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 June 25, 2013

 

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   x  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 x

 

Accelerated filer o

 

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 70,280,373 on July 24, 2013.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

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

3

Condensed Consolidated Balance Sheets — June 25, 2013 and December 25, 2012

3

Condensed Consolidated Statements of Income and Comprehensive Income — For the 13 and 26 Weeks Ended June 25, 2013 and June 26, 2012

4

Condensed Consolidated Statement of Stockholders’ Equity — For the 26 Weeks Ended June 25, 2013

5

Condensed Consolidated Statements of Cash Flows — For the 26 Weeks Ended June 25, 2013 and June 26, 2012

6

Notes to Condensed Consolidated Financial Statements

7

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

15

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

26

Item 4 — Controls and Procedures

27

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1 — Legal Proceedings

28

Item 1A — Risk Factors

28

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

29

Item 3 — Defaults Upon Senior Securities

29

Item 4 — Mine Safety Disclosures

29

Item 5 — Other Information

29

Item 6 — Exhibits

29

 

 

Signatures

30

 

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)

 

 

 

June 25, 2013

 

December 25, 2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

100,117

 

$

81,746

 

Receivables, net of allowance for doubtful accounts of $20 at June 25, 2013 and $22 at December 25, 2012

 

12,077

 

16,416

 

Inventories, net

 

11,182

 

10,909

 

Prepaid income taxes

 

 

3,374

 

Prepaid expenses

 

6,627

 

7,191

 

Deferred tax assets

 

3,467

 

2,836

 

Total current assets

 

133,470

 

122,472

 

Property and equipment, net of accumulated depreciation of $286,912 at June 25, 2013 and $269,052 at December 25, 2012

 

542,211

 

531,654

 

Goodwill

 

113,454

 

113,435

 

Intangible assets, net

 

8,283

 

9,264

 

Other assets

 

15,983

 

14,429

 

Total assets

 

$

813,401

 

$

791,254

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

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

 

$

317

 

$

338

 

Accounts payable

 

34,990

 

32,374

 

Deferred revenue — gift cards

 

28,527

 

53,041

 

Accrued wages

 

27,135

 

25,030

 

Income taxes payable

 

1,054

 

 

Accrued taxes and licenses

 

13,666

 

13,253

 

Dividends payable

 

8,427

 

13,135

 

Other accrued liabilities

 

19,188

 

21,491

 

Total current liabilities

 

133,304

 

158,662

 

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

 

51,120

 

51,264

 

Stock option and other deposits

 

4,678

 

4,718

 

Deferred rent

 

21,763

 

20,168

 

Deferred tax liabilities

 

5,715

 

6,102

 

Fair value of derivative financial instruments

 

3,138

 

4,016

 

Other liabilities

 

17,506

 

15,587

 

Total liabilities

 

237,224

 

260,517

 

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, ($0.001 par value, 100,000,000 shares authorized, 70,249,695 and 68,977,045 shares issued and outstanding at June 25, 2013 and December 25, 2012, respectively)

 

70

 

69

 

Additional paid in capital

 

215,394

 

199,967

 

Retained earnings

 

356,839

 

327,509

 

Accumulated other comprehensive loss

 

(1,923

)

(2,461

)

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

570,380

 

525,084

 

Noncontrolling interests

 

5,797

 

5,653

 

Total equity

 

576,177

 

530,737

 

Total liabilities and equity

 

$

813,401

 

$

791,254

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(in thousands, except per share data)

(unaudited)

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

June 25, 2013

 

June 26, 2012

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

348,929

 

$

317,546

 

$

705,493

 

$

639,558

 

Franchise royalties and fees

 

3,190

 

2,729

 

6,302

 

5,586

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

352,119

 

320,275

 

711,795

 

645,144

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Restaurant operating costs (excluding depreciation and amortization shown separately below):

 

 

 

 

 

 

 

 

 

Cost of sales

 

120,212

 

106,860

 

244,764

 

216,515

 

Labor

 

101,723

 

93,235

 

203,384

 

186,582

 

Rent

 

7,152

 

6,379

 

14,209

 

12,631

 

Other operating

 

54,989

 

50,555

 

110,767

 

101,784

 

Pre-opening

 

4,240

 

2,780

 

7,064

 

6,365

 

Depreciation and amortization

 

12,190

 

11,546

 

24,402

 

22,893

 

Impairment and closure

 

27

 

20

 

84

 

39

 

General and administrative

 

21,789

 

17,653

 

39,156

 

37,686

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

322,322

 

289,028

 

643,830

 

584,495

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

29,797

 

31,247

 

67,965

 

60,649

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

567

 

568

 

1,162

 

1,173

 

Equity income from investments in unconsolidated affiliates

 

(218

)

(121

)

(398

)

(162

)

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

29,448

 

30,800

 

67,201

 

59,638

 

Provision for income taxes

 

8,583

 

9,952

 

19,117

 

19,037

 

Net income including noncontrolling interests

 

$

20,865

 

$

20,848

 

$

48,084

 

$

40,601

 

Less: Net income attributable to noncontrolling interests

 

902

 

538

 

1,950

 

1,422

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

19,963

 

$

20,310

 

$

46,134

 

$

39,179

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivatives, net of tax of ($0.2) million, $0.1 million, ($0.3) million and $0.1 million, respectively

 

342

 

(65

)

538

 

(106

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

20,305

 

$

20,245

 

$

46,672

 

$

39,073

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

$

0.29

 

$

0.66

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.28

 

$

0.28

 

$

0.65

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

70,030

 

70,129

 

69,693

 

69,763

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

71,267

 

71,587

 

70,924

 

71,247

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.12

 

$

0.09

 

$

0.24

 

$

0.18

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except share data)

(unaudited)

 

 

 

Shares

 

Par
Value

 

Additional
Paid in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total Texas
Roadhouse, Inc. and
Subsidiaries

 

Noncontrolling
Interests

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 25, 2012

 

68,977,045

 

$

69

 

$

199,967

 

$

327,509

 

$

(2,461

)

$

525,084

 

$

5,653

 

$

530,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

46,134

 

 

46,134

 

1,950

 

48,084

 

Unrealized gain on derivatives, net of tax of $0.3 million

 

 

 

 

 

538

 

538

 

 

538

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(1,806

)

(1,806

)

Minority interest liquidation adjustments

 

 

 

5

 

 

 

5

 

 

5

 

Dividends declared and paid ($0.12 per share)

 

 

 

 

(8,377

)

 

(8,377

)

 

(8,377

)

Dividends declared ($0.12 per share)

 

 

 

 

 

 

 

(8,427

)

 

 

(8,427

)

 

 

(8,427

)

Shares issued under stock option plan including tax effects

 

810,690

 

 

12,649

 

 

 

12,649

 

 

12,649

 

Settlement of restricted stock units

 

685,301

 

1

 

(1

)

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(223,341

)

 

(4,197

)

 

 

(4,197

)

 

(4,197

)

Share-based compensation

 

 

 

6,971

 

 

 

6,971

 

 

6,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 25, 2013

 

70,249,695

 

$

70

 

$

215,394

 

$

356,839

 

$

(1,923

)

$

570,380

 

$

5,797

 

$

576,177

 

 

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)

 

 

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income including noncontrolling interests

 

$

48,084

 

$

40,601

 

Depreciation and amortization

 

24,402

 

22,893

 

Deferred income taxes

 

(1,358

)

(4,753

)

Loss on disposition of assets

 

1,953

 

1,683

 

Equity income from investments in unconsolidated affiliates

 

(398

)

(162

)

Distributions of income received from investments in unconsolidated affiliates

 

253

 

225

 

Provision for doubtful accounts

 

102

 

16

 

Share-based compensation expense

 

6,971

 

6,324

 

Changes in operating working capital:

 

 

 

 

 

Receivables

 

4,237

 

1,752

 

Inventories

 

(273

)

789

 

Prepaid expenses

 

564

 

1,709

 

Other assets

 

(1,404

)

(1,044

)

Accounts payable

 

2,616

 

(3,110

)

Deferred revenue — gift cards

 

(24,567

)

(22,773

)

Accrued wages

 

2,105

 

1,779

 

Excess tax benefits from share-based compensation

 

(2,098

)

(2,514

)

Prepaid income taxes and income taxes payable

 

6,526

 

8,231

 

Accrued taxes and licenses

 

413

 

(11

)

Other accrued liabilities

 

(2,225

)

4,884

 

Deferred rent

 

1,531

 

1,558

 

Other liabilities

 

1,919

 

1,461

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

69,353

 

$

59,538

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures — property and equipment

 

(35,915

)

(42,547

)

Proceeds from sale of property and equipment, including insurance proceeds

 

4

 

106

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(35,911

)

$

(42,441

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments of revolving credit facility

 

 

(10,000

)

Proceeds from noncontrolling interest contributions and other

 

 

512

 

Distributions to noncontrolling interests

 

(1,806

)

(1,523

)

Excess tax benefits from share-based compensation

 

2,098

 

2,514

 

Repayment of stock option and other deposits

 

(40

)

(48

)

Indirect repurchase of shares for minimum tax withholdings

 

(4,197

)

(2,167

)

Principal payments on long-term debt and capital lease obligations

 

(165

)

(147

)

Proceeds from exercise of stock options

 

10,551

 

8,349

 

Dividends paid to stockholders

 

(21,512

)

(11,806

)

 

 

 

 

 

 

Net cash used in financing activities

 

$

(15,071

)

$

(14,316

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

18,371

 

2,781

 

Cash and cash equivalents — beginning of period

 

81,746

 

78,777

 

Cash and cash equivalents — end of period

 

$

100,117

 

$

81,558

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Interest, net of amounts capitalized

 

$

1,194

 

$

1,269

 

Income taxes, net of refunds

 

$

13,948

 

$

15,551

 

 

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.  (“TRI”), our wholly-owned subsidiaries and subsidiaries in which we own more than 50 percent interest (collectively the “Company,” “we,” “our” and/or “us”) as of and for the 13 and 26 weeks ended June 25, 2013 and June 26, 2012.  Our wholly-owned subsidiaries include: Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse Development Corporation (“TRDC”) and Texas Roadhouse Management Corporation (“Management Corp.”).  We and our subsidiaries operate restaurants primarily under the Texas Roadhouse name. Holdings also provides supervisory and administrative services for certain other franchise Texas Roadhouse restaurants. TRDC sells franchise rights and collects the franchise royalties and fees.  Management Corp. provides management services to the Company and certain other franchise Texas Roadhouse restaurants.  All significant balances and transactions between the consolidated entities have been eliminated.

 

As of June 25, 2013 and June 26, 2012, we owned 5.0% to 10.0% equity interests in 23 and 22 franchise restaurants, respectively.  The unconsolidated restaurants are accounted for using the equity method.  While we exercise significant control over these franchise restaurants, we do not consolidate their financial position, results of operations or cash flows as it is immaterial to our consolidated financial position, results of operations and cash flows. Our investments in these unconsolidated affiliates are included in Other assets in our unaudited condensed consolidated balance sheets, and we record our percentage share of net income earned by these unconsolidated affiliates in our unaudited condensed consolidated statements of income and comprehensive income under Equity income from investments in unconsolidated affiliates.

 

We have 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 unaudited condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these unaudited 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 condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows 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 26 weeks ended June 25, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2012.

 

Certain prior year amounts have been reclassified in our unaudited condensed consolidated financial statements to conform with current year presentation.

 

Our significant interim accounting policies include the recognition of income taxes using an estimated annual effective tax rate.

 

(2)     Share-based Compensation

 

On May 16, 2013, the Company’s stockholders approved the Texas Roadhouse, Inc. 2013 Long-Term Incentive Plan (the “Plan”).  The Plan provides for the granting of incentive and non-qualified stock options to purchase shares of common stock, stock appreciation rights, and full value awards, including restricted stock, restricted stock units (“RSUs”), deferred stock units, performance stock and performance stock units.  As a result of the approval of the Plan, no future awards will be made under the Texas Roadhouse, Inc. 2004 Equity Incentive Plan.

 

Beginning in 2008, we changed the method by which we provide share-based compensation to our 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 common stock upon satisfaction of the vesting requirement.

 

7



Table of Contents

 

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

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

June 25, 2013

 

June 26, 2012

 

 

 

 

 

 

 

 

 

 

 

Labor expense

 

$

1,341

 

$

1,123

 

$

2,671

 

$

2,129

 

General and administrative expense

 

2,118

 

2,148

 

4,300

 

4,195

 

Total share-based compensation expense

 

$

3,459

 

$

3,271

 

$

6,971

 

$

6,324

 

 

Share-based compensation activity by type of grant as of June 25, 2013 and changes during the 26 weeks then ended are presented below.

 

Summary Details for 2004 Equity Incentive Plan Share Options

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-Average
Remaining Contractual
Term (years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 25, 2012

 

2,258,921

 

$

13.24

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Forfeited

 

(10,869

)

13.34

 

 

 

 

 

Exercised

 

(810,690

)

13.01

 

 

 

 

 

Outstanding at June 25, 2013

 

1,437,362

 

$

13.37

 

2.56

 

$

15,983

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 25, 2013

 

1,437,362

 

$

13.37

 

2.56

 

$

15,983

 

 

The total intrinsic value of options exercised during the 13 weeks ended June 25, 2013 and June 26, 2012 was $2.9 million and $3.2 million, respectively.  During the 26 weeks ended June 25, 2013 and June 26, 2012, the total intrinsic value of options exercised was $6.2 million and $6.6 million, respectively.  No stock options vested during the 13 or 26 week periods ended June 25, 2013.  The total grant date fair value of stock options vested for the 13 and 26 week periods ended June 26, 2012 was $0.1 million.

 

Summary Details for RSUs

 

 

 

Shares

 

Weighted-
Average
Grant Date
Fair Value

 

Weighted-Average
Remaining Contractual
Term (years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 25, 2012

 

1,803,514

 

$

15.73

 

 

 

 

 

Granted

 

272,660

 

21.13

 

 

 

 

 

Forfeited

 

(13,060

)

16.80

 

 

 

 

 

Vested

 

(685,301

)

15.88

 

 

 

 

 

Outstanding at June 25, 2013

 

1,377,813

 

$

16.71

 

8.72

 

$

33,743

 

 

As of June 25, 2013, with respect to unvested RSUs, there was $13.7 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 1.3 years.  The vesting terms of the RSUs range from 1.0 to 5.0 years.  The total intrinsic value of RSUs vested for the 13 weeks ended June 25, 2013 and June 26, 2012 was $3.3 million and $2.0 million, respectively.   For the 26 weeks ended June 25, 2013 and June 26, 2012, the total intrinsic value of RSUs vested was $13.2 million and $6.8 million, respectively.

 

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

 

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

 

 

 

June 25, 2013

 

December 25, 2012

 

Installment loans, due 2013 — 2020

 

$

1,362

 

$

1,473

 

Obligations under capital leases

 

75

 

129

 

Revolving credit facility

 

50,000

 

50,000

 

 

 

51,437

 

51,602

 

Less current maturities

 

317

 

338

 

 

 

$

51,120

 

$

51,264

 

 

The weighted-average interest rate for installment loans outstanding at both June 25, 2013 and December 25, 2012 was 10.55% and 10.56%, respectively.  The debt is secured by certain land and buildings and is subject to certain prepayment penalties.

 

On August 12, 2011, we entered into a $200.0 million five-year revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo, N.A.  This facility replaced our previous five-year revolving credit facility.   The revolving credit facility expires on August 12, 2016.  The terms of the revolving credit facility require us to pay interest on outstanding borrowings at London Interbank Offered Rate (“LIBOR”) plus a margin of 0.875% to 1.875%, depending on our leverage ratio, or the Alternate Base Rate, which is the higher of the issuing bank’s prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%.  We are also required to pay a commitment fee of 0.150% to 0.350% per year on any unused portion of the revolving credit facility, depending on our leverage ratio.  The weighted-average interest rate for the revolving credit facility at both June 25, 2013 and December 25, 2012 was 3.96%, including the impact of interest rate swaps as discussed in note 5.  At June 25, 2013, we had $50.0 million outstanding under the revolving credit facility and $145.3 million of availability, net of $4.7 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit under the revolving credit 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 revolving 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 June 25, 2013.

 

(4)     Income taxes

 

A reconciliation of the statutory federal income tax rate to our effective tax rate for the 13 and 26 weeks ended June 25, 2013 and June 26, 2012 is as follows:

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

June 25, 2013

 

June 26, 2012

 

 

 

 

 

 

 

 

 

 

 

Tax at statutory federal rate

 

35.0

%

35.0

%

35.0

%

35.0

%

State and local tax, net of federal benefit

 

3.7

 

3.8

 

3.7

 

3.8

 

FICA tip tax credit

 

(6.7

)

(5.5

)

(5.9

)

(5.6

)

Work opportunity tax credit

 

(1.6

)

(0.8

)

(2.6

)

(0.8

)

Incentive stock options

 

(0.8

)

(0.4

)

(0.7

)

(0.3

)

Nondeductible officer compensation

 

(0.1

)

1.0

 

0.3

 

1.0

 

Other

 

0.6

 

(0.2

)

(0.5

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

Total

 

30.1

%

32.9

%

29.3

%

32.7

%

 

We deduct net income attributable to noncontrolling interests from income before taxes as shown in our unaudited condensed consolidated statements of income and comprehensive income to determine the effective tax rates shown in the table above.

 

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(5)         Derivative and Hedging Activities

 

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”)We use interest rate-related derivative instruments to manage our exposure to fluctuations of interest rates.  By using these instruments, we expose ourselves, 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 us, which creates credit risk for us.  We attempt to minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.  Our counterparty in the interest rate swaps is JPMorgan Chase Bank, N.A.  Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates.  We minimize 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, 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 borrowings.  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 on the $25.0 million notional amount.

 

On January 7, 2009, we 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 our variable rate borrowings.  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 on the $25.0 million notional amount.

 

We entered into the above interest rate swaps with the objective of eliminating the variability of our interest cost that arises because of changes in the variable interest rate for the designated interest payments.  Changes in the fair value of the interest rate swaps will be reported as a component of accumulated other comprehensive income or loss (“AOCI”).  Additionally, amounts related to the yield adjustment of the hedged interest payments are subsequently reclassified into interest expense in the same period which the related interest affects earnings.  We will reclassify any gain or loss from accumulated other comprehensive income or loss, net of tax, in our unaudited condensed consolidated balance sheet to interest expense in our unaudited condensed consolidated statement of income and comprehensive income when the interest rate swap expires or at the time we choose to terminate the swap.  See note 11 for fair value discussion of these interest rate swaps.

 

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

 

 

 

Balance

 

Derivative Assets

 

Derivative Liabilities

 

 

 

Sheet

 

June 25,

 

December 25,

 

June 25,

 

December 25,

 

 

 

Location

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Contracts Designated as Hedging Instruments under ASC 815

 

 

(1)

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

$

 

$

 

$

3,138

 

$

4,016

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivative Contracts

 

 

 

$

 

$

 

$

3,138

 

$

4,016

 

 


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

 

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The following table summarizes the effect of our interest rate swaps in the unaudited condensed consolidated statements of income and comprehensive income for the 13 and 26 weeks ended June 25, 2013 and June 26, 2012:

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25,
2013

 

June 26,
2012

 

June 25,
2013

 

June 26,
2012

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in AOCI, net of tax (effective portion)

 

$

342

 

$

(65

)

$

538

 

$

(106

)

Gain (Loss) reclassified from AOCI to income (effective portion)

 

$

369

 

$

363

 

$

728

 

$

718

 

 

The loss reclassified from AOCI to income was recognized in interest expense on our unaudited condensed consolidated statements of income and comprehensive income. For each of the 13 and 26 weeks ended June 25, 2013 and June 26, 2012, we did not recognize any gain or loss due to hedge ineffectiveness related to the derivative instruments in the unaudited condensed consolidated statements of income and comprehensive income.

 

(6)         Recent Accounting Pronouncements

 

Comprehensive Income

(Accounting Standards Update 2013-02, “ASU 2013-2”)

 

In February 2013, the FASB issued ASU 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, that requires an organization to present the effects on the line items of net income of significant amounts reclassified out of AOCI, but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  ASU 2013-02 was effective for fiscal years beginning after December 15, 2012 (our 2013 fiscal year).  The adoption of this new guidance had no impact on our consolidated financial position, results of operations or cash flows.

 

(7)         Commitments and Contingencies

 

The estimated cost of completing capital project commitments at June 25, 2013 and December 25, 2012 was approximately $91.4 million and $73.2 million, respectively.

 

We 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. We have subsequently assigned the leases to the franchisees, but remain 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 9, the Everett, MA, Longmont, CO, and Fargo, ND restaurants are owned, in whole or part, by certain of our officers, directors or 5% shareholders.

 

During the 26 weeks ended June 25, 2013, we bought most of our beef from four suppliers. Although there are a limited number of beef suppliers, we believe 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. We have no material minimum purchase commitments with our vendors that extend beyond a year.

 

On September 30, 2011, the U.S. Equal Employment Opportunity Commission (“EEOC”) filed a lawsuit styled Equal Employment Opportunity Commission v. Texas Roadhouse, Inc., Texas Roadhouse Holdings LLC, Texas Roadhouse Management Corp. in the United States District Court, District of Massachusetts (“Court”), Civil Action Number 1:11-cv-11732. The complaint alleges that applicants over the age of 40 were denied employment in our restaurants in bartender, host, server and server assistant positions due to their age.  The EEOC is seeking injunctive relief, remedial actions, payment of damages to the applicants and costs.  We have filed an answer to the complaint, and the case is in discovery.  An Alternative Dispute Resolution conference set by the Court was held on July 25-26, 2013 in Boston, MA, and mediated by the magistrate judge assigned to the case.  We deny liability; however, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  We cannot estimate the possible amount or range of loss, if any, associated with this matter.

 

We are involved in various other 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 our consolidated financial position, results of operations or cash flows.

 

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(8)         Acquisitions

 

On December 25, 2012, we acquired two franchise restaurants in Illinois.  Pursuant to the terms of the acquisition agreement, we paid a purchase price of $4.2 million.  This acquisition is consistent with our long-term strategy to increase net income and earnings per share.

 

This transaction was accounted for using the purchase method as defined in ASC 805, Business Combinations (“ASC 805”). Based on a purchase price of $4.2 million, $2.8 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

 

$

64

 

Property and equipment, net

 

304

 

Goodwill

 

2,759

 

Intangible asset

 

1,342

 

Current liabilities

 

(195

)

Other liabilities

 

(64

)

 

 

 

 

Purchase Price

 

$

4,210

 

 

As a result of this acquisition, we recorded an intangible asset associated with reacquired franchise rights of $1.3 million in accordance with ASC 805.  ASC 805 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.  ASC 805 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.

 

The fair value of $1.3 million assigned to the intangible asset acquired was determined primarily using valuation methods that discount expected future cash flows to present value using estimates and assumptions determined by management.  The intangible asset has a weighted-average life of approximately 2.6 years based on the remaining term of the franchise agreements.  We recorded amortization expense relating to the intangible asset of approximately $0.3 million for the 26 weeks ended June 25, 2013.  We expect the annual expense for the next four years to be $0.6 million for 2013, $0.5 million for 2014, $0.2 million for 2015 and $0.1 million for 2016.

 

Pro forma results of operations have not been presented because the effect of the acquisition was not material to our financial position, results of operations or cash flows.

 

(9)         Related Party Transactions

 

The Longview, Texas restaurant, which was acquired by us in connection with the completion of our initial public offering, leases the land and restaurant building from an entity controlled by Steven L. Ortiz, our 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 $19,000 per month. 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 $56,000 for each of the 13 weeks ended June 25, 2013 and June 26, 2012.  For each of the 26 week periods ended June 25, 2013 and June 26, 2012, rent payments were approximately $0.1 million.

 

The Bossier City, Louisiana restaurant, of which Mr. Ortiz beneficially owns 66.0% and we own 5.0%, leases the land and restaurant building from an entity owned by Mr. Ortiz.  The lease term is 15 years and will terminate on March 31, 2020.   Rent is approximately $16,600 per month and escalates 10% each five year period during the term.  The next rent escalation is in the second quarter of 2015.  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 $50,000 for each of the 13 weeks ended June 25, 2013 and June 26, 2012.  For each of the 26 week periods ended June 25, 2013 and June 26, 2012, rent payments were approximately $0.1 million.

 

We have 15 franchise restaurants owned, in whole or part, by certain of our officers, directors or 5% shareholders as of June 25, 2013 and June 26, 2012. These entities paid us fees of approximately $0.6 million for both of the 13 weeks ended June 25, 2013 and June 26, 2012.  For both of the 26 week periods ended June 25, 2013 and June 26, 2012, these entities paid us fees of approximately $1.2 million.  As disclosed in note 7, we are contingently liable on leases which are related to three of these restaurants.

 

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(10)            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 and RSUs outstanding from our equity incentive plan as discussed in note 2.

 

The following table summarizes the options and nonvested stock that were outstanding but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect:

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

June 25, 2013

 

June 26, 2012

 

 

 

 

 

 

 

 

 

 

 

Options

 

7,387

 

291,902

 

38,445

 

295,737

 

Nonvested stock

 

 

16,333

 

 

11,644

 

 

 

 

 

 

 

 

 

 

 

Total

 

7,387

 

308,235

 

38,445

 

307,381

 

 

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

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

June 25, 2013

 

June 26, 2012

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

19,963

 

$

20,310

 

$

46,134

 

$

39,179

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

70,030

 

70,129

 

69,693

 

69,763

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

0.29

 

$

0.29

 

$

0.66

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

70,030

 

70,129

 

69,693

 

69.763

 

Dilutive effect of stock options and restricted stock

 

1,237

 

1,458

 

1,231

 

1,484

 

Shares — diluted

 

71,267

 

71,587

 

70,924

 

71,247

 

Diluted EPS

 

$

0.28

 

$

0.28

 

$

0.65

 

$

0.55

 

 

(11)            Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820 establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

 

Level 1                                Inputs based on quoted prices in active markets for identical assets.

Level 2                                Inputs other than quoted prices included within Level 1 that are observable for the assets, either directly or indirectly.

Level 3                                Inputs that are unobservable for the asset.

 

There were no transfers among levels within the fair value hierarchy during the 13 and 26 weeks ended June 25, 2013.

 

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The following table presents the fair values for our financial assets and liabilities measured on a recurring basis:

 

 

 

Fair Value Measurements

 

 

 

Level

 

June 25, 2013

 

December 25, 2012

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

2

 

$

(3,138

)

$

(4,016

)

Deferred compensation plan - assets

 

1

 

10,603

 

9,145

 

Deferred compensation plan - liabilities

 

1

 

(10,612

)

(9,160

)

 

The fair values of our interest rate swaps were determined based on industry-standard valuation models.  Such models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves.  See note 5 for discussion of our 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. We report the accounts of the rabbi trust in our unaudited 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 in the unaudited condensed consolidated statements of income and comprehensive income.

 

At June 25, 2013 and December 25, 2012, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values based on the short-term nature of these instruments. The fair value of our revolving credit facility at June 25, 2013 and December 25, 2012 approximated its carrying value since it is a variable rate credit facility (Level 2).  The fair value of our installment loans is estimated based on the current rates offered to us for instruments of similar terms and maturities. The carrying amounts and related estimated fair values for our installment loans are as follows:

 

 

 

June 25, 2013

 

December 25, 2012

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Installment loans — Level 2

 

$

1,362

 

$

1,601

 

$

1,473

 

$

1,752

 

 

(12)  Stock Repurchase Program

 

On February 16, 2012, our Board of Directors approved a stock repurchase program which authorized us to repurchase up to $100.0 million of our common stock.  This stock repurchase program has no expiration date.  All repurchases to date under our stock repurchase program have been made through open market transactions.  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.

 

We did not repurchase any shares of our common stock during the 13 and 26 week periods ended June 25, 2013 or June 26, 2012.

 

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Table of Contents

 

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

 

CAUTIONARY STATEMENT

 

This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.  The section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 25, 2012, and in our other Securities and Exchange Commission (“SEC”) filings, discusses some of the important risk factors that may affect our business, results of operations, or financial condition.  You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.  The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock.  We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

 

OVERVIEW

 

Texas Roadhouse is a growing, moderately priced, full-service restaurant chain. Our founder, chairman and chief executive officer, W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse in Clarksville, Indiana.  Since then, we have grown to 405 restaurants in 48 states and three international locations in two countries.  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 June 25, 2013, our 405 restaurants included:

 

·      330 “company restaurants,” of which 315 were wholly-owned and 15 were majority-owned.  The results of operations of company restaurants are included in our unaudited condensed consolidated statements of income and comprehensive 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 unaudited condensed consolidated statements of income and comprehensive income.

 

·      75 “franchise restaurants”, including three international restaurants.  We have a 5.0% to 10.0% ownership interest in 23 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 unaudited condensed consolidated statements of income and comprehensive 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 the remaining equity interests in 13 of the 15 majority-owned company restaurants, and 68 of the domestic franchise restaurants.

 

Presentation of Financial and Operating Data

 

Throughout this report, the 13 weeks ended June 25, 2013 and June 26, 2012 are referred to as Q2 2013 and Q2 2012, respectively.  The 26 weeks ended June 25, 2013 and June 26, 2012 are referred to as 2013 YTD and 2012 YTD, respectively.  Fiscal year 2013 will be 53 weeks in length and, as such, the fourth quarter of fiscal 2013 will be 14 weeks in length.  Fiscal year 2012 was 52 weeks in length, while the quarters for the year were 13 weeks in length.

 

Long-term Strategies to Grow Earnings Per Share and Create Shareholder Value

 

Our long-term strategies with respect to increasing net income and earnings per share, along with creating shareholder value, include the following:

 

Expanding Our Restaurant Base.   We will continue to evaluate opportunities to develop Texas Roadhouse restaurants in existing and new domestic and international markets. Domestically, 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, the presence of shopping and entertainment centers and a significant employment base.  Our ability to expand our restaurant base is influenced by many factors beyond our control and therefore we may not be able to achieve our anticipated growth.

 

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Our average capital investment for Texas Roadhouse restaurants opened during 2012, including pre-opening expenses, was $3.9 million.  This average includes 10 times the annual base rent amount for restaurants where we do not own the land.  We anticipate that our 2013 development costs will be the same as or slightly higher than our 2012 costs.  We continue to focus on driving sales and managing restaurant development costs in order to further increase our restaurant development in the future.

 

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.  In conjunction with this strategy, we signed our first international franchise agreement in April 2010 for the development of Texas Roadhouse restaurants in eight countries in the Middle East over 10 years, three of which are currently open.  Additionally, in 2010, we entered into a joint venture agreement with a casual dining restaurant operator in China for the minority ownership in four non-Texas Roadhouse restaurants, three of which are open.  We may also look to acquire domestic franchise restaurants under terms favorable to us and our shareholders.  Additionally, from time to time, we may evaluate potential mergers, acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts.  Of the 330 restaurants we owned and operated at June 25, 2013, we owned and operated 327 as Texas Roadhouse restaurants.  We opened 10 company restaurants during the first half of 2013 and plan to open approximately 18 additional company restaurants through the remainder of 2013.  During the first half of 2013, our franchise partners have opened three Texas Roadhouse restaurants, and we anticipate they will open two additional international Texas Roadhouse restaurants through the remainder of 2013.

 

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.  In general, we continue to balance the impact of inflationary pressures with our value positioning as we remain focused on the long-term success of Texas Roadhouse.  This may create a challenge in terms of maintaining and/or increasing restaurant margin, as a percentage of restaurant sales, in any given year, depending on the level of inflation we experience.  However, in addition to restaurant margin, as a percentage of restaurant sales, we also focus on restaurant margin growth per store week as a measure of restaurant level profitability.  In terms of driving higher guest traffic counts, we remain focused on encouraging repeat visits by our guests through our continued commitment to operational standards relating to our quality of food and service.  In order to attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, to focus on speed of service and to increase throughput by adding seats in certain restaurants.

 

Leveraging Our Scalable Infrastructure.   To support our growth, we continue to make investments in our 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. Our goal is for general and administrative costs to increase at a slower growth rate than our revenue.  Whether we are able to continue leveraging our infrastructure will depend, in part, on our new restaurant openings and our comparable restaurant sales growth rate going forward.

 

Returning Capital to Shareholders.  We continue to pay dividends and evaluate opportunities to return capital to our shareholders through repurchases of common stock. In 2011, our Board of Directors declared our first quarterly dividend of $0.08 per share of common stock, and we have consistently grown our per share dividend each year since that time.  Most recently, on May 16, 2013, our Board of Directors authorized the payment of a quarterly cash dividend of $0.12 per share of common stock which was paid on June 28, 2013.  The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any future decision to declare a dividend will be based on a number of factors, including, but not limited to, earnings, financial condition, applicable covenants under our revolving credit facility and other contractual restrictions, or other factors deemed relevant.

 

On February 16, 2012, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock.  Any repurchases will be made through open market transactions.  As of June 25, 2013, $70.6 million remains authorized for repurchase.  Since 2008, we have paid $145.5 million to repurchase 12.3 million shares of our common stock at an average price per share of $11.86 through our authorized stock repurchase programs.

 

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 the

 

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company restaurants in 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 current interim 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 quarterly or annual restaurant sales for company Texas Roadhouse 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 company average.

 

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

 

Restaurant Margin.  Restaurant margin represents restaurant sales less cost of sales, labor, rent and other operating costs.  Depreciation and amortization expense, substantially all of which relates to restaurant-level assets, is excluded from restaurant operating costs and is shown separately as it represents a non-cash charge for the investment in our restaurants.  Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance.  Restaurant margin is not a measurement determined in accordance with generally accepted accounting principles (“GAAP”) and should not be considered in isolation, or as an alternative, to income from operations or other similarly titled measures of other companies.  Restaurant margin, as a percentage of restaurant sales, may fluctuate based on inflationary pressures, commodity costs and wage rates.  We also focus on restaurant margin dollar growth per store week as a measure of restaurant-level profitability as it provides additional insight on operating performance.

 

Other Key Definitions

 

Restaurant Sales.   Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company restaurants.  Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the unaudited condensed consolidated statements of income and comprehensive income.

 

Franchise Royalties and Fees.   Domestic franchisees typically pay a $40,000 initial franchise fee for each new restaurant.  In addition, at each renewal period, we receive a 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 in an amount up to 4.0% of gross sales, as defined in our franchise agreements, paid to us by our domestic 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 restaurant managers. 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, except pre-opening 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 and gift card fees, gift card breakage 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 compensation and benefits, travel expenses, rent, food, beverage and other initial supplies and expenses.

 

Depreciation and Amortization Expense.   Depreciation and amortization expense (“D&A”) includes the depreciation of fixed assets and amortization of intangibles with definite lives, substantially all of which relates to restaurant-level assets.

 

Impairment and closure costs.  Impairment and closure costs include any impairment of long-lived assets, including goodwill, 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 as well as lease costs associated with closed restaurants.

 

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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 are offset against G&A.  G&A also includes share-based compensation expense related to executive officers, support center employees and area managers, including 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.   As of June 25, 2013 and June 26, 2012, we owned a 5.0% to 10.0% equity interest in 23 and 22 franchise restaurants, respectively.  Additionally, as of June 25, 2013, we owned a 40% equity interest in three non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China.  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 June 25, 2013 and June 26, 2012 included 15 and 13 majority-owned restaurants, respectively, all of which were open.

 

Managing Partners and Market Partners.  Managing partners are single unit operators who have primary responsibility for the day-to-day operations of the entire restaurant and are responsible for maintaining the standards of quality and performance we establish.  Market partners, generally, have supervisory responsibilities for up to 10 to 15 restaurants.  In addition to supervising the operations of our restaurants, they are also responsible for the hiring and development of each restaurant’s management team and assist in the new restaurant site selection process.

 

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Results of Operations

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

June 25, 2013

 

June 26, 2012

 

($ in thousands)

 

$

 

%

 

$

 

%

 

$

 

%

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

348,929

 

99.1

 

317,546

 

99.1

 

705,493

 

99.1

 

639,558

 

99.1

 

Franchise royalties and fees

 

3,190

 

0.9

 

2,729

 

0.9

 

6,302

 

0.9

 

5,586

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

352,119

 

100.0

 

320,275

 

100.0

 

711,795

 

100.0

 

645,144

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As a percentage of restaurant sales)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operating costs (excluding depreciation and amortization shown separately below):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

120,212

 

34.5

 

106,860

 

33.7

 

244,764

 

34.7

 

216,515

 

33.9

 

Labor

 

101,723

 

29.2

 

93,235

 

29.4

 

203,384

 

28.8

 

186,582

 

29.2

 

Rent

 

7,152

 

2.0

 

6,379

 

2.0

 

14,209

 

2.0

 

12,631

 

2.0

 

Other operating

 

54,989

 

15.8

 

50,555

 

15.9

 

110,767

 

15.7

 

101,784

 

15.9

 

(As a percentage of total revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening

 

4,240

 

1.2

 

2,780

 

0.9

 

7,064

 

1.0

 

6,365

 

1.0

 

Depreciation and amortization

 

12,190

 

3.5

 

11,546

 

3.6

 

24,402

 

3.4

 

22,893

 

3.5

 

Impairment and closure

 

27

 

NM

 

20

 

NM

 

84

 

NM

 

39

 

NM

 

General and administrative

 

21,789

 

6.2

 

17,653

 

5.5

 

39,156

 

5.5

 

37,686

 

5.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

322,322

 

91.5

 

289,028

 

90.2

 

643,830

 

90.5

 

584,495

 

90.6

 

Income from operations

 

29,797

 

8.5

 

31,247

 

9.8

 

67,965

 

9.5

 

60,649

 

9.4

 

Interest expense, net

 

567

 

0.2

 

568

 

0.2

 

1,162

 

0.2

 

1,173

 

0.2

 

Equity income from investments in unconsolidated affiliates

 

(218

)

NM

 

(121

)

NM

 

(398

)

0.1

 

(162

)

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

29,448

 

8.4

 

30,800

 

9.6

 

67,201

 

9.4

 

59,638

 

9.2

 

Provision for income taxes

 

8,583

 

2.4

 

9,952

 

3.1

 

19,117

 

2.7

 

19,037

 

3.0

 

Net income including noncontrolling interests

 

20,865

 

6.0

 

20,848

 

6.5

 

48,084

 

6.8

 

40,601

 

6.3

 

Net income attributable to noncontrolling interests

 

902

 

0.3

 

538

 

0.2

 

1,950

 

0.3

 

1,422

 

0.2

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

19,963

 

5.7

 

20,310

 

6.3

 

46,134

 

6.5

 

39,179

 

6.1

 

 

NM — Not meaningful

 

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Reconciliation of GAAP and Non-GAAP Information

(in thousands, except per share data)

 

In addition to the results provided in accordance with GAAP throughout this document, we have provided non-GAAP measurements which present operating results on a basis before the impact of a settlement of a legal matter.  This item is described in further detail throughout this document.

 

We used earnings before the impact of the legal settlement as a key performance measure of results of operations for purposes of evaluating performance internally. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP. Rather, we believe that the presentation of results before the impact of the legal settlement provides additional information to facilitate the comparison of past and present operations, excluding items that we do not believe were indicative of our ongoing operations in the 26 weeks ended June 26, 2012.

 

 

 

26 weeks Ended

 

 

 

June 25, 2013

 

June 26, 2012

 

 

 

$

 

$

 

 

 

 

 

 

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries, excluding settlement charge

 

46,134

 

42,241

 

Amount reserved for settlement of a legal matter, net of tax (1)

 

 

(3,062

)

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

46,134

 

39,179

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

70,924

 

71,247

 

 

 

 

 

 

 

Diluted earnings per share, excluding settlement charge

 

0.65

 

0.59

 

Impact of settlement charge on diluted earnings per share

 

 

(0.04

)

Diluted earnings per share

 

0.65

 

0.55

 

 


(1)         Amount reserved in the first quarter of 2012 for the settlement of a legal matter was $5.0 million before the statutory income tax rate.  The settlement was included in general administrative costs in our unaudited condensed consolidated statements of income and comprehensive income.

 

Restaurant Unit Activity

 

 

 

Company

 

Franchise

 

Total

 

Balance at December 25, 2012

 

320

 

72

 

392

 

Openings — Texas Roadhouse

 

9

 

3

 

12

 

Openings — Other

 

1

 

 

1

 

Acquisitions (Dispositions)

 

 

 

 

Closures

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 25, 2013

 

330

 

75

 

405

 

 

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Q2 2013 (13 weeks) Compared to Q2 2012 (13 weeks) and 2013 YTD (26 weeks) Compared to 2012 YTD (26 weeks)

 

Restaurant Sales.   Restaurant sales increased by 9.9% in Q2 2013 as compared to Q2 2012 and 10.3% in 2013 YTD compared to 2012 YTD.  This increase was primarily attributable to the opening of new restaurants and the acquisition of two franchise restaurants on December 25, 2012 combined with an increase in average unit volumes.

 

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

 

 

 

Q2 2013

 

Q2 2012

 

2013 YTD

 

2012 YTD

 

 

 

 

 

 

 

 

 

 

 

Increase in store weeks

 

6.4

%

9.8

%

7.4

%

8.9

%

Increase in average unit volumes

 

3.7

%

4.1

%

3.3

%

4.9

%

Other (1)

 

(0.2

)%

0.7

%

(0.4

)%

0.7

%

Total increase in restaurant sales

 

9.9

%

14.6

%

10.3

%

14.5

%

 

 

 

 

 

 

 

 

 

 

Store weeks

 

4,214

 

3,962

 

8,388

 

7,813

 

Comparable restaurant sales growth

 

4.5

%

4.5

%

4.1

%

5.3

%

 

 

 

 

 

 

 

 

 

 

Texas Roadhouse restaurants only:

 

 

 

 

 

 

 

 

 

Comparable restaurant sales growth

 

4.5

%

4.5

%

4.1

%

5.3

%

Average unit volume (in thousands)

 

$

1,077

 

$

1,038

 

$

2,188

 

$

2,118

 

 


(1)         Includes the impact of the year-over-year change in sales volume of all non-Texas Roadhouse restaurants, along with Texas Roadhouse restaurants open less than six months before the beginning of the period measured and, if applicable, the impact of restaurants closed during the period.

 

The increase in store weeks for the periods presented above is attributable to the opening of new restaurants and the acquisition of two franchise restaurants on December 25, 2012, partially offset by the closure of one non-Texas Roadhouse restaurant in the fourth quarter of 2012.  Company restaurant count activity is shown in the restaurant unit activity table above.

 

The increase in average unit volumes for Q2 2013 and 2013 YTD was primarily driven by positive comparable restaurant sales, partially offset by lower year-over-year sales for the newer restaurants included in our average unit volumes but excluded from comparable restaurant sales.  Comparable restaurant sales growth of 4.5% in Q2 2013 was due to a combination of an increase in our per person average check of 2.3% and an increase in guest traffic counts of 2.2%.  Comparable restaurant sales growth of 4.1% for 2013 YTD was primarily due to an increase in our per person average check of 2.6%, along with an increase in guest traffic counts of 1.4%.

 

The increase in average unit volumes for Q2 2012 and 2012 YTD was primarily driven by positive comparable restaurant sales, partially offset by lower year-over-year sales for the newer restaurants included in our average unit volumes but excluded from comparable restaurant sales.  Comparable restaurants sales of 4.5% in Q2 2012 and 5.3% in 2012 YTD were primarily due to an increase of 3.9% in our per person average check for both periods, along with an increase in guest traffic counts of 0.5% in Q2 2012 and 1.4% in 2012 YTD.

 

The increase in our per person average check for the periods presented was driven by menu price increases taken throughout 2012 and 2011.  In 2012, we increased menu prices approximately 2.2% in the first quarter and approximately 2.0% in early December.  In 2011, we increased menu prices approximately 2.5% to 3.0% with just over 1.0% during the first quarter of the year and the remaining during the third and fourth quarters of the year.  We currently do not plan to take any additional price increases until the latter part of 2013.

 

In 2013, we plan to open approximately 28 company restaurants, 10 of which opened in 2013 YTD.  We have either begun construction or have sites under contract for purchase or lease for all of the 18 remaining company restaurants.

 

Franchise Royalties and Fees.   Franchise royalties and fees increased by $0.5 million, or by 16.9%, in Q2 2013 from Q2 2012 and increased by $0.7 million or by 12.8% in 2013 YTD from 2012 YTD.  These increases were primarily attributable to an increase in average unit volumes and the opening of new franchise restaurants, partially offset by the impact of the acquisition of two franchise restaurants on December 25, 2012.  Franchise comparable restaurant sales increased 5.3% in Q2 2013 and 4.5% in 2013 YTD.  The acquired franchise restaurants generated approximately $0.1 million and $0.2 million in franchise royalties in Q2 2012 and 2012 YTD, respectively.  Franchise restaurant count activity is shown in the restaurant unit activity table above.  In 2013, we anticipate our franchise partners will open as many as five Texas Roadhouse restaurants, primarily internationally, three of which opened in 2013

YTD.

 

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Restaurant Cost of Sales.   Restaurant cost of sales, as a percentage of restaurant sales, increased to 34.5% in Q2 2013 from 33.7% in Q2 2012 and increased to 34.7% in 2013 YTD from 33.9% in 2012 YTD.  These increases were primarily attributable to commodity inflation, partially offset by the impact of menu pricing actions in 2012 and the benefit of operating efficiencies associated with process improvements at the restaurant level combined with the benefit of mix shift.  Commodity inflation of approximately 6.0% in Q2 2013 and 6.5% in 2013 YTD was driven by higher food costs, primarily beef.

 

For the remainder of 2013, we have fixed price contracts for approximately 70% of our overall food costs with the remainder subject to fluctuating market prices.  We expect commodity cost inflation of 6.5% to 7.0% in 2013.

 

Restaurant Labor Expenses.  Restaurant labor expenses, as a percentage of restaurant sales, decreased to 29.2% in Q2 2013 compared to 29.4% in Q2 2012 and decreased to 28.8% in 2013 YTD from 29.2% in 2012 YTD.  These decreases were primarily driven by an increase in average unit volumes, partially offset by higher average wage rates, along with higher workers compensation insurance costs in Q2 2013.  Our per person average check increase of 2.3% in Q2 2013 and 2.6% in 2013 YTD, combined with positive guest traffic counts, more than offset average wage rate and other labor-related inflation.  Workers compensation insurance costs were higher in Q2 2013 due to changes in our claims development history included in our quarterly actuarial reserve estimate.

 

We anticipate our labor costs will be pressured throughout the remainder of 2013 by inflation due to state-mandated increases in minimum and tip wage rates.  These increases may or may not be offset by guest traffic growth and/or possible menu price adjustments.

 

Restaurant Rent Expense.   Restaurant rent expense, as a percentage of restaurant sales, remained unchanged at 2.0% in Q2 2013 and 2013 YTD.  The impact of leasing more land and buildings than we have in the past was offset by the benefit from an increase in average unit volumes.

 

Restaurant Other Operating Expenses Restaurant other operating expenses, as a percentage of restaurant sales, decreased to 15.8% in Q2 2013 compared to 15.9% in Q2 2012 and decreased to 15.7% in 2013 YTD from 15.9% in 2012 YTD.  These decreases were primarily attributable to an increase in average unit volumes and lower supply and utility costs, partially offset by higher gift card fees.  Utility costs were lower primarily due to lower electricity costs, while lower supply costs were driven by purchasing initiatives.  Gift card fees were higher due to the redemption of gift cards related to our third-party gift card retail program which was expanded in the fourth quarter of 2012.

 

Restaurant Pre-opening Expenses.   Pre-opening expenses increased to $4.2 million in Q2 2013 from $2.8 million in Q2 2012 and increased to $7.1 million in 2013 YTD from $6.4 million in 2012 YTD.  These increases were primarily attributable to the timing of restaurant openings as we expect to open approximately 18 restaurants in the second half of 2013 compared to 10 restaurant openings in the second half of 2012.  We opened 10 restaurants in 2013 YTD compared with 15 restaurants in 2012 YTD.  Based on our increased restaurant development plans, we expect pre-opening expense to be higher in 2013.  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, decreased to 3.5% in Q2 2013 from 3.6% in Q2 2012 and decreased to 3.4% in 2013 YTD from 3.5% in 2012 YTD.  Along with increases in average unit volumes, these decreases were primarily due to lower depreciation expense, as a percentage of revenue, on older restaurants as depreciation expense on short-lived assets, such as equipment, has ended.  These decreases were partially offset by higher depreciation, as a percentage of revenue, at new restaurants.

 

General and Administrative Expenses.  G&A, as a percentage of total revenue, increased to 6.2% in Q2 2013 from 5.5% in Q2 2012 while it decreased to 5.5% in 2013 YTD from 5.8% in 2012 YTD.  The increase in Q2 2013 was primarily attributable to higher costs related to our annual managing partner conference where we celebrated our 20 year anniversary this year.  In Q2 2013 and 2013 YTD, we incurred costs of $3.9 million and $4.3 million, respectively, related to our annual managing partner conference compared to $1.6 million and $1.9 million in Q2 2012 and 2012 YTD, respectively.  The decrease in 2013 YTD is attributable to lower legal settlement charges and an increase in average unit volumes, partially offset by higher costs related to our annual managing partner conference as previously discussed.  In the first quarter of 2012, we recorded a pre-tax charge of $5.0 million ($3.1 million after-tax) related to the settlement of a previously disclosed legal matter.

 

Interest Expense, Net.   Interest expense remained flat at $0.6 million in Q2 2013 and Q2 2012 and flat at $1.2 million in 2013 YTD and 2012 YTD.

 

Income Tax Expense.   Our effective tax rate decreased to 30.1% in Q2 2013 from 32.9% in Q2 2012 and decreased to 29.3% in 2013 YTD from 32.7% in 2012 YTD.   The decreases were primarily attributable to a decrease in non-deductible officer compensation and higher federal tax credits, primarily due to the retrospective reinstatement of Work Opportunity Tax Credits (“WOTC”).

 

We expect the tax rate to be 30.0% to  30.5% for fiscal 2013 compared to 32.8% in fiscal 2012 due to higher federal tax credits, including the discrete impact of the retroactive reinstatement of WOTC, and the decrease in non-deductible officer’s compensation.

 

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Liquidity and Capital Resources

 

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

 

 

 

26 Weeks Ended

 

(in 000’s)

 

June 25, 2013

 

June 26, 2012

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

69,353

 

$

59,538

 

Net cash used in investing activities

 

(35,911

)

(42,441

)

Net cash used in financing activities

 

(15,071

)

(14,316

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

18,371

 

$

2,781

 

 

Net cash provided by operating activities was $69.4 million in 2013 YTD compared to $59.5 million in 2012 YTD.  This increase was primarily due to an increase in net income, partially offset by changes in working capital.  The change in working capital includes changes to the gift card liability as a result of gift card redemptions.  The increase in net income was driven by the continued opening of new restaurants, an increase in comparable restaurant sales at existing restaurants and the benefit from overlapping a $5.0 million ($3.1 million after-tax) charge related to the settlement of a previously disclosed legal matter which was accrued in the first quarter of 2012.

 

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 $35.9 million in 2013 YTD compared to $42.4 million in 2012 YTD.  This decrease was primarily due to the timing of restaurant openings.  We opened 10 company restaurants in 2013 YTD compared to 15 company restaurants in 2012 YTD.  We plan to open approximately 28 restaurants in 2013 as compared to 25 restaurants in 2012.

 

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 June 25, 2013, 123 of the 330 company restaurants have been developed on land which we own.

 

The following table presents a summary of capital expenditures related to the development of new restaurants and the refurbishment of existing restaurants:

 

(in 000’s)

 

2013 YTD

 

2012 YTD

 

New company restaurants

 

$

23,299

 

$

28,460

 

Refurbishment of existing restaurants (1)

 

12,616

 

14,087

 

Total capital expenditures

 

$

35,915

 

$

42,547

 

 

 

 

 

 

 

Restaurant-related repairs and maintenance expense (2)

 

$

7,229

 

$

6,960

 

 


(1) Includes minimal capital expenditures related to support center office.

(2) These amounts were recorded as an expense in the income statement as incurred.

 

Our future capital requirements will primarily depend on the number of new restaurants we open, the timing of those openings and the restaurant prototype developed in 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 2013, we expect our capital expenditures to be $100.0 to $105.0 million, the majority of which will relate to planned restaurant openings, including 28 restaurant openings in 2013.  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, if needed, funds available under our revolving credit facility.  For 2013, we anticipate net cash provided by operating activities will exceed capital expenditures, which we currently plan to use to repurchase common stock, pay dividends, as approved by our Board of Directors, and/or repay borrowings under our revolving credit facility.

 

Net cash used in financing activities was $15.1 million in 2013 YTD as compared to $14.3 million in 2012 YTD.  This increase was primarily due to an increase in dividends paid to stockholders, along with an increase in the indirect purchase of shares under our share-based compensation plan to settle tax withholding requirements, partially offset by a decrease in the payments on borrowings

under our revolving credit facility.  In the first quarter of 2013, we paid an additional dividend of $6.9 million and increased our

 

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quarterly dividend payment to $0.12 per share of common stock.  We made no payments on borrowings under our revolving credit facility in 2013 YTD compared to $10.0 million in payments in 2012 YTD.

 

On February 16, 2012, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100 million of our common stock.  This stock repurchase program has no expiration date.  All repurchases to date under our stock repurchase program have been made through open market transactions.  The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors, based on its evaluation of our stock price, market conditions and other corporate considerations.  We did not repurchase any shares of our common stock during 2013 YTD through our stock repurchase program and have $70.6 million remaining under the program as of June 25, 2013.

 

We paid cash dividends of $8.4 million in Q2 2013 related to dividends declared in February 2013.  Additionally, on May 16, 2013, our Board of Directors authorized the payment of a cash dividend of $0.12 per share of common stock.  The payment of this dividend totaling $8.4 million was distributed on June 28, 2013 to shareholders of record at the close of business on June 12, 2013.  The declared dividends are included as a liability in our unaudited condensed consolidated balance sheet as of June 25, 2013.

 

In Q2 2013, we paid distributions of $1.8 million to equity holders of 14 of our majority-owned company restaurants.  In 2012 YTD, we paid distributions of $1.5 million to equity holders of 12 of our majority-owned company restaurants.

 

On August 12, 2011, we entered into a $200.0 million five-year revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N. A., and Wells Fargo, N. A.  This facility expires on August 12, 2016.  The terms of revolving credit facility require us to pay interest on outstanding borrowings at London Interbank Offering Rate (“LIBOR”) plus a margin of 0.875% to 1.875%, depending on our leverage ratio, or the Alternate Base Rate, which is the higher of the issuing bank’s prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%.  We are also required to pay a commitment fee of 0.150% to 0.350% per year on any unused portion of our revolving credit facility, depending on our leverage ratio.  The weighted-average interest rate for our revolving credit facility was 3.96% at June 25, 2013 and December 25, 2012, including the impact of interest rate swaps discussed below.  At June 25, 2013, we had $50.0 million outstanding under the revolving credit facility and $145.3 million of availability, net of $4.7 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit under the revolving credit 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 revolving 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 June 25, 2013.

 

At June 25, 2013, in addition to the amounts outstanding on our revolving credit facility, we had various other notes payable totaling $1.4 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 June 25, 2013 was 4.13%, including the impact of interest rate swaps discussed below.

 

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 borrowings.  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 on the $25.0 million notional amount. Our counterparty in this interest rate swap is JPMorgan Chase Bank, 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 borrowings.  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 on the $25.0 million notional amount.  Our counterparty in this interest rate swap is JPMorgan Chase Bank, N.A.

 

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Contractual Obligations

 

The following table summarizes the amount of payments due under specified contractual obligations as of June 25, 2013:

 

 

 

Payments Due by Period

 

 

 

 

 

Less than

 

1-3

 

3-5

 

More than

 

 

 

Total

 

1 year

 

Years

 

Years

 

5 years

 

 

 

(in thousands )

 

Long-term debt obligations

 

$

51,362

 

$

241

 

$

497

 

$

50,319

 

$

305

 

Capital lease obligations

 

75

 

75

 

 

 

 

Interest (1)

 

7,703

 

2,115

 

4,141

 

1,420

 

27

 

Operating lease obligations

 

213,598

 

27,528

 

49,801

 

43,692

 

92,577

 

Capital obligations

 

91,382

 

91,382

 

 

 

 

Total contractual obligations

 

$

364,120

 

$

121,341

 

$

54,439

 

$

95,431

 

$

92,909

 

 


(1)         Assumes constant rate until maturity for our fixed and variable rate debt and capital lease obligations.  Uses interest rates as of June 25, 2013 for our variable rate debt.  Interest payments on our variable-rate revolving credit facility balance at June 25, 2013 are calculated based on the assumption that debt relating to the interest rate swaps covering notional amounts totaling $50.0 million remains outstanding until the expiration of the respective swap arrangements.  The interest rates used in determining interest payments to be made under the interest rate swap agreements were determined by taking the applicable fixed rate of each swap plus the 0.875 % margin, which was in effect as of June 25, 2013.

 

We have no material minimum purchase commitments with our vendors that extend beyond a year.  See note 7 to the unaudited condensed consolidated financial statements for details of contractual obligations.

 

Off-Balance Sheet Arrangements

 

Except for operating leases (primarily restaurant leases), we do not have any material off-balance sheet arrangements.

 

Guarantees

 

We entered into real estate lease agreements for franchise restaurants located in Everett, MA, Longmont, CO, Montgomeryville, PA, Fargo, ND and Logan, UT prior to our granting franchise rights for those restaurants. We have subsequently assigned the leases to the franchisees, but we remain contingently liable if a franchisee defaults under the terms of a lease. The Longmont lease expires in May 2014, the Everett lease expires in February 2018, the Montgomeryville lease expires in June 2021, the Fargo lease expires in July 2016 and the Logan lease expires in August 2019.  As the fair value of these guarantees is not considered significant, no liability has been recorded.

 

Recently Issued Accounting Standards

 

Comprehensive Income

 

(Accounting Standards Update 2013-02, “ASU 2013-2”)

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, that requires an organization to present the effects on the line items of net income of significant amounts reclassified out of AOCI, but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  ASU 2013-02 was effective for fiscal years beginning after December 15, 2012 (our 2013 fiscal year).  The adoption of this new guidance had no impact on our consolidated financial position, results of operations or cash flows.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates on debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding bank debt and dependent on the interest rate option we choose to utilize under our revolving credit facility.  Our options for the rate are LIBOR plus a margin of 0.875% to 1.875%, depending on our leverage ratio, or the Alternate Base Rate, which is the higher of the issuing bank’s prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%.  At June 25, 2013 there was $50.0 million outstanding under our revolving credit facility which bears interest at approximately 87.5 to 187.5 basis points (depending on our leverage ratios) over LIBOR.  As of June 25, 2013, our various other notes payable totaled $1.4 million and had a weighted average interest rate of 10.55%.

 

The weighted-average interest rate for our revolving credit facility was 3.96% at June 25, 2013 and December 25, 2012, including the impact of interest rate swaps discussed below.  Should interest rates based on the borrowings under our revolving credit facility increase by one percentage point, our estimated annual interest expense would not be impacted as our interest rates are fixed through our interest rate swaps.

 

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 borrowings. 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 on the $25.0 million notional amount.

 

On January 7, 2009, we entered into another interest rate swap, starting February 7, 2009, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate borrowings.  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 on the $25.0 million notional amount.

 

By using derivative instruments to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We attempt to minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.  Our counterparty in the interest rate swaps is JPMorgan Chase Bank, N.A.

 

Many of the ingredients used in the products sold in our restaurants are commodities that are subject to unpredictable price volatility. Currently, we do not utilize fixed price contracts for certain commodities such as produce and certain dairy products, therefore, we are subject to prevailing market conditions when purchasing those types of commodities. For other commodities, we employ various purchasing and pricing contract techniques in an effort to minimize volatility, including fixed price contracts for terms of generally one year or less and negotiating prices with vendors with reference to fluctuating market prices.  We currently do not use financial instruments to hedge commodity prices, but we will continue to evaluate their effectiveness. Extreme and/or long term increases in commodity prices could adversely affect our future results, especially if we are unable, primarily due to competitive reasons, to increase menu prices. Additionally, if there is a time lag between the increasing commodity prices and our ability to increase menu prices or if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected.

 

We are subject to business risk as our beef supply is highly dependent upon four vendors.  If these vendors were unable to fulfill their obligations under their contracts with us, we may encounter supply shortages and incur higher costs to secure adequate supplies, any of which would harm our business.

 

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