29, 2018
|
$
|
262
|
|
|
|
Other comprehensive loss before reclassifications
|
|
1,255
|
Amounts reclassified from accumulated other comprehensive income
|
|
(37)
|
Net current period other comprehensive Income
|
|
1,218
|
Accumulated other comprehensive income balance as of December 28, 2019
|
$
|
1,480
|
|
|
|
Other comprehensive income before reclassifications
|
|
1,806
|
Amounts reclassified from accumulated other comprehensive income
|
|
-
|
Net current period change in other comprehensive income
|
|
1,806
|
Accumulated other comprehensive income balance as of December 26, 2020
|
$
|
3,286
|
The following table sets forth the effects on net income of the amounts reclassified out of accumulated other comprehensive income for the periods ended December 26, 2020, December 28, 2019 and December 29, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from
|
|
|
Accumulated Other Comprehensive Income to the
|
|
|
Consolidated Statements of Income
|
(dollars in thousands)
|
Location
|
2020
|
2019
|
2018
|
Unrealized gains (losses) on available-for-sale marketable securities
|
|
|
|
|
|
|
|
Investment income (loss) and interest expense
|
$
|
-
|
$
|
(51)
|
$
|
(54)
|
|
Provision for income taxes
|
|
-
|
|
14
|
|
14
|
Total amount reclassified, net of tax
|
$
|
-
|
$
|
(37)
|
$
|
(40)
|
Note 9 Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
29,121
|
$
|
11,779
|
$
|
11,385
|
State
|
|
9,984
|
|
3,117
|
|
4,594
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
4,090
|
|
6,636
|
|
6,059
|
State
|
|
1,567
|
|
(871)
|
|
(2,640)
|
|
$
|
44,762
|
$
|
20,661
|
$
|
19,398
|
The reconciliation of income taxes computed at the federal statutory rate of 21% in 2020, 2019 and 2018. Ending deferred tax liability has been computed at the federal statutory rate of 21%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Income taxes at federal statutory rate
|
$
|
34,373
|
$
|
18,615
|
$
|
17,249
|
State income taxes, net of federal income tax benefit
|
|
7,261
|
|
1,333
|
|
639
|
Nondeductible employee-related expenses
|
|
2,223
|
|
1,974
|
|
768
|
2017 tax reform
|
|
-
|
|
-
|
|
657
|
Other
|
|
905
|
|
(1,261)
|
|
85
|
Provision for income taxes (effective tax rate 27.3%, 23.3% and 23.6%, respectively)
|
$
|
44,762
|
$
|
20,661
|
$
|
19,398
|
The effective income tax rate was 27.3%, 23.3% and 23.6% in 2020, 2019, and 2018, respectively. The effective income tax rate differs from the federal statutory rate of 21% primarily due to state taxes as well as nondeductible employee expenses. Not all the Company’s tax credits and state deductions are driven proportionately by taxable income levels, due to these items and the significant increase in taxable income from prior years, the result was a higher effective income tax rate for 2020.
Cash paid for federal income taxes was $33.5 million, $11.3 million $4.5 million and in 2020, 2019 and 2018 respectively. Cash paid for state income taxes was $8.8 million, $2.8 million and $2.1 million in 2020, 2019 and 2018 respectively.
Note 9 Income Taxes (continued)
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 26, 2020 and December 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Accounts receivable
|
$
|
659
|
$
|
749
|
Employment incentives
|
|
6,204
|
|
4,735
|
Self-insurance liability
|
|
8,515
|
|
7,344
|
Postretirement benefit obligations
|
|
6,527
|
|
6,054
|
Net operating loss and credit carryforwards
|
|
7,787
|
|
9,945
|
Unrecognized Tax Benefits
|
|
1,751
|
|
1,389
|
Other
|
|
1,407
|
|
611
|
Total deferred tax assets
|
|
32,850
|
|
30,827
|
Deferred tax liabilities:
|
|
|
|
|
Inventories
|
|
(13,407)
|
|
(13,072)
|
Unrealized gains on marketable securities
|
|
(3,059)
|
|
(2,851)
|
Prepaids
|
|
(5,993)
|
|
(4,883)
|
Nondeductible accruals and other
|
|
(332)
|
|
(926)
|
Depreciation
|
|
(113,463)
|
|
(106,136)
|
Total deferred tax liabilities
|
|
(136,254)
|
|
(127,868)
|
Net deferred tax liability
|
$
|
(103,404)
|
$
|
(97,041)
|
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
2019
|
Unrecognized tax benefits at beginning of year
|
$
|
6,612
|
$
|
6,405
|
Increases based on tax positions related to the current year
|
|
1,725
|
|
1,769
|
Additions for tax positions of prior year
|
|
-
|
|
-
|
Reductions for tax positions of prior years
|
|
-
|
|
-
|
Settlements
|
|
-
|
|
-
|
Expiration of the statute of limitations for assessment of taxes
|
|
-
|
|
(1,562)
|
Unrecognized tax benefits at end of year
|
$
|
8,337
|
$
|
6,612
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.7 million in 2020, $1.8 million in 2019 and $1.7 million in 2018.
The Company or one of its subsidiaries files tax returns in the United States and various state jurisdictions. The tax years subject to examination in the United State and in Pennsylvania, where the majority of the Company's revenues are generated, are 2016 to 2020.
The Company has net operating loss carryforwards of $72 million available for state income tax purposes. The net operating losses will begin to expire starting in 2027. The Company expects to fully utilize these net operating loss carryforwards.
Note 10 Summary of Quarterly Results (Unaudited)
Quarterly financial data for 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Thirteen Weeks Ended
|
|
|
|
March 28, 2020
|
|
June 27, 2020
|
|
September 26, 2020
|
|
December 26, 2020
|
|
Net sales
|
|
$
|
985,820
|
|
$
|
1,098,704
|
|
$
|
1,002,387
|
|
$
|
1,025,690
|
|
Gross profit on sales
|
|
|
264,147
|
|
|
292,888
|
|
|
274,333
|
|
|
269,066
|
|
Net income
|
|
|
26,689
|
|
|
41,472
|
|
|
31,336
|
|
|
19,420
|
|
Basic and diluted earnings per share
|
|
$
|
0.99
|
|
$
|
1.54
|
|
$
|
1.16
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Thirteen Weeks Ended
|
|
|
March 30, 2019
|
|
June 29, 2019
|
|
September 28, 2019
|
|
December 28, 2019
|
Net sales
|
|
$
|
876,718
|
|
$
|
887,967
|
|
$
|
876,222
|
|
$
|
902,392
|
Gross profit on sales
|
|
|
229,552
|
|
|
236,670
|
|
|
232,825
|
|
|
239,147
|
Net income
|
|
|
14,304
|
|
|
20,475
|
|
|
14,319
|
|
|
18,885
|
Basic and diluted earnings per share
|
|
$
|
0.53
|
|
$
|
0.76
|
|
$
|
0.53
|
|
$
|
0.70
|
Note 11 Fair Value Information
The carrying amounts for cash, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. The fair values of the Company’s marketable securities, as disclosed in Note 2, are based on quoted market prices and institutional pricing guidelines for those securities not classified as Level 1 securities. The Company’s SERP investments are classified as trading securities and are carried at fair value using Level 1 inputs.
Note 12 Commitments and Contingencies
The Company is involved in various legal actions arising out of the normal course of business. The Company also accrues for contingencies when it is probable that a liability has been incurred and the amount of the contingency can be reasonably estimated, based on experience. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
Note 13 Long-Term Debt
On September 1, 2016 Weis Markets entered into a revolving credit agreement with Wells Fargo Bank, National Association (the “Credit Agreement”), which was amended on August 21, 2019 and matures on September 1, 2022. The Credit Agreement provides for an unsecured revolving credit facility with an aggregate principal amount not to exceed $30.0 million with an additional discretionary amount available of $70.0 million. As of December 26, 2020, the availability under the revolving credit agreement was $25.1 million, net of $4.9 million letters of credit. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.
Interest expense related to long-term debt was $35 thousand and $55 thousand for 2020 and 2019, respectively.
Note 14 COVID-19
On March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus pandemic. The coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of the geographical area in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the novel coronavirus pandemic.
The Company’s business being deemed essential resulted in incremental financial performance that may not be indicative of future financial results and there remains uncertainty and increased risks concerning its employees, customers, supply chain and government regulation.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Weis Markets, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Weis Markets, Inc. and its subsidiaries (the Company) as of December 26, 2020 and December 28, 2019, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the 52 week periods ended December 26, 2020, December 28, 2019 and December 29, 2018, and the related notes to the consolidated financial statements and the financial statement schedule listed in the accompanying index (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for the 52 week periods ended December 26, 2020, December 28, 2019 and December 29, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 26, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income taxes
As described in Notes 1 and 9 of the consolidated financial statements, the Company operates 196 stores across seven states in the U.S. and a centralized distribution center in Pennsylvania. The Company’s provision for income taxes is impacted based on interpretations of various state and local income tax laws. Management prepared the Company’s provision for state income taxes using significant judgment when interpreting the provisions of state and local tax regulations and assessing the positions taken as a result of these considerations as to whether or not the amount of benefit recorded would be more likely than not to be sustained upon examination.
We identified the evaluation of the Company’s provision for state income taxes and its assessment of more likely than not surrounding state tax positions as a critical audit matter due to the significant judgments made by management when assessing the complex provisions of the tax laws and regulations. Auditing the matter required significant auditor judgment and increased audit effort, including the use of our state and local tax professionals, in evaluating the recorded results of management’s tax positions and their assessment of the sustainability of these tax positions.
Our audit procedures related to the Company’s provision for state income taxes include the following, among others:
We obtained an understanding of the relevant controls related to the determination of current and deferred taxes and the assessment of more likely than not surrounding state tax positions and tested such controls for design and operating effectiveness, including controls related to the interpretation and application of tax laws.
We involved our state and local tax professionals to assist in evaluating the application of state and local tax regulations. Our professionals developed an independent assessment of interpretations of state and local tax positions requiring significant judgement and compared them to the Company’s recorded positions.
We tested the accuracy and completeness of the data and inputs used to calculate the effective state tax rate, current provision calculations, deferred tax assets/liabilities, more likely than not state tax positions assessment and income taxes receivable/payable rollforward.
Retail inventory and related cost of sales
As described in Note 1 to the consolidated financial statements, the Company accounts for retail center store inventory under the retail inventory method (RIM) using the last-in, first-out (LIFO) method. RIM is commonly used by retail companies to determine cost and calculate gross margin based on applying a cost-to-retail ratio to each similar merchandise category’s ending retail value.
We identified the auditing of RIM inventory as a critical audit matter due to the increased audit effort, including involvement of more experienced audit team members and our information technology (IT) professionals. The RIM inventory computations utilize critical inputs dependent on multiple information systems that capture and process high volume transactions that elevates the importance of data interfaces and reliability of information systems.
Our audit procedures related to the Company’s RIM inventory include the following, among others:
We obtained an understanding of the relevant controls, including IT general controls, surrounding the retail inventory valuation process and tested such controls for design and operating effectiveness, including automated processes and transactional data interfaces and managements review controls over these data inputs and the Company’s RIM calculation outputs.
We tested the accuracy and completeness of the key inputs into the RIM calculation, including purchases, sales, discounts, shrink and price changes (markdowns) by comparing the key inputs back to source information such as point of sale information via retail pricing and tender/cash receipts, third-party vendor invoices and third-party inventory count information, including testing of a rollforward from the inventory count date to year-end inventory valuation.
We performed analytical procedures disaggregated by inventory category. Such disaggregated analytical procedures included trend analysis of RIM inputs based on warehouse and direct store delivery purchases as percent of sales, cost of sales percentages compared to historical periods and trends, and discounts and markdown analytics based on inquiries with various Company personnel to assess the level of retail price changes due to pricing and promotional strategies and inflation/deflation within a category. Additional analytics include trends analyses on store count and shrink results, store square footage analytics related to ending store level inventory values and gross profit analytics by category.
/s/ RSM US LLP
We have served as the Company's auditor since 2016.
Philadelphia, Pennsylvania
March 11, 2021