UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, 2012 | |
| OR | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from __________to_________ | |
| Commission File Number 1-5039 |
WEIS MARKETS,
INC.
(Exact name of registrant as specified in its
charter)
| PENNSYLVANIA (State or other jurisdiction of incorporation or organization) |
24-0755415 (I.R.S. Employer Identification No.) |
|
| 1000 S. Second
Street P. O. Box 471 Sunbury, Pennsylvania (Address of principal executive offices) |
17801-0471 (Zip Code) |
Registrant's telephone number, including area code: (570) 286-4571 Registrant's web address: www.weismarkets.com
Not
Applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. Yes [X]
No [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant
was required to submit and post such
files). Yes [X]
No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ]
No [X]
As of May 10, 2012, there were
issued and outstanding 26,898,443 shares of the
registrant's common stock.
WEIS MARKETS,
INC.
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION |
| ITEM I - FINANCIAL STATEMENTS |
| WEIS MARKETS, INC. |
| CONSOLIDATED BALANCE SHEETS |
| (dollars in thousands) |
| March 31, 2012 | December 31, 2011 | |||||
| (unaudited) | ||||||
| Assets | ||||||
| Current: | ||||||
| Cash and cash equivalents | $ | 37,229 | $ | 37,392 | ||
| Marketable securities | 91,369 | 89,348 | ||||
| Accounts receivable, net | 52,338 | 52,410 | ||||
| Inventories | 240,193 | 226,191 | ||||
| Prepaid expenses | 7,970 | 8,995 | ||||
| Income taxes recoverable | 39 | 1,226 | ||||
| Deferred income taxes | 885 | --- | ||||
| Total current assets | 430,023 | 415,562 | ||||
| Property and equipment, net | 575,702 | 575,003 | ||||
| Goodwill | 35,162 | 35,162 | ||||
| Intangible and other assets, net | 3,280 | 3,277 | ||||
| Deferred income taxes | 308 | --- | ||||
| Total assets | $ | 1,044,475 | $ | 1,029,004 | ||
| Liabilities | ||||||
| Current: | ||||||
| Accounts payable | $ | 127,114 | $ | 132,092 | ||
| Accrued expenses | 33,157 | 35,081 | ||||
| Accrued self-insurance | 18,456 | 18,103 | ||||
| Deferred revenue, net | 4,515 | 6,197 | ||||
| Income taxes payable | 12,200 | --- | ||||
| Deferred income taxes | 4,034 | 4,130 | ||||
| Total current liabilities | 199,476 | 195,603 | ||||
| Postretirement benefit obligations | 15,185 | 14,434 | ||||
| Deferred income taxes | 72,098 | 73,081 | ||||
| Total liabilities | 286,759 | 283,118 | ||||
| Shareholders' Equity | ||||||
| Common stock, no par value, 100,800,000 shares authorized, | ||||||
| 33,047,807 shares issued | 9,949 | 9,949 | ||||
| Retained earnings | 893,302 | 881,346 | ||||
| Accumulated other comprehensive income | ||||||
| (Net of deferred taxes of $3,712 in 2012 and $3,800 in 2011) | 5,322 | 5,448 | ||||
| 908,573 | 896,743 | |||||
| Treasury stock at cost, 6,149,364 shares | (150,857 | ) | (150,857 | ) | ||
| Total shareholders' equity | 757,716 | 745,886 | ||||
| Total liabilities and shareholders' equity | $ | 1,044,475 | $ | 1,029,004 | ||
| See accompanying notes to consolidated financial statements. |
Page 1 of 13 (Form 10-Q)
| WEIS MARKETS, INC. |
| CONSOLIDATED STATEMENTS OF INCOME |
| (unaudited) |
| (dollars in thousands, except shares and per share amounts) |
| 13 Weeks Ended | |||||
| March 31, 2012 | March 26, 2011 | ||||
| Net sales | $ | 661,610 | $ | 659,455 | |
| Cost of sales, including warehousing and distribution expenses | 478,485 | 480,951 | |||
| Gross profit on sales | 183,125 | 178,504 | |||
| Operating, general and administrative expenses | 152,695 | 150,251 | |||
| Income from operations | 30,430 | 28,253 | |||
| Investment income | 1,057 | 1,091 | |||
| Income before provision for income taxes | 31,487 | 29,344 | |||
| Provision for income taxes | 11,461 | 10,743 | |||
| Net income | $ | 20,026 | $ | 18,601 | |
| Weighted-average shares outstanding, basic and diluted | 26,898,443 | 26,898,443 | |||
| Cash dividends per share | $ | 0.30 | $ | 0.29 | |
| Basic and diluted earnings per share | $ | 0.74 | $ | 0.69 | |
| See accompanying notes to consolidated financial statements. | |||||
Page 2 of 13 (Form 10-Q)
| WEIS MARKETS, INC. |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| (unaudited) |
| (dollars in thousands) |
| 13 Weeks Ended | |||||
| March 31, 2012 | March 26, 2011 | ||||
| Net income | $ | 20,026 | $ | 18,601 | |
| Other comprehensive income by component, net of tax: | |||||
| Unrealized holding (losses) gains arising during period | |||||
| (Net of deferred taxes of $87 and $127, respectively) | (124 | ) | 179 | ||
| Reclassification adjustment for gains included in net income | |||||
| (Net of deferred taxes of $1 and $258, respectively) | (2 | ) | (364 | ) | |
| Other comprehensive income (loss), net of tax | (126 | ) | (185 | ) | |
| Comprehensive income, net of tax | $ | 19,900 | $ | 18,416 | |
| See accompanying notes to consolidated financial statements. | |||||
Page 3 of 13 (Form 10-Q)
| WEIS MARKETS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (unaudited) |
| (dollars in thousands) |
| 13 Weeks Ended | |||||
| March 31, 2012 | March 26, 2011 | ||||
| Cash flows from operating activities: | |||||
| Net income | $ | 20,026 | $ | 18,601 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||
| Depreciation | 10,821 | 12,121 | |||
| Amortization | 1,499 | 1,611 | |||
| Loss (gain) on disposition of fixed assets | 70 | (2 | ) | ||
| Gain on sale of marketable securities | (3 | ) | (622 | ) | |
| Changes in operating assets and liabilities: | |||||
| Inventories | (14,002 | ) | 7,625 | ||
| Accounts receivable and prepaid expenses | 1,097 | 3,147 | |||
| Income taxes recoverable | 1,187 | 2,712 | |||
| Accounts payable and other liabilities | (7,480 | ) | (18,710 | ) | |
| Income taxes payable | 12,200 | 5,933 | |||
| Deferred income taxes | (2,184 | ) | 1,563 | ||
| Other | (250 | ) | (1,721 | ) | |
| Net cash provided by operating activities | 22,981 | 32,258 | |||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (13,021 | ) | (22,728 | ) | |
| Proceeds from the sale of property and equipment | 19 | 374 | |||
| Purchase of marketable securities | (4,185 | ) | (27,730 | ) | |
| Proceeds from maturities of marketable securities | --- | 1,230 | |||
| Proceeds from the sale of marketable securities | 2,203 | 3,644 | |||
| Purchase of intangible assets | (90 | ) | --- | ||
| Net cash used in investing activities | (15,074 | ) | (45,210 | ) | |
| Cash flows from financing activities: | |||||
| Dividends paid | (8,070 | ) | (7,801 | ) | |
| Net cash used in financing activities | (8,070 | ) | (7,801 | ) | |
| Net decrease in cash and cash equivalents | (163 | ) | (20,753 | ) | |
| Cash and cash equivalents at beginning of year | 37,392 | 109,140 | |||
| Cash and cash equivalents at end of period | $ | 37,229 | $ | 88,387 | |
| See accompanying notes to consolidated financial statements. | |||||
Page 4 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(1) Significant Accounting
Policies
Basis of Presentation: The accompanying unaudited consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
for interim financial information and with the instructions for
Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring
deferrals and accruals) considered necessary for a fair
presentation have been included. The operating results for the
periods presented are not necessarily indicative of the results
to be expected for the full year. The Company has evaluated
subsequent events for disclosure through the date of issuance
of the accompanying unaudited consolidated interim financial
statements and there were no material subsequent events which
require additional disclosure. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's latest Annual Report on Form
10-K.
In the first quarter of 2012, the Company changed its accounting policy for property and equipment. Property and equipment continue to be recorded at cost. Prior to January 1, 2012, the Company provided for depreciation of buildings and improvements and equipment using accelerated methods. Effective January 1, 2012, the Company changed its method of depreciation for this group of assets from the accelerated methods to straight-line. Management deemed the change preferable because the straight-line method will more accurately reflect the pattern of usage and the expected benefits of such assets. Management also considered that the change will provide greater consistency with the depreciation methods used by other companies in the Company's industry. The change was accounted for as a change in estimate. The net book value of assets acquired prior to January 1, 2012 with useful lives remaining will be depreciated using the straight-line method prospectively. Depreciation expense in the first quarter 2012 would have been $2.9 million greater if the company had continued using accelerated methods. Had accelerated methods continued to be used, after considering the impact of income taxes, the effect would decrease net income by $1.6 million or $.06 per share.
Leasehold improvements are unaffected by the change noted above. Leasehold improvements continue to be amortized using the straight line method over the terms of the leases or the useful lives of the assets, whichever is shorter.
(2) Current Relevant Accounting
Standards
In May 2011, FASB issued new authoritative guidance to achieve
a consistent definition of fair value and ensure that the fair
value measurement and disclosure requirements are similar
between U.S. GAAP and International Financial Reporting
Standards. This new guidance amends current fair value
measurement and disclosure guidance to include increased
transparency around valuation inputs and investment
categorization. This new guidance is effective for fiscal years
and interim periods beginning after December 15, 2011. Adoption
of the new guidance did not have an impact on the Company's
consolidated financial statements.
In September 2011, FASB issued additional authoritative guidance on testing goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the new guidance to have an impact on the consolidated financial statements.
In December 2011, the FASB and International Accounting Standards Board jointly issued additional authoritative guidance to enhance disclosure requirements, including both gross and net information, for instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The guidance is effective for annual reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively. The Company is currently assessing the impact of this guidance on its disclosures. Adoption of the new guidance will not have an impact on the Company's consolidated financial statements, as the guidance impacts disclosure requirements only.
Page 5 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(3) Marketable Securities
The Company's marketable
securities are all classified as available-for-sale. 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 highly liquid equity securities, for
which quoted market prices are
available. The Company's bond portfolio is valued using
Level 2 inputs. The Company's 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 brokerage firm(s) which include various third
party pricing services such as FT Interactive Data,
Reuters, Bloomberg and JP Morgan Pricing Direct. 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.
Marketable securities, as of March
31, 2012 and December 31, 2011, consisted
of:
| Gross | Gross | |||||||
| Unrealized | Unrealized | |||||||
| (dollars in thousands) | Amortized | Holding | Holding | Fair | ||||
| March 31, 2012 | Cost | Gains | Losses | Value | ||||
| Available-for-sale: | ||||||||
| Level 1 | ||||||||
| Equity securities | $ | 1,713 | $ | 7,827 | $ | --- | $ | 9,540 |
| Level 2 | ||||||||
| Municipal bonds | 80,623 | 1,357 | 151 | 81,829 | ||||
| $ | 82,336 | $ | 9,184 | $ | 151 | $ | 91,369 |
| Gross | Gross | |||||||
| Unrealized | Unrealized | |||||||
| (dollars in thousands) | Amortized | Holding | Holding | Fair | ||||
| December 31, 2011 | Cost | Gains | Losses | Value | ||||
| Available-for-sale: | ||||||||
| Level 1 | ||||||||
| Equity securities | $ | 1,713 | $ | 7,735 | $ | --- | $ | 9,448 |
| Level 2 | ||||||||
| Municipal bonds | 78,388 | 1,512 | --- | 79,900 | ||||
| $ | 80,101 | $ | 9,247 | $ | --- | $ | 89,348 |
Maturities of marketable securities
classified as available-for-sale at March 31, 2012, were as follows:
| Amortized | Fair | |||
| (dollars in thousands) | Cost | Value | ||
| Available-for-sale: | ||||
| Due within one year | $ | 4,297 | $ | 4,234 |
| Due after one year through five years | 52,416 | 52,328 | ||
| Due after five years through ten years | 22,412 | 23,769 | ||
| Due after ten years | 1,498 | 1,498 | ||
| Equity securities | 1,713 | 9,540 | ||
| $ | 82,336 | $ | 91,369 |
Page 6 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of Weis
Markets, Inc.'s (the "Company") financial condition and results
of operations should be read in conjunction with the unaudited
financial statements and related notes included in Item 1 of
this Quarterly Report on Form 10-Q, the Company's audited
consolidated financial statements and the related notes
included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2011, filed with the U.S. Securities
and Exchange Commission, as well as the cautionary statement
captioned "Forward-Looking Statements" immediately following
this analysis.
Overview
Weis Markets,
Inc. was founded in 1912 by Harry and Sigmund Weis, in Sunbury,
Pennsylvania. The Company currently ranks among the top 50 food
and drug retailers in the United States in revenues generated.
As of March 31, 2012, the Company operated 161 retail food
stores in Pennsylvania and four surrounding states: Maryland,
New Jersey, New York and West Virginia.
Company revenues are generated in its retail food stores from the sale of a wide variety of consumer products including groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, deli products, prepared foods, bakery products, beer and wine, fuel, and general merchandise items, such as health and beauty care and household products. The Company supports its retail operations through a centrally located distribution facility, its own transportation fleet, three manufacturing facilities and its administrative offices. The Company's operations are reported as a single reportable segment.
Results of Operations
| Analysis of Consolidated Statements of Income | |||||||||
| (dollars in thousands except per share amounts) | Percent | ||||||||
| For the 13 Weeks Ended March 31, 2012 and | Changes |
| March 26, 2011 | 2012 | 2011 | 2012 vs. | ||||||
| (13 weeks) | (13 weeks) | 2011 | |||||||
| Net sales | $ | 661,610 | $ | 659,455 | 0.3 | % | |||
| Cost of sales, including warehousing and distribution expenses | 478,485 | 480,951 | (0.5 | ) | |||||
| Gross profit on sales | 183,125 | 178,504 | 2.6 | ||||||
| Gross profit margin | 27.7 | % | 27.1 | % | |||||
| Operating, general and administrative expenses | 152,695 | 150,251 | 1.6 | ||||||
| O, G & A, percent of net sales | 23.1 | % | 22.8 | % | |||||
| Income from operations | 30,430 | 28,253 | 7.7 | ||||||
| Operating margin | 4.6 | % | 4.3 | % | |||||
| Investment income | 1,057 | 1,091 | (3.1 | ) | |||||
| Investment income, percent of net sales | 0.2 | % | 0.2 | % | |||||
| Income before provision for income taxes | 31,487 | 29,344 | 7.3 | ||||||
| Provision for income taxes | 11,461 | 10,743 | 6.7 | ||||||
| Effective tax rate | 36.4 | % | 36.6 | % | |||||
| Net income | $ | 20,026 | $ | 18,601 | 7.7 | % | |||
| Net income, percent of net sales | 3.0 | % | 2.8 | % | |||||
| Basic and diluted earnings per share | $ | 0.74 | $ | 0.69 | 7.2 | % |
Net Sales
The Company's revenues are earned and cash is generated as
merchandise is sold to customers at the point of sale.
Discounts, except those provided by a vendor, are recognized as
a reduction in sales as products are sold or over the life of a
promotional program if redeemable in the
future.
Page 7 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
Results of
Operations (continued)
When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation for five full quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.
Comparable store sales and total store sales both increased 0.9% in the first quarter of 2012 compared to the same quarter in 2011. Excluding fuel sales, comparable store sales increased 0.3% in first quarter of 2012 compared to the same quarter in 2011, while total sales increased 0.2%.
Slow economic growth and high unemployment continue to impact the Company's markets. Many customers remain cautious in their spending and continue to focus on value and long term savings. To meet these needs, the Company continued to make significant investments in its "Price Freeze" and "Get Grillin'" promotional programs. The Company launched an eighth round of its "Price Freeze" program on January 8, 2012. This program froze prices of approximately 1,700 staple items for a 90-day period. On April 8, 2012, the Company entered into another round of its "Get Grillin'" promotional program. The "Get Grillin'" promotional program is a thirteen-week reduced pricing program on top items throughout the store that our customers find to be the most seasonally relevant. This program also lowered prices on approximately 1,200 items.
In addition to the "Price Freeze" and "Get Grillin' Weis" programs, the Company offered its "Gas Rewards" program in most markets. The "Gas Rewards" program allows Weis Preferred Shoppers club card members to earn gas discounts resulting from their in-store purchases. Customers can redeem these gas discounts at Sheetz convenience stores, located in most of the Company's markets, at Manley's Mighty Mart Valero locations, in the Binghamton, NY market or at any of the nineteen Weis Gas-n-Go locations.
The Company continued to employ a disciplined marketing and advertising strategy, along with targeted promotional activity in key markets, to help maintain its market share and increase its profits. During the first quarter of 2012, the Company generated a 2.1% increase in average sales per customer transaction while the number of identical customer store visits declined by 1.1%. In the fourth quarter of 2011, in preparation for the Company's 100th anniversary celebration in 2012, the Company launched its Gold Card program, an extension of its existing Preferred Club Shopper program. The Gold Card program targets the Company's best shoppers with personalized offers and strong values to help them save money.
In 2011, the Company launched "Your Neighbors, Our Farmers" local produce campaign, highlighting the long-term contributions of thirteen farmers and their families who supply Weis Markets' stores with local produce. The Company remains committed to buying local produce, which helps conserve resources and benefits the economies of the states where Weis Markets operates stores. Produce sales increased 1.9% in the first quarter of 2012, compared to the same quarter in 2011. This increase is attributed to a combination of an increase in produce units sold, solid in-store execution of merchandising plans and hotter ads in key categories. In addition, floral sales increased 17.3% in the first quarter of 2012 compared to the same quarter in 2011, as a result of clement weather, strong Valentine's Day sales efforts and the shift of some Easter floral sales from the second quarter to the first quarter.
The Company is committed to maintaining retail prices, but recognizes that inflationary pressures could cause the Company to raise prices in order to maintain margin rates.
Management remains confident in its ability to generate sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company's competitive position.
Page 8 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
Results of
Operations (continued)
Cost of Sales and Gross
Profit
Cost of sales consists of direct product costs (net of
discounts and allowances), warehouse and transportation costs,
as well as manufacturing facility operations.
According to the latest U.S. Bureau of Labor Statistics' report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 5.2% compared to an increase of 1.4% for the same period last year. The annual Seasonally Adjusted Producer Price Index for Finished Consumer Foods increased at a rate of 5.9% for the first quarter of 2012 compared to an increase of 4.2% as of the first quarter of 2011. In the first quarter of 2012 and 2011, the Company has been able to maintain a gross profit rate of 27.7% and 27.1%, respectively, despite fluctuating retail and wholesale prices.
The Company's profitability is impacted by the cost of oil. Fluctuating fuel prices affect the delivered cost of product and the cost of other petroleum-based supplies such as plastic bags. Cost of sales was impacted by an 11.5% increase in the cost of diesel fuel used by the Company to deliver goods from its distribution center to its stores as compared to the first quarter of 2011. According to the U.S. Department of Energy, the average U.S. diesel fuel price increased $0.33 per gallon to $4.28 per gallon as of March 31 2012, compared to $3.95 per gallon as of March 26, 2011. Based upon the U.S. Department of Energy's current estimate, the Company is expecting diesel fuel prices to continue to increase throughout 2012. The U.S. Energy Information Association is expecting a $10.00 increase in the price of a barrel of crude oil during the summer, resulting in an approximate increase of $.22 per gallon for gasoline and diesel fuel.
Although the Company experienced product cost inflation and deflation in various commodities for both quarters presented, management does not feel it can accurately measure the full impact of inflation and deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.
Operating, General and
Administrative Expenses
Business operating costs including expenses generated from
administration and purchasing functions, are recorded in
"Operating, general and administrative expenses." Business
operating costs include items such as wages, benefits,
utilities, repairs and maintenance, advertising costs and
credits, rent, insurance, equipment depreciation, leasehold
amortization and costs for outside provided
services.
Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise over 60% of the total operating, general and administrative expenses. Employee-related costs increased 4.4% in the first quarter of 2012 compared to the same quarter last year. As a percent of sales, employee-related costs increased 0.6%. In the first quarter of 2012, the Company's self-insured health care benefits increased 12.3% from the same period in 2011. Management expects health care benefit costs to increase approximately 5% in fiscal 2012 and continues to evaluate various programs to reduce this expense. The Company remains concerned about the potential impact that The Patient Protection and Affordable Care Act will have on its future operating expenses. As a percent of sales, direct store labor increased 0.2% compared to the first quarter of 2011.
Depreciation expense was $12.3 million, or 1.9% of total sales, for the first quarter 2012 compared to $13.7 million, or 2.1% of total sales for the first quarter 2011. In the first quarter of 2012, the Company changed its accounting policy for property and equipment. The decrease in depreciation expense resulted from the Company's change in depreciation method from accelerated methods to straight-line, despite additional capital expenditures as the Company implements its capital expansion program. See Note 1 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information on the Company's change in accounting estimate related to depreciation expense. See the Liquidity and Capital Resources section for further information regarding the Company's capital expansion program.
Page 9 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
Results of
Operations (continued)
The Company's interchange fees for accepting credit and debit cards increased 0.3% in the first quarter of 2012 compared to the first quarter of 2011. The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the Federal Reserve to set rules to implement caps on debit card interchange fees. The Federal Reserve released its final rules, which indicate there will be a reduction in fees. However, the Company is currently unable to determine the full impact of these rules on its "Operating, general and administrative expenses".
Above average snowfall and significant ice storms struck the Mid-Atlantic states, the Company's operating region, in the first quarter of 2011. In order to hedge the Company's potential snow removal expense against drastic swings and divert the associated risk, the Company has entered into a fixed rate contractual arrangement for snow and ice removal. As a result, these expenses decreased $503,000 in the first quarter of 2012 compared to the first quarter of the prior year.
Retail store profitability is sensitive to volatility in utility costs due to the amount of electricity and gas required to operate the Company's stores and facilities. The Company is responding to this volatility in operating costs by employing technologies, procurement strategies and associate energy awareness programs to manage and reduce consumption. Through these initiatives, with the added benefit of mild weather and a declining market in electricity costs, the Company's utility expense decreased by 12.2% in the first quarter of 2012, compared to the same quarter in 2011.
The Company may not be able to recover rising expenses through increased prices charged to its customers. Any delay in the Company's response to unforeseen cost increases or competitive pressures that prevent its ability to raise prices may cause earnings to suffer. Management does not foresee a change in these trends in the near future.
Investment
Income
The Company's investment portfolio consists of marketable
securities which currently includes municipal bonds and equity
securities. The Company classifies all of its marketable
securities as available-for-sale. Investment income declined
$34,000 in the first quarter of 2012 compared to the same
period a year ago. The Company did not sell any equity
securities in the first quarter of 2012 and experienced a
$557,000 decrease in investment income due to gains recognized
on the sale of equity securities in the first quarter of
2011. However, this decline was
primarily offset by an increase in the Company's
investment income during the first quarter of 2012,
resulting from strategic investment decisions weighed
heavily toward municipal bonds, starting at the end of
2010.
Provision for Income
Taxes
The effective income tax rate was 36.4% in the first quarter of
2012 compared to 36.6% in the first quarter of 2011. The
effective income tax rate differs from the federal statutory
rate of 35% primarily due to the effect of state taxes, net of
permanent differences.
Income is earned by selling merchandise at price levels that produce revenues in excess of cost of merchandise sold and operating and administrative expenses. Although the Company may experience short term fluctuations in its earnings due to unforeseen short-term operating cost increases, it historically has been able to increase revenues and maintain stable earnings from year to year.
Liquidity and Capital
Resources
During the first quarter of 2012, the Company generated $23.0 million in cash flows from operating activities compared to $32.3 million for the same period in 2011. Cash flows from operating activities were impacted as a result of an increase in inventory, due to the timing of the Easter holiday, in the first quarter of 2012. Since the beginning of the fiscal year, working capital increased 4.8% compared to an increase of 1.8% in the first quarter of 2011.
Net cash used in investing activities was $15.1 million compared to $45.2 million in the first quarter of 2012 and 2011, respectively. These funds were used primarily to purchase marketable securities and property and equipment in the quarters presented. The Company purchased $4.2 million of marketable securities in the first quarter of 2012 and $27.7 million in the first quarter of 2011. Property and equipment purchases during the first quarter of 2012 totaled $13.0 million compared to $22.7 million in the first quarter of 2011. As a percentage of sales, capital expenditures were 2.0% and 3.4% in 2012 and 2011, respectively.
Page 10 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
Liquidity and Capital
Resources (continued)
The Company's capital expansion program includes the construction of new superstores, the expansion and remodeling of existing units, the acquisition of sites for future expansion, new technology purchases and the continued upgrade of the Company's processing and distribution facilities. Management estimates that its current development plans will require an investment of approximately $125.0 million in 2012.
Net cash used in financing activities was $8.1 million and $7.8 million in the first quarter of 2012 and 2011, respectively, which solely consisted of dividend payments to shareholders. At March 31, 2012, the Company had outstanding letters of credit of $13.0 million. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company does not anticipate drawing on any of them.
Total cash dividend payments on common stock, on a per share basis, amounted to $.30 in the first quarter of 2012 compared to $.29 in the same period of 2011. At its regular meeting held in April, the Board of Directors unanimously approved a quarterly dividend of $.30 per share, payable on May 21, 2012 to shareholders of record on May 7, 2012. The Board of Directors' 2004 resolution authorizing the repurchase of up to one million shares of the Company's common stock has a remaining balance of 752,468 shares.
The Company has no other commitment of capital resources as of March 31, 2012, other than the lease commitments on its store facilities under operating leases that expire at various dates through 2028. The Company anticipates funding its working capital requirements and its $125.0 million capital expansion program through cash and investment reserves and future internally generated cash flows from operations. However, management is considering both a short-term and long-term credit facility to fund working capital needs and potential acquisitions.
Critical Accounting
Estimates
The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the Consolidated Financial Statements included in the 2011 Annual Report on Form 10-K. However, in the first quarter of 2012, the Company changed its accounting policy for the depreciation of property and equipment. See Note 1 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information on the Company's change in accounting estimate related to depreciation expense. There have been no other changes to the Critical Accounting Policies since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Forward-Looking Statements
In addition to historical information, this 10-Q Report may contain forward-looking statements, which are included pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the retail industry; the regulatory environment; rapidly changing technology and competitive factors, including increased competition with regional and national retailers; and price pressures. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files periodically with the Securities and Exchange Commission.
Page 11 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosure - There have been no material changes in the Company's market risk during the three months ended March 31, 2012. Quantitative information is set forth in Item 7a on the Company's Annual Report on Form 10-K under the caption "Quantitative and Qualitative Disclosures About Market Risk," which was filed for the fiscal year ended December 31, 2011 and is incorporated herein by reference.
Qualitative Disclosure - This information is
set forth in the Company's Annual Report on Form 10-K under the
caption "Liquidity and Capital Resources," within "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," which was filed for the fiscal year ended December
31, 2011 and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief
Financial Officer, together with the Company's Disclosure
Committee, evaluated the Company's disclosure controls and
procedures as of the fiscal quarter ended March 31, 2012. Based
on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the
period covered by this report to ensure that information
required to be disclosed by the Company in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as
amended, was recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms,
and include controls and procedures designed to ensure that
information required to be disclosed by the Company in such
reports was accumulated and communicated to the Company's
management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
In connection with the evaluation described above, there was no change in the Company's internal control over financial reporting during the fiscal quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Page 12 of 13 (Form 10-Q)
WEIS MARKETS,
INC.
PART II - OTHER INFORMATION
Exhibits
Exhibit 18
Letter re: Change in Accounting Principles
Exhibit 31.1
Rule 13a-14(a) Certification - CEO
Exhibit 31.2
Rule 13a-14(a) Certification - CFO
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WEIS MARKETS, INC. | |||
| (Registrant) | |||
| Date 05/10/2012 | /S/David J. Hepfinger | ||
| David J. Hepfinger | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date 05/10/2012 | /S/ Scott F. Frost | ||
| Scott F. Frost | |||
| Senior Vice President, Chief Financial Officer | |||
| and Treasurer | |||
| (Principal Financial Officer) | |||
Page 13 of 13 (Form 10-Q)