NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
1.
|
Description of the Business
|
Cracker Barrel Old Country Store, Inc. and its affiliates (collectively, in the Notes, the “Company”) are principally
engaged in the operation and development in the United States (“U.S.”) of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.
2.
|
Summary of Significant Accounting Policies
|
GAAP – The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted
accounting principles in the U.S. (“GAAP”).
Fiscal year – The Company’s fiscal year ends on the Friday nearest July 31st and each quarter consists of thirteen weeks
unless noted otherwise. The Company’s fiscal year ended August 3, 2018 consisted of 53 weeks and the fourth quarter of 2018 consisted of fourteen weeks. References in these Notes to a year or quarter are to the Company’s fiscal year
or quarter unless noted otherwise.
Principles of consolidation – The Consolidated Financial Statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated.
Cash and cash equivalents – The Company’s policy is to consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Accounts receivable – Accounts receivable represent their estimated net realizable value. Accounts receivable are written
off when they are deemed uncollectible.
Inventories – In 2017, inventories were stated at the lower of cost or market. In the first quarter of 2018, the Company
adopted new accounting guidance which required companies to measure certain inventory at lower of cost and net realizable value (see section below entitled “Inventory” under “Recent Accounting Pronouncements Adopted”. Cost of
restaurant inventory is determined by the first‑in, first‑out (“FIFO”) method. Retail inventories are valued using the retail inventory method (“RIM”) except at the retail distribution center which are valued using moving average
cost. Approximately 80% of retail inventories are valued using RIM. Retail inventories valued using RIM are stated at the lower of cost or market. Cost of restaurant inventory and retail inventory valued using moving average cost are
stated at the lower of cost and net realizable value. See Note 4 for additional information regarding the components of inventory.
Valuation provisions are included for retail inventory obsolescence, retail inventory shrinkage, returns and amortization of
certain items. Retail inventory also includes an estimate of retail inventory shrinkage that is adjusted upon physical inventory counts. Annual physical inventory counts are conducted throughout the third quarter based upon a cyclical
inventory schedule. An estimate of shrinkage is recorded for the time period between physical inventory counts by using a three-year average of the physical inventories’ results on a store-by-store basis.
Property and equipment – Property and equipment are stated at cost. For financial reporting purposes, depreciation and
amortization on these assets are computed by use of the straight‑line and double‑declining balance methods over the estimated useful lives of the respective assets, as follows:
|
|
Years
|
|
Buildings and improvements
|
|
|
30-45
|
|
Buildings under capital leases
|
|
|
15-25
|
|
Restaurant and other equipment
|
|
|
2-10
|
|
Leasehold improvements
|
|
|
1-35
|
|
Accelerated depreciation methods are generally used for income tax purposes.
Total depreciation expense and depreciation expense related to store operations for each of the three years are as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Total depreciation expense
|
|
$
|
93,266
|
|
|
$
|
85,912
|
|
|
$
|
77,816
|
|
Depreciation expense related to store operations*
|
|
|
86,913
|
|
|
|
79,214
|
|
|
|
71,382
|
|
*Depreciation expense related to store operations is included in other store operating expenses in the Consolidated Statements of Income.
Gain or loss is recognized upon disposal of property and equipment. The asset and related accumulated depreciation and
amortization amounts are removed from the accounts.
Maintenance and repairs, including the replacement of minor items, are charged to expense and major additions to property
and equipment are capitalized.
Impairment of long-lived assets – The Company assesses the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the
asset. If the total expected future cash flows are less than the carrying value of the asset, the carrying value is written down, for an asset to be held and used, to the estimated fair value or, for an asset to be disposed of, to the
fair value, net of estimated costs of disposal. Any loss resulting from impairment is recognized by a charge to income.
Derivative instruments and hedging activities – The Company is exposed to market risk, such as changes in interest rates and
commodity prices. The Company has interest rate risk relative to its outstanding borrowings, which bear interest at the Company’s election either at the prime rate or LIBOR plus a percentage point spread based on certain specified
financial ratios under its revolving credit facility (see Note 5). The Company’s policy has been to manage interest cost using a mix of fixed and variable rate debt. To manage this risk in a cost efficient manner, the Company uses
derivative instruments, specifically interest rate swaps.
Companies may elect whether or not to offset related assets and liabilities and report the net amount
on their financial statements if the right of setoff exists. Under a master netting agreement, the Company has the legal right to offset the amounts owed to the Company against amounts owed by the Company under a derivative instrument
that exists between the Company and a counterparty. When the Company is engaged in more than one outstanding derivative transaction with the same counterparty and also has a legally enforceable master netting agreement with that
counterparty, its credit risk exposure is based on the net exposure under the master netting agreement. If, on a net basis, the Company owes the counterparty, the Company regards its credit exposure to the counterparty as being zero.
The Company does not hold or use derivative instruments for trading purposes. The Company also does not have any
derivatives not designated as hedging instruments and has not designated any non-derivatives as hedging instruments. See Note 6 for additional information on the Company’s derivative and hedging activities.
Segment reporting – Operating segments are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Using these criteria, the Company manages its business on the basis of one reportable
operating segment (see Note 8 for additional information regarding segment reporting).
Revenue recognition – The Company records revenue from the sale of products as they are sold. The Company provides for
estimated returns based on return history and sales levels. The Company’s policy is to present sales in the Consolidated Statements of Income on a net presentation basis after deducting sales tax.
Unredeemed gift cards and certificates – Unredeemed gift cards and certificates represent a liability of the Company related
to unearned income and are recorded at their expected redemption value. No revenue is recognized in connection with the point-of-sale transaction when gift cards or gift certificates are sold. For those states that exempt gift cards
and certificates from their escheat laws, the Company makes estimates of the ultimate unredeemed (“breakage”) gift cards and certificates in the period of the original sale and amortizes this breakage over the redemption period that
other gift cards and certificates historically have been redeemed by reducing its liability and recording revenue accordingly. For those states that do not exempt gift cards and certificates from their escheat laws, the Company records
breakage in the period that gift cards and certificates are remitted to the state and reduces its liability accordingly. Any amounts remitted to states under escheat or similar laws reduce the Company’s deferred revenue liability and
have no effect on revenue or expense while any amounts that the Company is permitted to retain are recorded as revenue.
Insurance – The Company self-insures a significant portion of its workers’ compensation and general liability programs. The
Company purchases insurance for individual workers’ compensation claims that exceed $250, $750 or $1,000 depending on the state in which the claim originates. The Company purchases insurance for individual general liability claims that
exceed $500.
The Company records a reserve for workers’ compensation and general liability for all unresolved claims and for an estimate
of incurred but not reported claims (“IBNR”). These reserves and estimates of IBNR claims are based upon a full scope actuarial study which is performed annually at the end of the Company’s third quarter and is adjusted by the
actuarially determined losses and actual claims payments for the fourth quarter. Additionally, the Company performs limited scope actuarial studies on a quarterly basis to verify and/or modify the Company’s reserves. The reserves and
losses in the actuarial study represent a range of possible outcomes within which no given estimate is more likely than any other estimate. As such, the Company records the losses at the lower end of that range and discounts them to
present value using a risk-free interest rate based on projected timing of payments. The Company also monitors actual claims development, including incurrence or settlement of individual large claims during the interim periods between
actuarial studies as another means of estimating the adequacy of its reserves.
The Company’s group health plans combine the use of self-insured and fully-insured programs. Benefits for any individual
(employee or dependents) in the self-insured program are limited. The Company records a liability for the self-insured portion of its group health program for all unpaid claims based upon a loss development analysis derived from actual
group health claims payment experience. The Company also records a liability for unpaid prescription drug claims based on historical experience.
Store pre-opening costs – Start-up costs of a new store are expensed when incurred, with the exception of rent expense under
operating leases, in which the straight-line rent includes the pre-opening period during construction, as explained further under the “Leases” section in this Note.
Leases – The Company’s leases are classified as either capital or operating leases. The Company has ground leases and
office space leases that are recorded as operating leases. The Company also leases its advertising billboards which are recorded as operating leases. A majority of the Company’s lease agreements provide renewal options and some of
these options contain rent escalation clauses. Additionally, some of the leases have rent holiday and contingent rent provisions. During rent holiday periods, which include the pre-opening period during construction, the Company has
possession of and access to the property, but is not obligated to, and normally does not, make rent payments. Contingent rent is determined as a percentage of gross sales in excess of specified levels. The Company records a contingent
rent liability and corresponding rent expense when it is probable sales have been achieved in amounts in excess of the specified levels.
The liabilities under these leases are recognized on the straight-line basis over the shorter of the useful life, with a
maximum of 35 years, or the related lease life. The Company uses a lease life that generally begins on the date that the Company becomes legally obligated under the lease, including the rent holiday periods, and generally extends
through certain renewal periods that can be exercised at the Company’s option, for which at the inception of the lease, it is reasonably assured that the Company will exercise those renewal options. This lease period is consistent with
the period over which leasehold improvements are amortized.
Advertising – The Company expenses the costs of producing advertising the first time the advertising takes place. Other
advertising costs are expensed as incurred.
Advertising expense for each of the three years was as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Advertising expense
|
|
$
|
83,448
|
|
|
$
|
83,623
|
|
|
$
|
79,409
|
|
Share-based compensation – The Company’s share-based compensation consists of nonvested stock awards and units and
performance-based market stock units (“MSU Grants”). Share-based compensation is recorded in general and administrative expenses in the Consolidated Statements of Income. Share-based compensation expense is recognized based on the
grant date fair value and the achievement of performance conditions for certain awards. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period, which is generally the award’s
vesting period, or to the date on which retirement eligibility is achieved, if shorter.
Certain nonvested stock awards and units and the Company’s MSU Grants contain performance conditions. Compensation expense
for performance-based awards is recognized when it is probable that the performance criteria will be met. If any performance goals are not met, no compensation expense is ultimately recognized and, to the extent previously recognized,
compensation expense is reversed.
If a share-based compensation award is modified after the grant date, incremental compensation expense is recognized in an
amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Incremental compensation expense for vested awards is recognized immediately. For
unvested awards, the sum of the incremental compensation expense and the remaining unrecognized compensation expense for the original award on the modification date is recognized over the modified service period.
Additionally, the Company’s policy is to issue shares of common stock to satisfy exercises of share-based compensation
awards.
Income taxes – The Company’s provision for income taxes includes employer tax credits for FICA taxes paid on employee tip
income and other employer tax credits are accounted for by the flow-through method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company recognizes (or derecognizes) a tax position taken or expected to be taken in a tax return in the financial statements when it is more likely than not (i.e., a
likelihood of more than fifty percent) that the position would be sustained (or not sustained) upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. The Company recognizes, net of tax, interest and estimated penalties related to uncertain tax positions in its provision for income taxes. See Note 13 for additional
information regarding income taxes.
Comprehensive income – Comprehensive income includes net income and the effective unrealized portion of the changes in the
fair value of the Company’s interest rate swaps.
Net income per share – Basic consolidated net income per share is computed by dividing consolidated net income to common
shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted consolidated net income per share reflects the potential dilution that could occur if securities, options or other contracts to
issue common stock were exercised or converted into common stock and is based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares related to stock options,
nonvested stock awards and units and MSU Grants issued by the Company are calculated using the treasury stock method. The outstanding stock options, nonvested stock awards and units and MSU Grants issued by the Company represent the
only dilutive effects on diluted consolidated net income per share. See Note 14 for additional information regarding net income per share.
Use of estimates – Management of the Company has made certain estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods to prepare these Consolidated Financial
Statements in conformity with GAAP. Management believes that such estimates have been based on reasonable and supportable assumptions and that the resulting estimates are reasonable for use in the preparation of the Consolidated
Financial Statements. Actual results, however, could differ from those estimates.
Recent Accounting Pronouncements Adopted
Inventory
In July 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance which requires
companies to measure certain inventory at the lower of cost and net realizable value. This accounting guidance does not apply to inventories measured by using either the last-in, first-out method or the retail inventory method. This
accounting guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years on a prospective basis. The adoption of this accounting guidance in the first quarter of 2018 did not
have a significant impact on the Company’s consolidated financial position or results of operations.
Deferred Taxes
In November 2015, in order to simplify the presentation of deferred income taxes, the FASB issued accounting
guidance which requires deferred tax liabilities and assets to be classified as noncurrent in the balance sheet. This accounting guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those
fiscal years. This accounting guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Other than the revised balance sheet presentation of deferred tax
liabilities and assets, the adoption of this accounting guidance on a prospective basis in the first quarter of 2018 did not have a significant impact on the Company’s consolidated financial position or results of operations. Prior
periods were not retrospectively adjusted for the adoption of this accounting guidance.
Share-Based Payments
In March 2016, the FASB issued accounting guidance in order to simplify certain aspects of the accounting and
presentation of share-based payments, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This accounting guidance is effective for fiscal
periods beginning after December 15, 2016, and interim periods within those fiscal years. This guidance may be applied either on a prospective basis, retrospective basis or a modified retrospective basis depending on the specific
accounting topic covered in the accounting guidance. The Company adopted this accounting guidance in the first quarter of 2018. The impact of recognizing excess tax benefits of $759 as a reduction to the provision for income taxes on
a prospective basis resulted in a benefit of $0.03 per diluted share in the first quarter of 2018. The Company elected to apply the presentation of excess tax benefits on the statement of cash flows on a prospective basis; prior
periods were not retrospectively adjusted. The Company also elected to continue estimating forfeitures of share-based awards.
Recent Accounting Pronouncements Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued accounting guidance which clarifies the principles for recognizing revenue and provides a
comprehensive model for revenue recognition. Revenue recognition should 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 disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This accounting guidance is effective for fiscal years beginning after
December 15, 2017 and interim periods within those years. The Company is in the process of evaluating the Company’s current revenue recognition process in comparison to the adoption of this guidance. The Company plans to adopt this
accounting guidance using the modified retrospective transition method. The adoption of this accounting guidance in the first quarter of 2019 is not expected to have a material effect on the Company’s consolidated financial position or
results of operations, and the Company does not anticipate recording a cumulative catch-up adjustment to the opening balance of retained earnings.
Leases
In February 2016, the FASB issued accounting guidance which requires the recognition of lease assets and lease liabilities
on the balance sheet and disclosure of key information about leasing arrangements. The accounting guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years on a modified
retrospective basis. Early adoption is permitted. The Company is in the process of implementing software to assist in the quantification of the impact on the Company’s consolidated financial position and results of operations related
to the adoption of this accounting guidance in the first quarter of 2020.
Recognition of Breakage for Certain Prepaid Stored-Value Products
In March 2016, in order to address diversity in practice related to the derecognition of a prepaid stored-value product
liability, the FASB issued accounting guidance requiring breakage for prepaid stored-value product liabilities to be accounted for consistent with the breakage guidance in the revenue recognition standard (see “Revenue Recognition”
above). This accounting guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. This accounting guidance may be applied either on a modified retrospective basis or on a
retrospective basis. The Company does not expect that the adoption of this accounting guidance in the first quarter of 2019 will have a significant impact on the Company’s consolidated financial position or results of operations.
Modification of Share-Based Payment Awards
In May 2017, the FASB issued accounting guidance to provide clarity, reduce the diversity in practice and to simplify the
accounting guidance related to a change to the terms or conditions of a share-based payment award. This new standard provides guidance for evaluating which changes to the terms or conditions of a share-based payment award are
substantive and require modification accounting to be applied. This accounting guidance is effective for fiscal periods beginning after December 15, 2017, and interim periods within those years on a prospective basis. The Company does
not expect that the adoption of this accounting guidance in the first quarter of 2019 will have a significant impact on the Company’s consolidated financial position or results of operations.
Accounting for Hedging Activities
In August 2017, the FASB issued accounting guidance which amends the recognition, presentation and disclosure requirements
of hedge accounting in order to better portray the economics of entities’ risk management activities, increase transparency and understandability of hedging relationships and simplify the application of hedge accounting. This
accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted. The recognition requirements for cash flow and net investment hedges
existing at the date of adoption will be applied using a cumulative-effect adjustment to retained earnings. The amended presentation and disclosure requirements will be applied on a prospective basis. The Company is currently
evaluating the impact of adopting this accounting guidance in the first quarter of 2020.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
On December 22, 2017, the U.S. government enacted P.L. 115-97, the Tax Cuts and Jobs Act (the “Tax Act”). In February 2018,
the FASB issued accounting guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulted from the Tax Act. This accounting guidance is effective for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. If elected, this accounting guidance should be applied either in the period of adoption or retrospectively to each period in which the change in the
U.S. federal corporate rate in the Tax Act is recognized. Early application is permitted. The Company is currently evaluating the impact of adopting this accounting guidance in the first quarter of 2020.
Share-Based Payment Arrangements With Nonemployees
In June 2018, the FASB issued accounting guidance in order to simplify accounting for share-based payments granted to
nonemployees for goods and services. This new guidance aligns most of the accounting requirements for share-based payments granted to nonemployees with the existing guidance for share-based payments granted to employees. This
accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, using a modified retrospective transition approach. Early adoption is permitted. The Company does not
expect that the adoption of this accounting guidance in the first quarter of 2020 will have a significant impact on the Company’s consolidated financial position or results of operations.
3.
|
Fair Value Measurements
|
Fair value for certain of the Company’s assets and liabilities is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, a three level hierarchy for inputs is used. These levels are:
·
|
Quoted Prices in Active Markets for Identical Assets (“Level 1”) – quoted prices (unadjusted) for an identical asset or liability in an active market.
|
·
|
Significant Other Observable Inputs (“Level 2”) – quoted prices for a similar asset or liability in an active market or model-derived valuations in which all
significant inputs are observable for substantially the full term of the asset or liability.
|
·
|
Significant Unobservable Inputs (“Level 3”) – unobservable and significant to the fair value measurement of the asset or liability.
|
The Company’s assets and liabilities measured at fair value on a recurring basis at August 3, 2018 were as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
Value
|
|
Cash equivalents*
|
|
$
|
38,446
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
38,446
|
|
Interest rate swap asset (see Note 6)
|
|
|
--
|
|
|
|
6,255
|
|
|
|
--
|
|
|
|
6,255
|
|
Total
|
|
$
|
38,446
|
|
|
$
|
6,255
|
|
|
$
|
--
|
|
|
$
|
44,701
|
|
Deferred compensation plan assets** measured at net asset value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,669
|
|
Total assets at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability (see Note 6)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Total liabilities at fair value
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
The Company’s assets and liabilities measured at fair value on a recurring basis at July 28, 2017 were as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
Value
|
|
Cash equivalents*
|
|
$
|
82,524
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
82,524
|
|
Interest rate swap asset (see Note 6)
|
|
|
--
|
|
|
|
32
|
|
|
|
--
|
|
|
|
32
|
|
Deferred compensation plan assets**
|
|
|
31,196
|
|
|
|
--
|
|
|
|
--
|
|
|
|
31,196
|
|
Total assets at fair value
|
|
$
|
113,720
|
|
|
$
|
32
|
|
|
$
|
--
|
|
|
$
|
113,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability (see Note 6)
|
|
$
|
--
|
|
|
$
|
6,880
|
|
|
$
|
--
|
|
|
$
|
6,880
|
|
Total liabilities at fair value
|
|
$
|
--
|
|
|
$
|
6,880
|
|
|
$
|
--
|
|
|
$
|
6,880
|
|
*Consists of money market fund investments.
**Represents plan assets invested in mutual funds established under a Rabbi Trust for the Company’s non-qualified savings plan and is included
in the Consolidated Balance Sheets as other assets (see Note 12).
The Company’s money market fund investments are measured at fair value using quoted market prices. The fair values of the
Company’s interest rate swap assets and liabilities are determined based on the present value of expected future cash flows. Since the Company’s interest rate swap values are based on the LIBOR forward curve, which is observable at
commonly quoted intervals for the full terms of the swaps, it is considered a Level 2 input. Nonperformance risk is reflected in determining the fair value of the interest rate swaps by using the Company’s credit spread less the
risk-free interest rate, both of which are observable at commonly quoted intervals for the terms of the swaps. Thus, the adjustment for nonperformance risk is also considered a Level 2 input. The Company’s deferred compensation plan
assets are measured based on net asset value per share as a practical expedient to estimate fair value.
The fair values of accounts receivable and accounts payable at August 3, 2018 and July 28, 2017, approximate their carrying
amounts because of their short duration. The fair value of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amounts at August 3, 2018 and July 28, 2017.
Inventories were comprised of the following at:
|
|
August 3, 2018
|
|
|
July 28, 2017
|
|
Retail
|
|
$
|
117,606
|
|
|
$
|
119,446
|
|
Restaurant
|
|
|
20,659
|
|
|
|
20,252
|
|
Supplies
|
|
|
17,988
|
|
|
|
16,669
|
|
Total
|
|
$
|
156,253
|
|
|
$
|
156,367
|
|
On January 8, 2015, the Company entered into a five-year $750,000 revolving credit facility (the “2015 Revolving Credit
Facility”). At both August 3, 2018 and July 28, 2017, the Company had $400,000 in outstanding borrowings under the 2015 Revolving Credit Facility. On September 5, 2018, the Company entered into a five-year $950,000 revolving credit
facility (“2019 Revolving Credit Facility”) with substantially the same terms and financial covenants as the 2015 Revolving Credit Facility, which it replaced. The 2019 Revolving Credit Facility also contains an option to increase the
revolving credit facility by $300,000.
At August 3, 2018, the Company had $9,455 of standby letters of credit, which reduce the Company’s borrowing availability
under the 2015 Revolving Credit Facility (see Note 15). At August 3, 2018, the Company had $340,545 in borrowing availability under the 2015 Revolving Credit Facility.
In accordance with the 2015 Revolving Credit Facility, outstanding borrowings bear interest, at the Company’s election,
either at LIBOR or prime plus a percentage point spread based on certain specified financial ratios. At August 3, 2018 and July 28, 2017, the Company’s outstanding borrowings were swapped at a weighted average interest rates of 3.73%
and 3.21%, respectively (see Note 6 for information on the Company’s interest rate swaps).
The 2015 Revolving Credit Facility contains customary financial covenants, which include maintenance of a maximum
consolidated total leverage ratio and a minimum consolidated interest coverage ratio. At August 3, 2018 and July 28, 2017, the Company was in compliance with all debt covenants.
The 2015 Revolving Credit Facility also imposes restrictions on the amount of dividends the Company is permitted to pay and
the amount of shares the Company is permitted to repurchase. Under the 2015 Revolving Credit Facility, provided there is no default existing and the total of the Company’s availability under the 2015 Revolving Credit Facility plus the
Company’s cash and cash equivalents on hand is at least $100,000 (the “cash availability”), the Company may declare and pay cash dividends on shares of its common stock and repurchase shares of its common stock (1) in an unlimited
amount if at the time such dividend or repurchase is made the Company’s consolidated total leverage ratio is 3.00 to 1.00 or less and (2) in an aggregate amount not to exceed $100,000 in any fiscal year if the Company’s consolidated
total leverage ratio is greater than 3.00 to 1.00 at the time the dividend or repurchase is made; notwithstanding (1) and (2), so long as immediately after giving effect to the payment of any such dividends, cash availability is at
least $100,000, the Company may declare and pay cash dividends on shares of its common stock in an aggregate amount not to exceed in any fiscal year the product of the aggregate amount of dividends declared in the fourth quarter of the
immediately preceding fiscal year multiplied by four.
6.
|
Derivative Instruments and Hedging Activities
|
For each of the Company’s interest rate 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 notional principal amount. The interest rates on the portion of the Company’s outstanding debt covered by its interest rate swaps are fixed at the rates in
the table below plus the Company’s credit spread. The Company’s credit spread was 1.25% at both August 3, 2018 and July 28, 2017. All of the Company’s interest rate swaps are accounted for as cash flow hedges.
A summary of the Company’s interest rate swaps at August 3, 2018 is as follows:
Trade Date
|
Effective Date
|
|
Term
(in Years)
|
|
|
Notional Amount
|
|
|
Fixed
Rate
|
|
June 18, 2014
|
May 3, 2015
|
|
|
4
|
|
|
$
|
160,000
|
|
|
|
2.51
|
%
|
June 24, 2014
|
May 3, 2015
|
|
|
4
|
|
|
|
120,000
|
|
|
|
2.51
|
%
|
July 1, 2014
|
May 5, 2015
|
|
|
4
|
|
|
|
120,000
|
|
|
|
2.43
|
%
|
January 30, 2015
|
May 3, 2019
|
|
|
2
|
|
|
|
80,000
|
|
|
|
2.15
|
%
|
January 30, 2015
|
May 3, 2019
|
|
|
2
|
|
|
|
60,000
|
|
|
|
2.16
|
%
|
January 30, 2015
|
May 4, 2021
|
|
|
3
|
|
|
|
120,000
|
|
|
|
2.41
|
%
|
January 30, 2015
|
May 3, 2019
|
|
|
2
|
|
|
|
60,000
|
|
|
|
2.15
|
%
|
January 30, 2015
|
May 4, 2021
|
|
|
3
|
|
|
|
80,000
|
|
|
|
2.40
|
%
|
The estimated fair values of the Company’s derivative instruments were as follows:
(See Note 3)
|
Balance Sheet Location
|
|
August 3, 2018
|
|
|
July 28, 2017
|
|
Interest rate swaps
|
Prepaid expenses and other current assets
|
|
$
|
169
|
|
|
$
|
32
|
|
Interest rate swaps
|
Other assets
|
|
|
6,086
|
|
|
|
--
|
|
Total assets
|
|
|
$
|
6,255
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Other current liabilities
|
|
$
|
--
|
|
|
$
|
47
|
|
Interest rate swaps
|
Long-term interest rate swap liability
|
|
|
--
|
|
|
|
6,833
|
|
Total liabilities
|
|
|
$
|
--
|
|
|
$
|
6,880
|
|
**These interest rate swap assets and liabilities are recorded at gross at both August 3, 2018 and July 28, 2017 since there
were no offsetting assets and liabilities under the Company’s master netting agreements.
The estimated fair values of the Company’s interest rate swap assets and liabilities incorporate the Company’s
non-performance risk. The adjustment related to the Company’s non-performance risk at August 3, 2018 and July 28, 2017 resulted in reductions of $213 and $103, respectively, in the total fair value of the interest rate swap assets and
liabilities. The offset to the interest rate swap assets and liabilities is recorded in accumulated other comprehensive income (loss) (“AOCIL”), net of the deferred tax assets, and will be reclassified into earnings over the term of
the underlying debt. As of August 3, 2018, the estimated pre-tax portion of AOCIL that is expected to be reclassified into earnings over the next twelve months is $533. Cash flows related to the interest rate swaps are included in
interest expense and in operating activities.
The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCIL for each of the three
years:
|
|
Amount of Income (Loss) Recognized in AOCIL
on Derivatives (Effective Portion)
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
13,103
|
|
|
$
|
15,402
|
|
|
$
|
(16,188
|
)
|
The following table summarizes the changes in AOCIL, net of tax, related to the Company’s interest rate swaps for the years
ended August 3, 2018, July 28, 2017 and July 29, 2016:
|
|
August 3,
2018
|
|
|
July 28,
2017
|
|
|
July 29,
2016
|
|
Beginning AOCIL balance
|
|
$
|
(4,229
|
)
|
|
$
|
(13,740
|
)
|
|
$
|
(3,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
11,274
|
|
|
|
12,082
|
|
|
|
(6,683
|
)
|
Amounts reclassified from AOCIL into earnings
|
|
|
(2,360
|
)
|
|
|
(2,571
|
)
|
|
|
(3,332
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
8,914
|
|
|
|
9,511
|
|
|
|
(10,015
|
)
|
Ending AOCIL balance
|
|
$
|
4,685
|
|
|
$
|
(4,229
|
)
|
|
$
|
(13,740
|
)
|
The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for each of the three
years:
Location of Loss Reclassified from
AOCIL into Income (Effective Portion)
|
|
Amount of Loss Reclassified from AOCIL into
Income (Effective Portion)
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Interest expense
|
|
$
|
3,398
|
|
|
$
|
4,163
|
|
|
$
|
5,395
|
|
The following table summarizes the amounts reclassified out of AOCIL related to the Company’s interest rate swaps for the
years ended August 3, 2018, July 28, 2017 and July 29, 2016:
Details about AOCIL
|
|
August 3, 2018
|
|
|
July 28, 2017
|
|
|
July 29, 2016
|
|
Affected Line Item in
the Consolidated
Statement of Income
|
Loss on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(3,398
|
)
|
|
$
|
(4,163
|
)
|
|
$
|
(5,395
|
)
|
Interest expense
|
Tax benefit
|
|
|
1,038
|
|
|
|
1,592
|
|
|
|
2,063
|
|
Provision for income taxes
|
|
|
$
|
(2,360
|
)
|
|
$
|
(2,571
|
)
|
|
$
|
(3,332
|
)
|
Net of tax
|
Any portion of the fair value of the interest rate swaps determined to be ineffective will be recognized currently in earnings. No
ineffectiveness has been recorded in 2018, 2017 and 2016.
In each of 2018, 2017 and 2016, subject to a maximum amount of $25,000 and the limits imposed by its credit facility, the
Company was authorized to repurchase shares at management’s discretion. In 2018, the Company repurchased 100,000 shares of its common stock in the open market at an aggregate cost of $14,772. The Company did not repurchase any shares
of its common stock in 2017. In 2016, the Company repurchased 100,000 shares of its common stock in the open market at an aggregate cost of $14,653.
Cracker Barrel stores represent a single, integrated operation with two related and substantially integrated product lines.
The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in many respects. Accordingly, the Company manages its business on the basis of one reportable operating
segment. All of the Company’s operations are located within the United States.
Total revenue was comprised of the following at:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Restaurant
|
|
$
|
2,439,389
|
|
|
$
|
2,351,212
|
|
|
$
|
2,323,199
|
|
Retail
|
|
|
591,056
|
|
|
|
575,077
|
|
|
|
589,152
|
|
Total revenue
|
|
$
|
3,030,445
|
|
|
$
|
2,926,289
|
|
|
$
|
2,912,351
|
|
As of August 3, 2018, the Company operated 240 stores in leased facilities and also leased certain land, a retail
distribution center and advertising billboards.
Rent expense under operating leases, including the sale-leaseback transactions discussed below, for each of the last three
years was:
Year
|
|
Minimum
|
|
|
Contingent
|
|
|
Total
|
|
2018
|
|
$
|
76,445
|
|
|
$
|
255
|
|
|
$
|
76,700
|
|
2017
|
|
|
75,000
|
|
|
|
252
|
|
|
|
75,252
|
|
2016
|
|
|
74,405
|
|
|
|
263
|
|
|
|
74,668
|
|
The following is a schedule by year of the future minimum rental payments required under the Company’s operating leases as
of August 3, 2018:
Year
|
|
Total
|
|
2019
|
|
$
|
66,029
|
|
2020
|
|
|
53,510
|
|
2021
|
|
|
33,170
|
|
2022
|
|
|
31,763
|
|
2023
|
|
|
32,106
|
|
Later years
|
|
|
493,557
|
|
Total
|
|
$
|
710,135
|
|
Sale-Leaseback Transactions
In 2009, the Company completed sale-leaseback transactions involving 15 of its owned stores and its retail distribution
center. Under the transactions, the land, buildings and improvements at the locations were sold and leased back for terms of 20 and 15 years, respectively. Equipment was not included. The leases include specified renewal options for
up to 20 additional years.
The Company leases 65 of its stores pursuant to a sale-leaseback transaction which closed in 2000. Under the transaction,
the land, buildings and building improvements at the locations were sold and leased back for a term of 21 years. The leases for these stores include specified renewal options for up to 20 additional years and have certain financial
covenants related to fixed charge coverage for the leased stores. At August 3, 2018 and July 28, 2017, the Company was in compliance with these covenants.
10.
|
Share-Based Compensation
|
Stock Compensation Plans
The Company’s employee compensation plans are administered by the Compensation Committee of the Company’s Board of Directors
(the “Committee”). The Committee is authorized to determine, at time periods within its discretion and subject to the direction of the Board of Directors, which employees will be granted awards, the number of shares covered by any
awards granted, and within applicable limits, the terms and provisions relating to the exercise and vesting of any awards.
The Company has one active compensation plan, the 2010 Omnibus Incentive Compensation Plan (the “2010 Omnibus Plan”), for
employees and non-employee directors which authorizes the granting of nonvested stock awards and units, performance-based MSU Grants, stock options and other types of share-based awards.
The 2010 Omnibus Plan allows the Committee to grant awards for an aggregate of 1,500,000 shares of the Company’s common
stock. However, this share reserve is increased by shares awarded under this and prior plans which are forfeited, expired, settled for cash and shares withheld by the Company in payment of a tax withholding obligation. Additionally,
this share reserve was decreased by shares granted from prior plans after July 30, 2010 until December 1, 2010. At August 3, 2018, the number of shares authorized for future issuance under the Company’s active plan is 1,020,477. At
August 3, 2018, the number of outstanding awards under the 2010 Omnibus Plan was 103,539.
Types of Share-Based Awards
Nonvested Stock Awards
Nonvested stock awards consist of the Company’s common stock, generally accrue dividend equivalents and vest over
1–5 years. The fair value of the Company’s nonvested stock awards which accrue dividends is equal to the market price of the Company’s stock at the date of the grant. Dividends are forfeited for any nonvested stock awards that do not
vest.
The Company’s nonvested stock awards include its long-term performance plans which were established by the Committee for the
purpose of rewarding certain officers with shares of the Company’s common stock if the Company achieved certain performance targets. The stock awards under the long-term performance plans are calculated or estimated based on achievement
of financial performance measures.
The following table summarizes the performance periods and vesting periods for the Company’s nonvested stock awards under
its long-term performance plans at August 3, 2018:
Long-Term Performance Plan (“LTPP”)
|
|
Performance Period
|
|
Vesting Period
(in Years)
|
2018 LTPP
|
|
|
2018 – 2019
|
|
2 or 3
|
2017 LTPP
|
|
|
2017 – 2018
|
|
2 or 3
|
The following table summarizes the shares that have been accrued under the 2018 LTPP and 2017 LTPP at August 3, 2018:
2018 LTPP
|
|
|
8,892
|
|
2017 LTPP
|
|
|
23,511
|
|
A summary of the Company’s nonvested stock activity as of August 3, 2018, and changes during 2018 are presented in the
following table:
Nonvested Stock
|
|
Shares
|
|
|
Weighted-Average Grant
Date Fair Value
|
|
Unvested at July 28, 2017
|
|
|
32,017
|
|
|
$
|
139.04
|
|
Granted
|
|
|
51,406
|
|
|
|
154.28
|
|
Vested
|
|
|
(38,889
|
)
|
|
|
153.66
|
|
Forfeited
|
|
|
(2,776
|
)
|
|
|
145.92
|
|
Unvested at August 3, 2018
|
|
|
41,758
|
|
|
$
|
143.73
|
|
The following table summarizes the total fair value of nonvested stock that vested for each of the three years:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Total fair value of nonvested stock
|
|
$
|
5,976
|
|
|
$
|
14,700
|
|
|
$
|
8,418
|
|
Nonvested Stock Units
Beginning in 2017, the Company adopted long-term incentive plans that award nonvested stock units
based upon relative total shareholder return (“rTSR RSUs”). The number of nonvested stock units that will ultimately be awarded and will vest at the end of the applicable three-year performance period is based on relative total
shareholder return, which is defined as increases in the Company’s stock price plus dividends paid during the performance period as compared to the total shareholder return of a group of peer companies determined by the Committee. The
number of shares awarded at the end of the performance period for each nonvested stock unit may range from 75% to 125% of the target award. The probability of the actual shares expected to be earned is considered in the grant date
valuation; therefore, the expense will not be adjusted to reflect the actual units earned. In addition to a service requirement, the vesting of the nonvested stock units is also subject to the achievement of a specified level of
operating income during the performance period. If this performance goal is not met, no nonvested stock units will be awarded and no compensation expense will be recorded.
The fair value of the nonvested stock units is determined using the Monte-Carlo simulation model,
which simulates a range of possible future stock prices and estimates the probabilities of the potential payouts. This model uses the average prices for the 60 consecutive calendar days beginning 30 days prior to and ending 30 days
after the first business day of the performance period. This model also incorporates the following ranges of assumptions:
·
|
The expected volatilities are the historical volatilities of the Company’s stock and the members of the peer group over the period commensurate with the
three-year performance period.
|
·
|
The risk-free interest rate is based on the U.S. Treasury rate assumption commensurate with the three-year performance period. The risk-free rates for the
nonvested stock units granted in 2017 ranged from 1.0% to 1.4%. The risk-free interest rate for the nonvested stock units granted in 2018 was 1.6%.
|
·
|
The expected dividend yield is assumed to be zero since the award holders are entitled to any dividends paid over the performance period.
|
Dividends accrue on the nonvested stock units. Dividends will be forfeited for nonvested stock units that do not vest.
The following table summarizes the shares that have been accrued for rTSR RSUs awards under the 2018 and 2017 long-term
incentive plans at August 3, 2018:
|
|
Shares
|
|
2018 rTSR RSUs
|
|
|
3,368
|
|
2017 rTSR RSUs
|
|
|
5,676
|
|
Performance-Based Market Stock Units
The number of MSU Grants (last granted in 2016) that will ultimately be awarded and will vest at the
end of the applicable three-year performance period for each annual plan is based on total shareholder return, which is defined as the change in the Company’s stock price plus dividends paid during the performance period. The number of
shares awarded at the end of the performance period will vary in direct proportion to a target number of shares set at the beginning of the period, up to a maximum of 150% of target, based on the change in the Company’s cumulative total
shareholder return over the performance period. The probability of the actual shares expected to be earned is considered in the grant date valuation; therefore, the expense will not be adjusted to reflect the actual units earned. In
addition to a service requirement, the vesting of the MSU Grants is also subject to the achievement of a specified level of operating income during the performance period. If this performance goal is not met, no MSU Grants will be
awarded and no compensation expense will be recorded.
The fair value of the MSU Grants was determined using the Monte-Carlo simulation model, which
simulated a range of possible future stock prices and estimated the probabilities of the potential payouts. This model used the average prices for the 60 consecutive calendar days beginning 30 days prior to and ending 30 days after the
first business day of the performance period. This model also incorporated the following ranges of assumptions:
·
|
The expected volatility was a blend of implied volatility based on market-traded options on the Company’s stock and historical volatility of our stock over the
period commensurate with the three-year performance period. The expected volatility for the 2016 MSU Grants ranged from 23% to 24%.
|
·
|
The risk-free interest rate was based on the U.S. Treasury rate assumption commensurate with the three-year performance period. The risk-free rates for the
2016 MSU Grants ranged from 0.9% to 1.0%.
|
·
|
The expected dividend yield was assumed to be zero since the award holders are entitled to any dividends paid over the performance period.
|
Dividends accrue on the 2016 MSU Grants. Dividends will be forfeited for any MSU Grants that do not vest. No MSU
Grants were awarded in 2017 or 2018. At August 3, 2018, 20,334 shares for the 2016 MSU Grants were accrued.
Stock Options
Prior to 2012, stock options were granted with an exercise price equal to the market price of the Company’s stock on the
grant date; those option awards generally vest at a cumulative rate of 33% per year beginning on the first anniversary of the grant date and expire ten years from the date of grant. No stock options were granted in 2016, 2017 or 2018.
A summary of the Company’s stock option activity as of August 3, 2018, and changes during 2018 are presented in the
following table:
|
|
|
|
Fixed Options
|
|
Shares
|
|
|
Weighted-
Average
Price
|
|
Outstanding at July 28, 2017
|
|
|
4,000
|
|
|
$
|
32.86
|
|
Exercised
|
|
|
(4,000
|
)
|
|
|
32.86
|
|
Outstanding at August 3, 2018
|
|
|
--
|
|
|
|
--
|
|
The following table summarizes the total intrinsic values of options exercised during each of the three years:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Total intrinsic values of options exercised*
|
|
$
|
466
|
|
|
$
|
1,070
|
|
|
$
|
917
|
|
*The intrinsic value for stock options is defined as the difference between the current market value and the grant price.
Compensation Expense
The following table highlights the components of share-based compensation expense for each of the three years:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Nonvested stock awards and units
|
|
$
|
6,052
|
|
|
$
|
6,654
|
|
|
$
|
10,277
|
|
MSU Grants
|
|
|
925
|
|
|
|
1,804
|
|
|
|
2,925
|
|
Total compensation expense
|
|
$
|
6,977
|
|
|
$
|
8,458
|
|
|
$
|
13,202
|
|
The following table highlights the total unrecognized compensation expense related to the outstanding nonvested stock awards
and nonvested stock units and the weighted-average periods over which the expense is expected to be recognized as of August 3, 2018:
|
|
Nonvested
Stock Awards
|
|
|
Nonvested
Stock Units
|
|
Total unrecognized compensation
|
|
$
|
3,189
|
|
|
$
|
1,341
|
|
Weighted-average period in years
|
|
|
1.82
|
|
|
|
1.71
|
|
The following table highlights the total income tax benefit recognized in the Consolidated Statements of Income for each of
the three years:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Total income tax benefit
|
|
$
|
774
|
|
|
$
|
2,740
|
|
|
$
|
3,819
|
|
During 2018, the Company issued 55,868 shares of its common stock resulting from the vesting of share-based compensation
awards and stock option exercises. Related tax withholding payments on certain share-based compensation awards exceeded proceeds received from the exercise of stock options which resulted in a net reduction to shareholders’ equity of
$3,816.
11.
|
Shareholder Rights Plan
|
On April 9, 2018, the Company’s Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for
each outstanding share of common stock, par value $0.01 per share, and adopted a shareholder rights plan, as set forth in the Rights Agreement dated as of April 9, 2018 (the “Rights Agreement”), by and between the Company and American
Stock Transfer & Trust Company, LLC, as rights agent. The dividend was payable on April 19, 2018 to the shareholders of record on April 19, 2018. The Rights Agreement replaced the Company’s previous shareholder rights plan adopted
in 2015 (the “2015 Plan”), and it became effective immediately following the expiration of the 2015 Plan at the close of business on April 9, 2018. The 2015 Plan and the preferred share purchase rights issued thereunder expired by
their own terms and shareholders of the Company were not entitled to any payment as a result of the expiration of the 2015 Plan. The Rights Agreement will terminate unless approved by shareholders at the Company’s 2018 annual meeting.
The Rights
The Rights initially trade with, and are inseparable from, the Company’s common stock. The Rights are evidenced only by the
balances indicated in the book-entry account system of the transfer agent for the Company’s common stock or, in the case of certificated shares, by certificates that represent shares of the Company’s common stock. New Rights will
accompany any new shares of common stock the Company issues after April 19, 2018 until the earlier to occur of the Distribution Date, redemption of the Rights by the Company’s Board of Directors or the final expiration of the Rights
Agreement, each as described below.
Exercise Price
Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock (“Preferred Share”) for $600.00 (the “Exercise Price”), once the Rights become exercisable. This portion of a Preferred Share will give the shareholder approximately the same dividend and liquidation rights as would one
share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.
Exercisability
The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an
“Acquiring Person” by obtaining beneficial ownership of 20% or more of the Company’s outstanding common stock.
Shares held by affiliates and associates of an Acquiring Person, and Notional Common Shares (as defined in the Rights
Agreement) held by counterparties to a Derivatives Contract (as defined in the Rights Agreement) with an Acquiring Person, will be deemed to be beneficially owned by the Acquiring Person. Certain synthetic interests in securities
created by derivative positions – whether or not such interests are considered to be ownership of the underlying common stock or are reportable for purposes of Regulation 13D of the Securities Exchange Act – are treated as beneficial
ownership of the number of shares of the Company’s common stock equivalent to the economic exposure created by the derivative.
The date when the Rights become exercisable is the “Distribution Date.” Until the Distribution Date, the common stock
certificates will also evidence the Rights, and any transfer of shares of common stock will constitute a transfer of Rights. After that date, the Rights will separate from the common stock and will be evidenced by book-entry credits or
by Rights certificates that the Company will mail to all eligible holders of common stock. Any Rights held by an Acquiring Person will be void and may not be exercised.
At August 3, 2018, none of the Rights were exercisable.
Consequences of a Person or Group Becoming an Acquiring Person
If a person or group becomes an Acquiring Person, after the Distribution Date, each Right will generally entitle the holder,
except the Acquiring Person or any associate or affiliate thereof, to acquire, for the exercise price of $600.00 per Right (subject to adjustment as provided in the Rights Agreement), shares of the Company’s common stock (or, in certain
circumstances, Preferred Shares) having a market value equal to twice the Right’s then-current exercise price (initially $1,200.00 per Right).
In addition, if, the Company is later acquired in a merger or similar transaction after the Distribution Date, each Right
will generally entitle the holder, except the Acquiring Person or any associate or affiliate thereof, to acquire, for the exercise price of $600.00 per Right (subject to adjustment as provided in the Rights Agreement), shares of the
acquiring corporation having a market value equal to twice the Right’s then-current exercise price (initially $1,200.00 per Right).
Shares held by affiliates and associates of an Acquiring Person, and Notional Common Shares (as defined in the Rights
Agreement) held by counterparties to a Derivatives Contract (as defined in the Rights Agreement) with an Acquiring Person, will be deemed to be beneficially owned by the Acquiring Person.
Preferred Share Provisions
Each one one-hundredth of a Preferred Share, if issued:
|
·
|
will not be redeemable;
|
|
·
|
will entitle holders to quarterly dividend payments of $0.01 per share, or an amount equal to the dividend paid on one share of common stock, whichever is
greater;
|
|
·
|
will entitle holders upon liquidation either to receive $1.00 per share or an amount equal to the payment made on one share of common stock, whichever is
greater;
|
|
·
|
will have the same voting power as one share of common stock; and
|
|
·
|
if shares of the Company’s common stock are exchanged via merger, consolidation, or a similar transaction, will entitle holders to a per share payment equal to
the payment made on one share of common stock.
|
The value of one one-hundredth of a Preferred Share will generally approximate the value of one share of common stock.
Redemption
The Board of Directors may redeem the Rights for $0.01 per Right at any time before any person or group becomes an Acquiring
Person. If the Board of Directors redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.01 per Right. The redemption
price will be adjusted if the Company has a stock split or stock dividends of its common stock.
Qualifying Offer Provision
The Rights would also not interfere with all-cash, fully financed tender offers for all shares of common stock that remain
open for a minimum of 60 business days, are subject to a minimum condition of a majority of the outstanding shares and provide for a 20-business day “subsequent offering period” after consummation (such offers are referred to as
“qualifying offers”). In the event the Company receives a qualifying offer and the Board of Directors has not redeemed the Rights prior to the consummation of such offer, the consummation of the qualifying offer will not cause the
offeror or its affiliates to become an Acquiring Person, and the Rights will immediately expire upon consummation of the qualifying offer.
Exchange
After a person or group becomes an Acquiring Person, but before an Acquiring Person owns 50% or more of the Company’s
outstanding common stock, the Board of Directors may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person.
Anti-Dilution Provisions
The Board of Directors may adjust the purchase price of the Preferred Shares, the number of Preferred Shares issuable and
the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, a reclassification of the Preferred Shares or common stock. No adjustments to the Exercise Price of less than 1% will be made.
Amendments
The terms of the Rights Agreement may be amended by the Board
of Directors without the consent of the holders of the Rights. After a person or group becomes an Acquiring Person, the Board of Directors may not amend the agreement in a way that adversely affects holders of the Rights
.
Expiration
If the Rights Agreement is approved by the Company’s shareholders at the 2018 annual meeting, the Rights will expire on
April 9, 2021. If shareholders do not approve the Rights Agreement, the Rights will expire immediately following certification of the vote at the 2018 annual meeting.
12.
|
Employee Savings Plans
|
The Company sponsors a qualified defined contribution retirement plan (“401(k) Savings Plan”) covering salaried and hourly
employees who have completed ninety days of service and have attained the age of twenty-one. This plan allows eligible employees to defer receipt of up to 50% of their compensation, as defined in the plan. The Company also sponsors a
non-qualified defined contribution retirement plan (“Non-Qualified Savings Plan”) covering highly compensated employees, as defined in the plan. This plan allows eligible employees to defer receipt of up to 50% of their base
compensation and 100% of their eligible bonuses, as defined in the plan.
Contributions under both plans may be invested in various investment funds at the employee’s discretion. Such
contributions, including the Company’s matching contributions described below, may not be invested in the Company’s common stock. In 2018, the Company matched 50% of employee contributions for each participant in the 401(k) Savings
Plan up to a total of 5% of the employee’s compensation and matched 25% of employee contributions in the Non-Qualified Savings Plan up to a total of 6% of the employee’s compensation. In 2017 and 2016, the Company matched 25% of
employee contributions for each participant in either plan up to a total of 6% of the employee’s compensation. Employee contributions vest immediately while Company contributions vest 20% annually beginning on the first anniversary of
a contribution date and are vested 100% on the fifth anniversary of such contribution date.
At the inception of the Non-Qualified Savings Plan, the Company established a Rabbi Trust to fund the plan’s obligations.
The market value of the trust assets for the Non-Qualified Savings Plan of $32,669 is included in other assets and the related liability to the participants of $32,669 is included in other long-term obligations in the Consolidated
Balance Sheets. Company contributions under both plans are recorded as either labor and other related expenses or general and administrative expenses in the Consolidated Statements of Income.
The following table summarizes the Company’s contributions for each plan for each of the three years:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
401(k) Savings Plan
|
|
$
|
3,812
|
|
|
$
|
2,501
|
|
|
$
|
2,528
|
|
Non-Qualified Savings Plan
|
|
|
342
|
|
|
|
291
|
|
|
|
296
|
|
The components of the provision for income taxes for each of the three years were as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
40,761
|
|
|
$
|
83,743
|
|
|
$
|
62,054
|
|
State
|
|
|
6,099
|
|
|
|
7,567
|
|
|
|
6,447
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(16,779
|
)
|
|
|
4,696
|
|
|
|
12,477
|
|
State
|
|
|
722
|
|
|
|
982
|
|
|
|
(3,858
|
)
|
Total provision for income taxes
|
|
$
|
30,803
|
|
|
$
|
96,988
|
|
|
$
|
77,120
|
|
A reconciliation of the Company’s provision for income taxes and income taxes based on the statutory U.S. federal rate of
26.9%, 35.0% and 35.0% in 2018, 2017 and 2016, respectively, was as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Provision computed at federal statutory income tax rate
|
|
$
|
74,859
|
|
|
$
|
104,611
|
|
|
$
|
93,247
|
|
State and local income taxes, net of federal benefit
|
|
|
5,066
|
|
|
|
5,856
|
|
|
|
1,427
|
|
Revaluation of deferred taxes due to a reduction in the federal tax rate at the enactment date of
the Tax Act
|
|
|
(26,772
|
)
|
|
|
--
|
|
|
|
--
|
|
Revaluation of deferred taxes due to the impact of the change in rate on 2018 temporary items
|
|
|
(3,710
|
)
|
|
|
--
|
|
|
|
--
|
|
Employer tax credits for FICA taxes paid on employee tip income
|
|
|
(13,707
|
)
|
|
|
(11,543
|
)
|
|
|
(11,048
|
)
|
Other employer tax credits
|
|
|
(4,476
|
)
|
|
|
(2,814
|
)
|
|
|
(7,326
|
)
|
Other-net
|
|
|
(457
|
)
|
|
|
878
|
|
|
|
820
|
|
Total provision for income taxes
|
|
$
|
30,803
|
|
|
$
|
96,988
|
|
|
$
|
77,120
|
|
The decrease in the Company’s provision for income taxes from 2017 to 2018 reflected the significant impact of the Tax Act.
The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. In accordance with Section 15 of the Internal
Revenue Code, the Company used a blended rate of 26.9% for its fiscal 2018 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date of the Tax Act.
Significant components of the Company’s net deferred tax liability consisted of the following at:
|
|
August 3, 2018
|
|
|
July 28, 2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
6,342
|
|
|
$
|
10,110
|
|
Deferred rent
|
|
|
12,667
|
|
|
|
18,270
|
|
Accrued liabilities
|
|
|
8,546
|
|
|
|
13,233
|
|
Insurance reserves
|
|
|
7,291
|
|
|
|
12,401
|
|
Inventory
|
|
|
3,106
|
|
|
|
4,411
|
|
Other
|
|
|
--
|
|
|
|
2,767
|
|
Deferred tax assets
|
|
$
|
37,952
|
|
|
$
|
61,192
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
75,433
|
|
|
$
|
100,373
|
|
Inventory
|
|
|
7,448
|
|
|
|
10,906
|
|
Other
|
|
|
7,232
|
|
|
|
12,273
|
|
Deferred tax liabilities
|
|
|
90,113
|
|
|
|
123,552
|
|
Net deferred tax liability
|
|
$
|
52,161
|
|
|
$
|
62,360
|
|
The decrease in the Company’s net deferred tax liability reflected the significant impact of the Tax Act on rate and
capitalization policies. While the Company is able to make reasonable estimates of the impact of both, the final impact of the Tax Act may differ from these estimates, due to, among other things, additional guidance that may be issued
by the Internal Revenue Service, expected state tax responses to either follow or reject the federal changes, and changes in our interpretations and assumptions. The Company continues to gather additional information to determine the
final impact.
The Company believes that adequate amounts of tax, interest and penalties have been provided for potential tax
uncertainties; these amounts are included in other long-term liabilities in the Consolidated Balance Sheets. As of August 3, 2018 and July 28, 2017, the Company’s gross liability for uncertain tax positions, exclusive of interest and
penalties, was $18,634 and $20,731, respectively. Summarized below is a tabular reconciliation of the beginning and ending balance of the Company’s total gross liability for uncertain tax positions exclusive of interest and penalties:
|
|
August 3, 2018
|
|
|
July 28, 2017
|
|
|
July 29, 2016
|
|
Balance at beginning of year
|
|
$
|
20,731
|
|
|
$
|
21,899
|
|
|
$
|
25,507
|
|
Tax positions related to the current year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
3,029
|
|
|
|
4,003
|
|
|
|
4,860
|
|
Reductions
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Tax positions related to the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
610
|
|
|
|
582
|
|
|
|
2,186
|
|
Reductions
|
|
|
(575
|
)
|
|
|
(2,966
|
)
|
|
|
(6,896
|
)
|
Settlements
|
|
|
(3,878
|
)
|
|
|
(1,027
|
)
|
|
|
(2,324
|
)
|
Expiration of statute of limitations
|
|
|
(1,283
|
)
|
|
|
(1,760
|
)
|
|
|
(1,434
|
)
|
Balance at end of year
|
|
$
|
18,634
|
|
|
$
|
20,731
|
|
|
$
|
21,899
|
|
If the Company were to prevail on all uncertain tax positions, the reversal of this accrual would be a tax benefit to the
Company and impact the effective tax rate. The following table highlights the amount of uncertain tax positions, exclusive of interest and penalties, which, if recognized, would affect the effective tax rate for each of the three
years:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Uncertain tax positions
|
|
$
|
14,721
|
|
|
$
|
13,475
|
|
|
$
|
14,234
|
|
The Company had $5,681, $6,128, and $5,497 in interest and penalties accrued as of August 3, 2018, July 28, 2017, and July
29, 2016, respectively.
The Company recognized accrued interest and penalties related to unrecognized tax benefits of $(447), $631 and $(4,256) in
its provision for income taxes on August 3, 2018, July 28, 2017 and July 29, 2016, respectively. The decrease from 2017 to 2018 was mostly attributable to audit settlements in 2018. The increase from 2016 to 2017 was attributable to
the Company’s revaluation of select reserves and audit settlements in 2016.
In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by the
relevant taxing authorities. Based on the outcome of these examinations or as a result of the expiration of the statutes of limitations for specific taxing jurisdictions, it is reasonably possible that the related uncertain tax
positions taken regarding previously filed tax returns could decrease from those recorded as liabilities for uncertain tax positions in the Company’s financial statements at August 3, 2018 by approximately $2,000 to $3,000 within the
next twelve months. At August 3, 2018, the Company was subject to income tax examinations for its U.S. federal income taxes after 2014 and for state and local income taxes generally after 2014.
14.
|
Net Income Per Share and Weighted Average Shares
|
The following table reconciles the components of diluted earnings per share computations:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net income per share numerator
|
|
$
|
247,620
|
|
|
$
|
201,899
|
|
|
$
|
189,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
24,011,161
|
|
|
|
24,031,810
|
|
|
|
23,945,041
|
|
Add potential dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, nonvested stock awards and units and MSU Grants
|
|
|
64,453
|
|
|
|
86,478
|
|
|
|
129,232
|
|
Diluted weighted average shares outstanding
|
|
|
24,075,614
|
|
|
|
24,118,288
|
|
|
|
24,074,273
|
|
15.
|
Commitments and Contingencies
|
The Company and its subsidiaries are party to various legal and regulatory proceedings and claims incidental to their
business in the ordinary course. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company’s consolidated
results of operations or financial position.
The Company maintains insurance coverage for various aspects of its business and operations. The Company has elected,
however, to retain all or a portion of losses that occur through the use of various deductibles, limits and retentions under its insurance programs. This situation may subject the Company to some future liability for which it is only
partially insured, or completely uninsured. The Company intends to mitigate any such future liability by continuing to exercise prudent business judgment in negotiating the terms and conditions of its contracts. See Note 2 for a
further discussion of insurance and insurance reserves.
Related to its insurance coverage, the Company is contingently liable pursuant to standby letters of credit as credit
guarantees to certain insurers. As of August 3, 2018, the Company had $9,455 of standby letters of credit related to securing reserved claims under workers’ compensation insurance. All standby letters of credit are renewable annually
and reduce the Company’s borrowing availability under its Revolving Credit facility (see Note 5).
As of August 3, 2018, the Company is secondarily liable for lease payments associated with two properties. The Company is
not aware of any non-performance under these lease arrangements that would result in the Company having to perform in accordance with the terms of these guarantees, and therefore, no provision has been recorded in the Consolidated
Balance Sheets for amounts to be paid in case of non-performance by the third party by the primary obligor under such lease agreements.
The Company enters into certain indemnification agreements in favor of third parties in the ordinary course of business.
The Company believes that the probability of incurring an actual liability under other indemnification agreements is sufficiently remote so that no liability has been recorded in the Consolidated Balance Sheet.
16.
|
Quarterly Financial Data (Unaudited)
|
Quarterly financial data for 2018 and 2017 are summarized as follows:
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
(a)
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
710,368
|
|
|
$
|
787,771
|
|
|
$
|
721,413
|
|
|
$
|
810,893
|
|
Store operating income
|
|
|
107,731
|
|
|
|
112,686
|
|
|
|
98,718
|
|
|
|
118,213
|
|
Income before income taxes
|
|
|
67,220
|
|
|
|
72,994
|
|
|
|
59,715
|
|
|
|
78,494
|
|
Net income
|
|
|
46,380
|
|
|
|
91,139
|
|
|
|
48,747
|
|
|
|
61,354
|
|
Net income per share – basic
|
|
|
1.93
|
|
|
|
3.80
|
|
|
|
2.03
|
|
|
|
2.56
|
|
Net income per share – diluted
|
|
|
1.92
|
|
|
|
3.79
|
|
|
|
2.03
|
|
|
|
2.55
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
709,971
|
|
|
$
|
772,682
|
|
|
$
|
700,410
|
|
|
$
|
743,226
|
|
Store operating income
|
|
|
109,832
|
|
|
|
117,513
|
|
|
|
107,478
|
|
|
|
119,749
|
|
Income before income taxes
|
|
|
72,068
|
|
|
|
79,058
|
|
|
|
68,089
|
|
|
|
79,672
|
|
Net income
|
|
|
48,355
|
|
|
|
52,727
|
|
|
|
46,924
|
|
|
|
53,893
|
|
Net income per share – basic
|
|
|
2.01
|
|
|
|
2.19
|
|
|
|
1.95
|
|
|
|
2.24
|
|
Net income per share – diluted
|
|
|
2.01
|
|
|
|
2.19
|
|
|
|
1.95
|
|
|
|
2.23
|
|
|
(a)
|
The Company’s fourth quarter of fiscal 2018 consisted of 14 weeks.
|