Summary Details for Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Average Exercise
|
|
Remaining Contractual
|
|
Aggregate
|
|
|
|
Shares
|
|
Price
|
|
Term (years)
|
|
Intrinsic Value
|
|
Outstanding at December 29, 2015
|
|
328,498
|
|
$
|
13.10
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Cancelled/Expired
|
|
(1,694)
|
|
|
14.60
|
|
|
|
|
|
|
Exercised
|
|
(175,428)
|
|
|
12.38
|
|
|
|
|
|
|
Outstanding at September 27, 2016
|
|
151,376
|
|
$
|
13.92
|
|
0.7
|
|
$
|
4,103
|
|
Exercisable at September 27, 2016
|
|
151,376
|
|
$
|
13.92
|
|
0.7
|
|
$
|
4,103
|
|
No stock options vested during 39 weeks ended September 27, 2016 or September 29, 2015. For the 39 weeks ended September 27, 2016 and September 29, 2015, the total intrinsic value of options exercised was $5.3 million and $5.9 million, respectively.
For the 39 weeks ended September 27, 2016 and September 29, 2015, cash received before tax withholdings from options exercised was $2.2 million and $4.2 million, respectively. The excess tax benefit realized from deductions associated with options exercised for the 39 weeks ended September 27, 2016 and September 29, 2015 was $1.5 million and $1.6 million, respectively.
(3) Long-term Debt and Obligation Under Capital Lease
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 27,
|
|
December 29,
|
|
|
|
2016
|
|
2015
|
|
Installment loan, due 2020
|
|
$
|
587
|
|
$
|
694
|
|
Obligation under capital lease
|
|
|
2,000
|
|
|
—
|
|
Revolver
|
|
|
50,000
|
|
|
25,000
|
|
|
|
|
52,587
|
|
|
25,694
|
|
Less current maturities
|
|
|
163
|
|
|
144
|
|
|
|
$
|
52,424
|
|
$
|
25,550
|
|
The interest rate for our installment loan outstanding at both September 27, 2016 and December 29, 2015 was 10.46%. The debt is secured by certain land and building assets and is subject to certain prepayment penalties.
On November 1, 2013, we entered into Omnibus Amendment No. 1 and Consent to Credit Agreement and Guaranty with respect to our revolving credit facility dated as of August 12, 2011 with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo, N.A. The amended revolving credit facility, which has a maturity date of November 1, 2018, remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million. The amendment provides us with the option to increase the revolving credit facility by $200.0 million, up to $400.0 million, subject to certain limitations.
The terms of the amended revolving credit facility require us to pay interest on outstanding borrowings at the 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 0.125% to 0.30% per year on any unused portion of the amended revolving credit facility, depending on our leverage ratio. The weighted-average interest rate for the amended revolving credit facility at September 27, 2016 and December 29, 2015 was 1.39% and 3.22%, respectively, including the impact of an interest rate swap which expired on January 7, 2016. At September 27, 2016, we had $50.0 million outstanding under the revolving credit facility and $143.4 million of availability, net of $6.6 million of outstanding letters of credit.
Deferred Taxes
(Accounting Standards Update 2015-17, "ASU 2015-17")
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016 (our 2017 fiscal year), including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2015-17 may be applied either prospectively or retrospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial position, results of operations or cash flows.
Leases
(Accounting Standards Update 2016-02, "ASU 2016-02")
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (our 2019 fiscal year). Early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows and we have not determined the effect of the amended guidance on our ongoing financial reporting.
Share-Based Compensation
(Accounting Standards Update 2016-09, "ASU 2016-09")
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which is intended to simplify several aspects of the accounting for share-based payment transactions. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 (our 2017 fiscal year) and interim periods within those annual periods. Early adoption is permitted. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows as well as the method of adoption.
Financial Instruments
(Accounting Standards Update 2016-13, "ASU 2016-13")
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which requires measurement and recognition of expected versus incurred losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 (our 2020 fiscal year), with early adoption permitted for annual periods beginning after December 15, 2018. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.
Statement of Cash Flows
(Accounting Standards Update 2016-15, "ASU 2016-15")
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 (our 2018 fiscal year) and interim periods within those annual periods. Early adoption is permitted. We do not expect the adoption of this guidance to have a material 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 September 27, 2016 and December 29, 2015 was approximately $161.2 million and $129.4 million, respectively.
Effective December 31, 2013, we sold two restaurants, which operated under the name Aspen Creek, located in Irving, Texas and Louisville, Kentucky. We assigned the leases associated with these restaurants to the acquirer, but remain contingently liable under the terms of the leases if the acquirer defaults. We are contingently liable for the initial terms of the leases and any optional renewal periods. The Irving lease has an initial term that expires December 2019, along with three five-year renewals. The Louisville lease has an initial term that expires November 2023, along with three five-year renewals. The assignment of the Louisville lease releases us from liability after the initial lease term expiration contingent upon certain conditions being met by the acquirer.
We entered into real estate lease agreements for five restaurant locations, listed in the table below, 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 the lease.
|
|
|
|
|
|
|
|
Lease
Assignment Date
|
|
Current Lease
Term Expiration
|
|
Everett, Massachusetts(1)
|
|
September 2002
|
|
February 2018
|
|
Longmont, Colorado
|
|
October 2003
|
|
May 2019
|
|
Montgomeryville, Pennsylvania
|
|
October 2004
|
|
June 2021
|
|
Fargo, North Dakota(1)
|
|
February 2006
|
|
July 2021
|
|
Logan, Utah
|
|
January 2009
|
|
August 2019
|
|
|
(1)
|
|
As discussed in note 8, these restaurants are owned, in whole or part, by certain officers, directors and 5% shareholders of the Company.
|
We are contingently liable for the initial terms of the leases and any optional renewal periods. All of the leases have three optional five-year renewals.
As of September 27, 2016 and December 29, 2015, we are contingently liable for $16.6 million and $17.2 million, respectively, for the seven leases discussed above. These amounts represent the maximum potential liability of future payments under the guarantees. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of September 27, 2016 and December 29, 2015 as the likelihood of default was deemed to be less than probable and the fair value of the guarantees is not considered significant.
During the 13 and 39 weeks ended September 27, 2016, we bought most of our beef from three 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, higher costs to secure adequate supplies 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 and Texas Roadhouse Management Corp. in the United States District Court, District of Massachusetts, 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 trial is scheduled for January 2017. We deny liability and are vigorously defending this case; however, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time. We cannot estimate the amount or range of loss, if any, associated with this matter.
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 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 29, 2015, in Part II, Item 1A in this Form 10-Q and disclosures in our other Securities and Exchange Commission (“SEC”) filings discuss 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, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman and chief executive officer ("CEO"), W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse restaurant in Clarksville, Indiana. Since then, we have grown to 507 restaurants in 49 states and five foreign countries. Our mission statement is "Legendary Food, Legendary Service
®
." Our operating strategy is designed to position each of our restaurants as the local hometown favorite for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of September 27, 2016, our 507 restaurants included:
|
·
|
|
422 "company restaurants," of which 406 were wholly-owned and 16 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. Of the 422 restaurants we owned and operated as of September 27, 2016, we operated 408 as Texas Roadhouse restaurants and operated 12 as Bubba’s 33 restaurants. In addition, we operated two restaurants outside of the casual dining segment.
|
|
·
|
|
85 "franchise restaurants," 24 of which we have a 5.0% to 10.0% ownership interest. The income derived from our minority interests in these 24 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 24 franchise restaurants, as well as six additional franchise restaurants in which we have no ownership interest. All of the franchise restaurants operated as Texas Roadhouse restaurants.
|
We have contractual arrangements which grant us the right to acquire at pre-determined formulas the remaining equity interests in 14 of the 16 majority-owned company restaurants and 69 of the 85 franchise restaurants.
Throughout this report, we use the term "restaurants" to include Texas Roadhouse and Bubba’s 33, unless otherwise noted.
Presentation of Financial and Operating Data
Throughout this report, the 13 weeks ended September 27, 2016 and September 29, 2015 are referred to as Q3 2016 and Q3 2015, respectively. The 39 weeks ended September 27, 2016 and September 29, 2015 are referred to as 2016 YTD and 2015 YTD, respectively.
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 and Bubba’s 33 restaurants in existing markets and in new domestic and international markets. Domestically, we will remain focused primarily on markets where we believe a significant demand for our restaurants exists because of population size, income levels and the presence of shopping and entertainment centers and a significant employment base. 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.
In 2016 YTD, we opened 21 company-owned restaurants, including five Bubba’s 33 restaurants. Additionally, in 2016 YTD, our franchise partners opened two international and one domestic franchise restaurant. We currently plan to open approximately 30 company-owned restaurants in 2016 including as many as nine Bubba’s 33 restaurants. In addition, we anticipate that our existing franchise partners will open approximately four, primarily international, Texas Roadhouse restaurants during 2016.
Our average capital investment for Texas Roadhouse restaurants opened during 2015, including pre‑opening expenses and a capitalized rent factor, was $4.7 million, while the average capital investment, including pre-opening costs, for the four Bubba’s 33 restaurants opened during the year was $6.0 million. We expect our average capital investment for Texas Roadhouse and Bubba’s 33 restaurants opening in 2016 to be approximately $5.0 million and $6.4 million, respectively. The expected increases in our average capital investment for Texas Roadhouse and Bubba’s 33 restaurants are primarily due to increases in development costs associated with land, including capitalized rent, and building costs. We continue to focus on driving sales and managing restaurant development costs in order to further increase our restaurant development in the future. Our capital investment (including cash and non‑cash costs) for new restaurants varies significantly depending on a number of factors including, but not limited to: the square footage, layout, scope of any required site work, type of construction labor, local permitting requirements, our ability to negotiate with landlords, cost of liquor and other licenses and hook‑up fees and geographical location.
We may, at our discretion, add franchise restaurants, domestically and/or internationally, primarily with franchisees who have demonstrated prior success with 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 development agreement in 2010 for the development of Texas Roadhouse restaurants in eight countries in the Middle East. In addition to the Middle East, we currently have signed franchise development agreements for the development of Texas Roadhouse restaurants in Taiwan, the Philippines and Mexico. We currently have nine restaurants open in three countries in the Middle East, two restaurants open in Taiwan and one in the Philippines for a total of 12 restaurants in five foreign countries. Additionally, in 2010, we entered into a joint venture agreement with a casual dining restaurant operator in China for a minority ownership in four non‑Texas Roadhouse restaurants, all of which are currently open. We continue to explore opportunities in other countries for international expansion. We may also look to acquire domestic franchise restaurants under terms favorable to the Company and our stockholders. Additionally, from time to time, we will evaluate potential mergers, acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts either domestically and/or internationally.
Maintaining and/or Improving Restaurant Level Profitability.
We plan to maintain, or possibly increase, restaurant-level profitability (restaurant margin) through a combination of increased comparable restaurant sales and operating cost management. In general, we continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on our long-term success. 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. In addition to restaurant margin, as a percentage of restaurant sales, we also focus on the growth of restaurant margin dollars 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 and attracting new guests through our continued commitment to operational standards relating to food and service quality. 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 and accounting systems, real estate, human resources, legal, marketing, international and restaurant operations, including the development of new concepts. Our goal is for general and administrative costs to increase at a slower growth rate than our revenue. Whether we are able to leverage our infrastructure in future years will depend, in part, on our new restaurant openings, our comparable restaurant sales growth rate going forward and the level of investment we continue to make in our infrastructure.
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. We have consistently grown our per share dividend each year since that time and our long-term strategy includes increasing our regular quarterly dividend amount over time. On August 18, 2016, our Board of Directors declared a quarterly dividend of $0.19 per share of common stock. The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any 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 amended revolving credit facility, other contractual restrictions and other factors deemed relevant.
In 2008, our Board of Directors approved our first stock repurchase program. From inception through September 27, 2016, we have paid $216.6 million through our authorized stock repurchase programs to repurchase 14,844,851 shares of our common stock at an average price per share of $14.59. On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. All repurchases to date have been made through open market transactions. As of September 27, 2016, $69.9 million remains authorized for stock repurchases.
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 Texas Roadhouse 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 sales for company-owned restaurants over the same period in prior years for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the current interim period excluding sales from 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-owned restaurants open for a full six months before the beginning of the period measured excluding sales from restaurants closed during the period. Growth in average unit volume 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 volume less than 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 operating costs, including 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. As such, we also focus on the growth of restaurant margin dollars 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-owned 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 other 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 agreement, paid to us by our domestic franchisees. In addition, fees paid to us by our international franchisees are included in franchise royalties and fees. The terms of the international agreements may vary significantly from our domestic agreements.
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 managing partners and market partners. These profit sharing expenses are reflected in restaurant other operating expenses. Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.
Restaurant Rent Expense.
Restaurant rent expense includes all rent, 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, local store advertising, repairs and maintenance, equipment rent, property taxes, credit card and gift card fees and general liability insurance offset by gift card breakage income. Profit sharing incentive compensation expenses earned by our restaurant 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. On average, over 70% of total pre-opening costs incurred per restaurant opening relate to the hiring and training of employees. Pre-opening costs vary by location depending on a number of factors, including the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the availability of qualified restaurant staff members; the cost of travel and lodging for different geographic areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants.
Depreciation and Amortization Expenses.
Depreciation and amortization expenses ("D&A") include 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, 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 a relocated restaurant or the sale of a closed restaurant and/or assets held for sale as well as lease costs associated with closed or relocated restaurants.
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 including advertising costs incurred less amounts remitted by franchise restaurants. 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. The realized and unrealized holding gains and losses related to the investments in our deferred compensation plan, as well as offsetting compensation expense, are also recorded in G&A.
Interest Expense, Net.
Interest expense includes the cost of our debt or financing 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 September 27, 2016 and September 29, 2015, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants. Additionally, as of September 27, 2016 and September 29, 2015, we owned a 40% equity interest in four 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 restaurants. Our consolidated subsidiaries at September 27, 2016 and September 29, 2015 included 16 majority-owned restaurants, all of which were open.
Q3 2016 Financial Highlights
Total revenue increased $43.5 million, or 9.9%, to $481.6 million in Q3 2016 compared to $438.1 million in Q3 2015 primarily due to the opening of new restaurants combined with an increase in average unit volume driven by comparable restaurant sales growth. Comparable restaurant sales increased 3.4% at company restaurants in Q3 2016.
Restaurant margin, as percentage of restaurant sales, increased 155 basis points to 18.1% in Q3 2016 compared to 16.6% in Q3 2015 primarily due to commodity deflation of approximately 4.2% driven by lower food costs, primarily beef. The benefit of commodity deflation was partially offset by higher labor costs due to higher average wage rates. See page 20 for the definition of restaurant margin.
Net income increased $5.2 million, or 25.4%, to $25.7 million in Q3 2016 compared to $20.5 million in Q3 2015 primarily due to the increase in restaurant margin partially offset by higher general and administrative and depreciation costs as well as higher income tax expense.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
|
September 27, 2016
|
|
September 29, 2015
|
|
September 27, 2016
|
|
September 29, 2015
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
477,617
|
|
99.2
|
|
433,932
|
|
99.1
|
|
1,493,531
|
|
99.2
|
|
1,340,917
|
|
99.1
|
|
Franchise royalties and fees
|
|
4,020
|
|
0.8
|
|
4,157
|
|
0.9
|
|
12,473
|
|
0.8
|
|
12,100
|
|
0.9
|
|
Total revenue
|
|
481,637
|
|
100.0
|
|
438,089
|
|
100.0
|
|
1,506,004
|
|
100.0
|
|
1,353,017
|
|
100.0
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As a percentage of restaurant sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant operating costs (excluding depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
161,886
|
|
33.9
|
|
156,643
|
|
36.1
|
|
506,565
|
|
33.9
|
|
484,700
|
|
36.1
|
|
Labor
|
|
145,301
|
|
30.4
|
|
129,198
|
|
29.8
|
|
442,861
|
|
29.7
|
|
392,686
|
|
29.3
|
|
Rent
|
|
10,266
|
|
2.1
|
|
9,325
|
|
2.1
|
|
30,477
|
|
2.0
|
|
27,442
|
|
2.0
|
|
Other operating
|
|
73,583
|
|
15.4
|
|
66,848
|
|
15.4
|
|
227,082
|
|
15.2
|
|
204,523
|
|
15.3
|
|
(As a percentage of total revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-opening
|
|
5,017
|
|
1.0
|
|
5,749
|
|
1.3
|
|
14,253
|
|
0.9
|
|
14,476
|
|
1.1
|
|
Depreciation and amortization
|
|
20,941
|
|
4.3
|
|
17,843
|
|
4.1
|
|
60,718
|
|
4.0
|
|
50,994
|
|
3.8
|
|
Impairment and closure
|
|
13
|
|
NM
|
|
—
|
|
NM
|
|
54
|
|
NM
|
|
—
|
|
NM
|
|
General and administrative
|
|
26,162
|
|
5.4
|
|
21,927
|
|
5.0
|
|
82,933
|
|
5.5
|
|
67,344
|
|
5.0
|
|
Total costs and expenses
|
|
443,169
|
|
92.0
|
|
407,533
|
|
93.0
|
|
1,364,943
|
|
90.6
|
|
1,242,165
|
|
91.8
|
|
Income from operations
|
|
38,468
|
|
8.0
|
|
30,556
|
|
7.0
|
|
141,061
|
|
9.4
|
|
110,852
|
|
8.2
|
|
Interest expense, net
|
|
288
|
|
0.1
|
|
470
|
|
0.1
|
|
902
|
|
0.1
|
|
1,480
|
|
0.1
|
|
Equity income from investments in unconsolidated affiliates
|
|
(4)
|
|
NM
|
|
(449)
|
|
(0.1)
|
|
(831)
|
|
(0.1)
|
|
(1,288)
|
|
(0.1)
|
|
Income before taxes
|
|
38,184
|
|
7.9
|
|
30,535
|
|
7.0
|
|
140,990
|
|
9.4
|
|
110,660
|
|
8.2
|
|
Provision for income taxes
|
|
11,381
|
|
2.4
|
|
9,141
|
|
2.1
|
|
42,325
|
|
2.8
|
|
33,419
|
|
2.5
|
|
Net income including noncontrolling interests
|
|
26,803
|
|
5.6
|
|
21,394
|
|
4.9
|
|
98,665
|
|
6.6
|
|
77,241
|
|
5.7
|
|
Net income attributable to noncontrolling interests
|
|
1,128
|
|
0.2
|
|
912
|
|
0.2
|
|
3,792
|
|
0.3
|
|
3,329
|
|
0.2
|
|
Net income attributable to Texas Roadhouse, Inc. and subsidiaries
|
|
25,675
|
|
5.3
|
|
20,482
|
|
4.7
|
|
94,873
|
|
6.3
|
|
73,912
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
|
September 27, 2016
|
|
September 29, 2015
|
|
September 27, 2016
|
|
September 29, 2015
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Restaurant margin ($ in thousands)
|
|
86,581
|
|
18.1
|
|
71,917
|
|
16.6
|
|
286,546
|
|
19.2
|
|
231,566
|
|
17.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant margin $/store week
|
|
15,953
|
|
|
|
14,258
|
|
|
|
17,866
|
|
|
|
15,610
|
|
|
|
See page 20 for the definition of restaurant margin.
NM — Not meaningful
Restaurant Unit Activity
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Texas Roadhouse
|
|
Bubba's 33
|
|
Jaggers
|
Balance at December 29, 2015
|
|
483
|
|
474
|
|
7
|
|
2
|
Company openings
|
|
21
|
|
16
|
|
5
|
|
—
|
Franchise openings - U.S.
|
|
1
|
|
1
|
|
—
|
|
—
|
Franchise openings - International
|
|
2
|
|
2
|
|
—
|
|
—
|
Balance at September 27, 2016
|
|
507
|
|
493
|
|
12
|
|
2
|
Q3 2016 (13 weeks) compared to Q3 2015 (13 weeks) and 2016 YTD (39 weeks) compared to 2015 YTD (39 weeks)
Restaurant Sales.
Restaurant sales increased by 10.1% in Q3 2016 as compared to Q3 2015 and 11.4% in 2016 YTD compared to 2015 YTD. The following table summarizes certain key drivers and/or attributes of restaurant sales at company restaurants for the periods presented. Company restaurant count activity is shown in the restaurant unit activity table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2016
|
|
Q3 2015
|
|
2016 YTD
|
|
2015 YTD
|
|
Company Restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in store weeks
|
|
|
7.6
|
%
|
|
7.7
|
%
|
|
8.1
|
%
|
|
7.5
|
%
|
Increase in average unit volume
|
|
|
2.8
|
%
|
|
6.6
|
%
|
|
3.7
|
%
|
|
8.1
|
%
|
Other(1)
|
|
|
(0.3)
|
%
|
|
(0.7)
|
%
|
|
(0.4)
|
%
|
|
(0.8)
|
%
|
Total increase in restaurant sales
|
|
|
10.1
|
%
|
|
13.6
|
%
|
|
11.4
|
%
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store weeks
|
|
|
5,427
|
|
|
5,044
|
|
|
16,039
|
|
|
14,834
|
|
Comparable restaurant sales growth
|
|
|
3.4
|
%
|
|
6.9
|
%
|
|
4.2
|
%
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas Roadhouse restaurants only:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurant sales growth
|
|
|
3.5
|
%
|
|
6.9
|
%
|
|
4.2
|
%
|
|
8.1
|
%
|
Average unit volume (in thousands)
|
|
$
|
1,151
|
|
$
|
1,119
|
|
$
|
3,660
|
|
$
|
3,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weekly sales by group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurants (368 and 346 units, respectively)
|
|
$
|
89,079
|
|
$
|
86,331
|
|
|
|
|
|
|
|
Average unit volume restaurants (24 and 22 units, respectively)(2)
|
|
$
|
80,390
|
|
$
|
82,555
|
|
|
|
|
|
|
|
Restaurants less than six months old (16 and 17 units, respectively)
|
|
$
|
84,539
|
|
$
|
92,082
|
|
|
|
|
|
|
|
|
(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 or acquired during the period.
|
|
(2)
|
|
Average unit volume restaurants include restaurants open a full six to 18 months before the beginning of the period measured.
|
The increases in restaurant sales for all periods presented were primarily attributable to the opening of new restaurants combined with an increase in average unit volume driven by comparable restaurant sales growth. Comparable restaurant sales growth for all periods presented was due to an increase in our guest traffic counts and an increase in our per person average check as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2016
|
|
|
Q3 2015
|
|
|
2016 YTD
|
|
|
2015 YTD
|
|
|
Guest traffic counts
|
|
|
2.0
|
%
|
|
5.2
|
%
|
|
2.7
|
%
|
|
6.3
|
%
|
|
Per person average check
|
|
|
1.4
|
%
|
|
1.7
|
%
|
|
1.5
|
%
|
|
1.8
|
%
|
|
Comparable restaurant sales growth
|
|
|
3.4
|
%
|
|
6.9
|
%
|
|
4.2
|
%
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-year sales for newer restaurants included in our average unit volume, but excluded from our comparable restaurant sales, partially offset the impact of positive comparable restaurant sales growth in Q3 2016 and 2016 YTD.
The increase in our per person average check for the periods presented was primarily driven by menu price increases taken in 2015 and 2014. In 2015 and 2014, we increased menu prices in the fourth quarter by approximately 2.0% and approximately 1.8%, respectively. These menu price increases were taken as a result of inflationary pressures, primarily commodities. In Q3 2016 and 2016 YTD, average guest check did not increase in line with the menu price increase implemented as some guests are purchasing fewer alcoholic and non-alcoholic beverages and/or shifting to lower menu price items. We currently plan to take an additional price increase of approximately 1.0% in late November 2016.
In 2016, we plan to open approximately 30 company restaurants including as many as nine Bubba’s 33 restaurants. We opened 21 company restaurants in 2016 YTD including 16 Texas Roadhouse restaurants and five Bubba’s 33 restaurants. We have begun construction for all of our expected 2016 openings. Additionally, we currently plan to open approximately 30 company restaurants in 2017, including seven to eight Bubba’s 33 restaurants.
Franchise Royalties and Fees.
Franchise royalties and fees decreased by $0.1 million, or by 3.3%, in Q3 2016 from Q3 2015 and increased by $0.4 million, or by 3.1% in 2016 YTD from 2015 YTD. The decrease in Q3 2016 was primarily attributable to lower franchise royalties associated with our international restaurants in Q3 2016 compared to Q3 2015 due to the lapping of a favorable adjustment recorded in the prior year quarter. In 2016 YTD, the increase was primarily attributable to the opening of new franchise restaurants and an increase in average unit volume. Franchise comparable restaurant sales increased 1.9% in Q3 2016 which included an increase in domestic franchise comparable restaurant sales of 3.3%. For 2016 YTD, franchise comparable restaurant sales increased 2.5% which included an increase in domestic franchise comparable restaurant sales of 3.9%. Franchise restaurant count activity is shown in the restaurant unit activity table above. In 2016, we anticipate our franchise partners will open approximately four Texas Roadhouse restaurants, primarily international, three of which opened in 2016 YTD. Additionally, we currently anticipate our franchise partners will open as many as seven Texas Roadhouse restaurants, primarily international, in 2017.
Restaurant Cost of Sales.
Restaurant cost of sales, as a percentage of restaurant sales, decreased to 33.9% in Q3 2016 and 2016 YTD from 36.1% in both Q3 2015 and 2015 YTD. These decreases were primarily attributable to commodity deflation and menu pricing actions, along with the benefit of operating efficiencies associated with process improvements at the restaurant level. Commodity deflation of approximately 4.2% in Q3 2016 and 4.1% in 2016 YTD was driven by lower food costs, primarily beef. Recent menu pricing actions are summarized in our discussion of restaurant sales above.
For the remainder of 2016, we have fixed price contracts for approximately 75% of our overall food costs with the remainder subject to fluctuating market prices. We expect approximately 3.5% food cost deflation in 2016.
For 2017, we have fixed price contracts for approximately 50% of our overall food costs with the remainder subject to fluctuating market prices. We expect low single digit commodity cost deflation in 2017.
Restaurant Labor Expenses.
Restaurant labor expenses, as a percentage of restaurant sales, increased to 30.4% in Q3 2016 compared to 29.8% in Q3 2015 and increased to 29.7% in 2016 YTD compared to 29.3% in 2015 YTD. These increases were primarily attributable to higher average wage rates partially offset by the benefit from the increase in average unit volume. The increase in 2016 YTD was also partially offset by lower payroll tax expense.
For the remainder of 2016, we expect mid-single digit labor inflation due to increases in minimum and tip wage rates as well as regulatory changes. In 2016, the Department of Labor published changes related to the Fair Labor Standards Act ("FLSA") which resulted in changes to the threshold for overtime pay which become effective on December 1, 2016. These increases in costs may or may not be offset by additional menu price adjustments and/or guest traffic growth.
Restaurant Rent Expense.
Restaurant rent expense, as a percentage of restaurant sales, remained unchanged at 2.1% in Q3 2016 and Q3 2015 and at 2.0% in 2016 YTD and 2015 YTD. For both periods, the benefit from an increase in
average unit volume was offset by an increase in rent expense, as a percentage of restaurant sales, related to newer restaurants.
Restaurant Other Operating Expenses.
Restaurant other operating expenses, as a percentage of restaurant sales, remained flat at 15.4% in Q3 2016 compared to Q3 2015 and decreased to 15.2% in 2016 YTD from 15.3% in 2015 YTD. In Q3 2016, an increase in average unit volume and lower costs associated with remodels and general liability self-insurance was offset by higher third party gift card fees and higher bonus expense. The decrease in 2016 YTD was primarily attributable to an increase in average unit volume and lower costs associated with utilities and general liability self-insurance, partially offset by higher third party gift card fees and higher bonus expense.
In Q3 2016, lower general liability self-insurance was driven by changes in our claims development history included in our quarterly actuarial reserve estimate. For all periods presented, higher third party gift card fees were primarily due to the continued expansion of our third-party gift card program while improved restaurant margins led to higher bonus expense. In 2016 YTD, utility costs were lower primarily due to lower electricity and natural gas rates.
Restaurant Pre-opening Expenses.
Pre-opening expenses decreased to $5.0 million in Q3 2016 from $5.7 million in Q3 2015 and decreased to $14.3 million in 2016 YTD compared to $14.5 million in 2015 YTD. The decreases were primarily due to the number of restaurants opened during each period compared to the prior year period. In Q3 2016, we opened seven restaurants compared to ten restaurants in Q3 2015, while we opened 21 restaurants in 2016 YTD compared to 22 restaurants in 2015 YTD.
Overall, we plan to open approximately 30 company-owned restaurants in 2016 compared to 29 company-owned restaurants in 2015. Pre-opening costs will fluctuate from quarter to quarter based on the specific pre-opening costs incurred for each restaurant, the number and timing of restaurant openings and the number and timing of restaurant managers hired.
Depreciation and Amortization Expense.
D&A, as a percentage of total revenue, increased to 4.3% in Q3 2016 compared to 4.1% in Q3 2015 and increased to 4.0% in 2016 YTD compared to 3.8% in 2015 YTD. This increase was primarily due to increased investment in short-lived assets, such as equipment, and higher depreciation, as a percentage of revenue, at new restaurants, partially offset by an increase in average unit volume.
In 2016, we expect D&A, as a percentage of revenue, to continue to be higher than the prior year due to an increase in our capitalized costs related to restaurants opened in 2015 and 2016, along with an increase in the level of reinvestment in our existing restaurants.
General and Administrative Expenses.
G&A, as a percentage of total revenue, increased to 5.4% in Q3 2016 compared to 5.0% in Q3 2015 and increased to 5.5% in 2016 YTD compared to 5.0% in 2015 YTD. In Q3 2016, the increase was driven by an additional charge of $1.2 million ($0.8 million after-tax) related to the settlement of a previously disclosed legal matter along with higher costs associated with incentive and share-based compensation expense, partially offset by an increase in average unit volume. The increase in 2016 YTD was primarily due to a pre-tax charge of $6.7 million ($4.1 million after-tax) related to the settlement of a legal matter, along with higher costs associated with incentive and shared-based compensation expense and higher costs associated with our managing partner conference, partially offset by an increase in average unit volume. The $6.7 million charge had a $0.06 impact on diluted earnings per share in 2016 YTD. See note 7 for further discussion of this charge.
Interest Expense, Net.
Interest expense decreased to $0.3 million in Q3 2016 compared to $0.5 million in Q3 2015 and decreased to $0.9 million in 2016 YTD compared to $1.5 million in 2015 YTD. These decreases were primarily due to the expiration of our interest rate swaps.
Equity Income from Investments in Unconsolidated Affiliates.
Equity income from unconsolidated affiliates decreased by approximately $0.5 million in Q3 2016 and 2016 YTD compared to Q3 2015 and 2015 YTD. Equity income earned from our unconsolidated affiliates of approximately $0.4 million in Q3 2016 was offset by a reduction in income of approximately $0.4 million related to our investment in four non-Texas Roadhouse restaurants.
Income Tax Expense.
Our effective tax rate remained relatively flat at 29.8% in Q3 2016 compared to 29.9% in Q3 2015 and decreased to 30.0% in 2016 YTD compared to 30.2% in 2015 YTD. We expect the tax rate to be approximately 30.0% for fiscal 2016. For 2017, we expect the rate to be approximately 30.0% to 31.0%.
Liquidity and Capital Resources
The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
|
September 27, 2016
|
|
September 29, 2015
|
|
Net cash provided by operating activities
|
|
$
|
159,782
|
|
$
|
131,508
|
|
Net cash used in investing activities
|
|
|
(113,219)
|
|
|
(124,828)
|
|
Net cash used in financing activities
|
|
|
(24,184)
|
|
|
(20,186)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
22,379
|
|
$
|
(13,506)
|
|
Net cash provided by operating activities was $159.8 million in 2016 YTD compared to $131.5 million in 2015 YTD. This increase was primarily due to an increase in net income and non-cash items such as depreciation and amortization expense and deferred income taxes partially offset by a decrease in working capital. The decrease in working capital was primarily due to a decrease in cash flows related to a change in the payment timing of accrued wages and deferred revenue related to gift cards partially offset by an increase in cash flows related to accounts receivable. The increase in cash flow from operations was primarily driven by an increase in comparable restaurant sales at existing restaurants, the continued opening of new restaurants and lower commodity inflation, primarily beef.
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 $113.2 million in 2016 YTD compared to $124.8 million in 2015 YTD. The decrease was primarily due to decreased spending related to new restaurant openings in future years. In addition, increased development costs in 2016 more than offset the decrease in capital spending as a result of opening 21 restaurants in 2016 YTD compared to 22 restaurants in 2015 YTD.
We require capital principally for the development of new company restaurants and the refurbishment of existing restaurants. We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land where it is cost effective. As of September 27, 2016, we had developed 136 of the 422 company restaurants 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:
|
|
|
|
|
|
|
|
|
|
2016 YTD
|
|
2015 YTD
|
|
New company restaurants
|
|
$
|
75,231
|
|
$
|
85,555
|
|
Refurbishment of existing restaurants(1)
|
|
|
37,988
|
|
|
39,545
|
|
Total capital expenditures
|
|
$
|
113,219
|
|
$
|
125,100
|
|
|
|
|
|
|
|
|
|
Restaurant-related repairs and maintenance expense(2)
|
|
$
|
16,501
|
|
$
|
15,349
|
|
|
(1)
|
|
Includes minimal capital expenditures related to the support center office.
|
|
(2)
|
|
These amounts were recorded as an expense 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 2016, we expect our capital expenditures to be approximately $165.0 to $175.0 million, the majority of which will relate to planned restaurant openings, including approximately 30 restaurant openings in 2016. These amounts exclude 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 amended revolving credit facility. For 2016, we anticipate net cash provided by operating activities will exceed capital expenditures. We currently anticipate this excess will be used to pay dividends, as approved by our Board of Directors, repurchase common stock, and/or repay borrowings under our amended revolving credit facility.
Net cash used in financing activities was $24.2 million in 2016 YTD compared to $20.2 million in 2015 YTD. This increase was primarily due to higher dividend payments and lower proceeds from stock option exercises in 2016 YTD partially offset by an increase in borrowings on our amended revolving credit facility.
On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. 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 an evaluation of our stock price, market conditions and other corporate considerations. During 2016 YTD, we paid $4.1 million to repurchase 114,700 shares of our common stock, and we had approximately $69.9 million remaining under our authorized stock repurchase program as of September 27, 2016.
On August 18, 2016, our Board of Directors authorized the payment of a cash dividend of $0.19 per share of common stock. The payment of this dividend totaling $13.4 million was distributed on September 30, 2016 to shareholders of record at the close of business on September 14, 2016. The declared dividends are included as a liability in our unaudited condensed consolidated balance sheet as of September 27, 2016.
We paid distributions of $3.5 million and $3.2 million to equity holders of 16 of our majority-owned company restaurants in 2016 YTD and 2015 YTD, respectively.
On November 1, 2013, we entered into Omnibus Amendment No. 1 and Consent to Credit Agreement and Guaranty with respect to our revolving credit facility dated as of August 12, 2011 with a syndicate of commercial lenders led by JP Morgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo, N.A. The amended revolving credit facility, which has a maturity date of November 1, 2018, remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million. The amendment provides us with the option to increase the revolving credit facility by $200.0 million, up to $400.0 million, subject to certain limitations.
The terms of the amended revolving credit facility require us to pay interest on outstanding borrowings at the 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 0.125% to 0.30% per year on any unused portion of the amended revolving credit facility, depending on our leverage ratio. The weighted‑average interest rate for the amended revolving credit facility at September 27, 2016 was 1.39%. The weighted-average interest rate for the amended revolving credit facility at December 29, 2015 was 3.22%, including the impact of the interest rate swap. At September 27, 2016, we had $50.0 million outstanding under the revolving credit facility and $143.4 million of availability, net of $6.6 million of outstanding letters of credit.
The lenders’ obligation to extend credit under the amended 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 amended 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 15% 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 financial covenants as of September 27, 2016.
At September 27, 2016, in addition to the amounts outstanding on our amended revolving credit facility, we had one other note payable totaling $0.6 million with a fixed interest rate of 10.46%, which relates to the financing of a specific restaurant and is subject to certain prepayment penalties. Our total weighted-average effective interest rate at September 27, 2016 was 1.50%.
Contractual Obligations
The following table summarizes the amount of payments due under specified contractual obligations as of September 27, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
5 years
|
|
Long-term debt obligations
|
|
$
|
52,587
|
|
$
|
163
|
|
|
50,382
|
|
|
94
|
|
$
|
1,948
|
|
Interest(1)
|
|
|
7,374
|
|
|
975
|
|
|
1,256
|
|
|
509
|
|
|
4,634
|
|
Operating lease obligations
|
|
|
751,649
|
|
|
40,320
|
|
|
81,371
|
|
|
79,628
|
|
|
550,330
|
|
Capital obligations
|
|
|
161,151
|
|
|
161,151
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual obligations(2)
|
|
$
|
972,761
|
|
$
|
202,609
|
|
$
|
133,009
|
|
$
|
80,231
|
|
$
|
556,912
|
|
|
(1)
|
|
Uses interest rates as of September 27, 2016 for our variable rate debt. We assumed $50.0 million remains outstanding on the amended revolving credit facility until the expiration date. We calculated interest rate payments using the weighted average interest rate of 1.39%, which was the interest rate associated with our amended revolving credit facility at September 27, 2016. We assumed a constant rate until maturity for our fixed rate debt.
|
|
(2)
|
|
Unrecognized tax benefits under Accounting Standards Codification 740 are immaterial and, therefore, are excluded from this amount.
|
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 a discussion 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
See note 7 to the condensed consolidated financial statements.
Recently Issued Accounting Standards
See note 6 to the condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS
K
We are exposed to market risk from changes in interest rates on variable rate debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding bank debt. The terms of the amended 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%. At September 27, 2016, we had $50.0 million outstanding under the amended
revolving credit facility, which bears interest at approximately 87.5 to 187.5 basis points (depending on our leverage ratios) over LIBOR. The interest rate on our amended revolving credit facility at September 27, 2016 was 1.39%. We had one other note payable totaling $0.6 million with a fixed interest rate of 10.46%. Should interest rates based on this variable rate borrowing increase by one percentage point, our estimated annual interest expense would increase by $0.5 million.
In an effort to secure high quality, low cost ingredients used in the products sold in our restaurants, we employ various purchasing and pricing contract techniques. When purchasing certain types of commodities, we may be subject to prevailing market conditions resulting in unpredictable price volatility. For certain commodities, we may also enter into contracts for terms of one year or less that are either fixed price agreements or fixed volume agreements where the price is negotiated 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 three vendors. If these vendors were unable to fulfill their obligations under their contracts, we may encounter supply shortages, higher costs to secure adequate supplies and a possible loss of sales, any of which would harm our business.
ITEM 4. CONTROLS AND PROCEDURE
S
Evaluation of disclosure controls and procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to, and as defined in, Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of our management, including the Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 27, 2016.
Changes in internal control
During the quarter ended September 27, 2016, the Company implemented a new general ledger and accounting system to support the majority of our accounting activities and enhance business information. As a result, changes to processes and procedures occurred that affected the Company’s internal control over financial reporting. While management believes the Company’s internal control over financial reporting for affected processes and procedures are effective, management will continue to evaluate and monitor these changes and assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year.
Except for the changes noted above, there were no other changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 27, 2016 that materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.