Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 29, 2009

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                  to                  

 

Commission File Number 000-50972

 

Texas Roadhouse, Inc.

(Exact name of registrant specified in its charter)

 

Delaware

 

20-1083890

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification Number)

 

6040 Dutchmans Lane, Suite 200

Louisville, Kentucky 40205

(Address of principal executive offices) (Zip Code)

 

(502) 426-9984

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o.

 

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 Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o.

 

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.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x.

 

The number of shares of common stock outstanding were 70,309,121 on October 30, 2009.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1 — Financial Statements — Texas Roadhouse, Inc. and Subsidiaries

 

3

Condensed Consolidated Balance Sheets — September 29, 2009 and December 30, 2008

 

3

Condensed Consolidated Statements of Income — For the 13 and 39 Weeks Ended September 29, 2009 and September 23, 2008

 

4

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income — For the 39 Weeks Ended September 29, 2009

 

5

Condensed Consolidated Statements of Cash Flows — For the 39 Weeks Ended September 29, 2009 and September  23, 2008

 

6

Notes to Condensed Consolidated Financial Statements

 

7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4 — Controls and Procedures

 

24

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1 — Legal Proceedings

 

25

Item 1A — Risk Factors

 

25

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 3 — Defaults Upon Senior Securities

 

25

Item 4 — Submission of Matters to a Vote of Security Holders

 

25

Item 5 — Other Information

 

25

Item 6 — Exhibits

 

26

 

 

 

Signatures

 

27

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 — FINANCIAL STATEMENTS

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

(unaudited)

 

 

 

 

 

September 29, 2009

 

December 30, 2008

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

35,833

 

$

5,258

 

Receivables, net of allowance for doubtful accounts of $810 at September 29, 2009 and $524 at December 30, 2008

 

8,471

 

9,922

 

Inventories, net

 

7,046

 

8,140

 

Prepaid income taxes

 

 

3,429

 

Prepaid expenses

 

3,919

 

6,097

 

Deferred tax assets

 

1,378

 

1,962

 

Total current assets

 

56,647

 

34,808

 

Property and equipment, net

 

457,267

 

456,132

 

Goodwill

 

114,859

 

114,807

 

Intangible asset, net

 

11,958

 

12,807

 

Other assets

 

5,901

 

4,109

 

Total assets

 

$

646,632

 

$

622,663

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and obligations under capital leases

 

$

240

 

$

228

 

Accounts payable

 

19,808

 

32,175

 

Deferred revenue — gift cards/certificates

 

13,303

 

32,265

 

Accrued wages

 

19,072

 

15,500

 

Income tax payable

 

2,623

 

 

Accrued taxes and licenses

 

11,154

 

8,544

 

Other accrued liabilities

 

10,219

 

10,931

 

Total current liabilities

 

76,419

 

99,643

 

Long-term debt and obligations under capital leases, excluding current maturities

 

126,243

 

132,482

 

Stock option and other deposits

 

3,527

 

3,784

 

Deferred rent

 

11,534

 

9,920

 

Deferred tax liabilities

 

9,832

 

6,205

 

Fair value of derivative financial instruments

 

816

 

2,704

 

Other liabilities

 

6,668

 

5,128

 

Total liabilities

 

235,039

 

259,866

 

Texas Roadhouse, Inc. and subsidiaries stockholders’ equity:

 

 

 

 

 

Preferred stock ($0.001 par value, 1,000,000 shares authorized; no shares issued or outstanding)

 

 

 

Common stock, Class A, ($0.001 par value, 100,000,000 shares authorized, 65,030,353 and 64,070,620 shares issued and outstanding at September 29, 2009 and December 30, 2008, respectively)

 

65

 

64

 

Common stock, Class B, ($0.001 par value, 8,000,000 shares authorized, 5,265,376 shares issued and outstanding)

 

5

 

5

 

Additional paid in capital

 

229,489

 

220,385

 

Retained earnings

 

180,010

 

141,240

 

Accumulated other comprehensive loss

 

(501

)

(1,704

)

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

409,068

 

359,990

 

Noncontrolling interests

 

2,525

 

2,807

 

Total equity

 

411,593

 

362,797

 

Total liabilities and equity

 

$

646,632

 

$

622,663

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

September 29,
2009

 

September 23,
2008

 

September 29,
2009

 

September 23,
2008

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

224,417

 

$

215,739

 

$

708,808

 

$

639,127

 

Franchise royalties and fees

 

2,050

 

1,996

 

6,155

 

7,132

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

226,467

 

217,735

 

714,963

 

646,259

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Restaurant operating costs:

 

 

 

 

 

 

 

 

 

Cost of sales

 

74,489

 

76,845

 

237,844

 

225,205

 

Labor

 

67,630

 

63,750

 

210,203

 

183,996

 

Rent

 

5,029

 

4,248

 

14,870

 

11,138

 

Other operating

 

38,778

 

36,772

 

119,450

 

105,368

 

Pre-opening

 

1,194

 

2,935

 

4,411

 

8,973

 

Depreciation and amortization

 

10,395

 

9,444

 

31,482

 

27,056

 

Impairment and closure

 

(201

)

43

 

(273

)

777

 

General and administrative

 

11,872

 

10,277

 

35,918

 

32,585

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

209,186

 

204,314

 

653,905

 

595,098

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

17,281

 

13,421

 

61,058

 

51,161

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

784

 

974

 

2,517

 

2,336

 

Equity income from investments in unconsolidated affiliates

 

(36

)

(45

)

(185

)

(184

)

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

16,533

 

12,492

 

58,726

 

49,009

 

Provision for income taxes

 

5,431

 

3,906

 

18,582

 

16,498

 

Net income including noncontrolling interests

 

$

11,102

 

$

8,586

 

$

40,144

 

$

32,511

 

Less: Net income (loss) attributable to noncontrolling interests

 

407

 

(58

)

1,374

 

482

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

10,695

 

$

8,644

 

$

38,770

 

$

32,029

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to Texas Roadhouse, Inc. and subsidiaries:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.12

 

$

0.56

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.15

 

$

0.12

 

$

0.54

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

70,204

 

71,947

 

69,847

 

73,649

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

71,550

 

73,303

 

71,151

 

75,242

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(in thousands, except share data)

(unaudited)

 

 

 

Class A

 

Class B

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

Shares

 

Par
Value

 

Shares

 

Par
Value

 

Paid in
Capital

 

Retained
Earnings

 

Comprehensive
Income (Loss)

 

Noncontrolling
Interests

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 30, 2008

 

64,070,620

 

$

64

 

5,265,376

 

$

5

 

$

220,385

 

$

141,240

 

$

(1,704

)

$

2,807

 

$

362,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on derivatives, net of tax

 

 

 

 

 

 

 

1,203

 

 

1,203

 

Net income

 

 

 

 

 

 

38,770

 

 

1,374

 

40,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(1,656

)

(1,656

)

Shares issued under stock option plan including tax effects

 

681,188

 

1

 

 

 

4,828

 

 

 

 

4,829

 

Settlement of restricted stock units, net of tax

 

278,545

 

 

 

 

(1,366

)

 

 

 

(1,366

)

Share-based compensation

 

 

 

 

 

5,642

 

 

 

 

5,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 29, 2009

 

65,030,353

 

$

65

 

5,265,376

 

$

5

 

$

229,489

 

$

180,010

 

$

(501

)

$

2,525

 

$

411,593

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

39 Weeks Ended

 

 

 

September 29, 2009

 

September 23, 2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income including noncontrolling interests

 

$

40,144

 

$

32,511

 

Depreciation and amortization

 

31,482

 

27,056

 

Deferred income taxes

 

3,526

 

(2,908

)

Loss on disposition of assets

 

918

 

827

 

Impairment and closure

 

(305

)

611

 

Equity income from investments in unconsolidated affiliates

 

(185

)

(184

)

Distributions received from investments in unconsolidated affiliates

 

261

 

302

 

Provision for doubtful accounts

 

286

 

200

 

Share-based compensation expense

 

5,642

 

5,578

 

Changes in operating working capital:

 

 

 

 

 

Receivables

 

1,165

 

7,104

 

Inventories

 

1,094

 

(112

)

Prepaid expenses and other current assets

 

2,160

 

1,614

 

Other assets

 

(1,860

)

(443

)

Accounts payable

 

(12,367

)

(2,621

)

Deferred revenue — gift cards/certificates

 

(18,962

)

(19,040

)

Accrued wages

 

3,572

 

621

 

Excess tax benefits from share-based compensation

 

(1,671

)

(2,930

)

Prepaid income taxes and income taxes payable

 

8,288

 

2,688

 

Accrued taxes and licenses

 

2,590

 

3,716

 

Other accrued liabilities

 

(740

)

1,622

 

Deferred rent

 

1,614

 

1,707

 

Other liabilities

 

1,644

 

331

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

68,296

 

58,250

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures — property and equipment

 

(34,814

)

(75,413

)

Acquisitions of franchise restaurants, net of cash acquired

 

25

 

(18,405

)

Proceeds from sale of property and equipment, including insurance proceeds

 

2,329

 

289

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(32,460

)

$

(93,529

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

(Repayments of) proceeds from revolving credit facility, net

 

(6,000

)

86,000

 

Proceeds from noncontrolling interests contributions and other

 

 

878

 

Investments in unconsolidated affiliates

 

(19

)

 

Distributions to noncontrolling interest holders

 

(1,656

)

(957

)

Excess tax benefits from share-based compensation

 

1,671

 

2,930

 

Repurchase shares of common stock

 

 

(52,578

)

Repayments of stock option and other deposits

 

(1,182

)

 

Proceeds from stock option and other deposits

 

925

 

321

 

Settlement of restricted stock units, net of tax

 

(1,366

)

 

Principal payments on long-term debt and capital lease obligations

 

(227

)

(1,015

)

Proceeds from exercise of stock options

 

2,593

 

1,855

 

 

 

 

 

 

 

Net cash (used in)/provided by financing activities

 

$

(5,261

)

$

37,434

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

30,575

 

2,155

 

Cash and cash equivalents — beginning of period

 

5,258

 

11,564

 

Cash and cash equivalents — end of period

 

$

35,833

 

$

13,719

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

  Interest, net of amounts capitalized

 

$

2,603

 

$

2,540

 

  Income taxes, net of refunds

 

$

6,784

 

$

16,753

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except per share data)

(unaudited)

 

(1)   Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Texas Roadhouse, Inc. (the “Company”), its wholly-owned subsidiaries and subsidiaries in which it owns more than 50 percent interest, as of and for the 13 and 39 weeks ended September 29, 2009 and September 23, 2008.  Texas Roadhouse, Inc.’s wholly-owned subsidiaries include: Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse Development Corporation (“TRDC”) and Texas Roadhouse Management Corp. (“Management Corp”).  The Company and its subsidiaries operate Texas Roadhouse restaurants. Holdings also provides supervisory and administrative services for certain other franchise and license restaurants. TRDC sells franchise rights and collects the franchise royalties and fees.  Management Corp. provides management services to the Company, Holdings and certain other license and franchise restaurants.  All material balances and transactions between the consolidated entities have been eliminated.  In accordance with the Company’s adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10-50, Consolidation,  noncontrolling interests (previously shown as “minority interest in consolidated subsidiaries”) are reported below net income under the heading “Net income attributable to the noncontrolling interests” in the condensed consolidated statements of income and shown as a component of equity in the condensed consolidated balance sheets.

 

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the period to prepare these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill, obligations related to insurance reserves, income taxes and share-based compensation expense. Actual results could differ from those estimates.

 

In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented.  The financial statements have been prepared in accordance with GAAP, except that certain information and footnotes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  Operating results for the 13 and 39 weeks ended September 29, 2009 are not necessarily indicative of the results that may be expected for the year ending December 29, 2009.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2008.

 

The Company’s significant interim accounting policies include the recognition of income taxes using an estimated annual effective tax rate.

 

The Company has performed an evaluation of subsequent events through November 6, 2009, which is the date the financial statements were issued.

 

(2)   Share-based Compensation

 

The Company may grant incentive and non-qualified stock options to purchase shares of Class A common stock, stock bonus awards (restricted stock unit awards (“RSUs”)) and restricted stock awards under the Texas Roadhouse, Inc. 2004 Equity Incentive Plan (the “Plan”).  Beginning in 2008, the Company changed the method by which it provides share-based compensation to its employees by eliminating stock option grants and, instead, granting RSUs as a form of share-based compensation.   An RSU is the conditional right to receive one share of Class A common stock upon satisfaction of the vesting requirement.

 

The following table summarizes the share-based compensation recorded in the accompanying condensed consolidated statements of income:

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

September 29,
2009

 

September 23,
2008

 

September 29,
2009

 

September 23,
2008

 

 

 

 

 

 

 

 

 

 

 

Labor expense

 

$

694

 

$

702

 

$

2,116

 

$

1,870

 

General and administrative expense

 

1,134

 

1,294

 

3,526

 

3,708

 

Total share-based compensation expense

 

$

1,828

 

$

1,996

 

$

5,642

 

$

5,578

 

 

7



Table of Contents

 

A summary of share-based compensation activity by type of grant as of September 29, 2009 and changes during the period then ended is presented below.

 

Summary Details for Plan Share Options

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-Average
Remaining Contractual
Term (years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 30, 2008

 

6,276,323

 

$

10.14

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Forfeited

 

(114,414

)

13.55

 

 

 

 

 

Exercised

 

(681,188

)

3.85

 

 

 

 

 

Outstanding at September 29, 2009

 

5,480,721

 

$

10.85

 

5.56

 

$

10,421

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 29, 2009

 

4,997,026

 

$

10.55

 

5.39

 

$

10,392

 

 

No stock options were granted during the 39 weeks ended September 29, 2009.

 

The total intrinsic value of options exercised during the 13 weeks ended September 29, 2009 and September 23, 2008 was $0.8 million and $7.0 million, respectively.  The total intrinsic value of options exercised during the 39 weeks ended September 29, 2009 and September 23, 2008 was $4.9 million and $8.1 million, respectively.  As of September 29, 2009, with respect to unvested stock options, there was $0.1 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 0.3 year.  The total grant date fair value of stock options vested for the 13 week periods ended September 29, 2009 and September 23, 2008 was $0.2 million and $1.6 million, respectively.  The total grant date fair value of stock options vested for both 39 week periods ended September 29, 2009 and September 23, 2008 was $1.0 million and $5.0 million, respectively.

 

Summary Details for RSUs

 

 

 

Shares

 

Weighted-
Average
Grant Date
Fair Value

 

 

 

 

 

 

 

Outstanding at December 30, 2008

 

1,253,530

 

$

9.63

 

Granted

 

505,174

 

9.94

 

Forfeited

 

(39,276

)

8.97

 

Vested

 

(409,393

)

10.21

 

Outstanding at September 29, 2009

 

1,310,035

 

$

9.59

 

 

As of September 29, 2009, with respect to unvested RSUs, there was $8.5 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 1.7 years.  The vesting terms of the RSUs range from approximately 1.0 to 5.0 years.  The total grant date fair value of RSUs vested for the 13 and 39 week periods ended September 29, 2009 was $0.8 million and $4.2 million.

 

(3)   Long-term Debt and Obligations Under Capital Leases

 

Long-term debt and obligations under capital leases consisted of the following:

 

 

 

September 29, 2009

 

December 30, 2008

 

Installment loans, due 2009 – 2020

 

$

2,069

 

$

2,194

 

Obligations under capital leases

 

414

 

516

 

Revolver

 

124,000

 

130,000

 

 

 

126,483

 

132,710

 

Less current maturities

 

240

 

228

 

 

 

$

 126,243

 

$

132,482

 

 

The weighted-average interest rate for installment loans outstanding at September 29, 2009 and December 30, 2008 was 10.58% and 10.55%, respectively.  The debt is secured by certain land and buildings.

 

8



Table of Contents

 

The Company has a $250.0 million five-year revolving credit facility with a syndicate of commercial lenders led by Bank of America, N.A., Banc of America Securities LLC and National City Bank which, in December 2008, was acquired by PNC Bank.  The facility expires on May 31, 2012.  The terms of the facility require the Company to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to 0.875%, depending on its leverage ratio, or the Base Rate, which is the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.50%.  The Company is also required to pay a commitment fee of 0.10% to 0.175% per year on any unused portion of the facility, depending on its leverage ratio.  The weighted-average interest rate for the revolver at September 29, 2009 and December 30, 2008 was 2.07% and 2.73%, respectively.  At September 29, 2009, the Company had $124.0 million outstanding under the credit facility and $122.0 million of availability, net of $4.0 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit under the facility depends on the Company maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The credit facility permits the Company to incur additional secured or unsecured indebtedness outside the facility, except for the incurrence of secured indebtedness that in the aggregate exceeds 20% of the Company’s consolidated tangible net worth or circumstances where the incurrence of secured or unsecured indebtedness would prevent the Company from complying with its financial covenants.  The Company was in compliance with all covenants as of September 29, 2009.

 

(4)   Derivative and Hedging Activities

 

The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under FASB ASC 815, Derivatives and Hedging (“ASC 815”)The Company uses interest rate-related derivative instruments to manage its exposure to fluctuations of interest rates.  By using these instruments, the Company exposes itself, from time to time, to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company.  The Company minimizes the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.  The Company’s counterparty in the interest rate swaps is J.P. Morgan Chase, N.A.  Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of the Company’s common stock.  The Company minimizes market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be taken.

 

Interest Rate Swaps

 

On October 22, 2008, the Company entered into an interest rate swap, starting on November 7, 2008, with a notional amount of $25.0 million to hedge a portion of the cash flows of its variable rate credit facility.  The Company has designated the interest rate swap as a cash flow hedge of its exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under its revolving credit facility.  Under the terms of the swap, the Company pays a fixed rate of 3.83% on the $25.0 million notional amount and receives payments from the counterparty based on the 1-month LIBOR rate for a term ending on November 7, 2015, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.

 

On January 7, 2009, the Company entered into an interest rate swap, starting on February 7, 2009, with a notional amount of $25.0 million to hedge a portion of the cash flows of its variable rate credit facility.  The Company has designated the interest rate swap as a cash flow hedge of its exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under its revolving credit facility.  Under the terms of the swap, the Company pays a fixed rate of 2.34% on the $25.0 million notional amount and receives payments from the counterparty based on the 1-month LIBOR rate for a term ending on January 7, 2016, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.

 

The Company entered into the above interest rate swaps with the objective of eliminating the variability of its interest expense that arises because of changes in the variable interest rate for the designated interest payments.  Changes in the fair value of the interest rate swap will be reported as a component of accumulated other comprehensive income.  The Company will reclassify any gain or loss from accumulated other comprehensive income, net of tax, on the Company’s consolidated balance sheet to interest expense on the Company’s consolidated statement of income when the interest rate swap expires or at the time the Company chooses to terminate the swap.  See note 10 for fair value discussion of these interest rate swaps.

 

9



Table of Contents

 

The following table summarizes the fair value and presentation in the condensed consolidated balance sheets for derivatives designated as hedging instruments under FASB ASC 815:

 

 

 

Balance

 

Derivative Assets

 

Derivative Liabilities

 

 

 

Sheet
Location

 

September 29,
2009

 

December 30,
2008

 

September 29,
2009

 

December 30,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Contracts Designated as Hedging Instruments under ASC 815

 

(1)

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

$

 

$

 

$

816

 

$

2,704

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivative Contracts

 

 

 

$

 

$

 

$

816

 

$

2,704

 

 


(1)          Derivative assets and liabilities are included in fair value of derivative financial instruments on the condensed consolidated balance sheets.

 

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of income for the 39 weeks ended September 29, 2009 and September 23, 2008:

 

 

 

Amount of Gain (Loss)
Recognized in AOCI
(effective portion)

 

Location of
Gain (Loss)
Reclassified
from AOCI

 

Amount of Gain (Loss)
Reclassified from AOCI
to Income (effective
portion)

 

Location of
Gain (Loss)
Recognized
in Income
(ineffective

 

Amount of Gain (Loss)
Recognized in Income
(ineffective portion)

 

 

 

2009

 

2008

 

Income

 

2009

 

2008

 

portion)

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

1,203

 

$

 

 

$

 

$

 

 

$

 

$

 

 

(5)           Recent Accounting Pronouncements

 

FASB Accounting Standards Codification

(Accounting Standards Update (“ASU”) 2009-01)

 

In June 2009, the FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative, nongovernmental U.S. generally accepted accounting principle (GAAP).  The Codification did not change GAAP but reorganizes the literature.  The Codification is effective for interim and annual periods ending after September 15, 2009 (the Company’s fiscal 2009 third quarter) and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification.  There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended September 29, 2009.

 

As a result of the Company’s implementation of the Codification during the quarter ended September 29, 2009, previous references to new accounting standards and literature are no longer applicable.  In the current quarter financial statements, the Company will provide reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature.

 

Fair Value of Financial Instruments

(Included in ASC 825, “Financial Instruments”, previously FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”)

 

FSP FAS 107-1 requires fair value disclosures on an interim basis for financial instruments that are not reflected in the condensed consolidated balance sheets at fair value.  Prior to the issuance of FSP FAS 107-1, the fair values of those financial instruments were only disclosed on an annual basis.  FSP FAS 107-1 is effective for interim reporting periods that end after June 15, 2009 (the Company’s fiscal 2009 second quarter).  The adoption of FSP FAS 107-1 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Subsequent Events

(Included in ASC 855, “Subsequent Events”, previously SFAS No. 165, “Subsequent Events”)

 

SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS 165 also requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  SFAS 165 is effective for interim or annual periods ending after

 

10



Table of Contents

 

June 15, 2009 (the Company’s fiscal 2009 second quarter).  The adoption of SFAS 165 did not materially impact the Company.  The Company has performed an evaluation of subsequent events through November 6, 2009, which is the date the financial statements were issued.

 

Consolidation of Variable Interest Entities — Amended

(To be included in ASC 810, “Consolidation”, previously SFAS 167, “Amendments to FASB Interpretation No. 46(R)”)

 

SFAS 167 amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, regarding certain guidance for determining the primary beneficiary of a variable interest entity.  In addition, SFAS 167 requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity.  SFAS 167 is effective for the first annual reporting period that begins after November 15, 2009 (fiscal year 2010 for the Company).  The Company is currently evaluating the impact of the adoption of SFAS 167 on its consolidated financial position, results of operations and cash flows.

 

(6)           Commitments and Contingencies

 

The estimated cost of completing capital project commitments at September 29, 2009 and December 30, 2008 was approximately $17.9 million and $34.0 million, respectively.

 

The Company entered into real estate lease agreements for franchise restaurants located in Everett, MA, Longmont, CO, Montgomeryville, PA, Fargo, ND and Logan, UT before granting franchise rights for those restaurants. The Company has subsequently assigned the leases to the franchisees, but remains contingently liable if a franchisee defaults under the terms of a lease.  The Longmont lease was assigned in October 2003 and expires in May 2014, the Everett lease was assigned in September 2002 and expires in February 2018, the Montgomeryville lease was assigned in October 2004 and expires in June 2021, the Fargo lease was assigned in February 2006 and expires in July 2016 and the Logan lease was assigned in January 2009 and expires in August 2019.  As the fair value of the guarantees is not considered significant, no liability has been recorded.  As discussed in note 7, the Everett, MA, Longmont, CO, and Fargo, ND restaurants are owned, in whole or part, by certain officers, directors or 5% shareholders of the Company.

 

The Company is involved in various claims and legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

The Company currently buys most of its beef from two suppliers. Although there are a limited number of beef suppliers, management believes that other suppliers could provide a similar product on comparable terms. A change in suppliers, however, could cause supply shortages and a possible loss of sales, which would affect operating results adversely. The Company has no material minimum purchase commitments with its vendors that extend beyond a year.

 

(7)   Related Party Transactions

 

The Longview, Texas restaurant leases the land and restaurant building from an entity controlled by Steven L. Ortiz, the Company’s Chief Operating Officer. The lease term is 15 years and will terminate in November 2014. The lease can be renewed for two additional terms of five years each. Rent is approximately $16,000 per month and will increase by 5% on the 11th anniversary date of the lease. The lease can be terminated if the tenant fails to pay the rent on a timely basis, fails to maintain the insurance specified in the lease, fails to maintain the building or property or becomes insolvent. Total rent payments were approximately $50,000 for each of the 13 week periods ended September 29, 2009 and September 23, 2008.   For the 39 weeks ended September 29, 2009 and September 23, 2008, rent payments were $0.1 million.

 

The Bossier City, Louisiana restaurant, of which Steven L. Ortiz beneficially owns 66.0% and the Company owns 5.0%, leases the land and building from an entity owned by Mr. Ortiz.  The lease term is 15 years and will terminate on March 31, 2020.  The lease can be renewed for three additional terms of five years each.  Rent is approximately $15,000 per month for the first five years of the lease and escalates 10% each five year period during the term.  The lease can be terminated if the tenant fails to pay rent on a timely basis, fails to maintain insurance, abandons the property or becomes insolvent.  Total rent payments were approximately $45,000 for each of the 13 week periods ended September 29, 2009 and September 23, 2008.  For the 39 weeks ended September 29, 2009 and September 23, 2008, rent payments were $0.1 million.

 

The Company has 14 franchise and license restaurants owned, in whole or part, by certain officers, directors or 5% shareholders of the Company at September 29, 2009 and September 23, 2008. These entities paid the Company fees of approximately $0.5 million during each of the 13 week periods ended September 29, 2009 and September 23, 2008, respectively.  For the 39 weeks ended September 29, 2009 and September 23, 2008, these entities paid the Company fees of $1.5 million and $1.6 million, respectively.  As disclosed in note 6, the Company is contingently liable on leases which are related to three of these restaurants.

 

11



Table of Contents

 

(8)   Earnings Per Share

 

The share and net income per share data for all periods presented are based on the historical weighted-average shares outstanding.  The diluted earnings per share calculations show the effect of the weighted-average stock options, RSUs and restricted stock awards outstanding from the Plan as discussed in note 2.  For the 13 and 39 weeks ended September 29, 2009, options to purchase 2,841,558 and 3,057,085 shares of common stock, respectively, were outstanding, but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.  For the 13 and 39 weeks ended September 23, 2008, options to purchase 3,721,689 and 3,251,267  shares of common stock, respectively, were outstanding, but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

 

The following table sets forth the calculation of weighted-average shares outstanding (in thousands) as presented in the accompanying condensed consolidated statements of income:

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

September 29,
2009

 

September 23,
2008

 

September 29,
2009

 

September 23,
2008

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

10,695

 

$

8,644

 

$

38,770

 

$

32,029

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

70,204

 

71,947

 

69,847

 

73,649

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

0.15

 

$

0.12

 

$

0.56

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

70,204

 

71,947

 

69,847

 

73,649

 

Dilutive effect of stock options and restricted stock

 

1,346

 

1,356

 

1,304

 

1,593

 

Shares – diluted

 

71,550

 

73,303

 

71,151

 

75,242

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

0.15

 

$

0.12

 

$

0.54

 

$

0.43

 

 

(9)   Acquisitions

 

On September 24, 2008, the Company acquired one franchise restaurant.  Pursuant to the terms of the acquisition agreement, the Company paid a purchase price of approximately $1.4 million.  This acquisition is consistent with the Company’s long-term strategy to increase net income and earnings per share.

 

This transaction was accounted for using the purchase method as defined in SFAS No. 141, Business Combinations (“SFAS 141”).  Based on a purchase price of $1.4 million, including approximately $0.1 million of direct acquisition costs and net of $0.1 million of cash acquired, and the Company’s estimates of the fair value of net assets acquired, $1.1 million of goodwill was generated by the acquisition, which is not amortizable for book purposes, but is deductible for tax purposes.

 

The purchase price has been allocated as follows:

 

Current assets

 

$

20

 

Property and equipment, net

 

204

 

Goodwill

 

1,069

 

Intangible asset

 

270

 

Current liabilities

 

(120

)

 

 

 

 

 

 

$

1,443

 

 

12



Table of Contents

 

If the acquisition had been completed as of the beginning of the year ended December 30, 2008, pro forma revenue, net income and earnings per share would have been as follows:

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

September 23, 2008

 

September 23, 2008

 

 

 

 

 

 

 

Revenue

 

$

218,503

 

$

648,884

 

Net income

 

$

8,593

 

$

32,050

 

Basic EPS

 

$

0.12

 

$

0.44

 

Diluted EPS

 

$

0.12

 

$

0.43

 

 

As a result of this acquisition, the Company recorded an intangible asset relating to certain reacquired franchise rights of $0.3 million in accordance with Emerging Issues Task Force (“EITF”) Issue No. 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination (“EITF 04-1”).  EITF 04-1 requires that a business combination between two parties that have a preexisting relationship be evaluated to determine if a settlement of a preexisting relationship exists. EITF 04-1 also requires that certain reacquired rights (including the rights to the acquirer’s trade name under a franchise agreement) be recognized as intangible assets apart from goodwill. However, if a contract giving rise to the reacquired rights includes terms that are favorable or unfavorable when compared to pricing for current market transactions for the same or similar items, EITF 04-1 requires that a settlement gain or loss be measured as the lesser of (i) the amount by which the contract is favorable or unfavorable under market terms from the perspective of the acquirer or (ii) the stated settlement provisions of the contract available to the counterparty to which the contract is unfavorable.

 

The intangible asset of $0.3 million has a weighted-average life of approximately 15 years.  When calculating this intangible asset, the Company considered the remaining term of the existing franchise agreement including renewals.  The Company recorded amortization expense relating to the intangible asset of approximately $4,300 and $13,000 for the 13 and 39 weeks ended September 29, 2009, respectively.  The Company expects the annual expense for each of the next five years to be approximately $17,000.

 

Effective July 23, 2008, the Company completed the acquisitions of nine franchise restaurants located in Tennessee.  Pursuant to the terms of the acquisition agreements, the Company paid an aggregate purchase price of approximately $8.4 million.  These acquisitions are consistent with the Company’s long-term strategy to increase net income and earnings per share.

 

These transactions were accounted for using the purchase method as defined in SFAS 141.  Based on a purchase price of $8.4 million, including approximately $0.2 million of direct acquisition costs and net of the $0.1 million of cash acquired and the $0.1 million charge related to EITF 04-1 and the Company’s estimates of the fair value of net assets acquired, $5.7 million of goodwill was generated by the acquisitions, which is not amortizable for book purposes, but is deductible for tax purposes.

 

The purchase price has been allocated as follows:

 

Current assets

 

$

264

 

Property and equipment, net

 

1,741

 

Goodwill

 

5,698

 

Intangible asset

 

3,465

 

Current liabilities

 

(2,778

)

 

 

 

 

 

 

$

8,390

 

 

If the acquisitions had been completed as of the beginning of the year ended December 30, 2008, pro forma revenue, net income and earnings per share would have been as follows:

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

September 23,
2008

 

September 23,
2008

 

 

 

 

 

 

 

Revenue

 

$

219,758

 

$

662,563

 

Net income

 

$

8,499

 

$

31,739

 

Basic EPS

 

$

0.12

 

$

0.43

 

Diluted EPS

 

$

0.12

 

$

0.42

 

 

As a result of these acquisitions, the Company incurred a charge of $0.1 million and recorded an intangible asset relating to certain reacquired franchise rights of $3.5 million in accordance with EITF 04-1.

 

13



Table of Contents

 

The intangible asset of $3.5 million has a weighted-average life of approximately 13 years.  When calculating this intangible asset, the Company considered the remaining term of the existing franchise agreements including renewals.  The remaining terms ranged from 10 to 19 years.  The Company recorded amortization expense relating to the intangible asset of approximately $0.1 million and $0.2 million for the 13 and 39 weeks ended September 29, 2009, respectively.  The Company expects the annual expense for each of the next five years to be $0.3 million.

 

(10)  Fair Value Measurement

 

The following table presents the fair values for the Company’s financial assets and liabilities measured on a recurring basis as of September 29, 2009:

 

 

 

 

 

Fair Value Measurements

 

 

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

 

Significant Other
Observable
Inputs (Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(816

)

$

 

$

(816

)

$

 

Deferred compensation plan – assets

 

3,112

 

3,112

 

 

 

Deferred compensation plan - liabilities

 

(3,084

)

(3,084

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(788

)

$

28

 

$

(816

)

$

 

 

The fair value of the Company’s interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration. See note 4 for discussion of the Company’s interest rate swaps.

 

The Second Amended and Restated Deferred Compensation Plan of Texas Roadhouse Management Corp., as amended, (the “Deferred Compensation Plan”) is a nonqualified deferred compensation plan which allows highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds held in a rabbi trust. The Company reports the accounts of the rabbi trust in its condensed consolidated financial statements. These investments are considered trading securities and are reported at fair value based on third-party broker statements.  The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, are recorded in general and administrative expense on the condensed consolidated statements of income.

 

The following table presents the fair values for the Company’s financial assets and liabilities measured on a nonrecurring basis as of September 29, 2009:

 

 

 

 

 

Fair Value Measurements

 

 

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

 

Significant Other
Observable
Inputs (Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

$

1,598

 

$

 

$

1,598

 

$

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,598

 

$

 

$

1,598

 

$

 

 

Long-lived assets held for sale including land and buildings and are valued using Level 2 inputs, primarily an independent third party appraisal.  These assets are included in Property and equipment in the Company’s condensed consolidated balance sheets as the Company does not expect to sell these assets in the next 12 months.  Costs to market and/or sell the assets are factored into the estimates of fair value.  During the 13 weeks ended September 29, 2009,  long-lived assets held for sale with a carrying amount of $2.0 million were written down to their fair value of $1.6 million, resulting in a loss of $0.4 million, which is included in Impairment and closure in the Company’s condensed consolidated statements of income.

 

14



Table of Contents

 

At September 29, 2009 and December 30, 2008, the fair value of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying value based on the short-term nature of these instruments. The fair value of the Company’s long-term debt is estimated based on the current rates offered to the Company for instruments of similar terms and maturities. The carrying amounts and related estimated fair values for the Company’s debt are as follows:

 

 

 

September 29, 2009

 

December 30, 2008

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Installment loans

 

$

2,069

 

$

2,658

 

$

2,194

 

$

2,866

 

Revolver

 

124,000

 

124,000

 

130,000

 

130,000

 

 

(11)  Stock Repurchase Program

 

On February 14, 2008, the Company’s Board of Directors approved a stock repurchase program under which it authorized the Company to repurchase up to $25.0 million of its Class A common stock.  On July 8, 2008, the Company’s Board of Directors approved a $50.0 million increase in the Company’s stock repurchase program.  The Company’s total stock repurchase authorization increased to $75.0 million.  Under this program, the Company may repurchase outstanding shares of its Class A common stock from time to time in open market transactions during the two-year period ending February 14, 2010.  The timing and the amount of any repurchases will be determined by management of the Company under parameters established by its Board of Directors, based on its evaluation of the Company’s stock price, market conditions and other corporate considerations.

 

For the 13 and 39 weeks ended September 29, 2009, the Company did not repurchase any shares of its Class A common stock.  For the 13 weeks ended September 23, 2008 the Company paid approximately $37.4 million to repurchase and retire 4,080,707 shares at an average price of $9.17 per share.   For the 39 weeks ended September 23, 2008, the Company paid approximately $52.5 million to repurchase and retire 5,704,907 shares at an average price of $9.20 per share.

 

(12)  Subsequent Events

 

On September 30, 2009, pursuant to a provision in the Company’s Amended and Restated Certificate of Incorporation (the “Certificate”), each share of the Company’s Class B Common Stock converted (the “Conversion”) automatically into one share of the Company’s Class A Common Stock.  Prior to the Conversion, our founder and chairman, W. Kent Taylor, beneficially owned all of the Company’s Class B common stock.  The Class B common stock had ten votes per share, while the Class A common stock has one vote per share.  Immediately following the Conversion, and also pursuant to the Certificate, the Company’s Class A Common Stock was redesignated as “Common Stock”.

 

15



Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Texas Roadhouse is a growing, moderately priced, full-service restaurant chain. Our founder and chairman, W. Kent Taylor, started the business in 1993. Our mission statement is “Legendary Food, Legendary Service®.” Our operating strategy is designed to position each of our restaurants as the local hometown destination for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of September 29, 2009, there were 326 Texas Roadhouse restaurants operating in 46 states, including:

 

· 255 “company restaurants,” of which 245 were wholly-owned and 10 were majority-owned.  The results of operations of company restaurants are included in our condensed consolidated statements of income. The portion of income attributable to minority interests in company restaurants that are not wholly-owned is reflected in the line item entitled “Net income attributable to noncontrolling interests” in our condensed consolidated statements of income.

 

· 71 “franchise restaurants,” of which 68 were franchise restaurants and three were license restaurants. We have a 5.0% to 10.0% ownership interest in 21 franchise restaurants.  The income derived from our minority interests in these franchise restaurants is reported in the line item entitled “Equity income from investments in unconsolidated affiliates” in our condensed consolidated statements of income. Additionally, we provide various management services to these franchise restaurants, as well as seven additional franchise restaurants in which we have no ownership interest.

 

We have contractual arrangements which grant us the right to acquire at pre-determined valuation formulas (i) the remaining equity interests in eight of the 10 majority-owned company restaurants, and (ii) 63 of the franchise restaurants.

 

Presentation of Financial and Operating Data

 

Throughout this report, the 13 weeks ended September 29, 2009 and September 23, 2008 are referred to as Q3 2009 and Q3 2008, respectively, and the 39 weeks ended September 29, 2009 and September 23, 2008 are referred to as 2009 YTD and 2008 YTD, respectively.

 

Long-term Strategies to Grow Earnings Per Share

 

Our long-term strategies with respect to increasing net income and earnings per share include the following:

 

Expanding Our Restaurant Base.   We will continue to evaluate opportunities to develop Texas Roadhouse restaurants in existing and new domestic or international markets. We will remain focused primarily on mid-sized markets where we believe a significant demand for our restaurants exists because of population size, income levels and the presence of shopping and entertainment centers and a significant employment base.

 

We may, at our discretion, add franchise restaurants, domestically and/or internationally, primarily with franchisees who have demonstrated prior success with the Texas Roadhouse or other restaurant concepts and in markets in which the franchisee demonstrates superior knowledge of the demographics and restaurant operating conditions.  We may also look to acquire franchise restaurants under terms favorable to us and our stockholders.  Additionally, from time to time, we may evaluate potential mergers, acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts.  On February 24, 2009, we opened a new restaurant, Aspen Creek, which is wholly-owned by Texas Roadhouse, Inc.

 

Maintaining and/or Improving Restaurant Level Profitability.   We plan to maintain, or possibly increase, restaurant level profitability through a combination of increased comparable restaurant sales and operating cost management.

 

Leveraging Our Scalable Infrastructure.   Over the past several years, we have made significant investments in our infrastructure, including information systems, real estate, human resources, legal, marketing and operations. As a result, we believe that our general and administrative costs will increase at a slower growth rate than our revenue.

 

Stock Repurchase Program.  We continue to look at opportunities to repurchase our Class A common stock at favorable market prices under our stock repurchase program.  Currently, our Board of Directors has authorized us to repurchase up to $75.0 million of our Class A common stock.  As of September 29, 2009, $18.2 million worth of Class A common stock remains authorized for repurchase.

 

16



Table of Contents

 

Key Measures We Use to Evaluate Our Company

 

Key measures we use to evaluate and assess our business include the following:

 

Number of Restaurant Openings.   Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings we incur pre-opening costs, which are defined below, before the restaurant opens. Typically new restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease to a steady level approximately three to six months after opening. However, although sales volumes are generally higher, so are initial costs, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately three to six months after opening.

 

Comparable Restaurant Sales Growth.   Comparable restaurant sales growth reflects the change in year-over-year sales for all company restaurants for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the later fiscal period excluding restaurants closed during the period. Comparable restaurant sales growth can be impacted by changes in guest traffic counts or by changes in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.

 

Average Unit Volume.   Average unit volume represents the average annual restaurant sales for all company restaurants open for a full six months before the beginning of the period measured. Average unit volume excludes sales on restaurants closed during the period.  Growth in average unit volumes in excess of comparable restaurant sales growth is generally an indication that newer restaurants are operating with sales levels in excess of the company average. Conversely, growth in average unit volumes less than growth in comparable restaurant sales growth is generally an indication that newer restaurants are operating with sales levels lower than the system average.

 

Store Weeks.   Store weeks represent the number of weeks that our company restaurants were open during the reporting period.

 

Other Key Definitions

 

Restaurant Sales.   Restaurant sales include gross food and beverage sales, net of promotions and discounts.

 

Franchise Royalties and Fees.   Franchisees typically pay a $40,000 initial franchise fee for each new restaurant and a franchise renewal fee equal to the greater of 30% of the then-current initial franchise fee or $10,000 to $15,000. Franchise royalties consist of royalties typically in the amount of 2.0% to 4.0% of gross sales, as defined in our franchise agreement, paid to us by our franchisees.

 

Restaurant Cost of Sales.   Restaurant cost of sales consists of food and beverage costs.

 

Restaurant Labor Expenses.   Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit sharing incentive compensation expenses earned by our managing partners. These profit sharing expenses are reflected in restaurant other operating expenses.  Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.

 

Restaurant Rent Expense.   Restaurant rent expense includes all rent associated with the leasing of real estate and includes base, percentage and straight-line rent expense.

 

Restaurant Other Operating Expenses.   Restaurant other operating expenses consist of all other restaurant-level operating costs, the major components of which are utilities, supplies, advertising, repair and maintenance, property taxes, credit card fees and general liability insurance. Profit sharing allocations to managing partners and market partners are also included in restaurant other operating expenses.

 

Pre-opening Expenses.   Pre-opening expenses, which are charged to operations as incurred, consist of expenses incurred before the opening of a new restaurant and are comprised principally of opening team and training salaries, travel expenses, rent, and food, beverage and other initial supplies and expenses.

 

Depreciation and Amortization Expenses.   Depreciation and amortization expenses (“D&A”) includes the depreciation of fixed assets and amortization of intangibles with definite lives.

 

Impairment and closure costs.  Impairment and closure costs include any impairment of long-lived assets associated with restaurants where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset and expenses associated with the closure of a restaurant.  Closure costs also include any gains or losses associated with the sale of a closed restaurant and/or assets held for sale.

 

17



Table of Contents

 

General and Administrative Expenses.   General and administrative expenses (“G&A”) are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth.   Supervision and accounting fees received from certain franchise restaurants and license restaurants are offset against G&A.  G&A also includes share-based compensation expense related to executive officers, support center employees and market partners.

 

Interest Expense, Net.   Interest expense includes the cost of our debt obligations including the amortization of loan fees, reduced by interest income and capitalized interest.  Interest income includes earnings on cash and cash equivalents.

 

Equity Income from Unconsolidated Affiliates.   We own a 5.0% to 10.0% equity interest in 21 franchise restaurants. Equity income from unconsolidated affiliates represents our percentage share of net income earned by these unconsolidated affiliates.

 

Net Income Attributable to Noncontrolling Interests.   Net income attributable to noncontrolling interests represents the portion of income attributable to the other owners of the majority-owned or controlled restaurants.  Our consolidated subsidiaries at September 29, 2009 and September 23, 2008 included ten majority-owned restaurants, all of which were open.

 

Results of Operations

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

September 29, 2009

 

September 23, 2008

 

September 29, 2009

 

September 23, 2008

 

($ in thousands)

 

$

 

%

 

$

 

%

 

$

 

%

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

224,417

 

99.1

 

215,739

 

99.1

 

708,808

 

99.1

 

639,137

 

98.9

 

Franchise royalties and fees

 

2,050

 

0.9

 

1,996

 

0.9

 

6,155

 

0.9

 

7,132

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

226,467

 

100.0

 

217,735

 

100.0

 

714,963

 

100.0

 

646,259

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As a percentage of restaurant sales)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

74,489

 

33.2

 

76,845

 

35.6

 

237,844

 

33.6

 

225,205

 

35.2

 

Labor

 

67,630

 

30.1

 

63,750

 

29.5

 

210,203

 

29.7

 

183,996

 

28.8

 

Rent

 

5,029

 

2.2

 

4,248

 

2.0

 

14,870

 

2.1

 

11,138

 

1.7

 

Other operating

 

38,778

 

17.3

 

36,772

 

17.0

 

119,450

 

16.9

 

105,368

 

16.5

 

(As a percentage of total revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening

 

1,194

 

0.5

 

2,935

 

1.3

 

4,411

 

0.6

 

8,973

 

1.4

 

Depreciation and amortization

 

10,395

 

4.6

 

9,444

 

4.3

 

31,482

 

4.4

 

27,056

 

4.2

 

Impairment and closure

 

(201

)

NM

 

43

 

NM

 

(273

)

NM

 

777

 

0.1

 

General and administrative

 

11,872

 

5.2

 

10,277

 

4.7

 

35,918

 

5.0

 

32,585

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

209,186

 

92.4

 

204,314

 

93.8

 

653,905

 

91.5

 

595,098

 

92.1

 

Income from operations

 

17,281

 

7.6

 

13,421

 

6.2

 

61,058

 

8.5

 

51,161

 

7.9

 

Interest expense, net

 

784

 

0.3

 

974

 

0.4

 

2,517

 

0.4

 

2,336

 

0.4

 

Equity income from investments in unconsolidated affiliates

 

(36

)

NM

 

(45

)

NM

 

(185

)

NM

 

(184

)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

16,533

 

7.3

 

12,492

 

5.7

 

58,726

 

8.2

 

49,009

 

7.6

 

Provision for income taxes

 

5,431

 

2.4

 

3,906

 

1.8

 

18,582

 

2.6

 

16,498

 

2.5

 

Net income including noncontrolling interests

 

11,102

 

4.9

 

8,586

 

3.9

 

40,144

 

5.6

 

32,511

 

5.1

 

Net income (loss) attributable to noncontrolling interests

 

407

 

0.2

 

(58

)

NM

 

1,374

 

0.2

 

482

 

0.1

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

10,695

 

4.7

 

8,644

 

4.0

 

38,770

 

5.4

 

32,029

 

5.0

 

 

NM — Not meaningful

 

18



Table of Contents

 

Restaurant Unit Activity

 

 

 

Company

 

Franchise

 

Total

 

Balance at December 30, 2008

 

245

 

69

 

314

 

Openings

 

12

 

3

 

15

 

Acquisitions (Dispositions)

 

 

 

 

Closures

 

(2

)

(1

)

(3

)

 

 

 

 

 

 

 

 

Balance at September 29, 2009

 

255

 

71

 

326

 

 

Q3 2009 (13 weeks) Compared to Q3 2008 (13 weeks) and 2009 YTD (39 weeks) Compared to 2008 YTD (39 weeks)

 

Restaurant Sales.   Restaurant sales increased by 4.0% in Q3 2009 as compared to Q3 2008 and by 10.9% in 2009 YTD compared to 2008 YTD.  These increases were attributable to the opening of new restaurants and the acquisitions of franchise restaurants in fiscal 2008, partially offset by a decrease in comparable restaurant sales and average unit volumes.

 

The following table summarizes certain key drivers and/or attributes of restaurant sales at company restaurants for the periods.

 

 

 

Q3 2009

 

Q3 2008

 

2009 YTD

 

2008 YTD

 

 

 

 

 

 

 

 

 

 

 

Store weeks

 

3,331

 

3,000

 

9,893

 

8,472

 

Comparable restaurant sales growth

 

(4.6

)%

(3.2

)%

(3.0

)%

(1.5

)%

Average unit volume (in thousands)

 

$

874

 

$

927

 

$

2,792

 

$

2,920

 

 

We have implemented certain menu pricing increases to partially offset impacts from higher operating costs and other inflationary pressures.  The following table summarizes our menu pricing actions for the periods shown.

 

 

 

Increased Menu
Pricing

 

 

 

 

 

April 2009

 

1.4

%

May/June 2008

 

1.5

%

January/February 2008

 

1.1

%

 

We will continue to evaluate the need for and test further menu price increases as we assess the current inflationary and competitive environment.

 

On September 24, 2008, we acquired one franchise restaurant, which is expected to have no significant net revenue or accretive impact on an on-going annual basis.  In Q3 2009 and 2009 YTD, restaurant sales included $0.8 million and $2.8 million from the acquired franchise restaurant.

 

Franchise Royalties and Fees.   Franchise royalties and fees increased slightly by $0.1 million, or by 2.7%, in Q3 2009 from Q3 2008 and decreased by $1.0 million, or by 13.7%, in 2009 YTD from 2008 YTD.  The slight increase in Q3 2009 was primarily attributable to new franchise restaurants in 2009 YTD and increasing royalty rates and franchise fees in conjunction with the renewal of certain franchise agreements, partially offset by the reduction of royalties in several restaurants and a decrease in average unit volumes.  The decrease in 2009 YTD was primarily attributable to the loss of royalties associated with the acquisition of 13 franchise restaurants in 2008, the reduction of royalties in several restaurants and a decrease in average unit volumes.  This decrease was partially offset by new franchise restaurants in 2009 YTD and increasing royalty rates and franchise fees in conjunction with the renewal of certain franchise agreements.  The acquired franchise restaurants generated approximately $0.1 million and $0.8 million in franchise royalties in Q3 2008 and 2008 YTD, respectively.  Franchise comparable restaurant sales decreased 3.6% and 3.0% in Q3 2009 and 2009 YTD, respectively.  Franchise restaurant count activity is shown in the restaurant unit activity table above.

 

Restaurant Cost of Sales.   Restaurant cost of sales, as a percentage of restaurant sales, decreased to 33.2% in Q3 2009 from 35.6% in Q3 2008 and to 33.6% in 2009 YTD from 35.2% in 2008 YTD.  These decreases were primarily attributable to the benefit of lower beef, dairy and produce costs and menu price increases discussed above, partially offset by higher commodity costs on chicken and food items such as wheat and oil-based ingredients.  Through the second quarter of 2009, we had fixed price contracts for 90% of our beef product volume with the remainder subject to fluctuating market prices.  During the third quarter of 2009, we locked in the 10% remainder and currently have fixed price contracts on 100% of our beef product volume.  We expect commodity cost deflation of approximately 2.5-3.0% in 2009.

 

Restaurant Labor Expenses.  Restaurant labor expenses, as a percentage of restaurant sales, increased to 30.1% in Q3 2009 from 29.5% in Q3 2008 and to 29.7% in 2009 YTD from 28.8% in 2008 YTD.  These increases were primarily attributable to a decrease in average unit volumes combined with higher average wage rates, higher payroll tax expense as a result of state unemployment rate changes that occurred in the first quarter of 2009, and higher workers’ compensation expense due to changes in our claims

 

19



Table of Contents

 

development history.  These increases were partially offset by menu price increases discussed above.  Based on our most recent actuarial analysis received at the end of Q3 2009, workers’ compensation expense increased in Q3 2009 by $0.3 million as compared to a decrease in Q3 2008 of $0.1 million.  Higher average hourly wage rates resulted from several state-mandated increases in minimum and tip wage rates throughout 2008 and 2009, including increases in federal minimum wage rate in July 2008 and July 2009.  We anticipate our labor costs will continue to be pressured by inflation.  These increases may or may not be offset by additional menu price adjustments.

 

Restaurant Rent Expense.   Restaurant rent expense, as a percentage of restaurant sales, increased to 2.2% in Q3 2009 from 2.0% in Q3 2008 and increased to 2.1% in 2009 YTD from 1.7% in 2008 YTD.  These increases were primarily attributable to a decrease in average unit volumes, combined with rent expense associated with the franchise restaurants acquired in 2008 and the restaurants opened in 2009 YTD and fiscal 2008, as we are leasing more land and buildings than we have in the past.

 

Restaurant Other Operating Expenses Restaurant other operating expenses, as a percentage of restaurant sales, increased to 17.3% in Q3 2009 from 17.0% in Q3 2008 and to 16.9% in 2009 YTD from 16.5% in 2008 YTD.  These increases were primarily attributable to a reduction in the impact of favorable general liability insurance claims experience, higher costs for repairs and maintenance, managing partner and market partner bonuses, property taxes and credit card charges, as a percentage of restaurant sales, and a decrease in average unit volumes,  partially offset by lower utilities.  During Q3 2009, a $0.2 million adjustment made to general liability insurance expense due to favorable general liability claims experience based on our most recent quarterly actuarial analysis was lower than a $0.9 million adjustment made in Q3 2008.  Managing partner and market partner bonus expense was higher in Q3 2009 and 2009 YTD as a result of improved restaurant margins.

 

Restaurant Pre-opening Expenses.   Pre-opening expenses decreased to $1.2 million in Q3 2009 from $2.9 million in Q3 2008 and decreased to $4.4 million in 2009 YTD from $9.0 million in 2008 YTD.  These decreases were primarily attributable to fewer openings and fewer restaurants being in the development pipeline in 2009 compared to 2008.  In fiscal 2009, we have reduced our planned Company-owned restaurant openings to approximately 17 restaurants, 12 of which opened in 2009 YTD, compared to 29 restaurants opened in fiscal 2008, 23 of which opened during 2008 YTD.  Pre-opening costs will fluctuate from period to period based on the number and timing of restaurant openings and the number and timing of restaurant managers hired.

 

Depreciation and Amortization Expense.   D&A, as a percentage of total revenue, increased to 4.6% in Q3 2009 from 4.3% in Q3 2008 and to 4.4% in 2009 YTD from 4.2% in 2008 YTD.  These increases were primarily attributable to higher construction costs and other capital spending on new restaurants and a decrease in average unit volumes, partially offset by lower depreciation expense on older restaurants.

 

Impairment and Closure Expenses.  Impairment and closure expenses decreased to ($0.2) million in Q3 2009 compared to $43,000 in Q3 2008.  Impairment and closure expenses decreased to ($0.3) million in 2009 YTD compared to $0.8 million in 2008 YTD.  We recorded a gain of $0.6 million in Q3 2009 due to the sale of a restaurant closed during Q3 2009.  Additionally, we recorded $0.4 million in Q3 2009 due to charges incurred in conjunction with the closure of a second restaurant in Q3 2009.  In the first quarter of 2008, we recorded $0.7 million due to lease reserve and other charges incurred in conjunction with the closure of a restaurant in Q1 2008.  The lease associated with this restaurant was favorably settled in the second quarter of 2009.

 

General and Administrative Expenses.  G&A, as a percentage of total revenue, increased to 5.2% in Q3 2009 from 4.7% in Q3 2008 and remained the same at 5.0% in 2009 YTD compared to 2008 YTD.  The increase in Q3 2009 was primarily attributable to higher performance-based bonus expense for executive and other support center employees, partially offset by lower abandoned site costs and the leveraging of costs due to revenue growth.  In 2009 YTD, higher performance-based bonus expense was offset by the lower abandoned site costs and the leveraging of costs due to revenue growth.  Bonus expense was $1.9 million and $2.3 million higher in Q3 2009 and 2009 YTD, respectively, for two reasons.  First, additional bonus expense of $1.2 million and $1.6 million was recorded in Q3 2009 and 2009 YTD, respectively in anticipation of exceeding our bonus targets for fiscal 2009.  Second, in Q3 2008 and 2008 YTD, bonus expense was lower by $0.7 million due to no profit portion of bonus being earned in Q3 2008.  For the remainder of 2009, we expect bonus expense to be $1.0 - $1.5 million higher than the same period in 2008 as a result of not meeting our bonus targets in fiscal 2008 and exceeding our targets for fiscal 2009.  Abandoned site costs were $0.3 million higher in Q3 2008 as a result of cutting back our planned openings for 2009.

 

Interest Expense, Net.   Interest expense decreased to $0.8 million in Q3 2009 from $1.0 million in Q3 2008 and increased to $2.5 million in 2009 YTD from $2.3 million in 2008 YTD.  The decrease in Q3 2009 was primarily attributable to lower interest rates, partially offset by lower interest income and capitalized interest.   The increase in 2009 YTD was primarily attributable to lower interest income and capitalized interest and increased borrowings under our credit facility, partially offset by lower interest rates.  Lower interest income and capitalized interest were primarily due to lower interest rates and slower restaurant development in 2009 YTD compared to 2008 YTD.  For 2009 YTD, the increased borrowings were primarily related to cash spent on stock repurchases and franchise restaurant acquisitions during 2008.

 

Income Tax Expense.   We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740,  Income Taxes (“ASC 740”).  Our effective tax rate increased to 33.7% in Q3 2009 from 31.1% in Q3 2008 and decreased to 32.4% in 2009 YTD from 34.0% in 2008 YTD.  The increase in Q3 2009 was primarily

 

20



Table of Contents

 

attributable to lower federal tax credits, such as FICA tip credit and Work Opportunity Tax credits, as a percentage of net income before income tax, partially offset by lower non-deductible stock compensation expense.  The decrease in 2009 YTD was primarily attributable to lower non-deductible stock compensation expense and higher federal tax credits, as a percentage of net income before income tax.  We expect the effective tax rate to be approximately 32.4% for fiscal 2009.

 

Liquidity and Capital Resources

 

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:

 

 

 

39 Weeks Ended

 

 

 

September 29, 2009

 

September 23, 2008

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

68,296

 

$

58,250

 

Net cash used in investing activities

 

(32,460

)

(93,529

)

Net cash (used in)/provided by financing activities

 

(5,261

)

37,434

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

30,575

 

$

2,155

 

 

Net cash provided by operating activities was $68.3 million in 2009 YTD compared to $58.3 million in 2008 YTD.  This increase was primarily due to higher net income and depreciation, as a result of opening new restaurants, and deferred income taxes, partially offset by a $7.1 million reduction in the source of cash from accounts receivable, along with other decreases in working capital.  The $7.1 million reduction in the source of cash from accounts receivable was driven by timing issues related to credit card settlements.  Our fiscal year 2007 ended on a bank holiday, therefore we had a larger than normal amount of credit card settlements in accounts receivable at the end of 2007, which were subsequently received during the first quarter of 2008.

 

Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital.  Sales are primarily for cash, and restaurant operations do not require significant inventories or receivables.  In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.

 

Net cash used in investing activities was $32.5 million in 2009 YTD compared to $93.5 million in 2008 YTD.  This decrease was due to fewer restaurants in the development pipeline in Q3 2009, along with the $16.9 million use of cash associated with franchise acquisitions in 2008 YTD.  In fiscal 2009, we have reduced our planned Company-owned restaurant openings to approximately 17 restaurants, 12 of which opened in 2009 YTD, compared to 29 restaurants opened in fiscal 2008, 23 of which opened during 2008 YTD.

 

We require capital principally for the development of new company restaurants and the refurbishment of existing restaurants.  We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land where it is cost effective. As of September 29, 2009, 114 of the 255 company restaurants had been developed on land which we owned.

 

Our future capital requirements will primarily depend on the number of new restaurants we open and the timing of those openings within a given fiscal year. These requirements will include costs directly related to opening new restaurants and may also include costs necessary to ensure that our infrastructure is able to support a larger restaurant base. In fiscal 2009, we expect our capital expenditures to be approximately $50.0 million to $55.0 million, substantially all of which will relate to planned restaurant openings.  This amount excludes any cash used for franchise acquisitions.  We intend to satisfy our capital requirements over the next 12 months with cash on hand, net cash provided by operating activities and funds available under our credit facility.  For 2009, we anticipate net cash provided by operating activities will exceed capital expenditures, which we currently plan to use to increase our cash balance and/or repay borrowings under our credit facility.

 

Net cash used in financing activities was $5.3 million in 2009 YTD as compared to net cash provided by financing activities of $37.4 million in 2008 YTD.  This decrease was primarily due to decreased borrowings under our credit facility, offset by stock repurchases of $52.6 million in 2008 YTD.  The borrowings in 2008 were made in conjunction with stock repurchases in fiscal 2008, the acquisition of three franchise restaurants in the second quarter of 2008 and the acquisition of nine franchise restaurants in the third quarter of 2009.

 

On February 14, 2008, our Board of Directors approved a stock repurchase program to repurchase up to $25.0 million of Class A common stock.  On July 8, 2008, our Board of Directors approved a $50.0 million increase in the Company’s stock repurchase program, thereby increasing the Company’s total stock repurchase authorization to $75.0 million.  Under this program, we may repurchase outstanding shares from time to time in open market transactions during the two-year period ending February 14, 2010.

 

21



Table of Contents

 

The timing and the amount of any repurchases will be determined by management under parameters established by our Board of Directors, based on its evaluation of our stock price, market conditions and other corporate considerations.  The approximate dollar value of shares that may yet be purchased under the plan is $18.2 million.

 

In 2009 YTD, we paid distributions of $1.7 million to equity holders of seven of our majority-owned company restaurants.  Currently, our intent is to retain our future earnings, if any, primarily to finance the future development and operation of our business, including the repayment of indebtedness and possible stock repurchases.

 

We have a $250.0 million five-year revolving credit facility with a syndicate of commercial lenders led by Bank of America, N.A., Banc of America Securities LLC and National City Bank which, in December 2008, was acquired by PNC Bank.  The facility expires on May 31, 2012.  The terms of the facility require us to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to 0.875%, depending on our leverage ratio, or the Base Rate, which is the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.50%.  We are also required to pay a commitment fee of 0.10% to 0.175% per year on any unused portion of the facility, depending on our leverage ratio.  The weighted-average interest rate for the revolver at September 29, 2009 and December 30, 2008 was 2.07% and 2.73%, respectively.  The lenders’ obligation to extend credit under the facility depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The credit facility permits us to incur additional secured or unsecured indebtedness outside the facility, except for the incurrence of secured indebtedness that in the aggregate exceeds 20% of our consolidated tangible net worth or circumstances where the incurrence of secured or unsecured indebtedness would prevent us from complying with our financial covenants.  We were in compliance with all covenants as of September 29, 2009.

 

At September 29, 2009, we had $124.0 million of outstanding borrowings under our credit facility and $122.0 million of availability net of $4.0 million of outstanding letters of credit.  In addition, we had various other notes payable totaling $2.1 million with interest rates ranging from 10.46% to 10.80%.  Each of these notes related to the financing of specific restaurants. Our total weighted-average effective interest rate at September 29, 2009 was 2.21%.

 

On October 22, 2008, we entered into an interest rate swap, starting on November 7, 2008, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate credit facility.  We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixed rate of 3.83% on the $25.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on November 7, 2015, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount. Our counterparty in this interest rate swap is J.P. Morgan Chase, N.A.

 

On January 7, 2009, we entered into another interest rate swap, starting on February 7, 2009, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate credit facility.  We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixed rate of 2.34% on the $25.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on January 7, 2016, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.  Our counterparty in this interest rate swap is J.P. Morgan Chase, N.A.

 

Contractual Obligations

 

The following table summarizes the amount of payments due under specified contractual obligations as of September 29, 2009:

 

 

 

Payments Due by Period