10-K 1 publix-10kx12312016.htm 10-K Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission File Number 0-00981
publixlogoa04a06.jpg
PUBLIX SUPER MARKETS, INC.
(Exact name of Registrant as specified in its charter)
Florida
 
59-0324412
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
3300 Publix Corporate Parkway
 
 
Lakeland, Florida
 
33811
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (863) 688-1188
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $1.00 Par Value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      
Yes                No    X  
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      
Yes                No    X  
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 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 during the preceding 12 months.
Yes    X         No        
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
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        
  
Non-accelerated filer    X  
  
Smaller reporting company        
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes               No    X  
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $18,853,076,000 as of June 24, 2016, the last business day of the Registrant’s most recently completed second fiscal quarter.
The number of shares of the Registrant’s common stock outstanding as of February 7, 2017 was 761,952,000.
Documents Incorporated By Reference
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Proxy Statement solicited for the 2017 Annual Meeting of Stockholders to be held on April 18, 2017.

 


TABLE OF CONTENTS

 
 
 
 
 
 
 
Page
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
 
 
 
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
Item 13.
 
Item 14.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 15.
 



PART I
Item 1. Business
Publix Super Markets, Inc. and its wholly owned subsidiaries (the Company) are in the business of operating retail food supermarkets in Florida, Georgia, Alabama, South Carolina, Tennessee and North Carolina. The Company plans to expand its retail operations into Virginia in 2017. The Company was founded in 1930 and later merged into another corporation that was originally incorporated in 1921. The Company has no other significant lines of business or industry segments.
Merchandising and manufacturing
The Company sells grocery (including dairy, produce, deli, bakery, meat and seafood), health and beauty care, general merchandise, pharmacy, floral and other products and services. The percentage of consolidated sales by merchandise category for 2016, 2015 and 2014 was as follows:
 
 
2016
 
2015
 
2014
Grocery
 
84
%
 
85
%
 
85
%
Other
 
16
%
 
15
%
 
15
%
 
 
100
%
 
100
%
 
100
%
The Company’s lines of merchandise include a variety of nationally advertised and private label brands as well as unbranded merchandise such as produce, meat and seafood. The Company receives the food and nonfood products it distributes from many sources. These products are delivered to the supermarkets through Company distribution centers or directly from the suppliers and are generally available in sufficient quantities to enable the Company to adequately satisfy its customers. The Company believes that its sources of supply of these products and raw materials used in manufacturing are adequate for its needs and that it is not dependent upon a single supplier or relatively few suppliers. Approximately 74% of the total cost of products purchased is delivered to the supermarkets through the Company’s distribution centers. Private label items are produced in the Company’s dairy, bakery and deli manufacturing facilities or are manufactured for the Company by suppliers.
The Company has experienced no significant changes in the kinds of products sold or in its methods of distribution since the beginning of the fiscal year.
Store operations
The Company operated 1,136 supermarkets at the end of 2016, compared with 1,114 at the beginning of the year. In 2016, 32 supermarkets were opened (including seven replacement supermarkets) and 156 supermarkets were remodeled. Ten supermarkets were closed during the period. Of the seven replacement supermarkets opened during 2016, one replaced two of the supermarkets closed in 2016, four replaced supermarkets also closed in 2016 and two replaced supermarkets closed in 2015 that were replaced on site. The four remaining supermarkets closed in 2016 will be replaced on site in subsequent periods. New supermarkets added 1.3 million square feet in 2016, an increase of 2.4%. At the end of 2016, the Company had 774 supermarkets located in Florida, 184 in Georgia, 63 in Alabama, 57 in South Carolina, 39 in Tennessee and 19 in North Carolina. Also, at the end of 2016, the Company had 12 supermarkets under construction in Florida, seven in North Carolina, four in Virginia, two in Alabama, two in Tennessee, one in Georgia and one in South Carolina.
Competition
The Company is engaged in the highly competitive retail food industry. The Company’s competitors include national and regional supermarket chains, independent supermarkets, supercenters, membership warehouse clubs, mass merchandisers, dollar stores, drug stores, specialty food stores, restaurants, convenience stores and online retailers. The Company’s ability to attract and retain customers is based primarily on quality of goods and service, price, convenience, product mix and store location. 
Working capital
The Company’s working capital at the end of 2016 consisted of $4,595.7 million in current assets and $2,943.7 million in current liabilities. Normal operating fluctuations in these balances can result in changes to cash flows from operating activities presented in the consolidated statements of cash flows that are not necessarily indicative of long-term operating trends. There are no unusual industry practices or requirements relating to working capital items.
Seasonality
The historical influx of winter residents to Florida and increased purchases of products during the traditional Thanksgiving, Christmas and Easter holidays typically result in seasonal sales increases between November and April of each year.


1


Employees
The Company had 191,000 employees at the end of 2016. The Company considers its employee relations to be good.
Intellectual property
The Company’s trademarks, trade names, copyrights and similar intellectual property are important to the success of the Company’s business. Numerous trademarks, including “Publix” and “Where Shopping is a Pleasure,” have been registered with the U.S. Patent and Trademark Office. Due to the importance of its intellectual property to its business, the Company actively defends and enforces its rights to such property.
Environmental matters
The Company’s operations are subject to regulation under federal, state and local environmental protection laws and regulations. The Company may be subject to liability under applicable environmental laws for cleanup of contamination at its facilities. Compliance with these laws had no material effect on capital expenditures, results of operations or the competitive position of the Company.
Company information
The Company’s Annual Reports on Form 10-K, Proxy Statements, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports may be obtained electronically, free of charge, through the Company’s website at corporate.publix.com/stock.
Item 1A. Risk Factors
In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company’s business. The Company’s financial condition and results of operations could be materially and adversely affected by any of these risks.
Increased competition and low profit margins could adversely affect the Company.
The retail food industry in which the Company operates is highly competitive with low profit margins. The Company’s competitors include national and regional supermarket chains, independent supermarkets, supercenters, membership warehouse clubs, mass merchandisers, dollar stores, drug stores, specialty food stores, restaurants, convenience stores and online retailers. The Company’s ability to attract and retain customers is based primarily on quality of goods and service, price, convenience, product mix and store location.
As a result of the highly competitive environment, traditional supermarkets, including the Company, face business challenges. There has been a trend in recent years for traditional supermarkets to lose market share to nontraditional competitors. The Company’s ability to retain its customers depends on its ability to meet the business challenges created by this highly competitive environment. There can be no assurance that the Company will be able to meet these challenges. In addition, the Company believes it will face increased competition in the future from existing and potentially new competitors and its financial condition and results of operations could be impacted by the pricing, purchasing, advertising or promotional decisions made by its competitors as well as competitor format innovation and location additions.
General economic and other conditions that impact consumer spending could adversely affect the Company.
The Company’s results of operations are sensitive to changes in general economic conditions that impact consumer spending. Adverse economic conditions, including high unemployment, home foreclosures and weakness in the housing market, declines in the stock market and the instability of the credit markets, could cause a reduction in consumer spending. While there has been a trend toward lower unemployment and fuel prices in recent periods which has contributed to a better economic climate, there is continued uncertainty about the strength of the economic recovery. If the economy does not continue to improve or if it weakens, or if fuel prices increase, consumers may reduce consumer spending. Other conditions that could affect consumer spending include increases in tax, interest and inflation rates, increases in energy costs, increases in health care costs, the impact of natural disasters or acts of terrorism, and other factors. This reduction in the level of consumer spending could cause customers to purchase lower margin items or to shift spending to lower priced competitors, which could adversely affect the Company’s financial condition and results of operations.
Increased operating costs could adversely affect the Company.
The Company’s operations tend to be more labor intensive than some of its competitors due to the additional customer service offered in its supermarkets. Consequently, uncertain labor markets, government mandated increases in the minimum wage or other benefits, increased wage rates by retailers and other labor market competitors, an increased proportion of full-time employees, increased costs of health care due to health insurance reform or other factors could result in an increase in labor costs. In addition, the inability to improve or manage operating costs, including payroll, facilities or other non-product related costs, could adversely affect the Company’s financial condition and results of operations.



2


Failure to execute on the Company’s core strategies could adversely affect the Company.
The Company’s core strategies focus on customer service, product quality, shopping environment, competitive pricing and convenient locations. The Company has implemented several strategic business and technology initiatives as part of the execution of these core strategies. The Company believes these core strategies and related strategic initiatives differentiate it from its competition and present opportunities for sustained market share and financial growth. Failure to execute on these core strategies, or failure to execute the core strategies on a cost effective basis, could adversely affect the Company’s financial condition and results of operations.
Failure to identify and obtain or retain suitable supermarket sites could adversely affect the Company.
The Company’s ability to obtain sites for new supermarkets and, to a lesser extent, acquire existing supermarket locations is dependent on identifying and entering into lease or purchase agreements on commercially reasonable terms for properties that are suitable for its needs. If the Company fails to identify suitable sites and enter into lease or purchase agreements on a timely basis for any reason, including competition from other companies seeking similar sites, the Company’s growth could be adversely affected because it may be unable to open new supermarkets as anticipated. Similarly, its business could be adversely affected if it is unable to renew the leases on its supermarkets on commercially reasonable terms.
Failure to maintain the privacy and security of confidential customer and business information and the resulting unfavorable publicity could adversely affect the Company.
The Company receives, retains and transmits confidential information about its customers, employees and suppliers and entrusts certain of that information to third party service providers. The Company depends upon the secure transmission of confidential information, including customer payments, over external networks. Additionally, the use of individually identifiable data by the Company and its third party service providers is subject to federal, state and local laws and regulations. An intrusion into or compromise of the Company’s information technology systems, or those of its third party service providers, that results in customer, employee or supplier information being obtained by unauthorized persons could adversely affect the Company’s reputation with existing and potential customers, employees and others. Such an intrusion or compromise could require expending significant resources related to remediation, lead to legal proceedings and regulatory actions, result in a disruption of operations and have an adverse effect on the Company’s financial condition and results of operations.
Disruptions in information technology systems could adversely affect the Company.
The Company is dependent on complex information technology systems to operate its business, enhance customer service, improve the efficiency of its supply chain and increase employee efficiency. Certain of these information technology systems are hosted by third party service providers. The Company’s information technology systems, as well as those of the Company’s third party service providers, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, malicious service disruptions, catastrophic events and user errors. Significant disruptions in the information technology systems of the Company or its third party service providers could have an adverse effect on the Company’s financial condition and results of operations.
Unexpected changes in the insurance market or factors affecting self-insurance reserve estimates could adversely affect the Company.
The Company uses a combination of insurance coverage and self-insurance to provide for potential liability for employee benefits, workers’ compensation, general liability, fleet liability and directors and officers liability. The Company is self-insured for property, plant and equipment losses. There is no assurance that the Company will be able to continue to maintain its insurance coverage or obtain comparable insurance coverage on commercially reasonable terms. Self-insurance reserves are determined based on actual claims experience and an estimate of claims incurred but not reported including, where necessary, actuarial studies. Actuarial projections of losses are subject to variability caused by, but not limited to, such factors as future interest and inflation rates, future economic conditions, claims experience, litigation trends and benefit level changes. The Company’s financial condition and results of operations could be adversely affected by an increase in the frequency or costs of claims, changes in actuarial assumptions or catastrophic events involving property, plant and equipment losses.
Product liability claims, product recalls and the resulting unfavorable publicity could adversely affect the Company.
The distribution and sale of grocery, drug and other products purchased from suppliers or manufactured by the Company entails an inherent risk of product liability claims, product recall and the resulting adverse publicity. Such products may contain contaminants that may be inadvertently sold by the Company. These contaminants may, in certain cases, result in illness, injury or death if processing at the consumer level, if applicable, does not eliminate the contaminants. Even an inadvertent shipment of adulterated products may be a violation of law and may lead to a product recall and/or an increased risk of exposure to product liability claims. There can be no assurance that such claims will not be asserted against the Company or that the Company will not be obligated to perform product recalls in the future. If a product liability claim is successful, the Company’s insurance coverage may not be adequate to pay all liabilities, and the Company may not be able to continue to maintain such insurance coverage or obtain comparable insurance coverage on commercially reasonable terms. If the Company does not have adequate insurance coverage or contractual indemnification available, product liability claims could have an adverse effect on the Company’s ability


3


to successfully market its products and on the Company’s financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the adverse publicity surrounding any assertion that the Company’s products caused illness or injury could have an adverse effect on the Company’s reputation with existing and potential customers and on the Company’s financial condition and results of operations.
Unfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect the Company.
The Company is subject to federal, state and local laws and regulations that govern activities that may have adverse environmental effects and impose liabilities for the costs of contamination cleanup and damages arising from sites of past spills, disposals or other releases of hazardous materials. Under current environmental laws, the Company may be held responsible for the remediation of environmental conditions regardless of whether the Company leases, subleases or owns the supermarkets or other facilities and regardless of whether such environmental conditions were created by the Company or a prior owner or tenant. The costs of investigation, remediation or removal of environmental conditions may be substantial. In addition, the increased focus on climate change, waste management and other environmental issues may result in new environmental laws or regulations that could negatively affect the Company directly or indirectly through increased costs on its suppliers. There can be no assurance that environmental conditions relating to prior, existing or future sites or other environmental changes will not adversely affect the Company’s financial condition and results of operations through, for instance, business interruption, cost of remediation or adverse publicity.
Unfavorable changes in, failure to comply with or increased costs to comply with laws and regulations could adversely affect the Company.
In addition to environmental laws and regulations, the Company is subject to federal, state and local laws and regulations relating to, among other things, product labeling and safety, zoning, land use, workplace safety, public health, accessibility and restrictions on the sale of various products, including alcoholic beverages, tobacco and drugs. The Company is also subject to laws governing its relationship with employees, including minimum wage requirements, overtime, labor, working conditions, disabled access and work permit requirements. Compliance with, or changes in, these laws, the passage of new laws and increased government regulation could adversely affect the Company’s financial condition and results of operations.
Unfavorable results of legal proceedings could adversely affect the Company.
The Company is subject from time to time to various lawsuits, claims and charges arising in the normal course of business, including employment, personal injury, commercial and other matters. Some lawsuits also contain class action allegations. The Company estimates its exposure to these legal proceedings and establishes reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by the Company, differences in actual outcomes or changes in the Company’s evaluation could have an adverse effect on the Company’s financial condition or results of operations.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
At year end, the Company operated 53.4 million square feet of supermarket space. The Company’s supermarkets vary in size. Current supermarket prototypes range from 28,000 to 61,000 square feet. Supermarkets are often located in strip shopping centers where the Company is the anchor tenant. The majority of the Company’s supermarkets are leased. Substantially all of these leases will expire during the next 20 years. However, in the normal course of business, it is expected that the leases will be renewed or replaced by new leases. Both the building and land are owned at 274 locations. The building is owned while the land is leased at 57 other locations.
The Company supplies its supermarkets from eight primary distribution centers located in Lakeland, Miami, Jacksonville, Sarasota, Orlando, Deerfield Beach and Boynton Beach, Florida and Lawrenceville, Georgia. The Company operates six manufacturing facilities, including three dairy plants located in Lakeland and Deerfield Beach, Florida and Lawrenceville, Georgia, two bakery plants located in Lakeland, Florida and Atlanta, Georgia and a deli plant located in Lakeland, Florida.
The Company’s corporate offices, primary distribution centers and manufacturing facilities are owned with no outstanding debt. The Company’s properties are well maintained, in good operating condition and suitable for operating its business.


4



Item 3. Legal Proceedings
The Company is subject from time to time to various lawsuits, claims and charges arising in the normal course of business. The Company believes its recorded reserves are adequate in light of the probable and estimable liabilities. The estimated amount of reasonably possible losses for lawsuits, claims and charges, individually and in the aggregate, is considered to be immaterial. In the opinion of management, the ultimate resolution of these legal proceedings will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable


5


PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market Information
The Company’s common stock is not traded on an established securities market. Substantially all transactions of the Company’s common stock have been among the Company, its employees, former employees, their families and the benefit plans established for the Company’s employees. Common stock is made available for sale by the Company only to its current employees and members of its Board of Directors through the Company’s Employee Stock Purchase Plan (ESPP) and Non-Employee Directors Stock Purchase Plan (Directors Plan) and to participants of the Company’s 401(k) Plan. In addition, common stock is provided to employees through the Employee Stock Ownership Plan (ESOP). The Company currently repurchases common stock subject to certain terms and conditions. The ESPP, Directors Plan, 401(k) Plan and ESOP each contain provisions prohibiting any transfer for value without the owner first offering the common stock to the Company. The Company serves as the registrar and stock transfer agent for its common stock.
Because there is no trading of the Company’s common stock on an established securities market, the market price of the Company’s common stock is determined by its Board of Directors. As part of the process to determine the stock value, an independent valuation is obtained. The process includes comparing the Company’s financial results to those of comparable companies that are publicly traded (comparable publicly traded companies). The purpose of the process is to determine a value for the Company’s common stock that is comparable to the stock value of comparable publicly traded companies by considering both the results of the stock market and the relative financial results of comparable publicly traded companies. The market prices for the Company’s common stock for 2016 and 2015 were as follows:
 
 
2016
 
2015
January - February
 
$
41.80

 
33.80

March - April
 
45.20

 
39.05

May - July
 
43.95

 
42.10

August - October
 
41.90

 
42.00

November - December
 
40.15

 
41.80

(b)
Approximate Number of Equity Security Holders
As of February 7, 2017, the approximate number of holders of record of the Company’s common stock was 179,000.
(c)
Dividends
During 2016, the Company paid one quarterly dividend of $0.20 per share and three quarterly dividends of $0.2225 per share for a total of $0.8675 per share. During 2015, the Company paid one semiannual dividend of $0.39 per share and two quarterly dividends of $0.20 per share for a total of $0.79 per share. Payment of dividends is within the discretion of the Board of Directors and depends on, among other factors, net earnings, capital requirements and the financial condition of the Company. However, the Company intends to continue to pay comparable dividends to stockholders in the future.


6


(d)
Purchases of Equity Securities by the Issuer
Issuer Purchases of Equity Securities
Shares of common stock repurchased by the Company during the three months ended December 31, 2016 were as follows (amounts are in thousands, except per share amounts): 
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)
September 25, 2016
through
October 29, 2016
 
 
1,153

 
 
 
$
41.90

 
 
N/A
 
N/A
October 30, 2016
through
November 26, 2016
 
 
3,083

 
 
 
40.18

 
 
N/A
 
N/A
November 27, 2016
through
December 31, 2016
 
 
1,630

 
 
 
40.15

 
 
N/A
 
N/A
 
 
Total
 
 
5,866

 
 
 
$
40.51

 
 
N/A
 
N/A























____________________________
(1)
Common stock is made available for sale by the Company only to its current employees and members of its Board of Directors through the ESPP and Directors Plan and to participants of the 401(k) Plan. In addition, common stock is provided to employees through the ESOP. The Company currently repurchases common stock subject to certain terms and conditions. The ESPP, Directors Plan, 401(k) Plan and ESOP each contain provisions prohibiting any transfer for value without the owner first offering the common stock to the Company.
The Company’s common stock is not traded on an established securities market. The amount of common stock offered to the Company for repurchase is not within the control of the Company, but is at the discretion of the stockholders. The Company does not believe that these repurchases of its common stock are within the scope of a publicly announced plan or program (although the terms of the plans discussed above have been communicated to the participants). Thus, the Company does not believe that it has made any repurchases during the three months ended December 31, 2016 required to be disclosed in the last two columns of the table.


7


(e)
Performance Graph
The following performance graph sets forth the Company’s cumulative total stockholder return during the five years ended December 31, 2016, compared to the cumulative total return on the S&P 500 Index and a custom Peer Group Index including retail food supermarket companies.(1) The Peer Group Index is weighted based on the various companies’ market capitalization. The comparison assumes $100 was invested at the end of 2011 in the Company’s common stock and in each of the related indices and assumes reinvestment of dividends.
The Company’s common stock is valued as of the end of each fiscal quarter. After the end of a quarter, however, shares continue to be traded at the prior valuation until the new valuation is received. The cumulative total return for the companies represented in the S&P 500 Index and the custom Peer Group Index is based on those companies’ trading price as of the Company’s fiscal year end. The following performance graph is based on the Company’s trading price at fiscal year end based on its market price as of the prior fiscal quarter. For comparative purposes, a performance graph based on the fiscal year end valuation (market price as of March 1, 2017) is provided in the 2017 Proxy Statement. Past stock performance shown below is no guarantee of future performance.
Comparison of Five-Year Cumulative Return Based Upon Fiscal Year End Trading Price
publix-q4x_chartx36288a01a06.jpg
 
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
symbol1a01a04.jpg
Publix
$
100.00
 
 
115.77

 
158.16

 
182.18

 
229.53

 
225.04

 
symbol2a01a04.jpg
S&P 500
100.00
 
 
114.07

 
153.00

 
177.13

 
178.48

 
198.24

 
symbol3a01a04.jpg
Peer Group (1)
100.00
 
 
97.20

 
147.36

 
194.40

 
249.03

 
229.92

 


___________________________
(1)
Companies included in the Peer Group are Ahold Delhaize, Kroger, Supervalu and Weis Markets. Ahold and Delhaize Group merged into Ahold Delhaize in 2016. The Peer Group includes Ahold Delhaize for 2016 and Ahold and Delhaize Group in prior years.


8


Item 6.   Selected Financial Data

2016 (1)

2015

2014

2013

2012
 

(Amounts are in thousands, except per share  amounts and number of supermarkets)


 
Sales:




















 
Sales
$
33,999,921
 

32,362,579
 

30,559,505
 

28,917,439
 

27,484,766
 
 
Percent change
5.1
%
 



5.9
%




5.7
%




5.2
%




1.9% (2)
Comparable store sales percent change
1.9
%




4.2
%




5.4
%




3.6
%




2.2
%


 
Earnings:



















 
Gross profit (3)
$
9,265,616
 

8,902,969
 

8,326,855
 

7,980,120
 

7,573,782
 
 
Earnings before income tax expense
$
2,940,376
 

2,869,261
 

2,570,121
 

2,465,689
 

2,302,594
 
 
Net earnings
$
2,025,688
 

1,965,048
 

1,735,308
 

1,653,954
 

1,552,255
 
 
Net earnings as a percent of sales
6.0
%




6.1
%




5.7
%




5.7
%




5.6
%


 
Common stock:



















 
Weighted average shares outstanding
769,267
 

774,428
 

778,708
 

780,188
 

782,553
 
 
Basic and diluted earnings per share
$
2.63
 

2.54
 

2.23
 

2.12
 

1.98
 
 
Dividends per share
$
0.8675
 

0.79
 

0.74
 

0.70
 
 
0.89 (4)
Financial data:



















 
Capital expenditures
$
1,443,827
 

1,235,648
 

1,374,124
 

668,485
 

697,112
 
 
Working capital
$
1,651,960
 

1,411,744
 

1,035,758
 

881,222
 

928,138
 
 
Current ratio
1.56
 

1.49
 

1.38
 

1.37
 

1.42
 
 
Total assets
$
17,463,954
 

16,359,278
 

15,083,480
 

13,546,641
 

12,278,320
 
 
Long-term debt (including current portion)
$
250,584
 

236,446
 

217,638
 

162,154
 

158,472
 
 
Common stock related to ESOP
$
3,068,097
 

2,953,878
 

2,680,528
 

2,322,903
 

2,272,963
 
 
Total equity
$
13,497,437
 

12,431,262
 

11,345,223
 

10,267,796
 

9,128,818
 
 
Supermarkets
1,136
 

1,114
 

1,095
 

1,079
 

1,069
 
 
















____________________________
(1)
Fiscal year 2016 includes 53 weeks. All other years include 52 weeks.
(2)
Fiscal year 2012 sales are impacted by the prior year (fiscal year 2011) including 53 weeks.
(3)
Gross profit represents sales less cost of merchandise sold as reported in the consolidated statements of earnings.
(4)
The Company paid dividends on its common stock of $0.89 per share in 2012, which included an annual dividend of $0.59 per share paid in June 2012 and a semiannual dividend of $0.30 per share paid in December 2012.


9


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is engaged in the retail food industry, operating supermarkets in Florida, Georgia, Alabama, South Carolina, Tennessee and North Carolina. The Company plans to expand its retail operations into Virginia in 2017. The Company has no other significant lines of business or industry segments. As of December 31, 2016, the Company operated 1,136 supermarkets including 774 located in Florida, 184 in Georgia, 63 in Alabama, 57 in South Carolina, 39 in Tennessee and 19 in North Carolina. In 2016, 32 supermarkets were opened (including seven replacement supermarkets) and 156 supermarkets were remodeled. During 2016, the Company opened 15 supermarkets in Florida, eight in North Carolina, three in Georgia, three in South Carolina, two in Alabama and one in Tennessee. Ten supermarkets were closed during the period. Of the seven replacement supermarkets opened during 2016, one replaced two of the supermarkets closed in 2016, four replaced supermarkets also closed in 2016 and two replaced supermarkets closed in 2015 that were replaced on site. The four remaining supermarkets closed in 2016 will be replaced on site in subsequent periods. In the normal course of operations, the Company replaces supermarkets and closes supermarkets that are not meeting performance expectations. The impact of future supermarket closings is not expected to be material.
The Company’s revenues are earned and cash is generated as merchandise is sold to customers. Income is earned by selling merchandise at price levels that produce sales in excess of the cost of merchandise sold and operating and administrative expenses. The Company has generally been able to increase revenues and net earnings from year to year. Further, the Company has been able to meet its cash requirements from internally generated funds without the need for debt financing. The Company’s year end cash balances are impacted by its operating results as well as by capital expenditures, investment transactions, stock repurchases and dividend payments.
The Company sells a variety of merchandise to generate revenues. This merchandise includes grocery (including dairy, produce, deli, bakery, meat and seafood), health and beauty care, general merchandise and other products and services. Most of the Company’s supermarkets also have pharmacy and floral departments. Merchandise includes a variety of nationally advertised and private label brands as well as unbranded merchandise such as produce, meat and seafood. The Company’s private label brands play an important role in its merchandising strategy.
Operating Environment
The Company is engaged in the highly competitive retail food industry. The Company’s competitors include traditional supermarkets, such as national and regional supermarket chains and independent supermarkets, as well as nontraditional competitors, such as supercenters, membership warehouse clubs, mass merchandisers, dollar stores, drug stores, specialty food stores, restaurants, convenience stores and online retailers. The Company’s ability to attract and retain customers is based primarily on quality of goods and service, price, convenience, product mix and store location. In addition, the Company competes with other companies for additional retail site locations. The Company also competes with retailers and other labor market competitors in attracting and retaining quality employees. As a result of the highly competitive environment, traditional supermarkets, including the Company, face business challenges. There has been a trend in recent years for traditional supermarkets to lose market share to nontraditional competitors. The Company’s ability to retain its customers depends on its ability to meet the business challenges created by this highly competitive environment.
In order to meet its competitive challenges, the Company continues to focus on its core strategies, including customer service, product quality, shopping environment, competitive pricing and convenient locations. The Company has implemented several strategic business and technology initiatives as part of the execution of these core strategies. The Company believes these core strategies and related strategic initiatives differentiate it from its competition and present opportunities for sustained market share and financial growth.
Results of Operations
The Company’s fiscal year ends on the last Saturday in December. Fiscal year 2016 includes 53 weeks and fiscal years 2015 and 2014 include 52 weeks.
Sales
Sales for 2016 were $34.0 billion as compared with $32.4 billion in 2015, an increase of $1,637.3 million or 5.1%. The increase in sales for 2016 as compared with 2015 was primarily due to a 1.9% increase in sales from the additional week in 2016 and a 1.9% increase in comparable store sales (supermarkets open for the same weeks in both periods, including replacement supermarkets). Sales for supermarkets that are replaced on site are classified as new supermarket sales since the replacement period for the supermarket is generally 9 to 12 months. Comparable store sales for 2016 increased primarily due to increased product costs and customer counts.
Sales for 2015 were $32.4 billion as compared with $30.6 billion in 2014, an increase of $1,803.1 million or 5.9%. The increase in sales for 2015 as compared with 2014 was primarily due to a 4.2% increase in comparable store sales. Comparable store sales


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for 2015 increased primarily due to product cost inflation and increased customer counts resulting from a better economic climate in 2015.
Gross profit
Gross profit (sales less cost of merchandise sold) as a percentage of sales was 27.3%, 27.5% and 27.2% in 2016, 2015 and 2014, respectively. Excluding the last-in, first-out (LIFO) reserve effect of $(4.6) million, $26.0 million and $30.7 million in 2016, 2015 and 2014, respectively, gross profit as a percentage of sales would have been 27.2%, 27.6% and 27.3% in 2016, 2015 and 2014, respectively. After excluding the LIFO reserve effect, the decrease in gross profit as a percentage of sales for 2016 as compared with 2015 was primarily due to an increase in promotional activities. After excluding the LIFO reserve effect, the increase in gross profit as a percentage of sales for 2015 as compared with 2014 was primarily due to changes in promotional activities and pricing strategies.
Operating and administrative expenses
Operating and administrative expenses as a percentage of sales were 20.0% in 2016 and 2015 and 20.2% in 2014. Operating and administrative expenses as a percentage of sales for 2016 as compared with 2015 remained unchanged primarily due to a decrease in rent as a percentage of sales due to the acquisition of shopping centers with the Company as the anchor tenant offset by an increase in payroll as a percentage of sales. The decrease in operating and administrative expenses as a percentage of sales for 2015 as compared with 2014 was primarily due to a decrease in rent as a percentage of sales due to the acquisition of shopping centers with the Company as the anchor tenant.
Investment income
Investment income was $133.1 million, $156.0 million and $143.9 million in 2016, 2015 and 2014, respectively. The decrease in investment income for 2016 as compared with 2015 was primarily due to a decrease in realized gains on the sale of equity securities partially offset by an increase in interest income. The increase in investment income for 2015 as compared with 2014 was primarily due to an increase in realized gains on the sale of equity securities.
Income tax expense
The effective income tax rate was 31.1%, 31.5% and 32.5% in 2016, 2015 and 2014, respectively. The decrease in the effective income tax rate for 2016 as compared with 2015 was primarily due to increases in qualified inventory donations, deductions for manufacturing production costs and investment related tax credits partially offset by the effect of a state income tax settlement in 2015. The decrease in the effective income tax rate for 2015 as compared with 2014 was primarily due to a state income tax settlement and investment related tax credits.
Net earnings
Net earnings were $2,025.7 million or $2.63 per share, $1,965.0 million or $2.54 per share and $1,735.3 million or $2.23 per share for 2016, 2015 and 2014, respectively. Net earnings as a percentage of sales were 6.0%, 6.1% and 5.7% for 2016, 2015 and 2014, respectively. The decrease in net earnings as a percentage of sales for 2016 as compared with 2015 was primarily due to the decrease in gross profit as a percentage of sales partially offset by the incremental profit from the additional week. The increase in net earnings as a percentage of sales for 2015 as compared with 2014 was primarily due to the increase in gross profit as a percentage of sales and the decrease in operating and administrative expenses as a percentage of sales.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and long-term investments totaled $7,176.9 million as of December 31, 2016, as compared with $6,955.1 million as of December 26, 2015. The increase was primarily due to the Company generating cash in excess of the amount needed for operations, capital expenditures, common stock repurchases and dividend payments.
Net cash provided by operating activities
Net cash provided by operating activities was $3,253.0 million, $2,941.4 million and $2,777.2 million in 2016, 2015 and 2014, respectively. The increase in net cash provided by operating activities for 2016 as compared with 2015 was primarily due to the timing of the Company’s fiscal year end relative to the Christmas holiday. The increase in net cash provided by operating activities for 2015 as compared with 2014 was primarily due to the timing of income tax payments.
Net cash used in investing activities
Net cash used in investing activities was $1,806.1 million, $1,846.5 million and $1,641.7 million in 2016, 2015 and 2014, respectively. The primary use of net cash in investing activities for 2016 was funding capital expenditures and net increases in investment securities. Capital expenditures for 2016 totaled $1,443.8 million. These expenditures were incurred in connection with the opening of 32 new supermarkets (including seven replacement supermarkets) and remodeling 156 supermarkets. Expenditures were also incurred for supermarkets and remodels in progress, new or enhanced information technology hardware and applications and the acquisition of shopping centers with the Company as the anchor tenant. In 2016, the payment for investments, net of the proceeds from the sale and maturity of such investments, was $368.5 million. The primary use of net cash in investing activities for 2015 was funding capital expenditures and net increases in investment securities. Capital expenditures


11


for 2015 totaled $1,235.6 million. These expenditures were incurred in connection with the opening of 28 new supermarkets (including 10 replacement supermarkets) and remodeling 154 supermarkets. Expenditures were also incurred for supermarkets and remodels in progress, new or enhanced information technology hardware and applications and the acquisition of shopping centers with the Company as the anchor tenant. In 2015, the payment for investments, net of the proceeds from the sale and maturity of such investments, was $615.2 million.
Net cash used in financing activities
Net cash used in financing activities was $1,360.7 million, $1,150.2 million and $1,029.9 million in 2016, 2015 and 2014, respectively. The primary use of net cash used in financing activities was funding net common stock repurchases and dividend payments. Net common stock repurchases totaled $630.2 million, $510.5 million and $404.2 million in 2016, 2015 and 2014, respectively. The Company currently repurchases common stock at the stockholders’ request in accordance with the terms of the ESPP, Directors Plan, 401(k) Plan and ESOP. The amount of common stock offered to the Company for repurchase is not within the control of the Company, but is at the discretion of the stockholders. The Company expects to continue to repurchase its common stock, as offered by its stockholders from time to time, at its then current value for amounts similar to those in prior years. However, with the exception of certain shares distributed from the ESOP, such purchases are not required and the Company retains the right to discontinue them at any time.
Dividends
The Company paid dividends on its common stock of $0.8675 per share or $667.9 million, $0.79 per share or $612.8 million and $0.74 per share or $577.2 million in 2016, 2015 and 2014, respectively.
Capital expenditure projection
Capital expenditures expected to use cash in 2017 are approximately $1,850 million, primarily consisting of new supermarkets, remodeling existing supermarkets, new or enhanced information technology hardware and applications and the acquisition of shopping centers with the Company as the anchor tenant. The shopping center acquisitions are financed with internally generated funds and assumed debt, if prepayment penalties for the debt are determined to be significant. This capital program is subject to continuing change and review.
Cash requirements
In 2017, the cash requirements for operations, capital expenditures, common stock repurchases and dividend payments are expected to be financed by internally generated funds or liquid assets. Based on the Company’s financial position, it is expected that short-term and long-term borrowings would be available to support the Company’s liquidity requirements, if needed.


12


Contractual Obligations
Following is a summary of contractual obligations as of December 31, 2016:


Payments Due by Period


Total

2017

 2018-
2019

 2020-
2021

There-
after


(Amounts are in thousands)
 Contractual obligations:










Operating leases (1)

$
3,742,606


428,303

 
780,658

 
639,738

 
1,893,907

Purchase obligations (2)(3)(4)

2,044,399


1,130,213


297,035


173,949


443,202

Other long-term liabilities:



 

 

 

 
Self-insurance reserves (5)

355,679


139,554


97,214


40,814


78,097

Accrued postretirement benefit cost

107,178


4,638

 
9,702

 
10,319

 
82,519

Long-term debt (6)

250,584


113,999


42,522


34,473


59,590

Other

144,760


125,281


1,221


983


17,275

Total

$
6,645,206


1,941,988


1,228,352


900,276


2,574,590

Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations or cash flows.












____________________________
(1)
For a more detailed description of the operating lease obligations, refer to Note 8(a) Commitments and Contingencies - Operating Leases in the Notes to Consolidated Financial Statements.
(2)
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable within 30 days without penalty.
(3)
As of December 31, 2016, the Company had outstanding $7.6 million in trade letters of credit and $11.8 million in standby letters of credit to support certain of these purchase obligations.
(4)
Purchase obligations include $948.2 million in real estate taxes, insurance and maintenance commitments related to operating leases. The actual amounts to be paid are variable and have been estimated based on current costs.
(5)
As of December 31, 2016, the Company had a restricted trust account in the amount of $164.1 million for the benefit of the Company’s insurance carrier related to self-insurance reserves.
(6)
For a more detailed description of the long-term debt obligations, refer to Note 4 Consolidation of Joint Ventures and Long-Term Debt in the Notes to Consolidated Financial Statements.


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Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) requiring companies to change the methodology used to measure credit losses on financial instruments.  The ASU is effective for reporting periods beginning after December 15, 2019 with early adoption permitted only for reporting periods beginning after December 15, 2018.  The Company does not expect the adoption of the ASU to have a material effect on the Company’s financial condition or results of operations. The adoption of the ASU will have no effect on the Company’s cash flows.
In February 2016, the FASB issued an ASU on lease accounting. The ASU requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating the ASU, the Company expects the adoption of the ASU to have a material effect on the Company’s financial condition due to the recognition of the lease rights and obligations as assets and liabilities on the consolidated balance sheets. The Company does not expect the adoption of the ASU to have a material effect on the Company’s results of operations. The adoption of the ASU will have no effect on the Company’s cash flows.
In January 2016, the FASB issued an ASU requiring companies to measure equity securities at fair value with changes in fair value recognized in net earnings as opposed to other comprehensive earnings. The ASU is effective for reporting periods beginning after December 15, 2017. The adoption of the ASU will have an effect on the Company’s results of operations. The extent of the effect on results of operations will vary with the changes in the fair value of equity securities. The adoption of the ASU will have no effect on the Company’s financial condition or cash flows.
In November 2015, the FASB issued an ASU requiring companies to classify deferred tax assets and liabilities in the noncurrent section of the balance sheet. The ASU is effective for reporting periods beginning after December 15, 2016 with early adoption permitted.  The adoption of the ASU will not have a material effect on the Company’s financial condition and will have no effect on the Company’s results of operations or cash flows.
In May 2014, the FASB issued an ASU on the recognition of revenue from contracts with customers. The ASU requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The ASU is effective for reporting periods beginning after December 15, 2017 with early adoption permitted only for reporting periods beginning after December 15, 2016. The Company does not expect the adoption of the ASU to have a material effect on the Company’s financial condition, results of operations or cash flows.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements. The Company believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Inventories
Inventories are valued at the lower of cost or market. The cost for 83% and 84% of inventories was determined using the dollar value LIFO method as of December 31, 2016 and December 26, 2015, respectively. Under this method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to each similar merchandise category’s ending retail value. The cost of the remaining inventories was determined using the first-in, first-out (FIFO) method. The FIFO cost of inventory approximates replacement or current cost. The FIFO method is used to value manufactured, seasonal, certain perishable and other miscellaneous inventory items because of fluctuating costs and inconsistent product availability. The Company also reduces inventory for estimated losses related to shrink.
Investments
All of the Company’s debt and equity securities are classified as available-for-sale (AFS) and carried at fair value. The Company evaluates whether AFS securities are other-than-temporarily impaired (OTTI) based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, the credit rating of the issuer or security, the failure of the issuer to make scheduled principal or interest payments and the financial health and prospects of the issuer or security. Declines in the value of AFS securities determined to be OTTI are recognized in earnings and reported as OTTI losses, while declines in the value of AFS securities determined to be temporary are reported net of income taxes as other comprehensive losses and included as a component of stockholders’ equity. If market or issuer conditions decline, the Company may incur future impairments.


14


Debt securities with unrealized losses are considered OTTI if the Company intends to sell the debt security or if the Company will be required to sell the debt security prior to any anticipated recovery. If the Company determines that a debt security is OTTI under these circumstances, the impairment recognized in earnings is measured as the difference between the amortized cost and the current fair value. A debt security is also determined to be OTTI if the Company does not expect to recover the amortized cost of the debt security. However, in this circumstance, if the Company does not intend to sell the debt security and will not be required to sell the debt security, the impairment recognized in earnings equals the estimated credit loss as measured by the difference between the present value of expected cash flows and the amortized cost of the debt security. Expected cash flows are discounted using the debt security’s effective interest rate. Debt securities held by the Company at year end primarily consisted of corporate, state and municipal bonds with high credit ratings; therefore, the Company believes the credit risk is low. The Company believes a 100 basis point increase in interest rates would result in an immaterial unrealized loss on its debt securities. Since the Company does not intend to sell its debt securities or will likely not be required to sell its debt securities prior to any anticipated recovery, such a hypothetical temporary unrealized loss would impact comprehensive earnings, but not net earnings or cash flows.
Equity securities held by the Company are subject to equity price risk that results from fluctuations in quoted market prices as of the balance sheet date. Market price fluctuations may result from perceived changes in the underlying economic characteristics of the issuer, the relative price of alternative investments and general market conditions. An equity security is determined to be OTTI if the Company does not expect to recover the cost of the equity security. A hypothetical decrease of 10% in the value of the Company’s equity securities would result in an immaterial decrease in the value of such long-term investments.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the net book value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the net book value of an asset to the future net undiscounted cash flows expected to be generated by the asset. An impairment loss is recorded for the excess of the net book value over the fair value of the asset. The fair value is estimated based on expected discounted future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell and are no longer depreciated. Long-lived assets, including buildings and improvements, leasehold improvements, and furniture, fixtures and equipment, are evaluated for impairment at the supermarket level.
The Company’s judgment regarding the existence of circumstances that indicate the potential impairment of an asset’s net book value is based on several factors, including the decision to close a supermarket or a decline in operating cash flows. The variability of these factors depends on a number of conditions, including uncertainty about future events and general economic conditions; therefore, the Company’s accounting estimates may change from period to period. These factors could cause the Company to conclude that a potential impairment exists, and the applicable impairment tests could result in a determination that the value of long-lived assets is impaired, resulting in a write-down of the long-lived assets. The Company attempts to select supermarket sites that will achieve the forecasted operating results. To the extent the Company’s assets are maintained in good condition and the forecasted operating results of the supermarkets are achieved, it is relatively unlikely that future assessments of recoverability would result in impairment charges that would have a material effect on the Company’s financial condition and results of operations. There were no material changes in the estimates or assumptions related to the impairment of long-lived assets in 2016.
Cost of Merchandise Sold
Cost of merchandise sold includes costs of inventory and costs related to in-store production. Cost of merchandise sold also includes inbound freight charges, purchasing and receiving costs, warehousing costs and other costs of the Company’s distribution network.
Allowances and credits, including cooperative advertising allowances, received from a vendor in connection with the purchase or promotion of the vendor’s products are recognized as a reduction of cost of merchandise sold as earned. These allowances and credits are recognized as earned in accordance with the underlying agreement with the vendor and completion of the earnings process. Short-term vendor agreements with advance payment provisions are recorded as a current liability and recognized over the appropriate period as earned according to the underlying agreements. Long-term vendor agreements with advance payment provisions are recorded as a noncurrent liability and recognized over the appropriate period as earned according to the underlying agreements.






15


Self-Insurance
The Company is self-insured for health care claims and property, plant and equipment losses. The Company has insurance coverage for losses in excess of self-insurance limits for workers’ compensation, general liability and fleet liability claims. Historically, it has been infrequent for incurred claims to exceed these self-insurance limits.
Self-insurance reserves are established for health care, workers’ compensation, general liability and fleet liability claims. These reserves are determined based on actual claims experience and an estimate of claims incurred but not reported including, where necessary, actuarial studies. The Company believes that the use of actuarial studies to determine self-insurance reserves represents a consistent method of measuring these subjective estimates. Actuarial projections of losses for general liability and workers’ compensation claims are discounted and subject to variability. The causes of variability include, but are not limited to, such factors as future interest and inflation rates, future economic conditions, claims experience, litigation trends and benefit level changes. The Company believes a 100 basis point change in the discount rate would result in an immaterial change in the Company’s self-insurance reserves.
Forward-Looking Statements
From time to time, certain information provided by the Company, including written or oral statements made by its representatives, may contain forward-looking information as defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking information includes statements about the future performance of the Company, which is based on management’s assumptions and beliefs in light of the information currently available to them. When used, the words “plan,” “estimate,” “project,” “intend,” “expect,” “believe” and other similar expressions, as they relate to the Company, are intended to identify such forward-looking statements. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from those statements including, but not limited to, the following: competitive practices and pricing in the food and drug industries generally and particularly in the Company’s principal markets; results of programs to increase sales, including private label sales; results of programs to control or reduce costs; changes in buying, pricing and promotional practices; changes in shrink management; changes in the general economy; changes in consumer spending; changes in population, employment and job growth in the Company’s principal markets; and other factors affecting the Company’s business within or beyond the Company’s control. These factors include changes in the rate of inflation, changes in federal, state and local laws and regulations, adverse determinations with respect to litigation or other claims, ability to recruit and retain employees, increases in operating costs including, but not limited to, labor costs, credit card fees and utility costs, particularly electric rates, ability to construct new supermarkets or complete remodels as rapidly as planned and stability of product costs. Other factors and assumptions not identified above could also cause the actual results to differ materially from those set forth in the forward-looking statements. Except as may be required by applicable law, the Company assumes no obligation to publicly update these forward-looking statements.


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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.
Cash equivalents and short-term investments are subject to three market risks, namely interest rate risk, credit risk and secondary market risk. Most of the cash equivalents and short-term investments are held in money market investments and debt securities that mature in less than one year. Due to the quality of the short-term investments held, the Company does not expect the valuation of these investments to be significantly impacted by future market conditions.
Long-term investments consist of debt and equity securities that are classified as AFS and carried at fair value. The Company evaluates whether AFS securities are OTTI based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, the credit rating of the issuer or security, the failure of the issuer to make scheduled principal or interest payments and the financial health and prospects of the issuer or security. Declines in the value of AFS securities determined to be OTTI are recognized in earnings and reported as OTTI, while declines in the value of AFS securities determined to be temporary are reported net of income taxes as other comprehensive losses and included as a component of stockholders’ equity. If market or issuer conditions decline, the Company may incur future impairments.
Debt securities are subject to both interest rate risk and credit risk. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the debt security or if the Company will be required to sell the debt security prior to any anticipated recovery. If the Company determines that a debt security is OTTI under these circumstances, the impairment recognized in earnings is measured as the difference between the amortized cost and the current fair value. A debt security is also determined to be OTTI if the Company does not expect to recover the amortized cost of the debt security. However, in this circumstance, if the Company does not intend to sell the debt security and will not be required to sell the debt security, the impairment recognized in earnings equals the estimated credit loss as measured by the difference between the present value of expected cash flows and the amortized cost of the debt security. Expected cash flows are discounted using the debt security’s effective interest rate. Debt securities held by the Company at year end primarily consisted of corporate, state and municipal bonds with high credit ratings; therefore, the Company believes the credit risk is low. The Company believes a 100 basis point increase in interest rates would result in an immaterial unrealized loss on its debt securities. Since the Company does not intend to sell its debt securities or will likely not be required to sell its debt securities prior to any anticipated recovery, such a hypothetical temporary unrealized loss would impact comprehensive earnings, but not net earnings or cash flows.
Equity securities are subject to equity price risk that results from fluctuations in quoted market prices as of the balance sheet date. Market price fluctuations may result from perceived changes in the underlying economic characteristics of the issuer, the relative price of alternative investments and general market conditions. An equity security is determined to be OTTI if the Company does not expect to recover the cost of the equity security. A hypothetical decrease of 10% in the value of the Company’s equity securities would result in an immaterial decrease in the value of such long-term investments.


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Item 8.  Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Schedule
 
 
 
Page
Report of Independent Registered Public Accounting Firm
 
 
 
Consolidated Financial Statements:
 
 
 
 
Consolidated Balance Sheets – December 31, 2016 and December 26, 2015
 
 
 
Consolidated Statements of Earnings – Years ended December 31, 2016, December 26, 2015
and December 27, 2014
 
 
 
Consolidated Statements of Comprehensive Earnings – Years ended December 31, 2016,
December 26, 2015 and December 27, 2014
 
 
 
Consolidated Statements of Cash Flows – Years ended December 31, 2016, December 26, 2015 and 
December 27, 2014

 
 
 
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2016,
December 26, 2015 and December 27, 2014
 
 
 
Notes to Consolidated Financial Statements
 
 
 
The following consolidated financial statement schedule of the Company for the years ended
December 31, 2016, December 26, 2015 and December 27, 2014 is submitted herewith:
 
 
 
 
Schedule II – Valuation and Qualifying Accounts
 
 
 
All other schedules are omitted as the required information is inapplicable or the information is
presented in the financial statements or related notes.
 
 


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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Publix Super Markets, Inc.:
We have audited the accompanying consolidated balance sheets of Publix Super Markets, Inc. and subsidiaries as of December 31, 2016 and December 26, 2015, and the related consolidated statements of earnings, comprehensive earnings, cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Publix Super Markets, Inc. and subsidiaries as of December 31, 2016 and December 26, 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Tampa, Florida
March 1, 2017
Certified Public Accountants


19


PUBLIX SUPER MARKETS, INC.
Consolidated Balance Sheets
December 31, 2016 and
December 26, 2015
 
 
 
2016
 
2015
 
ASSETS
 
(Amounts are in thousands)
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
 
$
438,319

 
352,176

 
Short-term investments
 
1,591,740

 
1,376,698

 
Trade receivables
 
715,292

 
723,685

 
Merchandise inventories
 
1,722,392

 
1,740,513

 
Deferred tax assets
 
77,496


51,216

 
Prepaid expenses
 
50,434

 
70,145

 
Total current assets
 
4,595,673

 
4,314,433

 
Long-term investments
 
5,146,878

 
5,226,236

 
Other noncurrent assets
 
434,280

 
431,311

 
Property, plant and equipment:
 
 
 
 
 
Land
 
1,415,565

 
1,157,619

 
Buildings and improvements
 
4,066,743

 
3,467,015

 
Furniture, fixtures and equipment
 
4,581,924

 
4,303,132

 
Leasehold improvements
 
1,727,952

 
1,635,791

 
Construction in progress
 
189,448

 
148,755

 
 
 
11,981,632

 
10,712,312

 
Accumulated depreciation
 
(4,694,509
)
 
(4,325,014
)
 
Net property, plant and equipment
 
7,287,123

 
6,387,298

 
 
 
$
17,463,954

 
16,359,278

 



See accompanying notes to consolidated financial statements.
20


 
 
 
 
 
 
 
 
2016
 
2015
 
LIABILITIES AND EQUITY
 
(Amounts are in thousands,
except par value)
 
Current liabilities:
 
 
 
 
 
Accounts payable
 
$
1,609,652

 
1,675,858

 
Accrued expenses:
 
 
 
 
 
Contributions to retirement plans
 
525,668

 
513,072

 
Self-insurance reserves
 
139,554

 
135,865

 
Salaries and wages
 
127,856

 
131,253

 
Other
 
414,197

 
380,314

 
Current portion of long-term debt
 
113,999

 
56,693

 
Federal and state income taxes
 
12,787

 
9,634

 
Total current liabilities
 
2,943,713

 
2,902,689

 
Deferred tax liabilities
 
473,980


425,132

 
Self-insurance reserves
 
216,125

 
214,474

 
Accrued postretirement benefit cost
 
102,540

 
101,725

 
Long-term debt
 
136,585

 
179,753

 
Other noncurrent liabilities
 
93,574

 
104,243

 
Total liabilities
 
3,966,517

 
3,928,016

 
Common stock related to Employee Stock Ownership Plan (ESOP)
 
3,068,097


2,953,878

 
Stockholders’ equity:
 
 
 
 
 
Common stock of $1 par value. Authorized 1,000,000 shares; issued
and outstanding 763,198 shares in 2016 and 770,175 shares in 2015
 
763,198

 
770,175

 
Additional paid-in capital
 
2,849,947

 
2,556,391

 
Retained earnings
 
9,836,696

 
9,041,497

 
Accumulated other comprehensive earnings
 
23,427

 
26,268

 
Common stock related to ESOP
 
(3,068,097
)
 
(2,953,878
)
 
Total stockholders’ equity
 
10,405,171

 
9,440,453

 
Noncontrolling interests
 
24,169

 
36,931

 
Total equity
 
13,497,437

 
12,431,262

 
Commitments and contingencies
 

 

 
 
 
$
17,463,954

 
16,359,278

 



21


PUBLIX SUPER MARKETS, INC.
Consolidated Statements of Earnings
Years ended December 31, 2016December 26, 2015
and December 27, 2014

 
 
2016
 
2015
 
2014
 
 
 
(Amounts are in thousands, except per share amounts)
 
Revenues:
 
 
 
 
 
 
 
Sales
 
$
33,999,921

 
32,362,579

 
30,559,505

 
Other operating income
 
274,188

 
256,180

 
242,961

 
Total revenues
 
34,274,109

 
32,618,759

 
30,802,466

 
Costs and expenses:
 
 
 
 
 
 
 
Cost of merchandise sold
 
24,734,305

 
23,459,610

 
22,232,650

 
Operating and administrative expenses
 
6,788,153

 
6,480,908

 
6,168,955

 
Total costs and expenses
 
31,522,458

 
29,940,518

 
28,401,605

 
Operating profit
 
2,751,651

 
2,678,241

 
2,400,861

 
Investment income
 
133,067

 
156,026

 
143,875

 
Other nonoperating income, net
 
55,658

 
34,994

 
25,385

 
Earnings before income tax expense
 
2,940,376

 
2,869,261

 
2,570,121

 
Income tax expense
 
914,688

 
904,213

 
834,813

 
Net earnings
 
$
2,025,688

 
1,965,048

 
1,735,308

 
Weighted average shares outstanding
 
769,267

 
774,428

 
778,708

 
Basic and diluted earnings per share
 
$
2.63

 
2.54

 
2.23

 

See accompanying notes to consolidated financial statements.
22


PUBLIX SUPER MARKETS, INC.
Consolidated Statements of Comprehensive Earnings
Years ended December 31, 2016December 26, 2015
and December 27, 2014

 
 
2016
 
2015
 
2014
 
 
 
(Amounts are in thousands)
 
Net earnings
 
$
2,025,688

 
1,965,048

 
1,735,308

 
Other comprehensive earnings:
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale (AFS) securities
net of income taxes of $11,093, $(27,605) and $37,133 in
2016, 2015 and 2014, respectively
 
17,615


(43,838
)

58,968

 
Reclassification adjustment for net realized gain on AFS
securities net of income taxes of $(12,464), $(26,972) and
$(22,571) in 2016, 2015 and 2014, respectively
 
(19,792
)

(42,829
)

(35,842
)
 
Adjustment to postretirement benefit obligation net
of income taxes of $(418), $2,394 and $(624) in 2016,
2015 and 2014, respectively
 
(664
)

3,801


(991
)
 
Comprehensive earnings
 
$
2,022,847

 
1,882,182

 
1,757,443

 


See accompanying notes to consolidated financial statements.
23


PUBLIX SUPER MARKETS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2016December 26, 2015
and December 27, 2014

 
 
2016
 
2015
 
2014
 
 
 
(Amounts are in thousands)
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Cash received from customers
 
$
34,088,337

 
32,249,651

 
30,596,486

 
Cash paid to employees and suppliers
 
(30,291,186
)
 
(28,718,224
)
 
(27,045,219
)
 
Income taxes paid
 
(683,464
)
 
(721,226
)
 
(895,758
)
 
Self-insured claims paid
 
(338,010
)
 
(315,624
)
 
(317,441
)
 
Dividends and interest received
 
246,202

 
219,589

 
222,134

 
Other operating cash receipts
 
268,347

 
249,588

 
235,642

 
Other operating cash payments
 
(37,271
)
 
(22,389
)
 
(18,612
)
 
Net cash provided by operating activities
 
3,252,955

 
2,941,365

 
2,777,232

 
Cash flows from investing activities:
 
 
 
 
 
 
 
Payment for capital expenditures
 
(1,443,827
)
 
(1,235,648
)
 
(1,374,124
)
 
Proceeds from sale of property, plant and equipment
 
6,268

 
4,350

 
40,222

 
Payment for investments
 
(2,526,973
)
 
(2,764,436
)
 
(1,839,814
)
 
Proceeds from sale and maturity of investments
 
2,158,434

 
2,149,233

 
1,532,007

 
Net cash used in investing activities
 
(1,806,098
)
 
(1,846,501
)
 
(1,641,709
)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Payment for acquisition of common stock
 
(960,262
)
 
(855,801
)
 
(688,339
)
 
Proceeds from sale of common stock
 
330,040

 
345,319

 
284,105

 
Dividends paid
 
(667,902
)
 
(612,766
)
 
(577,227
)
 
Repayments of long-term debt
 
(49,828
)
 
(30,164
)
 
(57,442
)
 
Other, net
 
(12,762
)
 
3,231

 
9,005

 
Net cash used in financing activities
 
(1,360,714
)
 
(1,150,181
)
 
(1,029,898
)
 
Net increase (decrease) in cash and cash equivalents
 
86,143

 
(55,317
)
 
105,625

 
Cash and cash equivalents at beginning of year
 
352,176

 
407,493

 
301,868

 
Cash and cash equivalents at end of year
 
$
438,319

 
352,176

 
407,493

 











See accompanying notes to consolidated financial statements.
24


 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
2014
 
 
 
(Amounts are in thousands)
 
Reconciliation of net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
2,025,688

 
1,965,048

 
1,735,308

 
Adjustments to reconcile net earnings to net cash
provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
624,203

 
581,892

 
513,393

 
(Decrease) increase in LIFO reserve
 
(4,643
)
 
25,996

 
30,743

 
Retirement contributions paid or payable in
common stock
 
365,936

 
369,017

 
338,979

 
Deferred income taxes
 
24,357

 
108,574

 
2,392

 
Loss on disposal and impairment of property,
plant and equipment
 
11,035

 
49,596

 
26,155

 
Gain on AFS securities
 
(32,256
)

(69,801
)

(58,413
)
 
Net amortization of investments
 
141,869

 
137,883

 
137,533

 
Change in operating assets and liabilities providing (requiring) cash:
 
 
 
 
 
 
 
Trade receivables
 
8,306

 
(174,610
)
 
(8,829
)
 
Merchandise inventories
 
22,764

 
(168,826
)
 
(121,449
)
 
Prepaid expenses and other noncurrent assets
 
(14,307
)
 
(12,571
)
 
(4,210
)
 
Accounts payable and accrued expenses
 
(74,917
)
 
114,811

 
268,491

 
Self-insurance reserves
 
5,340

 
(14,027
)
 
8,325

 
Federal and state income taxes
 
159,426

 
38,920

 
(86,910
)
 
Other noncurrent liabilities
 
(9,846
)
 
(10,537
)
 
(4,276
)
 
Total adjustments
 
1,227,267

 
976,317

 
1,041,924

 
Net cash provided by operating activities
 
$
3,252,955

 
2,941,365

 
2,777,232

 



25


PUBLIX SUPER MARKETS, INC.
Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2016December 26, 2015
and December 27, 2014

 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Common Stock (Acquired from) Sold to Stock-
holders
Accumu-
lated Other Compre-
hensive Earnings
Common Stock Related to ESOP
 
Total Stock-
holders’ Equity
 
 
(Amounts are in thousands, except per share amounts)
Balances at December 28, 2013
 
$
776,721

 
1,898,974

 
7,454,448

 
 

 
 
86,999

 
 
(2,322,903
)
 
7,894,239

Comprehensive earnings
 

 

 
1,735,308

 
 

 
 
22,135

 
 

 
1,757,443

Dividends, $0.74 per share
 

 

 
(577,227
)
 
 

 
 

 
 

 
(577,227
)
Contribution of 10,272 shares to retirement plans
 
8,063

 
235,362

 

 
 
66,289

 
 

 
 

 
309,714

Acquisition of 21,356 shares from stockholders
 

 

 

 
 
(688,339
)
 
 

 
 

 
(688,339
)
Sale of 8,835 shares to stockholders
 
2,168

 
66,556

 

 
 
215,381

 
 

 
 

 
284,105

Retirement of 12,480 shares
 
(12,480
)
 

 
(394,189
)
 
 
406,669

 
 

 
 

 

Change for ESOP related shares
 

 

 

 
 

 
 

 
 
(357,625
)
 
(357,625
)
Balances at December 27, 2014
 
774,472

 
2,200,892

 
8,218,340

 
 

 
 
109,134

 
 
(2,680,528
)
 
8,622,310

Comprehensive earnings
 

 

 
1,965,048

 
 

 
 
(82,866
)
 
 

 
1,882,182

Dividends, $0.79 per share
 

 

 
(612,766
)
 
 

 
 

 
 

 
(612,766
)
Contribution of 8,516 shares to retirement plans
 
6,172

 
247,139

 

 
 
79,248

 
 

 
 

 
332,559

Acquisition of 21,276 shares from stockholders
 

 

 

 
 
(855,801
)
 
 

 
 

 
(855,801
)
Sale of 8,463 shares to stockholders
 
2,756

 
108,360

 

 
 
234,203

 
 

 
 

 
345,319

Retirement of 13,225 shares
 
(13,225
)
 

 
(529,125
)
 
 
542,350

 
 

 
 

 

Change for ESOP related shares
 

 

 

 
 

 
 

 
 
(273,350
)
 
(273,350
)
Balances at December 26, 2015
 
770,175

 
2,556,391

 
9,041,497

 
 

 
 
26,268

 
 
(2,953,878
)
 
9,440,453

Comprehensive earnings
 

 

 
2,025,688

 
 

 
 
(2,841
)
 
 

 
2,022,847

Dividends, $0.8675 per share
 

 

 
(667,902
)
 
 

 
 

 
 

 
(667,902
)
Contribution of 7,837 shares to retirement plans
 
5,216

 
239,436

 

 
 
109,562

 
 

 
 

 
354,214

Acquisition of 22,500 shares from stockholders
 

 

 

 
 
(960,262
)
 
 

 
 

 
(960,262
)
Sale of 7,686 shares to stockholders
 
1,283

 
54,120

 

 
 
274,637

 
 

 
 

 
330,040

Retirement of 13,476 shares
 
(13,476
)
 

 
(562,587
)
 
 
576,063

 
 

 
 

 

Change for ESOP related shares
 

 

 

 
 

 
 

 
 
(114,219
)
 
(114,219
)
Balances at December 31, 2016
 
$
763,198

 
2,849,947

 
9,836,696

 
 

 
 
23,427

 
 
(3,068,097
)
 
10,405,171



See accompanying notes to consolidated financial statements.
26


PUBLIX SUPER MARKETS, INC.
Notes to Consolidated Financial Statements


(1)    Summary of Significant Accounting Policies
(a)
Business
Publix Super Markets, Inc. and its wholly owned subsidiaries (the Company) are in the business of operating retail food supermarkets in Florida, Georgia, Alabama, South Carolina, Tennessee and North Carolina. The Company plans to expand its retail operations into Virginia in 2017. The Company was founded in 1930 and later merged into another corporation that was originally incorporated in 1921. The Company has no other significant lines of business or industry segments. See percentage of consolidated sales by merchandise category on page 1.
(b)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and certain joint ventures in which the Company has a controlling financial interest. All significant intercompany balances and transactions are eliminated in consolidation.
(c)
Fiscal Year
The Company’s fiscal year ends on the last Saturday in December. Fiscal year 2016 includes 53 weeks and fiscal years 2015 and 2014 include 52 weeks.
(d)
Cash Equivalents
The Company considers all liquid investments with maturities of three months or less to be cash equivalents.
(e)
Trade Receivables
Trade receivables primarily include amounts due from vendor allowances, debit and credit card sales and third party insurance pharmacy billings.
(f)
Inventories
Inventories are valued at the lower of cost or market. The cost for 83% and 84% of inventories was determined using the dollar value last-in, first-out (LIFO) method as of December 31, 2016 and December 26, 2015, respectively. Under this method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to each similar merchandise category’s ending retail value. The cost of the remaining inventories was determined using the first-in, first-out (FIFO) method. The FIFO cost of inventory approximates replacement or current cost. The FIFO method is used to value manufactured, seasonal, certain perishable and other miscellaneous inventory items because of fluctuating costs and inconsistent product availability. The Company also reduces inventory for estimated losses related to shrink. If all inventories were valued using the FIFO method, inventories and current assets would have been higher than reported by $441,860,000 and $446,503,000 as of December 31, 2016 and December 26, 2015, respectively.
(g)
Investments
Debt and equity securities are classified as available-for-sale (AFS) and carried at fair value. The Company evaluates whether AFS securities are other-than-temporarily impaired (OTTI) based on criteria that include the extent to which cost exceeds market value, the duration of the market value decline, the credit rating of the issuer or security, the failure of the issuer to make scheduled principal or interest payments and the financial health and prospects of the issuer or security.
Declines in the value of AFS securities determined to be OTTI are recognized in earnings and reported as OTTI losses. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the debt security or if the Company will be required to sell the debt security prior to any anticipated recovery. If the Company determines that a debt security is OTTI under these circumstances, the impairment recognized in earnings is measured as the difference between the amortized cost and the current fair value. A debt security is also determined to be OTTI if the Company does not expect to recover the amortized cost of the debt security. However, in this circumstance, if the Company does not intend to sell the debt security and will not be required to sell the debt security, the impairment recognized in earnings equals the estimated credit loss as measured by the difference between the present value of expected cash flows and the amortized cost of the debt security. Expected cash flows are discounted using the debt security’s effective interest rate. An equity security is determined to be OTTI if the Company does not expect to recover the cost of the equity security. Declines in the value of AFS securities determined to be temporary are reported net of income taxes as other comprehensive losses and included as a component of stockholders’ equity. 
Interest and dividend income, amortization of premiums, accretion of discounts and realized gains and losses on AFS securities are included in investment income. Interest income is accrued as earned. Dividend income is recognized as income on the ex-dividend date of the security. The cost of AFS securities sold is based on the FIFO method.


27


PUBLIX SUPER MARKETS, INC.
Notes to Consolidated Financial Statements


(h)
Property, Plant and Equipment and Depreciation
Assets are recorded at cost and are depreciated using the straight-line method over their estimated useful lives or the terms of the related leases, if shorter, as follows:
 
Buildings and improvements
 
10–40 years
Furniture, fixtures and equipment
 
3–20 years
Leasehold improvements
 
10–20 years
Maintenance and repairs are charged to operating expenses as incurred. Expenditures for renewals and betterments are capitalized. The gain or loss realized on disposed assets or assets to be disposed of is recorded as operating and administrative expenses in the consolidated statements of earnings.
(i)
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the net book value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the net book value of an asset to the future net undiscounted cash flows expected to be generated by the asset. An impairment loss is recorded for the excess of the net book value over the fair value of the asset. The fair value is estimated based on expected discounted future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell and are no longer depreciated. Long-lived assets, including buildings and improvements, leasehold improvements, and furniture, fixtures and equipment, are evaluated for impairment at the supermarket level.
(j)
Self-Insurance
The Company is self-insured for health care claims and property, plant and equipment losses. The Company has insurance coverage for losses in excess of self-insurance limits for workers’ compensation, general liability and fleet liability claims. Self-insurance reserves are established for health care, workers’ compensation, general liability and fleet liability claims. These reserves are determined based on actual claims experience and an estimate of claims incurred but not reported including, where necessary, actuarial studies. Actuarial projections of losses for general liability and workers’ compensation claims are discounted.
(k)
Postretirement Benefit
The Company provides a postretirement life insurance benefit for certain salaried and hourly full-time employees who meet the eligibility requirements. Effective January 1, 2002, the Company amended the postretirement life insurance benefit under its Group Life Insurance Plan. To receive the postretirement life insurance benefit after the amendment, an employee must have had at least five years of full-time service and the employee’s age plus years of credited service must have equaled 65 or greater as of October 1, 2001. At retirement, such employees also must be at least age 55 with at least 10 years of full-time service to be eligible to receive the postretirement life insurance benefit.
Actuarial projections are used to calculate the year end postretirement benefit obligation, discounted using a yield curve methodology based on high quality bonds with a rating of AA or better. Actuarial losses are amortized from accumulated other comprehensive earnings into net periodic postretirement benefit cost over future years when the accumulation of such losses exceeds 10% of the year end postretirement benefit obligation.
(l)
Comprehensive Earnings
Comprehensive earnings include net earnings and other comprehensive earnings. Other comprehensive earnings include revenues, expenses, gains and losses that have been excluded from net earnings and recorded directly to stockholders’ equity. Included in other comprehensive earnings for the Company are unrealized gains and losses on AFS securities and adjustments to the postretirement benefit obligation.
(m)
Revenue Recognition
Revenue is recognized at the point of sale for retail sales. Customer returns are immaterial. Vendor coupons that are reimbursed are accounted for as sales. Coupons and other sales incentives offered by the Company that are not reimbursed are recorded as a reduction of sales.
(n)
Sales Taxes
The Company records sales net of applicable sales taxes.


28


PUBLIX SUPER MARKETS, INC.
Notes to Consolidated Financial Statements


(o)
Other Operating Income
Other operating income is recognized on a net revenue basis as earned. Other operating income includes income generated from other activities, primarily lottery commissions, licensee sales commissions, automated teller transaction fees, mall gift card commissions, vending machine commissions, money transfer fees and coupon redemption income.
(p)
Cost of Merchandise Sold
Cost of merchandise sold includes costs of inventory and costs related to in-store production. Cost of merchandise sold also includes inbound freight charges, purchasing and receiving costs, warehousing costs and other costs of the Company’s distribution network.
Allowances and credits, including cooperative advertising allowances, received from a vendor in connection with the purchase or promotion of the vendor’s products are recognized as a reduction of cost of merchandise sold as earned. These allowances and credits are recognized as earned in accordance with the underlying agreement with the vendor and completion of the earnings process. Short-term vendor agreements with advance payment provisions are recorded as a current liability and recognized over the appropriate period as earned according to the underlying agreements. Long-term vendor agreements with advance payment provisions are recorded as a noncurrent liability and recognized over the appropriate period as earned according to the underlying agreements.
(q)
Advertising Costs
Advertising costs are expensed as incurred and were $260,367,000, $248,454,000 and $232,499,000 for 2016, 2015 and 2014, respectively.
(r)
Other Nonoperating Income, net
Other nonoperating income, net includes rent received from tenants in owned shopping centers, net of related expenses, and other miscellaneous nonoperating income.
(s)
Income Taxes
Deferred tax assets and liabilities are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. The Company recognizes accrued interest and penalties related to income tax liabilities as a component of income tax expense. The Company invests in certain investment related tax credits that promote affordable housing and renewable energy. These investments generate a return primarily through the realization of federal and state tax credits and other tax benefits. The Company accounts for its affordable housing investments using the proportional amortization method. Under this method, the investment is amortized into income tax expense in proportion to the tax credits received and the investment tax credits are recognized as a reduction of income tax expense. The Company accounts for its renewable energy investments using the deferral method. Under this method, the investment tax credits are recognized as a reduction of the renewable energy investments.
(t)
Common Stock and Earnings Per Share
Basic and diluted earnings per share are calculated by dividing net earnings by the weighted average shares outstanding. Basic and diluted earnings per share are the same because the Company does not have options or other stock compensation programs that impact the calculation of diluted earnings per share. All shares owned by the Employee Stock Ownership Plan (ESOP) are included in the earnings per share calculations. Dividends paid to the ESOP, as well as dividends on all other common stock shares, are reflected as a reduction of retained earnings. All common stock shares, including ESOP and 401(k) Plan shares, receive one vote per share and have the same dividend rights. The voting rights for ESOP shares allocated to participants’ accounts are passed through to the participants. The Trustee of the Company’s common stock in the 401(k) Plan votes the shares held in that plan.
(u)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



29


PUBLIX SUPER MARKETS, INC.
Notes to Consolidated Financial Statements


(2)    Fair Value of Financial Instruments
The fair value of certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables and accounts payable, approximates their respective carrying amounts due to their short-term maturity.
The fair value of AFS securities is based on market prices using the following measurement categories:
Level 1 – Fair value is determined by using quoted prices in active markets for identical investments. AFS securities that are included in this category are primarily mutual funds, exchange traded funds and equity securities.
Level 2 – Fair value is determined by using other than quoted prices. By using observable inputs (for example, benchmark yields, interest rates, reported trades and broker dealer quotes), the fair value is determined through processes such as benchmark curves, benchmarking of like securities and matrix pricing of corporate, state and municipal bonds by using pricing of similar bonds based on coupons, ratings and maturities. AFS securities that are included in this category are primarily debt securities (tax exempt and taxable bonds).
Level 3 – Fair value is determined by using other than observable inputs. Fair value is determined by using the best information available in the circumstances and requires significant management judgment or estimation. No AFS securities are currently included in this category.
Following is a summary of fair value measurements for AFS securities as of December 31, 2016 and December 26, 2015:
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
(Amounts are in thousands)
December 31, 2016
 
$
6,738,618

 
1,286,625

 
5,451,993

 

December 26, 2015
 
6,602,934

 
1,049,791

 
5,553,143

 

(3)    Investments
Following is a summary of AFS securities as of December 31, 2016 and December 26, 2015:

 
Amortized Cost
 
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value

 
(Amounts are in thousands)
2016
 
 
 
 
 
 
 
 
 
 
 
Tax exempt bonds
 
$
3,036,060

 
 
2,211

 
 
24,649

 
 
3,013,622

Taxable bonds
 
2,469,192

 
 
1,359

 
 
33,903

 
 
2,436,648

Restricted investments
 
164,548

 
 

 
 
463

 
 
164,085

Equity securities
 
1,021,340

 
 
110,879

 
 
7,956

 
 
1,124,263


 
$
6,691,140

 
 
114,449

 
 
66,971

 
 
6,738,618

2015
 


 
 

 
 

 
 

Tax exempt bonds
 
$
3,336,841

 
 
12,038

 
 
2,737

 
 
3,346,142

Taxable bonds
 
2,214,366

 
 
1,492

 
 
10,399

 
 
2,205,459

Restricted investments
 
164,548

 
 

 
 
1,389

 
 
163,159

Equity securities
 
836,153

 
 
78,378

 
 
26,357

 
 
888,174


 
$
6,551,908

 
 
91,908

 
 
40,882

 
 
6,602,934

Realized gains on sales of AFS securities totaled $47,633,000 for 2016. Realized losses on sales of AFS securities totaled $15,377,000 for 2016.
Realized gains on sales of AFS securities totaled $94,778,000 for 2015. Realized losses on sales of AFS securities totaled $24,977,000 for 2015.
Realized gains on sales of AFS securities totaled $61,390,000 for 2014. Realized losses on sales of AFS securities totaled $2,977,000 for 2014.


30


PUBLIX SUPER MARKETS, INC.
Notes to Consolidated Financial Statements


The amortized cost and fair value of AFS securities by expected maturity as of December 31, 2016 and December 26, 2015 are as follows:
  
 
2016
 
2015
 
 
Amortized Cost
 
Fair
Value
 
Amortized Cost
 
Fair
Value
 
 
 
 
(Amounts are in thousands)
 
 
 
Due in one year or less
 
$
1,592,144


1,591,740


1,375,450


1,376,698

Due after one year through five years
 
3,218,371


3,187,739


3,951,600


3,948,654

Due after five years through ten years
 
680,641


656,162


161,732


162,999

Due after ten years
 
14,096


14,629


62,425


63,250


 
5,505,252


5,450,270


5,551,207


5,551,601

Restricted investments
 
164,548


164,085


164,548


163,159

Equity securities
 
1,021,340


1,124,263


836,153


888,174

 
 
$
6,691,140


6,738,618


6,551,908


6,602,934

Following is a summary of temporarily impaired AFS securities by the time period impaired as of December 31, 2016 and December 26, 2015:
 
 
Less Than
12 Months
 
12 Months
or Longer
 
Total
 
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
 
(Amounts are in thousands)
 
2016
 

 
 

 
 

 
 

 
 

 
 

 
Tax exempt bonds
 
$
2,360,143

 
 
24,416

 
 
6,099

 
 
233

 
 
2,366,242

 
 
24,649

 
Taxable bonds
 
1,921,367

 
 
33,354

 
 
51,769

 
 
549

 
 
1,973,136

 
 
33,903

 
Restricted investments
 
164,085

 
 
463

 
 

 
 

 
 
164,085

 
 
463

 
Equity securities
 
61,625

 
 
3,924

 
 
38,141

 
 
4,032

 
 
99,766

 
 
7,956

 
Total temporarily
impaired AFS securities
 
$
4,507,220

 
 
62,157

 
 
96,009

 
 
4,814

 
 
4,603,229

 
 
66,971

 
2015
 

 
 

 
 

 
 

 
 

 
 

 
Tax exempt bonds
 
$
890,907

 
 
2,264

 
 
63,474

 
 
473

 
 
954,381

 
 
2,737

 
Taxable bonds
 
1,676,719

 
 
9,988

 
 
70,309

 
 
411

 
 
1,747,028

 
 
10,399

 
Restricted investments
 
163,159

 
 
1,389

 
 

 
 

 
 
163,159

 
 
1,389

 
Equity securities
 
274,517

 
 
20,561

 
 
16,112

 
 
5,796

 
 
290,629

 
 
26,357

 
Total temporarily
impaired AFS securities
 
$
3,005,302

 
 
34,202

 
 
149,895

 
 
6,680

 
 
3,155,197

 
 
40,882

 
There are 649 AFS securities contributing to the total unrealized loss of $66,971,000 as of December 31, 2016. Unrealized losses related to debt securities are primarily due to interest rate volatility impacting the market value of certain bonds. The Company continues to receive scheduled principal and interest payments on these debt securities. Unrealized losses related to equity securities are primarily due to temporary equity market fluctuations that are expected to recover.



31


PUBLIX SUPER MARKETS, INC.
Notes to Consolidated Financial Statements


(4)    Consolidation of Joint Ventures and Long-Term Debt
From time to time, the Company enters into Joint Ventures (JV), in the legal form of limited liability companies, with certain real estate developers to partner in the development of shopping centers with the Company as the anchor tenant. The Company consolidates certain of these JVs in which it has a controlling financial interest. The Company is considered to have a controlling financial interest in a JV when it has (1) the power to direct the activities of the JV that most significantly impact the JV’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from the JV that could potentially be significant to such JV.
The Company evaluates a JV using specific criteria to determine whether the Company has a controlling financial interest and is the primary beneficiary of the JV. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of the other JV members, voting rights, involvement in routine capital and operating decisions and each member’s influence over the JV owned shopping center’s economic performance.
Generally, most major JV decision making is shared between all members. In particular, the use and sale of JV assets, business plans and budgets are generally required to be approved by all members. However, the Company, through its anchor tenant operating lease agreement, has the power to direct the activities that most significantly influence the economic performance of the JV owned shopping center. Additionally, through its member equity interest in the JV, the Company will receive a significant portion of the JV’s benefits or is obligated to absorb a significant portion of the JV’s losses.
As of December 31, 2016, the carrying amounts of the assets and liabilities of the consolidated JVs were $102,254,000 and $53,278,000, respectively. As of December 26, 2015, the carrying amounts of the assets and liabilities of the consolidated JVs were $141,355,000 and $64,928,000, respectively. The assets are owned by and the liabilities are obligations of the JVs, not the Company, except for a portion of the long-term debt of certain JVs guaranteed by the Company. The JVs are financed with capital contributions from the members, loans and/or the cash flows generated by the JV owned shopping centers once in operation. Total earnings attributable to noncontrolling interests for 2016, 2015 and 2014 were immaterial. The Company’s involvement with these JVs does not have a significant effect on the Company’s financial condition, results of operations or cash flows.
The Company’s long-term debt results primarily from the consolidation of loans of certain JVs and loans assumed in connection with the acquisition of certain shopping centers with the Company as the anchor tenant. The Company assumed loans totaling $63,966,000 and $40,287,000 during 2016 and 2015, respectively. Maturities of JV loans range from April 2017 through June 2017 and have variable interest rates based on a LIBOR index plus 175 to 250 basis points. Maturities of assumed shopping center loans range from March 2017 through January 2027 and have fixed interest rates ranging from 3.7%