Part I—FINANCIAL INFORMATION
Item 1. Financial Statements
Luby’s, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
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March 15,
2017
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August 31,
2016
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(Unaudited)
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|
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ASSETS
|
|
|
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,352
|
|
|
$
|
1,339
|
|
Trade accounts and other receivables, net
|
5,389
|
|
|
5,919
|
|
Food and supply inventories
|
4,589
|
|
|
4,596
|
|
Prepaid expenses
|
3,035
|
|
|
3,147
|
|
Assets related to discontinued operations
|
—
|
|
|
1
|
|
Deferred income taxes
|
255
|
|
|
540
|
|
Total current assets
|
14,620
|
|
|
15,542
|
|
Property held for sale
|
3,929
|
|
|
5,522
|
|
Assets related to discontinued operations
|
2,830
|
|
|
3,192
|
|
Property and equipment, net
|
185,067
|
|
|
193,218
|
|
Intangible assets, net
|
20,298
|
|
|
21,074
|
|
Goodwill
|
1,068
|
|
|
1,605
|
|
Deferred income taxes
|
7,011
|
|
|
8,738
|
|
Other assets
|
3,278
|
|
|
3,334
|
|
Total assets
|
$
|
238,101
|
|
|
$
|
252,225
|
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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|
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Current Liabilities:
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|
|
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Accounts payable
|
$
|
18,311
|
|
|
$
|
17,539
|
|
Liabilities related to discontinued operations
|
387
|
|
|
412
|
|
Current portion of credit facility debt
|
2,450
|
|
|
—
|
|
Accrued expenses and other liabilities
|
26,321
|
|
|
23,752
|
|
Total current liabilities
|
47,469
|
|
|
41,703
|
|
Credit facility debt, less current portion
|
34,617
|
|
|
37,000
|
|
Liabilities related to discontinued operations
|
16
|
|
|
17
|
|
Other liabilities
|
8,141
|
|
|
7,752
|
|
Total liabilities
|
90,243
|
|
|
86,472
|
|
Commitments and Contingencies
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|
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SHAREHOLDERS’ EQUITY
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|
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Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 29,566,355 and 29,440,041, respectively; shares outstanding were 29,066,355 and 28,940,041, respectively
|
9,461
|
|
|
9,421
|
|
Paid-in capital
|
31,178
|
|
|
30,348
|
|
Retained earnings
|
111,994
|
|
|
130,759
|
|
Less cost of treasury stock, 500,000 shares
|
(4,775
|
)
|
|
(4,775
|
)
|
Total shareholders’ equity
|
147,858
|
|
|
165,753
|
|
Total liabilities and shareholders’ equity
|
$
|
238,101
|
|
|
$
|
252,225
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|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
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Quarter Ended
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Two Quarters Ended
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March 15,
2017
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March 9,
2016
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March 15,
2017
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|
March 9,
2016
|
|
(12 weeks)
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|
(12 weeks)
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|
(28 weeks)
|
|
(28 weeks)
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SALES:
|
|
|
|
|
|
|
|
Restaurant sales
|
$
|
81,064
|
|
|
$
|
86,314
|
|
|
$
|
189,147
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|
|
$
|
199,861
|
|
Culinary contract services
|
3,306
|
|
|
3,918
|
|
|
7,602
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|
|
8,833
|
|
Franchise revenue
|
1,819
|
|
|
1,700
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|
|
3,691
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|
|
3,825
|
|
Vending revenue
|
125
|
|
|
137
|
|
|
284
|
|
|
295
|
|
TOTAL SALES
|
86,314
|
|
|
92,069
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200,724
|
|
|
212,814
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COSTS AND EXPENSES:
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|
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Cost of food
|
22,583
|
|
|
24,600
|
|
|
53,433
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|
57,034
|
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Payroll and related costs
|
29,295
|
|
|
29,834
|
|
|
67,968
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|
|
69,258
|
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Other operating expenses
|
13,763
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|
|
13,736
|
|
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33,411
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|
|
32,157
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Occupancy costs
|
5,322
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|
|
5,535
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|
11,797
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|
|
12,177
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|
Opening costs
|
132
|
|
|
174
|
|
|
298
|
|
|
571
|
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Cost of culinary contract services
|
2,960
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|
3,520
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|
6,771
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|
7,942
|
|
Cost of franchise operations
|
436
|
|
|
428
|
|
|
1,016
|
|
|
1,039
|
|
Depreciation and amortization
|
4,788
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|
|
5,220
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11,338
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|
12,235
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Selling, general and administrative expenses
|
9,008
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|
|
9,843
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|
22,767
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|
|
23,086
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Provision for asset impairments and restaurant closings, net
|
5,963
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|
|
37
|
|
|
6,250
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|
37
|
|
Net loss (gain) on disposition of property and equipment
|
329
|
|
|
(556
|
)
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|
414
|
|
|
(835
|
)
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Total costs and expenses
|
94,579
|
|
|
92,371
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|
|
215,463
|
|
|
214,701
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LOSS FROM OPERATIONS
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(8,265
|
)
|
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(302
|
)
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(14,739
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)
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(1,887
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)
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Interest income
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
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Interest expense
|
(727
|
)
|
|
(495
|
)
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(1,330
|
)
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(1,191
|
)
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Other income (expense), net
|
(242
|
)
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|
29
|
|
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(139
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)
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(90
|
)
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Loss before income taxes and discontinued operations
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(9,233
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)
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(767
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)
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(16,205
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)
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(3,166
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)
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Provision (benefit) for income taxes
|
3,603
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(185
|
)
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|
2,145
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(845
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)
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Loss from continuing operations
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(12,836
|
)
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(582
|
)
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(18,350
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)
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(2,321
|
)
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Loss from discontinued operations, net of income taxes
|
(343
|
)
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(17
|
)
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(415
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)
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(89
|
)
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NET LOSS
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$
|
(13,179
|
)
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$
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(599
|
)
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|
$
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(18,765
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)
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$
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(2,410
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)
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Loss per share from continuing operations:
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Basic
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$
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(0.44
|
)
|
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$
|
(0.02
|
)
|
|
$
|
(0.62
|
)
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|
$
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(0.08
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)
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Assuming dilution
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$
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(0.44
|
)
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$
|
(0.02
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)
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$
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(0.62
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)
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|
$
|
(0.08
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)
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Loss per share from discontinued operations:
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Basic
|
$
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(0.01
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)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
Assuming dilution
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$
|
(0.01
|
)
|
|
$
|
(0.00
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)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
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Net loss per share:
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Basic
|
$
|
(0.45
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.08
|
)
|
Assuming dilution
|
$
|
(0.45
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.08
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)
|
Weighted average shares outstanding:
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Basic
|
29,522
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|
|
29,247
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|
|
29,418
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|
|
29,182
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Assuming dilution
|
29,522
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|
|
29,247
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|
29,418
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|
29,182
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The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statement of Shareholders’ Equity (unaudited)
(In thousands)
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Common Stock
|
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Total
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Issued
|
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Treasury
|
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Paid-In
|
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Retained
|
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Shareholders’
|
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Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Equity
|
Balance at August 31, 2016
|
29,440
|
|
|
$
|
9,421
|
|
|
(500
|
)
|
|
$
|
(4,775
|
)
|
|
$
|
30,348
|
|
|
$
|
130,759
|
|
|
$
|
165,753
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,765
|
)
|
|
(18,765
|
)
|
Share-based compensation expense
|
41
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
857
|
|
|
—
|
|
|
870
|
|
Common stock issued under employee benefit plans
|
3
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Common stock issued under nonemployee benefit plans
|
83
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
(26)
|
|
|
—
|
|
|
—
|
|
Balance at March 15, 2017
|
29,567
|
|
|
$
|
9,461
|
|
|
(500
|
)
|
|
$
|
(4,775
|
)
|
|
$
|
31,178
|
|
|
$
|
111,994
|
|
|
$
|
147,858
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
|
|
|
|
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Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(28 weeks)
|
|
(28 weeks)
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net loss
|
$
|
(18,765
|
)
|
|
$
|
(2,410
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Provision for asset impairments and net (gains) on property sales
|
6,664
|
|
|
(798
|
)
|
Depreciation and amortization
|
11,338
|
|
|
12,250
|
|
Amortization of debt issuance cost
|
283
|
|
|
202
|
|
Share-based compensation expense
|
870
|
|
|
803
|
|
Deferred tax provision (benefit)
|
2,399
|
|
|
(1,247
|
)
|
Cash provided by operating activities before changes in operating assets and liabilities
|
2,789
|
|
|
8,800
|
|
Changes in operating assets and liabilities:
|
|
|
|
Decrease (Increase) in trade accounts and other receivables
|
530
|
|
|
(214
|
)
|
Decrease (Increase) in food and supply inventories
|
7
|
|
|
(805
|
)
|
Decrease in prepaid expenses and other assets
|
210
|
|
|
381
|
|
Increase (Decrease) in accounts payable, accrued expenses and other liabilities
|
3,067
|
|
|
(971
|
)
|
Net cash provided by operating activities
|
6,603
|
|
|
7,191
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Proceeds from disposal of assets and property held for sale
|
1,631
|
|
|
4,167
|
|
Decrease in notes receivable
|
—
|
|
|
17
|
|
Purchases of property and equipment
|
(7,962
|
)
|
|
(10,970
|
)
|
Net cash used in investing activities
|
(6,331
|
)
|
|
(6,786
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Revolver borrowings
|
65,700
|
|
|
50,700
|
|
Revolver repayments
|
(99,700
|
)
|
|
(51,200
|
)
|
Proceeds from term loan
|
35,000
|
|
|
—
|
|
Term loan repayments
|
(613
|
)
|
|
—
|
|
Debt issuance costs
|
(646
|
)
|
|
(42
|
)
|
Proceeds received on the exercise of employee stock options
|
—
|
|
|
75
|
|
Net cash used in financing activities
|
(259
|
)
|
|
(467
|
)
|
Net increase (decrease) in cash and cash equivalents
|
13
|
|
|
(62
|
)
|
Cash and cash equivalents at beginning of period
|
1,339
|
|
|
1,501
|
|
Cash and cash equivalents at end of period
|
$
|
1,352
|
|
|
$
|
1,439
|
|
Cash paid for:
|
|
|
|
Income taxes
|
$
|
—
|
|
|
$
|
—
|
|
Interest
|
679
|
|
|
951
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Luby’s, Inc. (the “Company” or “Luby’s”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are prepared for the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended
March 15, 2017
are not necessarily indicative of the results that may be expected for the fiscal year ending
August 30, 2017
.
The Consolidated Balance Sheet dated
August 31, 2016
, included in this Quarterly Report on Form 10-Q (this “Form 10-Q”), has been derived from the audited Consolidated Financial Statements as of that date. However, this Form 10-Q does not include all of the information and footnotes required by GAAP for audited, year-end financial statements. Therefore, these financial statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended
August 31, 2016
.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. Debt issuance costs related to the Company's new 2016 Credit Agreement (defined hereafter) amounted to
$0.6 million
. The portion of the debt issuance costs associated with the Term Loan (defined hereafter) are setup as a direct deduction from the long-term debt liability. The adoption of this update did not have a material impact on our consolidated financial statements. See Item 2. Management's Discussion and Analysis in this Form-10Q for more discussion on debt issuance cost.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017–04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This guidance eliminates the requirement to determine the implied fair value of goodwill to measure an impairment of goodwill. Rather, goodwill impairment charges will be calculated as the amount by which a reporting unit's carrying amount exceeds its fair value. Adoption of the provisions in ASU 2017-04 is required for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company has adopted ASU 2017-04 effective beginning in the current period. The provisions of ASU 2017-04 did not have a material effect on the Company's financial condition, results of operations, or cash flows.
New Accounting Pronouncements - "to be Adopted"
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. We have not yet decided on a method of transition upon adoption. The Company expects the pronouncement may impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a franchise restaurant. We are further evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The update also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right–of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. 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. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We are evaluating the impact on the Company’s consolidated financial statements and have not yet selected a transition method.
In March 2016, the FASB issued ASU No. 2016–04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored–Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored–value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. We are are evaluating the impact on the Company's consolidated financial statements and do not expect the adoption to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Subsequent Events
There are no subsequent events.
Note 2. Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate; fiscal year 2016 was such a year. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically includes three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.
Note 3. Reportable Segments
The Company has
three
reportable segments: Company-owned restaurants, Culinary Contract Services (“CCS”), and Franchise Operations.
Company-owned restaurants
Company-owned restaurants consists of several brands which are aggregated into
one
reportable segment because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment, and store level profit margin are similar. The chief operating decision maker analyzes Company-owned restaurants at store level profit which is revenue less cost of food, payroll and related costs, other operating expenses, and occupancy costs. The primary brands are Luby’s Cafeterias, Fuddruckers - World’s Greatest Hamburgers
®
and Cheeseburger in Paradise, with a non-core restaurant location operating under the brand name Bob Luby’s Seafood Grill. All company-owned restaurants are casual dining restaurants. Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant.
The total number of Company-owned restaurants was
173
at
March 15, 2017
and
175
at
August 31, 2016
.
Culinary Contract Services
CCS, branded as Luby’s Culinary Contract Services, consists of a business line servicing healthcare, corporate dining clients, and, as of December 2016, retail grocery. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. CCS has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, and business and industry clients. CCS has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. The cost of Culinary Contract Services on the Consolidated Statements of Operations include all food, payroll and related costs, and other operating expenses related to CCS sales.
The total number of CCS locations was
23
at
March 15, 2017
and
24
at
August 31, 2016
.
CCS began selling Luby's Famous Fried Fish and Macaroni & Cheese in February 2017 and December 2016, respectively, in the freezer section of H-E-B Grocery Stores, a Texas-born retail grocery store chain. H-E-B stores now stock the family-sized versions (approximately
five
servings) of Luby's Classic Macaroni and Cheese and Luby's Jalapeño Macaroni and Cheese varieties and Luby's Fried Fish (
two
regular size fillets that provide
four
LuAnn-sized portions).
Franchise Operations
We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements have a term of
20
years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a
four
-mile radius surrounding the franchised restaurant.
Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, the Company provides assistance to franchisees in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations, and accounting guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with Fuddruckers’ standards and specifications, including controls over menu items, food quality, and preparation. The Company requires the successful completion of its training program by a minimum of
three
managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections, and standard evaluation reports.
The number of franchised restaurants was
114
at
March 15, 2017
and
113
at
August 31, 2016
.
Licensee
In November 1997, a prior owner of the Fuddruckers – World’s Greatest Hamburgers
®
brand granted to a licensee the exclusive right to use the Fuddruckers proprietary marks, trade dress and system to develop Fuddruckers restaurants in a territory consisting of certain countries in Africa, the Middle East and parts of Asia. As of
April 2017
, this licensee operated
35
restaurants that are licensed to use the Fuddruckers Proprietary Marks in Saudi Arabia, Egypt, Lebanon, United Arab Emirates, Qatar, Jordan, Bahrain, Kuwait, Morocco, and Malaysia. The Company does not receive revenue or royalties from these restaurants.
The table on the following page shows segment financial information. The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets, and prepaid expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands)
|
Sales:
|
|
|
|
|
|
|
|
Company-owned restaurants
(1)
|
$
|
81,189
|
|
|
$
|
86,451
|
|
|
$
|
189,431
|
|
|
$
|
200,156
|
|
Culinary contract services
|
3,306
|
|
|
3,918
|
|
|
7,602
|
|
|
8,833
|
|
Franchise operations
|
1,819
|
|
|
1,700
|
|
|
3,691
|
|
|
3,825
|
|
Total
|
$
|
86,314
|
|
|
$
|
92,069
|
|
|
$
|
200,724
|
|
|
$
|
212,814
|
|
Segment level profit:
|
|
|
|
|
|
|
|
Company-owned restaurants
|
$
|
10,226
|
|
|
$
|
12,746
|
|
|
$
|
22,822
|
|
|
$
|
29,530
|
|
Culinary contract services
|
346
|
|
|
398
|
|
|
831
|
|
|
891
|
|
Franchise operations
|
1,383
|
|
|
1,272
|
|
|
2,675
|
|
|
2,786
|
|
Total
|
$
|
11,955
|
|
|
$
|
14,416
|
|
|
$
|
26,328
|
|
|
$
|
33,207
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Company-owned restaurants
|
$
|
3,981
|
|
|
$
|
4,318
|
|
|
$
|
9,435
|
|
|
$
|
10,128
|
|
Culinary contract services
|
15
|
|
|
27
|
|
|
38
|
|
|
64
|
|
Franchise operations
|
178
|
|
|
192
|
|
|
414
|
|
|
448
|
|
Corporate
|
614
|
|
|
683
|
|
|
1,451
|
|
|
1,595
|
|
Total
|
$
|
4,788
|
|
|
$
|
5,220
|
|
|
$
|
11,338
|
|
|
$
|
12,235
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Company-owned restaurants
|
$
|
2,783
|
|
|
$
|
5,128
|
|
|
$
|
7,333
|
|
|
$
|
10,622
|
|
Culinary contract services
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Franchise operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate
|
199
|
|
|
113
|
|
|
629
|
|
|
348
|
|
Total
|
$
|
2,982
|
|
|
$
|
5,241
|
|
|
$
|
7,962
|
|
|
$
|
10,970
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and discontinued operations:
|
|
|
|
|
|
|
|
Segment level profit
|
$
|
11,955
|
|
|
$
|
14,416
|
|
|
$
|
26,328
|
|
|
$
|
33,207
|
|
Opening costs
|
(132
|
)
|
|
(174
|
)
|
|
(298
|
)
|
|
(571
|
)
|
Depreciation and amortization
|
(4,788
|
)
|
|
(5,220
|
)
|
|
(11,338
|
)
|
|
(12,235
|
)
|
Selling, general and administrative expenses
|
(9,008
|
)
|
|
(9,843
|
)
|
|
(22,767
|
)
|
|
(23,086
|
)
|
Provision for asset impairments and restaurant closings, net
|
(5,963
|
)
|
|
(37
|
)
|
|
(6,250
|
)
|
|
(37
|
)
|
Net (loss) gain on disposition of property and equipment
|
(329
|
)
|
|
556
|
|
|
(414
|
)
|
|
835
|
|
Interest income
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
|
Interest expense
|
(727
|
)
|
|
(495
|
)
|
|
(1,330
|
)
|
|
(1,191
|
)
|
Other income (expense), net
|
(242
|
)
|
|
29
|
|
|
(139
|
)
|
|
(90
|
)
|
Loss before income taxes and discontinued operations
|
$
|
(9,233
|
)
|
|
$
|
(767
|
)
|
|
$
|
(16,205
|
)
|
|
$
|
(3,166
|
)
|
|
|
|
|
|
|
|
|
|
|
March 15,
2017
|
|
August 31,
2016
|
Total assets:
|
|
|
|
Company-owned restaurants
(2)
|
$
|
201,022
|
|
|
$
|
211,182
|
|
Culinary contract services
|
3,209
|
|
|
3,390
|
|
Franchise operations
(3)
|
11,797
|
|
|
12,266
|
|
Corporate
|
22,073
|
|
|
25,387
|
|
Total
|
$
|
238,101
|
|
|
$
|
252,225
|
|
|
|
(1)
|
Includes vending revenue of
$125 thousand
and
$137 thousand
for the quarters ended
March 15, 2017
and
March 9, 2016
, respectively, and
$284 thousand
and
$295 thousand
for the
two quarters
ended
March 15, 2017
and
March 9, 2016
, respectively.
|
|
|
(2)
|
Company-owned restaurants segment includes
$9.4 million
of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.
|
|
|
(3)
|
Franchise operations segment includes approximately
$11.0 million
in royalty intangibles.
|
Note 4. Derivative Financial Instruments
The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a percentage of its long-term variable rate debt. On
December 14, 2016
, the Company entered into an interest rate swap, pay fixed - receive floating, with a constant notional amount of
$17.5 million
. The fixed swap rate we pay is
1.965%
, plus an applicable margin. The variable rate we receive is one-month LIBOR, plus an applicable margin. The term of the interest rate swap is
5 years
. The Company does not apply hedge accounting treatment to this derivative, therefore, changes in fair value of the instrument are recognized in Other income (expense), net. During the
two quarters
ended
March 15, 2017
the changes in the interest rate swap fair value resulted in an expense of approximately
$45 thousand
.
The Company does not hold or use derivative instruments for trading purposes.
Note 5. Fair Value Measurements
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:
|
|
•
|
Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
•
|
Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
|
|
|
•
|
Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
|
Recurring fair value measurements related to liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Two Quarters Ended March 15, 2017
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Valuation Method
|
Recurring Fair Value - Liabilities
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
TSR Performance Based Incentive Plan
(1)
|
$
|
1,381
|
|
|
$
|
—
|
|
|
$
|
1,381
|
|
|
$
|
—
|
|
|
Monte Carlo Simulation
|
Derivative - Interest Rate Swap
|
45
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
Discounted Cash Flow
|
Total liabilities at Fair Value
|
$
|
1,426
|
|
|
$
|
—
|
|
|
$
|
1,426
|
|
|
$
|
—
|
|
|
|
(1) The fair value of the Company's 2015, 2016, and 2017 Performance Based Incentive Plan liabilities were approximately
$550 thousand
,
$634 thousand
, and
$197 thousand
, respectively. See Note 11 to the Company's consolidated financial statements in this Form 10-Q for further discussion of Performance Based Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Two Quarters Ended March 9, 2016
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Valuation Method
|
Recurring Fair Value - Liabilities
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
TSR Performance Based Incentive Plan
|
$
|
267
|
|
|
$
|
—
|
|
|
$
|
267
|
|
|
$
|
—
|
|
|
Monte Carlo Simulation
|
(1) The fair value of the Company's 2015 and 2016 Performance Based Incentive Plan liabilities were approximately
$207 thousand
and
$60 thousand
, respectively.
Non-recurring fair value measurements related to impaired property held for sale, goodwill, and property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Two Quarters Ended March 15, 2017
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments
(4)
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
Property held for sale
(1)
|
$
|
3,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,213
|
|
|
$
|
(419
|
)
|
Goodwill
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(537
|
)
|
Property and equipment related to company-owned restaurants
(3)
|
1,410
|
|
|
—
|
|
|
—
|
|
|
1,410
|
|
|
(5,226
|
)
|
Total Nonrecurring Fair Value Measurements
|
$
|
4,623
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,623
|
|
|
$
|
(6,182
|
)
|
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately
$4.8 million
were written down to their fair value, less approximately
$1.2 million
proceeds on sales and costs to sell, of approximately
$3.2 million
, resulting in an impairment charge of approximately
$0.4 million
.
(2) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately
$537 thousand
was written down to
zero
, resulting in an impairment charge of approximately
$537 thousand
.
(3) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately
$6.6 million
were written down to their fair value of approximately
$1.4 million
, resulting in an impairment charge of approximately
$5.2 million
.
(4) Total impairments are included in Provision for asset impairments in The Consolidated Statement of Operations in the
two quarters
ended
March 15, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Two Quarters Ended March 9, 2016
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
Goodwill
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
Total Nonrecurring Fair Value Measurements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
(1) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately
$38 thousand
was written down to its implied fair value of
zero
, resulting in an impairment charge of approximately
$38 thousand
, which is included in Provision for asset impairments in the Consolidated Statement of Operations in the
two quarters
ended
March 9, 2016
.
Note 6. Income Taxes
No
cash payments of estimated federal income taxes were made during the
two quarters
ended
March 15, 2017
.
Deferred tax assets and liabilities are recorded based on differences between the financial reporting basis and the tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are recognized to the extent future taxable income is expected to be sufficient to utilize those assets prior to their expiration. If current available information and projected future results raises doubt about the realization of the deferred tax assets, a valuation allowance is necessary. Management established a
$6.9 million
valuation allowance in the prior year for its deferred tax assets considered more likely than not to expire before being realized. In evaluating our ability to recover our deferred tax assets as of
March 15, 2017
, we considered available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax–planning strategies, projected future taxable income, and results of recent operations. Management determined that for the
two quarters
ended
March 15, 2017
an increase in the valuation allowance was necessary and increased the valuation allowance to approximately
$15.0 million
.
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying Consolidated Balance Sheet.
Note 7. Property and Equipment, Intangible Assets and Goodwill
The costs, net of impairment, and accumulated depreciation of property and equipment at
March 15, 2017
and
August 31, 2016
, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 15,
2017
|
|
August 31,
2016
|
|
Estimated
Useful Lives
(years)
|
|
(In thousands)
|
|
|
|
|
|
|
Land
|
$
|
61,940
|
|
|
$
|
61,940
|
|
|
|
|
—
|
|
|
Restaurant equipment and furnishings
|
73,764
|
|
|
75,764
|
|
|
3
|
|
to
|
|
15
|
Buildings
|
158,811
|
|
|
157,006
|
|
|
20
|
|
to
|
|
33
|
Leasehold and leasehold improvements
|
27,025
|
|
|
25,973
|
|
|
Lesser of lease term or estimated useful life
|
Office furniture and equipment
|
3,634
|
|
|
3,277
|
|
|
3
|
|
to
|
|
10
|
Construction in progress
|
934
|
|
|
145
|
|
|
|
|
—
|
|
|
|
326,108
|
|
|
324,105
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
(141,041
|
)
|
|
(130,887
|
)
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
185,067
|
|
|
$
|
193,218
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
20,298
|
|
|
$
|
21,074
|
|
|
15
|
|
to
|
|
21
|
Intangible assets, net, consist of the Fuddruckers trade name and franchise agreements and will be amortized. The Company believes the Fuddruckers brand name has an expected accounting life of
21
years from the date of acquisition based on the expected use of its assets and the restaurant environment in which it is being used. The trade name represents a respected brand with customer loyalty and the Company intends to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, have an estimated accounting life of
21
years from the date of acquisition and will be amortized over this period of time.
Intangible assets, net, also includes the license agreement and trade name related to Cheeseburger in Paradise and the value of the acquired licenses and permits allowing the sales of beverages with alcohol. These assets have an expected useful life of
15
years from the date of acquisition, December 6, 2012.
The aggregate amortization expense related to intangible assets subject to amortization was approximately
$0.8 million
for the
two quarters
ended
March 15, 2017
and approximately
$0.8 million
for the
two quarters
ended
March 9, 2016
. The aggregate amortization expense related to intangible assets subject to amortization is expected to be approximately
$1.4 million
in each of the next five successive fiscal years.
The following table presents intangible assets as of
March 15, 2017
and
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 15, 2017
|
|
August 31, 2016
|
|
(In thousands)
|
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Intangible Assets Subject to Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuddruckers trade name and franchise agreements
|
$
|
29,486
|
|
|
$
|
(9,294
|
)
|
|
$
|
20,192
|
|
|
$
|
29,486
|
|
|
$
|
(8,535
|
)
|
|
$
|
20,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cheeseburger in Paradise trade name and license agreements
|
$
|
421
|
|
|
$
|
(315
|
)
|
|
$
|
106
|
|
|
$
|
421
|
|
|
$
|
(298
|
)
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
29,907
|
|
|
$
|
(9,609
|
)
|
|
$
|
20,298
|
|
|
$
|
29,907
|
|
|
$
|
(8,833
|
)
|
|
$
|
21,074
|
|
In fiscal 2010, the Company recorded an intangible asset for goodwill in the amount of approximately
$0.2 million
related to the acquisition of substantially all of the assets of Fuddruckers. The Company also recorded, in fiscal 2013, an intangible asset for goodwill in the amount of approximately
$2.0 million
related to the acquisition of Cheeseburger in Paradise. Goodwill is considered to have an indefinite useful life and is not amortized. Management performs its formal annual assessment as of the second quarter each fiscal year. The individual restaurant level is the level at which goodwill is assessed for impairment under ASC 350. In accordance with our understanding of ASC 350, we have allocated the goodwill value to each reporting unit in proportion to each location’s fair value at the date of acquisition. The result of these second quarter fiscal 2017, 2016, 2015, and 2014 assessments was impairment of goodwill of approximately
$537 thousand
,
$38 thousand
,
$38 thousand
, and
$488 thousand
, respectively. The Company performs assessments on an interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. As of
March 15, 2017
, of the
23
locations that were acquired,
eight
locations remain operating as Cheeseburger in Paradise restaurants and of the restaurants closed for conversion to Fuddruckers
six
locations remain operating as a Fuddruckers restaurant.
Three
locations were removed due to the option to extend the leases was not exercised,
three
locations were subleased to franchisees, and the remaining
three
closed and held for future use.
Goodwill, net of accumulated impairments of approximately
$1.1 million
, was approximately
$1.1 million
as of
March 15, 2017
and approximately
$1.6 million
as of
August 31, 2016
, and relates to our Company-owned restaurants reportable segment.
Note 8. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings
Impairment of Long-Lived Assets and Store Closings
The Company periodically evaluates long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical cash flows of operating locations and compares results of poorer performing locations to more profitable locations. The Company also analyzes lease terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic and market conditions in the surrounding area.
For assets held for use, the Company estimates future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of the location’s assets, the Company records an impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and, if applicable, lease terms. The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The time span could be
20
to
25
years for newer properties, but only
5
to
10
years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in
determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.
The Company recognized the following impairment charges to income from operations:
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands, except per share data)
|
Provision for asset impairments and restaurant closings, net
|
$
|
6,250
|
|
|
$
|
37
|
|
Net loss (gain) on disposition of property and equipment
|
414
|
|
|
(835
|
)
|
|
|
|
|
|
$
|
6,664
|
|
|
$
|
(798
|
)
|
Effect on EPS:
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.03
|
|
Assuming dilution
|
$
|
0.23
|
|
|
$
|
0.03
|
|
The approximate
$6.3 million
impairment charge for the
two quarters
ended
March 15, 2017
is primarily related to assets at
13
locations, goodwill at
six
locations, and
four
properties held for sale written down to their fair value.
The approximate
$37 thousand
impairment charge for the
two quarters
ended
March 9, 2016
is primarily related to goodwill at
one
underperforming converted Cheeseburger in Paradise leasehold location.
The approximate
$0.4 million
net loss
for the
two quarters
ended
March 15, 2017
is related to the sale of property and equipment.
The approximate
$0.8 million
net gain
for the
two quarters
ended
March 9, 2016
is primarily related to the sale of one property.
Discontinued Operations
On March 21, 2014, the Board of Directors of the Company (the "Board) approved a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. This underperforming Cheeseburger in Paradise leasehold disposal plan called for certain Cheeseburger in Paradise restaurants closure or conversion to Fuddruckers restaurants. As of
March 15, 2017
,
no
locations were classified as discontinued operations in this plan.
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified
24
Luby’s Cafeterias to discontinued operations. As of
March 15, 2017
,
one
location remains held for sale.
The following table sets forth the assets and liabilities for all discontinued operations:
|
|
|
|
|
|
|
|
|
|
March 15,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
Prepaid expenses
|
$
|
—
|
|
|
$
|
1
|
|
Assets related to discontinued operations—current
|
$
|
—
|
|
|
$
|
1
|
|
Property and equipment
|
$
|
1,872
|
|
|
$
|
1,872
|
|
Deferred tax assets
|
958
|
|
|
1,320
|
|
Assets related to discontinued operations—non-current
|
$
|
2,830
|
|
|
$
|
3,192
|
|
Deferred income taxes
|
$
|
384
|
|
|
$
|
361
|
|
Accrued expenses and other liabilities
|
3
|
|
|
51
|
|
Liabilities related to discontinued operations—current
|
$
|
387
|
|
|
$
|
412
|
|
Other liabilities
|
$
|
16
|
|
|
$
|
17
|
|
Liabilities related to discontinued operations—non-current
|
$
|
16
|
|
|
$
|
17
|
|
As of
March 15, 2017
, under both closure plans, the Company had
one
property classified as discontinued operations. The asset carrying value of the owned property was approximately
$1.9 million
and is included in assets related to discontinued operations. The Company is actively marketing this property for sale. The asset carrying value of the ground lease was previously impaired to
zero
.
The following table sets forth the sales and pretax losses reported from discontinued operations:
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands, except discontinued locations)
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Pretax loss
|
(12
|
)
|
|
(147
|
)
|
Income tax benefit (expense) from discontinued operations
|
(403
|
)
|
|
58
|
|
Loss from discontinued operations, net of income taxes
|
$
|
(415
|
)
|
|
$
|
(89
|
)
|
Discontinued locations closed during the period
|
—
|
|
|
—
|
|
The following table summarizes discontinued operations for the
two quarters
of fiscal
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands, except per share data)
|
Discontinued operating loss
|
$
|
(12
|
)
|
|
$
|
(147
|
)
|
Impairments
|
—
|
|
|
—
|
|
Net gains (losses)
|
—
|
|
|
—
|
|
Pretax loss
|
$
|
(12
|
)
|
|
$
|
(147
|
)
|
Income tax benefit (expense) from discontinued operations
|
(403
|
)
|
|
58
|
|
Loss from discontinued operations, net of income taxes
|
$
|
(415
|
)
|
|
$
|
(89
|
)
|
Effect on EPS from discontinued operations—basic
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
Impairment charges included above relate to properties closed and designated for disposal as a result of our
two
closure plans during fiscal 2010 and 2014.
Property Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be moved to property held for sale, actively marketed and recorded at fair value less transaction costs. The Company analyzes market conditions each reporting period and records additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like the Company’s. Gains are not recognized until the properties are sold.
Property held for sale includes unimproved land, closed restaurant properties, and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value.
At
March 15, 2017
, the Company had
four
owned properties recorded at approximately
$3.9 million
in property held for sale.
At
August 31, 2016
, the Company had
five
owned properties recorded at approximately
$5.5 million
in property held for sale.
The Company is actively marketing the locations currently classified as property held for sale.
Abandoned Leased Facilities - Reserve for Store Closing
In fiscal 2016, the Company abandoned
three
Fuddruckers restaurant leased locations in Illinois, Maryland, and New York and
one
Luby's cafeteria leased location in Arkansas. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company decided to cease operations and has no foreseeable plans to occupy the spaces in the future. Therefore, in fiscal 2016, the Company recorded a liability for lease termination expense and charged to earnings, in provision for asset impairments, net, of approximately
$0.2 million
. The liability is equal to the total amount of rent and other direct costs for the remaining period of time the properties will be unoccupied plus the present value of the amount by which the rent paid by the Company to the landlord exceeds any rent paid to the Company by a tenant under a sublease over the remaining period of the lease terms. Accrued lease termination expense was approximately
$65 thousand
and
$151 thousand
as of
March 15, 2017
and
August 31, 2016
, respectively.
Note 9. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, except for operating leases.
Pending Claims
From time to time, the Company is subject to various private lawsuits, administrative proceedings, and claims that arise in the ordinary course of its business. A number of these lawsuits, proceedings, and claims may exist at any given time. These matters typically involve claims from guests, employees, and others related to issues common to the restaurant industry. The Company currently believes that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity. It is possible, however, that the Company’s future results of operations for a particular fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.
Construction Activity
From time to time, the Company enters into non-cancelable contracts for the construction of its new restaurants. This construction activity exposes the Company to the risks inherent in this industry, including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers, and contract termination expenses. The Company had
one
such non-cancelable contract with an approximate
$73 thousand
commitment remaining as of
March 15, 2017
.
Cheeseburger in Paradise, Royalty Commitment
The license agreement and trade name relates to a perpetual license to use intangible assets including trademarks, service marks and publicity rights related to Cheeseburger in Paradise owned by Jimmy Buffett and affiliated entities. In return, the Company pays a royalty fee of
2.5%
of gross sales, less discounts, at the Company's operating Cheeseburger in Paradise locations to an entity owned or controlled by Jimmy Buffett. The trade name represents a respected brand with positive customer loyalty, and the Company intends to cultivate and protect the use of the trade name.
Note 10. Related Parties
Affiliate Services
Christopher J. Pappas, the Company’s Chief Executive Officer, and Harris J. Pappas, director and former Chief Operating Officer of the Company, own
two
restaurant entities (the “Pappas entities”) that from time to time may provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement dated May 28, 2015 among the Company and the Pappas entities.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The total costs under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the
two quarters
ended
March 15, 2017
and
March 9, 2016
were
$4 thousand
and
zero
. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Board.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a
50%
limited partnership interest and a
50%
general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately
7%
of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of approximately
12
years with
two
subsequent
five
-year options and gives the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company is currently obligated to pay rent of
$22.00
per square foot plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The Company made payments of approximately
$207 thousand
and approximately
$207 thousand
in the
two quarters
ended
March 15, 2017
and
March 9, 2016
, respectively. The new lease agreement was approved by the Finance and Audit Committee.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company's Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately
six
years with
two
subsequent
five
-year options. Pursuant to the new ground lease agreement, the Company is currently obligated to pay
$27.56
per square foot plus maintenance, taxes, and insurance from March 12, 2014 until November 30, 2016. Thereafter, the new ground lease agreement provides for increases in rent at set intervals. The Company made payments of approximately
$81 thousand
and approximately
$80 thousand
in the
two quarters
ended
March 15, 2017
and
March 9, 2016
, respectively.
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands, except percentages)
|
Affiliated costs incurred:
|
|
|
|
General and administrative expenses—professional and other costs
|
$
|
—
|
|
|
$
|
—
|
|
Capital expenditures
|
4
|
|
|
—
|
|
Other operating expenses, occupancy costs and opening costs, including property leases
|
288
|
|
|
287
|
|
Total
|
$
|
292
|
|
|
$
|
287
|
|
Relative total Company costs:
|
|
|
|
Selling, general and administrative expenses
|
$
|
22,767
|
|
|
$
|
23,086
|
|
Capital expenditures
|
7,962
|
|
|
10,970
|
|
Other operating expenses, occupancy costs and opening costs
|
45,506
|
|
|
44,905
|
|
Total
|
$
|
76,235
|
|
|
$
|
78,961
|
|
Affiliated costs incurred as a percentage of relative total Company costs
|
0.38
|
%
|
|
0.36
|
%
|
Board of Directors
Christopher J. Pappas is a member of the Advisory Board of Amegy Bank, a Division of ZB, N.A. (formerly, Amegy Bank, N.A.), which was a lender and syndication agent under the 2013 Credit Facility (as defined herein).
Key Management Personnel
The Company entered into a new employment agreement with Christopher Pappas on January 24, 2014. The employment agreement was amended on February 4, 2016, to extend the termination date thereof to August 31, 2017. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc.
Peter Tropoli, a director of the Company and the Company’s Chief Operating Officer, and formerly the Company’s Senior Vice President, Administration, General Counsel and Secretary, is an attorney and stepson of Frank Markantonis, who is a director of the Company.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas, who is a director of the Company.
Note 11. Share-Based Compensation
We have
two
active share based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective
December 5, 2015
(the "Employee Stock Plan") and the Nonemployee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.
Of the
1.1 million
shares approved for issuance under the Nonemployee Director Stock Plan,
1.0 million
options, restricted stock units and restricted stock awards were granted, and
0.1 million
options were canceled or expired and added back into the plan, since the plan’s inception. Approximately
0.2 million
shares remain available for future issuance as of
March 15, 2017
. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the
two quarters
ended
March 15, 2017
and
March 9, 2016
were approximately
$409 thousand
and
$357 thousand
, respectively.
Of the aggregate
4.1 million
shares approved for issuance under the Employee Stock Plan (which amount includes shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of
December 5, 2015
),
6.1 million
options and restricted stock units were granted, and
3.5 million
options and restricted stock units were canceled or expired and added back into the plan, since the plan’s inception in 2005. Approximately
1.5 million
shares remain available for future issuance as of
March 15, 2017
. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for the
two quarters
ended
March 15, 2017
and
March 9, 2016
were approximately
$461 thousand
and
$653 thousand
, respectively. Included in the
two quarters
ended
March 9, 2016
, share based compensation cost was approximately
$252 thousand
, which represented accelerated share-based compensation expense as a result of the cancellation of
312,663
stock options.
The Company previously approved a Total Shareholder Return ("TSR") Performance Based Incentive Plan which provides for a right to receive an unspecified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a
three
-year cycle, for each plan year. The award value varies from
0%
to
200%
of a base amount, as a result of the Company’s TSR performance in comparison to its peers over the measurement period. The number of shares at the end of the
three
-year period will be determined as the award value divided by the closing stock price on the last day of each fiscal year accordingly. Since the plan provides for an undeterminable number of awards, the plan is accounted for as a liability based plan. As of
March 15, 2017
, the estimated fair value of the performance awards liability for 2015, 2016 and 2017 plan years was
$550 thousand
,
$634 thousand
, and
$197 thousand
, respectively. The estimated liability has been determined based on a Monte Carlo simulation model. Based on this estimate, management accrues expense ratably over the
three
-year service periods. A valuation estimate of the future liability associated with each fiscal year's performance award plan will be performed periodically with adjustments made to the outstanding liability at each reporting period, as appropriate. For the
two quarters
ended
March 15, 2017
and
March 9, 2016
, the Company has recorded approximately
$588 thousand
and
$159 thousand
, respectively, in non-cash compensation expense in selling, general and administrative expenses related to its TSR Performance Based Incentive Plans.
Stock Options
Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant.
Option awards under the Nonemployee Director Stock Plan generally vest
100%
on the first anniversary of the grant date and expire
ten
years from the grant date.
No
options were granted under the Nonemployee Director Stock Plan in the
two quarters
ended
March 15, 2017
.
No
options to purchase shares were outstanding under this plan as of
March 15, 2017
.
Options granted under the Employee Stock Plan generally vest
50%
on the first anniversary date of the grant date,
25%
on the second anniversary of the grant date and
25%
on the third anniversary of the grant date, with all options expiring
ten
years from the grant date. All options granted in the
two quarters
ended
March 15, 2017
were granted under the Employee Stock Plan. Options to purchase
1,427,418
shares at option prices of
$3.44
to
$11.10
per share remain outstanding as of
March 15, 2017
.
A summary of the Company’s stock option activity for the quarter ended
March 15, 2017
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Fixed
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(Per share)
|
|
(In years)
|
|
(In thousands)
|
Outstanding at August 31, 2016
|
1,169,238
|
|
|
$
|
4.76
|
|
|
6.6
|
|
|
$
|
178
|
|
Granted
|
295,869
|
|
|
4.26
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancelled
|
(9,290
|
)
|
|
4.49
|
|
|
—
|
|
|
—
|
|
Forfeited/Expired
|
(52,543
|
)
|
|
5.13
|
|
|
—
|
|
|
—
|
|
Outstanding at March 15, 2017
|
1,403,274
|
|
|
$
|
4.64
|
|
|
6.9
|
|
|
$
|
—
|
|
Exercisable at March 15, 2017
|
889,251
|
|
|
$
|
4.74
|
|
|
5.7
|
|
|
$
|
—
|
|
The intrinsic value for stock options is defined as the difference between the current market value, or closing price on
March 15, 2017
, and the grant price on the measurement dates in the table above.
Restricted Stock Units
Grants of restricted stock units consist of the Company’s common stock and generally vest after
three
years. All restricted stock units are cliff-vested. Restricted stock units are valued at the closing market price of the Company’s common stock at the date of grant.
A summary of the Company’s restricted stock unit activity during the
two quarters
ended
March 15, 2017
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
Weighted
Average
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
|
(Per share)
|
|
(In years)
|
Unvested at August 31, 2016
|
314,833
|
|
|
$
|
5.23
|
|
|
1.9
|
|
Granted
|
200,549
|
|
|
4.26
|
|
|
—
|
|
Vested
|
(85,738
|
)
|
|
6.43
|
|
|
—
|
|
Forfeited
|
(6,320
|
)
|
|
—
|
|
|
—
|
|
Unvested at March 15, 2017
|
423,324
|
|
|
$
|
4.54
|
|
|
2.2
|
|
At
March 15, 2017
, there was approximately
$1.2 million
of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of
2.2
years.
Restricted Stock Awards
Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors may receive a
20%
premium of additional restricted stock by opting to receive stock over a minimum required amount of stock, in lieu of cash. The number of shares granted is valued at the average of the high and low price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant.
Note 12. Earnings Per Share
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and unvested restricted stock for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. Stock options excluded from the computation of net income per share for the quarter ended
March 15, 2017
include
1,403,274
shares with exercise prices exceeding market prices and
no
shares whose inclusion would also be anti-dilutive.
The components of basic and diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands, expect per share data)
|
Numerator:
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(12,836
|
)
|
|
$
|
(582
|
)
|
|
$
|
(18,350
|
)
|
|
$
|
(2,321
|
)
|
Loss from discontinued operations, net of income taxes
|
(343
|
)
|
|
(17
|
)
|
|
(415
|
)
|
|
(89
|
)
|
NET LOSS
|
$
|
(13,179
|
)
|
|
$
|
(599
|
)
|
|
$
|
(18,765
|
)
|
|
$
|
(2,410
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings per share—weighted-average shares
|
29,522
|
|
|
29,247
|
|
|
29,418
|
|
|
29,182
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
Employee and non-employee stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator for earnings per share assuming dilution
|
29,522
|
|
|
29,247
|
|
|
29,418
|
|
|
29,182
|
|
Loss per share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.44
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.08
|
)
|
Assuming dilution
|
$
|
(0.44
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.08
|
)
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
Assuming dilution
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.45
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.08
|
)
|
Assuming dilution
|
$
|
(0.45
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.08
|
)
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and footnotes for the quarter ended
March 15, 2017
included in Item 1 of Part I of this Quarterly Report on Form 10 (this “Form 10-Q”), and the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2016
.
The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.
The following table sets forth selected operating data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of income.
Percentages may not total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
Restaurant sales
|
93.9
|
%
|
|
93.7
|
%
|
|
94.2
|
%
|
|
93.9
|
%
|
Culinary contract services
|
3.8
|
%
|
|
4.3
|
%
|
|
3.8
|
%
|
|
4.2
|
%
|
Franchise revenue
|
2.1
|
%
|
|
1.8
|
%
|
|
1.8
|
%
|
|
1.8
|
%
|
Vending revenue
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
TOTAL SALES
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
STORE COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
(As a percentage of restaurant sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of food
|
27.9
|
%
|
|
28.5
|
%
|
|
28.2
|
%
|
|
28.5
|
%
|
Payroll and related costs
|
36.1
|
%
|
|
34.6
|
%
|
|
35.9
|
%
|
|
34.7
|
%
|
Other operating expenses
|
17.0
|
%
|
|
15.9
|
%
|
|
17.7
|
%
|
|
16.1
|
%
|
Occupancy costs
|
6.6
|
%
|
|
6.4
|
%
|
|
6.2
|
%
|
|
6.1
|
%
|
Vending revenue
|
(0.2
|
)%
|
|
(0.2
|
)%
|
|
(0.2
|
)%
|
|
(0.1
|
)%
|
Store level profit
|
12.6
|
%
|
|
14.8
|
%
|
|
12.1
|
%
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
COMPANY COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
(As a percentage of total sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening costs
|
0.2
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
|
0.3
|
%
|
Depreciation and amortization
|
5.5
|
%
|
|
5.7
|
%
|
|
5.6
|
%
|
|
5.7
|
%
|
Selling, general and administrative expenses
|
10.4
|
%
|
|
10.7
|
%
|
|
11.3
|
%
|
|
10.8
|
%
|
Net loss (gain) on disposition of property and equipment
|
0.4
|
%
|
|
(0.6
|
)%
|
|
0.2
|
%
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
Culinary Contract Services Costs
|
|
|
|
|
|
|
|
(As a percentage of Culinary Contract Services sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of culinary contract services
|
89.5
|
%
|
|
89.8
|
%
|
|
89.1
|
%
|
|
89.9
|
%
|
Culinary income
|
10.5
|
%
|
|
10.2
|
%
|
|
10.9
|
%
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
Franchise Operations Costs
|
|
|
|
|
|
|
|
(As a percentage of
Franchise Operations)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of franchise operations
|
24.0
|
%
|
|
25.2
|
%
|
|
27.5
|
%
|
|
27.2
|
%
|
Franchise income
|
76.0
|
%
|
|
74.8
|
%
|
|
72.5
|
%
|
|
72.8
|
%
|
|
|
|
|
|
|
|
|
(As a percentage of total sales)
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
(9.6
|
)%
|
|
(0.3
|
)%
|
|
(7.3
|
)%
|
|
(0.9
|
)%
|
Interest income
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Interest expense
|
(0.8
|
)%
|
|
(0.5
|
)%
|
|
(0.7
|
)%
|
|
(0.6
|
)%
|
Other income (expense), net
|
(0.3
|
)%
|
|
0.0
|
%
|
|
(0.1
|
)%
|
|
0.0
|
%
|
Loss before income taxes and discontinued operations
|
(10.7
|
)%
|
|
(0.8
|
)%
|
|
(8.1
|
)%
|
|
(1.5
|
)%
|
Provision (benefit) for income taxes
|
4.2
|
%
|
|
(0.2
|
)%
|
|
1.0
|
%
|
|
(0.4
|
)%
|
Loss from continuing operations
|
(14.9
|
)%
|
|
(0.6
|
)%
|
|
(9.1
|
)%
|
|
(1.1
|
)%
|
Loss from discontinued operations, net of income taxes
|
(0.4
|
)%
|
|
0.0
|
%
|
|
(0.2
|
)%
|
|
0.0
|
%
|
NET LOSS
|
(15.3
|
)%
|
|
(0.6
|
)%
|
|
(9.3
|
)%
|
|
(1.1
|
)%
|
Although store level profit, defined as restaurant sales less cost of food, payroll and related costs, other operating expenses, and occupancy costs is a non-GAAP measure, we believe its presentation is useful because it explicitly shows the results of our most significant reportable segment. The following table reconciles between store level profit, a non-GAAP, measure to loss from continuing operations, a GAAP measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands)
|
|
(In thousands)
|
Store level profit
|
$
|
10,226
|
|
|
$
|
12,746
|
|
|
$
|
22,822
|
|
|
$
|
29,530
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
Sales from culinary contract services
|
3,306
|
|
|
3,918
|
|
|
7,602
|
|
|
8,833
|
|
Sales from franchise operations
|
1,819
|
|
|
1,700
|
|
|
3,691
|
|
|
3,825
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
Opening costs
|
132
|
|
|
174
|
|
|
298
|
|
|
571
|
|
Cost of culinary contract services
|
2,960
|
|
|
3,520
|
|
|
6,771
|
|
|
7,942
|
|
Cost of franchise operations
|
436
|
|
|
428
|
|
|
1,016
|
|
|
1,039
|
|
Depreciation and amortization
|
4,788
|
|
|
5,220
|
|
|
11,338
|
|
|
12,235
|
|
Selling, general and administrative expenses
|
9,008
|
|
|
9,843
|
|
|
22,767
|
|
|
23,086
|
|
Provision for asset impairments and restaurant closings, net
|
5,963
|
|
|
37
|
|
|
6,250
|
|
|
37
|
|
Net loss (gain) on disposition of property and equipment
|
329
|
|
|
(556
|
)
|
|
414
|
|
|
(835
|
)
|
Interest income
|
(1
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(2
|
)
|
Interest expense
|
727
|
|
|
495
|
|
|
1,330
|
|
|
1,191
|
|
Other income (expense), net
|
242
|
|
|
(29
|
)
|
|
139
|
|
|
90
|
|
Provision (benefit) for income taxes
|
3,603
|
|
|
(185
|
)
|
|
2,145
|
|
|
(845
|
)
|
Loss from continuing operations
|
$
|
(12,836
|
)
|
|
$
|
(582
|
)
|
|
$
|
(18,350
|
)
|
|
$
|
(2,321
|
)
|
The following table shows our restaurant unit count as of
August 31, 2016
and
March 15, 2017
.
Restaurant Counts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
2016
|
|
FY17 YTD Q2
Openings
|
|
FY17 YTD Q2
Closings
|
|
March 15,
2017
|
Luby’s Cafeterias
|
91
|
|
|
—
|
|
|
—
|
|
|
91
|
|
Fuddruckers Restaurants
|
75
|
|
|
—
|
|
|
(2
|
)
|
|
73
|
|
Cheeseburger in Paradise
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Other restaurants
(1)
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total
|
175
|
|
|
—
|
|
|
(2
|
)
|
|
173
|
|
(1)
Other restaurants include one Bob Luby’s Seafood Grill.
Overview
Luby’s, Inc. (“Luby’s” or “Company”) is a multi-branded company operating in the restaurant industry and in the contract food services industry. Our primary brands include Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers
®
, Luby’s Culinary Contract Services and Cheeseburger in Paradise.
Our Company’s vision is that our guests, employees and shareholders stay loyal to our restaurant brands and value them as a significant part of their lives. We want our company’s performance to make it a leader in our industry.
We are headquartered in Houston, Texas. Our corporate headquarters is located at 13111 Northwest Freeway, Suite 600, Houston, Texas 77040, and our telephone number at that address is (713) 329-6800. Our website is www.lubysinc.com. The information on our website is not, and shall not be deemed to be, a part of this Form 10-Q or incorporated by reference into any of our other filings with the SEC.
As of
March 15, 2017
, we owned and operated
173
restaurants, of which
91
are traditional cafeterias,
73
are gourmet hamburger restaurants, eight are casual dining restaurants and bars, and one primarily serves seafood. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States. Included in the
173
restaurants that we own and operate are 12 restaurants located at six property locations where we operate a side-by-side Luby’s Cafeteria and Fuddruckers on the same property. We refer to these locations as “Combo locations.”
As of
March 15, 2017
, we operated
23
Culinary Contract Services locations; 14 in the Houston, Texas area and one in each of Dallas, Texas and San Antonio, Texas. Outside of Texas we operate one in each of the following states: North Carolina, Florida, Georgia, Oklahoma, Louisiana, Missouri, and Massachusetts. Luby’s Culinary Contract Services currently provides food service management to healthcare and corporate dining facilities.
As of
March 15, 2017
, we had
49
franchisees operating
114
Fuddruckers restaurants. Our largest
five
franchise owners own five to twelve restaurants each.
Eighteen
franchise owners each own two to four restaurants. The
26
remaining franchise owners each own one restaurant.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate; fiscal 2016 was such a year. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically includes three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
Same-Store Sales
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. A restaurant’s sales results are included in the same-store sales calculation in the quarter after a store has been open for six consecutive fiscal quarters. Stores that close on a permanent basis are removed from the group in the quarter when operations cease at the restaurant, but remain in the same-store group for previously reported quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies.
RESULTS OF OPERATIONS
Quarter Ended
March 15, 2017
Compared to Quarter Ended
March 9, 2016
Comparability between quarters is affected by the varying lengths of the quarters and quarters ending at different points in the calendar year when seasonal patterns for sales are different. Both the quarter ended
March 15, 2017
and the quarter ended
March 9, 2016
consisted of
12
weeks. Both the
two quarters
ended
March 15, 2017
and the
two quarters
ended
March 9, 2016
consisted of
28
weeks.
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Restaurant sales
|
$
|
81,064
|
|
|
$
|
86,314
|
|
|
$
|
(5,250
|
)
|
|
(6.1
|
)%
|
Culinary contract services
|
3,306
|
|
|
3,918
|
|
|
(612
|
)
|
|
(15.6
|
)%
|
Franchise revenue
|
1,819
|
|
|
1,700
|
|
|
119
|
|
|
7.0
|
%
|
Vending revenue
|
125
|
|
|
137
|
|
|
(12
|
)
|
|
(8.8
|
)%
|
TOTAL SALES
|
$
|
86,314
|
|
|
$
|
92,069
|
|
|
$
|
(5,755
|
)
|
|
(6.3
|
)%
|
Total sales
decreased
approximately
$5.8 million
, or
6.3%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
, consisting primarily of an approximate
$5.2 million
decrease
in restaurant sales, an approximate
$0.6 million
decrease
in Culinary Contract Services sales, offset by an approximate
$0.1 million
increase
in franchise revenue. The other component of total sales is vending revenue, which
decreased
$12 thousand
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Restaurant sales
|
$
|
189,147
|
|
|
$
|
199,861
|
|
|
$
|
(10,714
|
)
|
|
(5.4
|
)%
|
Culinary contract services
|
7,602
|
|
|
8,833
|
|
|
(1,231
|
)
|
|
(13.9
|
)%
|
Franchise revenue
|
3,691
|
|
|
3,825
|
|
|
(134
|
)
|
|
(3.5
|
)%
|
Vending revenue
|
284
|
|
|
295
|
|
|
(11
|
)
|
|
(3.7
|
)%
|
TOTAL SALES
|
$
|
200,724
|
|
|
$
|
212,814
|
|
|
$
|
(12,090
|
)
|
|
(5.7
|
)%
|
Total sales
decreased
approximately
$12.1 million
, or
5.7%
, in the
two
quarters ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
, consisting primarily of an approximate
$10.7 million
decrease
in restaurant sales, an approximate
$1.2 million
decrease
in Culinary Contract Services sales, and an approximate
$0.1 million
decrease
in franchise revenue. The other component of total sales is vending revenue, which
decreased
$11 thousand
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
.
The Company has three reportable segments: Company-owned restaurants, franchise operations, and culinary contract services.
Company-Owned Restaurants
Restaurant Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000s)
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
Restaurant Brand
|
March 15,
|
|
March 9,
|
|
Increase/(Decrease)
|
|
2017
|
|
2016
|
|
$ Amount
|
|
% Change
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Luby’s Cafeterias
|
$
|
49,975
|
|
|
$
|
52,915
|
|
|
$
|
(2,940
|
)
|
|
(5.6
|
)%
|
Fuddruckers
|
22,860
|
|
|
24,567
|
|
|
(1,707
|
)
|
|
(6.9
|
)%
|
Combo locations
|
4,951
|
|
|
5,295
|
|
|
(344
|
)
|
|
(6.5
|
)%
|
Cheeseburger in Paradise
|
3,278
|
|
|
3,537
|
|
|
(259
|
)
|
|
(7.3
|
)%
|
Restaurant Sales
|
$
|
81,064
|
|
|
$
|
86,314
|
|
|
$
|
(5,250
|
)
|
|
(6.1
|
)%
|
Restaurant sales
decreased
approximately
$5.2 million
in the quarter ended
March 15, 2017
, compared to the quarter ended
March 9, 2016
. Sales at stand-alone Luby's Cafeteria restaurants
decreased
approximately
$2.9 million
to approximately
$50.0 million
; sales from stand-alone Fuddruckers locations
decreased
approximately
$1.7 million
to approximately $
22.9 million
; sales at Combo locations
decreased
approximately
$0.3 million
to approximately
$5.0 million
; and sales at Cheeseburger in Paradise restaurants
decreased
by approximately
$0.3 million
to approximately
$3.3 million
.
The approximate
$2.9 million
sales
decrease
in stand-alone Luby's Cafeteria restaurants was the result of the closure of two locations and a
4.4%
decrease in same-store sales. The
4.4%
Luby's Cafeteria same-store sales decrease was the result of a 6.6% decrease in guest traffic partially offset by a 2.2% increase in average spend per guest. The approximate
$1.7 million
sales decrease at stand-alone Fuddruckers restaurants was the result of six restaurant closings and a
1.1%
decrease in same-store sales, offset by the opening of three Fuddruckers locations. The
1.1%
decrease in Fuddruckers same-store sales was the result of a 2.8% decrease in guest traffic offset by a 1.7% increase in average spend per guest. All eight stores that we operate as Cheeseburger in Paradise are included in our same-store grouping and sales at this group of restaurants decreased
7.3%
in the quarter ended
March 15, 2017
compared to the the quarter ended
March 9, 2016
. All six Combo location stores are included in our same-store grouping and sales at this group of restaurants decreased
6.5%
. Approximately half of the decline in sales occurred at one Combo location. Two of the six Combo locations increased sales by 2.2% and 3.4% respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
Restaurant Brand
|
March 15,
|
|
March 9,
|
|
Increase/(Decrease)
|
($000s)
|
2017
|
|
2016
|
|
$ Amount
|
|
% Change
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Luby’s Cafeterias
|
$
|
118,315
|
|
|
$
|
123,821
|
|
|
$
|
(5,506
|
)
|
|
(4.4
|
)%
|
Fuddruckers
|
51,608
|
|
|
55,447
|
|
|
(3,839
|
)
|
|
(6.9
|
)%
|
Combo locations
|
11,577
|
|
|
12,315
|
|
|
(738
|
)
|
|
(6.0
|
)%
|
Cheeseburger in Paradise
|
7,647
|
|
|
8,278
|
|
|
(631
|
)
|
|
(7.6
|
)%
|
Total Restaurant Sales
|
$
|
189,147
|
|
|
$
|
199,861
|
|
|
$
|
(10,714
|
)
|
|
(5.4
|
)%
|
Restaurant sales
decreased
approximately
$10.7 million
in the
two quarters
ended
March 15, 2017
, compared to the
two quarters
ended
March 9, 2016
. Sales at stand-alone Luby's Cafeteria restaurants
decreased
approximately
$5.5 million
to approximately
$118.3 million
; sales from stand-alone Fuddruckers locations
decreased
approximately
$3.8 million
to approximately
$51.6 million
; sales at Combo locations
decreased
approximately
$0.7 million
to approximately
$11.6 million
; and sales at Cheeseburger in Paradise restaurants
decreased
approximately
$0.6 million
to approximately
$7.6 million
.
The approximate
$5.5 million
sales decrease in stand-alone Luby's Cafeteria restaurants was the result of a
3.1%
decrease
in same-store sales and the closure of two locations (accounting for approximately $1.7 million of this sale decline) compared to the
two quarters
ended
March 9, 2016
. The
3.1%
decrease
in Luby's Cafeteria same-store sales was the result of a 3.7% decrease in guest traffic partially offset by a 0.6% increase in average spend per guest. The approximate
$3.8 million
sales
decrease
at stand-alone Fuddruckers restaurants was the result of six restaurant closures and a same-store sales
decrease
of
1.4%
, offset by the opening of one location. Fuddruckers same-store sales
decrease
of
1.4%
was the result of a 2.7% decline in guest traffic offset by a 1.3% increase in average spend per guest. The approximate
$0.7 million
decrease in sales at our Combo locations was due to a
4.3%
decrease
in same-store sales and compares against a high volume sales period in the prior year following the opening of our sixth Combo location. The decline in sales at this sixth Combo location accounted for approximately one-half of the sales decline at Combo locations. All eight stores that we operate as Cheeseburger in Paradise are included in our same-store grouping and this group of restaurants realized a
7.6%
decrease
in sales in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
.
Cost of Food
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Cost of food
|
$
|
22,583
|
|
|
$
|
24,600
|
|
|
$
|
(2,017
|
)
|
|
(8.2
|
)%
|
As a percentage of restaurant sales
|
27.9
|
%
|
|
28.5
|
%
|
|
|
|
(0.6
|
)%
|
Cost of food
decreased
approximately
$2.0 million
, or
8.2%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
with lower guest traffic levels and lower average food commodity prices. As a percentage of restaurant sales, cost of food
decreased
0.6%
to
27.9%
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
due to lower average food commodity prices and a lower level of menu price discounting. Food commodity prices for our basket of food commodity purchases decreased approximately 3.0% at our Luby’s Cafeterias locations and approximately 2.0% at our Fuddruckers restaurants in the quarter ended
March 15, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Cost of food
|
$
|
53,433
|
|
|
$
|
57,034
|
|
|
$
|
(3,601
|
)
|
|
(6.3
|
)%
|
As a percentage of restaurant sales
|
28.2
|
%
|
|
28.5
|
%
|
|
|
|
(0.3
|
)%
|
Cost of food
decreased
approximately
$3.6 million
, or
6.3%
, for the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
with lower guest traffic levels and lower average food commodity prices. As a percentage of restaurant sales, cost of food
decreased
0.3%
to
28.2%
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
due to lower average food commodity prices, modest price increases, and a lower level of menu price discounting. Food commodity prices for our basket of food commodity purchases decreased approximately 3.0% at our Luby’s Cafeterias locations and approximately 3.5% at our Fuddruckers restaurants for the
two quarters
ended
March 15, 2017
.
Payroll and Related Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Payroll and related costs
|
$
|
29,295
|
|
|
$
|
29,834
|
|
|
$
|
(539
|
)
|
|
(1.8
|
)%
|
As a percentage of restaurant sales
|
36.1
|
%
|
|
34.6
|
%
|
|
|
|
1.5
|
%
|
Payroll and related costs
decreased
approximately
$0.5 million
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. The
decrease
reflects operating six fewer restaurants, lower associate hours scheduled and deployed on the decreased level of guest traffic, and reducing overtime hours deployed, partially offset by higher average hourly wage rates. Payroll and related costs includes an approximate $0.5 million reduction in workers' compensation liability estimates in the quarter ended
March 9, 2016
and less than an approximate $0.1 million reduction in workers' compensation liability estimates in the quarter ended
March 15, 2017
. As a percentage of restaurant sales, payroll and related costs
increased
1.5%
to
36.1%
in the quarter ended
March 15, 2017
compared to
34.6%
in the quarter ended
March 9, 2016
due to (1) the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels; (2) comparison to the approximate $0.5 million reduction in workers' compensation liability estimates in the prior year quarter ended
March 9, 2016
; and (3) higher average hourly wage rates; partially offset by (4) reduced overtime hours deployed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Payroll and related costs
|
$
|
67,968
|
|
|
$
|
69,258
|
|
|
$
|
(1,290
|
)
|
|
(1.9
|
)%
|
As a percentage of restaurant sales
|
35.9
|
%
|
|
34.7
|
%
|
|
|
|
1.2
|
%
|
Payroll and related costs
decreased
approximately
$1.3 million
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
due to operating six fewer restaurants, lower associate hours scheduled and deployed on the decreased level of guest traffic, and reducing overtime hours deployed, partially offset by higher average hourly wage rates. The
two quarters
ended
March 15, 2017
includes an approximate $0.5 million reduction in workers' compensation liability estimates and the
two quarters
ended
March 9, 2016
includes an approximate $0.8 million reduction in workers' compensation liability estimates. As a percentage of restaurant sales, payroll and related costs
increased
1.2%
, to
35.9%
in the
two quarters
ended
March 15, 2017
compared to
34.7%
in the
two quarters
ended
March 9, 2016
due to the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels.
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Other operating expenses
|
$
|
13,763
|
|
|
$
|
13,736
|
|
|
$
|
27
|
|
|
0.2
|
%
|
As a percentage of restaurant sales
|
17.0
|
%
|
|
15.9
|
%
|
|
|
|
1.1
|
%
|
Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, local store advertising, property and liability insurance losses above insurance deductibles, services and supplies. Other operating expenses
increased
approximately
$27 thousand
, or
0.2%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
, due primarily to (1) an approximate $0.2 million increase in restaurant services including higher computer network connectivity, point of sale software, and food-to-go delivery charges to third parties; (2) an approximate $0.2 million increase in repairs and maintenance expense; partially offset by (3) an approximate $0.4 million decrease in restaurant supplies expense, including cleaning supplies, kitchen supplies, paper supplies, and office supplies due to operating six fewer restaurants and implementation of cost savings initiatives. As a percentage of restaurant sales, other operating expenses
increased
1.1%
, to
17.0%
, in the quarter ended
March 15, 2017
, compared to
15.9%
for the the quarter ended
March 15, 2017
due to the net cost increases enumerated above on lower overall same-store sales volumes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Other operating expenses
|
$
|
33,411
|
|
|
$
|
32,157
|
|
|
$
|
1,254
|
|
|
3.9
|
%
|
As a percentage of restaurant sales
|
17.7
|
%
|
|
16.1
|
%
|
|
|
|
1.6
|
%
|
Other operating expenses
increased
by approximately
$1.3 million
, or
3.9%
, in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
, due primarily to (1) an approximate $1.0 million increase in repairs and maintenance expense; (2) an approximate $0.6 million increase in restaurant services expenses including higher computer network connectivity, point of sale software, restaurant security, and food-to-go delivery charges to third parties; (3) an approximate $0.2 million increase in utilities expense; partially offset by (4) an approximate $0.5 million decrease in restaurant supplies expense, including cleaning supplies, kitchen supplies, paper supplies, and office supplies due to operating six fewer restaurants and implementation of cost savings initiatives. As a percentage of restaurant sales, other operating expenses
increased
1.6%
, to
17.7%
, in the
two quarters
ended
March 15, 2017
, compared to
16.1%
for the
two quarters
ended
March 9, 2016
due to cost increases enumerate above on lower overall same-store sales volumes.
Occupancy Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Occupancy costs
|
$
|
5,322
|
|
|
$
|
5,535
|
|
|
$
|
(213
|
)
|
|
(3.8
|
)%
|
As a percentage of restaurant sales
|
6.6
|
%
|
|
6.4
|
%
|
|
|
|
0.2
|
%
|
Occupancy costs include property lease expense, property taxes, common area maintenance charges, and property insurance expense. Occupancy costs
decreased
approximately
$0.2 million
to approximately
$5.3 million
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. The decrease was primarily due to a decrease in rent and property taxes associated with operating six fewer restaurants in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
, partially offset by higher property insurance costs. As a percentage of restaurant sales, other occupancy costs
increased
0.2%
, to
6.6%
, in the quarter ended
March 15, 2017
, compared to
6.4%
in the the quarter ended
March 9, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Occupancy costs
|
$
|
11,797
|
|
|
$
|
12,177
|
|
|
$
|
(380
|
)
|
|
(3.1
|
)%
|
As a percentage of restaurant sales
|
6.2
|
%
|
|
6.1
|
%
|
|
|
|
0.1
|
%
|
Occupancy costs
decreased
approximately
$0.4 million
to approximately
$11.8 million
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. The
decrease
was primarily due to a decrease in rent and property taxes associated with operating six fewer restaurants in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
as well as comparison to the
two quarters
ended
March 9, 2016
when rent reserves and property tax estimates were increased, partially offset by higher property insurance costs.
Franchise Operations
We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) royalties paid to us as the franchisor for the Fuddruckers brand and (2) franchise fees paid to us when franchise units are opened for business or transferred to new owners. Cost of franchise operations includes the direct costs associated with supporting franchisees with opening new Fuddruckers franchised restaurants and the corporate overhead expenses associated with generating franchise revenue. These corporate expenses primarily include the salaries and benefits, travel and related expenses, and other expenses for employees whose primary job function involves supporting our franchise owners and the development of new franchise locations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Franchise revenue
|
$
|
1,819
|
|
|
$
|
1,700
|
|
|
$
|
119
|
|
|
7.0
|
%
|
Cost of franchise operations
|
436
|
|
|
428
|
|
|
8
|
|
|
1.9
|
%
|
Franchise profit
|
$
|
1,383
|
|
|
$
|
1,272
|
|
|
$
|
111
|
|
|
8.7
|
%
|
Franchise profit as a percentage of franchise revenue
|
76.0
|
%
|
|
74.8
|
%
|
|
|
|
1.2
|
%
|
Franchise revenue
increased
$119 thousand
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. The
$119 thousand
increase
in franchise revenue includes (1) an approximate $291 thousand increase in non-royalty related fee income due primarily to realized franchise development fees, partially offset by (2) an approximate $172 thousand decrease in franchise royalties due in part to the closure of certain franchise locations, lower international royalty income, and same-store sales declines at franchise locations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Franchise revenue
|
$
|
3,691
|
|
|
$
|
3,825
|
|
|
$
|
(134
|
)
|
|
(3.5
|
)%
|
Cost of franchise operations
|
1,016
|
|
|
1,039
|
|
|
(23
|
)
|
|
(2.2
|
)%
|
Franchise profit
|
$
|
2,675
|
|
|
$
|
2,786
|
|
|
$
|
(111
|
)
|
|
(4.0
|
)%
|
Franchise profit as a percentage of franchise revenue
|
72.5
|
%
|
|
72.8
|
%
|
|
|
|
(0.3
|
)%
|
Franchise revenue
decreased
$134 thousand
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. The
$134 thousand
decrease
in franchise revenue includes (1) an approximate $323 thousand decrease in franchise royalties due in part to the closure of certain franchise locations, lower international royalty income, and same-store sales declines at franchise locations, partially offset by (2) an approximate $189 thousand increase in non-royalty related fee income due primarily to realized franchise development fees, partially offset by lower fee income related to fewer franchise openings.
Cost of Franchise Operations
Cost of franchise operations includes the direct costs associated with supporting franchisees with opening new Fuddruckers franchised restaurants and the corporate overhead expenses associated with generating franchise revenue. These corporate expenses primarily include the salaries and benefits, travel and related expenses, and other expenses for employees whose primary job function involves supporting our franchise owners and the development of new franchise locations. Cost of franchise operations
increased
$8 thousand
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. Franchise profit, defined as Franchise revenue less Cost of franchise operations,
increased
$111 thousand
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
due to the higher non-royalty fee income discussed above in franchise revenue. Franchisees opened two international locations (in Canada and Panama) and one domestic location (in Nevada) in the quarter ended
March 15, 2017
. Two locations also closed in the quarter ended
March 15, 2017
.
Cost of franchise operations
decreased
approximately
$23 thousand
, or
2.2%
, in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. Franchise profit, defined as Franchise revenue less Cost of franchise operations,
decreased
approximately
$111 thousand
in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. Franchisees opened seven locations and closed six locations in the
two quarters
ended
March 15, 2017
.
Culinary Contract Services
Culinary Contract Services is a business line servicing healthcare, higher education, and corporate dining clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. We operated
23
Culinary Contract Services locations at the end of the quarter ended
March 15, 2017
and 28 at the end of the quarter ended
March 9, 2016
. We focus on clients who are able to enter into agreements in which all operating costs are reimbursed to us and we generally charge a fixed fee. These agreements typically present lower financial risk to the company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Culinary contract services sales
|
$
|
3,306
|
|
|
$
|
3,918
|
|
|
$
|
(612
|
)
|
|
(15.6
|
)%
|
Cost of culinary contract services
|
2,960
|
|
|
3,520
|
|
|
(560
|
)
|
|
(15.9
|
)%
|
Culinary contract profit
|
$
|
346
|
|
|
$
|
398
|
|
|
$
|
(52
|
)
|
|
(13.1
|
)%
|
Culinary contract services profit as a percentage of Culinary contract services sales
|
10.5
|
%
|
|
10.2
|
%
|
|
|
|
0.3
|
%
|
Culinary Contract Services sales decreased approximately
$0.6 million
, or
15.6%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. The decrease in Culinary Contract Services revenue was primarily the result of a decrease in the number of locations operated and a change in the mix of our Culinary agreements with clients.
Cost of Culinary Contract Services includes the food, payroll and related costs, other direct operating expenses, and corporate overhead expenses associated with generating Culinary Contract Services sales. Cost of Culinary Contract Services
decreased
approximately
$0.6 million
, or
15.9%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. Culinary Contract Services profit margin, defined as Culinary Contract Services sales less Cost of Culinary Contract Services,
increased
to
10.5%
in the quarter ended
March 15, 2017
from
10.2%
in the the quarter ended
March 9, 2016
due to the change in the mix of our Culinary agreements with clients.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Culinary contract services sales
|
$
|
7,602
|
|
|
$
|
8,833
|
|
|
$
|
(1,231
|
)
|
|
(13.9
|
)%
|
Cost of culinary contract services
|
6,771
|
|
|
7,942
|
|
|
(1,171
|
)
|
|
(14.7
|
)%
|
Culinary contract profit
|
$
|
831
|
|
|
$
|
891
|
|
|
$
|
(60
|
)
|
|
(6.7
|
)%
|
Culinary contract services profit as a percentage of Culinary contract services sales
|
10.9
|
%
|
|
10.1
|
%
|
|
|
|
0.8
|
%
|
Culinary Contract Services sales
decreased
approximately
$1.2 million
, or
13.9%
, in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. The decrease in Culinary Contract Services sales was the result of higher sales volume locations ceasing operations over the past 12 months, replaced with locations that are smaller in nature and thus generate lower sales volumes and a decrease in overall locations in operation.
Cost of Culinary Contract Services includes the food, payroll and related costs, other direct operating expenses, and corporate overhead expenses associated with generating Culinary Contract Services sales. Cost of Culinary Contract Services
decreased
approximately
$1.2 million
, or
14.7%
, in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
, consistent with a decrease in Culinary Contract Services sales. Culinary Contract Services profit margin, defined as Culinary Contract Services sales less Cost of Culinary Contract Services,
increased
to
10.9%
in the
two quarters
ended
March 15, 2017
from
10.1%
in the
two quarters
ended
March 9, 2016
.
Company-wide Expenses
Opening Costs
Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately
$0.1 million
in the quarter ended
March 15, 2017
compared to approximately
$0.2 million
in the quarter ended
March 9, 2016
. Both quarters included carrying costs of locations to be developed for future restaurant openings. The approximate
$0.1 million
in opening costs in the quarter ended
March 15, 2017
included the carrying costs for two locations where we previously operated as Cheeseburger in Paradise restaurants and the pre-opening costs for one Fuddruckers that opened after the quarter ended
March 15, 2017
. The approximate
$0.2 million
in opening costs in the quarter ended
March 9, 2016
included the carrying costs for two locations where we previously operated Cheeseburger in Paradise restaurants and the opening cost for one Fuddruckers location.
Opening costs were approximately
$0.3 million
in the
two quarters
ended
March 15, 2017
compared to approximately
$0.6 million
in the
two quarters
ended
March 9, 2016
. Both two-quarter periods included carrying costs of locations to be developed for future restaurant openings. The approximate
$0.3 million
in opening costs in the
two quarters
ended
March 15, 2017
included the carrying costs for two locations where we previously operated as Cheeseburger in Paradise restaurants and the pre-opening costs for one Fuddruckers that opened after the
two quarters
ended
March 15, 2017
. The approximate
$0.6 million
in opening costs in the
two quarters
ended
March 9, 2016
included the carrying costs for five locations where we previously operated Cheeseburger in Paradise restaurants and the opening costs for three Fuddruckers restaurants that opened in the
two quarters
ended
March 9, 2016
.
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
Depreciation and amortization
|
$
|
4,788
|
|
|
$
|
5,220
|
|
|
$
|
(432
|
)
|
|
(8.3
|
)%
|
As a percentage of total sales
|
5.5
|
%
|
|
5.7
|
%
|
|
|
|
(0.2
|
)%
|
Depreciation and amortization expense
decreased
by approximately
$0.4 million
, or
8.3%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
due primarily to reduced capital investment and certain assets reaching the end of their depreciable lives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
Depreciation and amortization
|
$
|
11,338
|
|
|
$
|
12,235
|
|
|
$
|
(897
|
)
|
|
(7.3
|
)%
|
As a percentage of total sales
|
5.6
|
%
|
|
5.7
|
%
|
|
|
|
(0.1
|
)%
|
Depreciation and amortization expense
decreased
by approximately
$0.9 million
, or
7.3%
, in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
due primarily to reduced capital investment and certain assets reaching the end of their depreciable lives.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(12 weeks vs 12 weeks)
|
General and administrative expenses
|
$
|
7,517
|
|
|
$
|
8,325
|
|
|
$
|
(808
|
)
|
|
(9.7
|
)%
|
Marketing and advertising expenses
|
1,491
|
|
|
1,518
|
|
|
(27
|
)
|
|
(1.8
|
)%
|
Selling, general and administrative expenses
|
$
|
9,008
|
|
|
$
|
9,843
|
|
|
$
|
(835
|
)
|
|
(8.5
|
)%
|
As a percentage of total sales
|
10.4
|
%
|
|
10.7
|
%
|
|
|
|
(0.3
|
)%
|
Selling, general and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders, share-based compensation, marketing and advertising expenses, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses
decreased
approximately
$0.8 million
, or
8.5%
, in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. The
decrease
in selling, general and administrative expenses include (1) an approximate $0.6 million decrease in salaries, benefits, and other compensation expenses; (2) an approximate $0.1 million decrease in corporate travel expenses; and (3) and approximate $0.1 million decrease in group health insurance costs.
As a percentage of total revenue, selling, general and administrative expenses
decreased
to
10.4%
in the quarter ended
March 15, 2017
, compared to
10.7%
in the the quarter ended
March 9, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
Two Quarters Ended
|
|
|
($000s)
|
March 15,
2017
|
|
March 9,
2016
|
|
Increase/
(Decrease)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(28 weeks vs 28 weeks)
|
General and administrative expenses
|
$
|
18,950
|
|
|
$
|
19,780
|
|
|
$
|
(830
|
)
|
|
(4.2
|
)%
|
Marketing and advertising expenses
|
3,817
|
|
|
3,306
|
|
|
511
|
|
|
15.5
|
%
|
Selling, general and administrative expenses
|
$
|
22,767
|
|
|
$
|
23,086
|
|
|
$
|
(319
|
)
|
|
(1.4
|
)%
|
As a percentage of total sales
|
11.3
|
%
|
|
10.8
|
%
|
|
|
|
0.5
|
%
|
Selling, general and administrative expenses
decreased
approximately
$0.3 million
, or
1.4%
, in the
two quarters
ended
March 15, 2017
compared to the
two quarters
ended
March 9, 2016
. The
decrease
in selling, general and administrative expenses include (1) an approximate $1.1 million decrease in salaries, benefits, and other compensation expenses; and (2) an approximate $0.4 million reduction in corporate travel expenses; partially offset by (3) an approximate $0.4 million increase in outside professional service fees; (4) an approximate
$0.5 million
increase
in marketing and advertising expenses; and (5) an approximate $0.3 million increase in other corporate overhead expenses. The approximate
$0.5 million
increase in marketing and advertising expenses includes sponsorships and partnerships with sports teams that we believe enhance our visibility and appeal within our core markets as well as other marketing commitments entered into prior to the start of the
two quarters
ended
March 15, 2017
. As a percentage of total sales, selling, general and administrative expenses
increased
to
11.3%
in the
two quarters
ended
March 15, 2017
, compared to
10.8%
in the
two quarters
ended
March 9, 2016
.
Provision for Asset Impairments and Restaurant Closings, net
The approximate
$6.0 million
impairment charge for the quarter ended
March 15, 2017
is related to assets at
13
locations, goodwill at
six
locations, and
two
properties held for sale written down to their fair value. The approximate
$37 thousand
impairment charge for the quarter ended
March 9, 2016
is primarily related to goodwill at
one
underperforming converted Cheeseburger in Paradise leasehold location.
The approximate
$6.3 million
impairment charge for the
two quarters
ended
March 15, 2017
is related to assets at
13
locations, goodwill at
six
locations, and
four
properties held for sale written down to their fair value. The approximate
$37 thousand
impairment charge for the
two quarters
ended
March 9, 2016
is primarily related to goodwill at
one
underperforming converted Cheeseburger in Paradise leasehold location.
Net (Gain) Loss on Disposition of Property and Equipment
Loss
on disposition of property and equipment was approximately
$0.3 million
in the quarter ended
March 15, 2017
and reflects normal asset retirement activity and a write-off at one location. The
gain
on disposition of property and equipment was approximately
$0.6 million
in the quarter ended
March 9, 2016
and primarily reflects the gain on the sale of one property that previously operated as a Luby's cafeteria, partially offset by normal asset retirement activity.
Loss
on disposition of property and equipment was approximately
$0.4 million
in the
two quarters
ended
March 15, 2017
and primarily reflects reflects normal asset retirement activity and a write-off at one location. The
gain
on disposition of property and equipment was approximately
$0.8 million
in the
two quarters
ended
March 9, 2016
related primarily to the gain on the sale of one property that previously operated as a Luby's cafeteria and the sale of one property that we had previously acquired for possible development, offset by normal asset retirement activity.
Interest Income
Interest income was
$1 thousand
in the quarter ended
March 15, 2017
and in the quarter ended
March 9, 2016
.
Interest income was
$3 thousand
in the
two quarters
ended
March 15, 2017
and
$2 thousand
in the
two quarters
ended
March 9, 2016
.
Interest Expense
Interest expense
increased
approximately
$0.2 million
to approximately
$0.7 million
in the quarter ended
March 15, 2017
compared to the quarter ended
March 9, 2016
. The
increase
in interest expense reflects acceleration of deferred financing fees related to the extinguishment of debt as well as higher average debt balances.
Interest expense
increased
$0.1 million
to approximately
$1.3 million
in the
two
quarters ended
March 15, 2017
compared to the
two
quarters ended
March 9, 2016
. The
increase
in interest expense reflects higher average debt balances. Both the
two
quarters ended
March 15, 2017
and the
two
quarters ended
March 9, 2016
include acceleration of deferred financing fees.
Other Income, Net
Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas royalty income; and changes in the fair value of our interest rate swap agreement. Other income, net, in the quarter ended
March 15, 2017
decreased
$0.3 million
compared to the quarter ended
March 9, 2016
due primarily to (1) lower net rental income and (2) a decrease in sales tax discounts as we did not participate in state tax prepayment programs fully in the quarter ended
March 15, 2017
.
Other income, net, in the
two
quarters ended
March 15, 2017
decreased approximately
$49 thousand
compared to the
two
quarters ended
March 9, 2016
due primarily to (1) lower net rental income; (2) a decrease in sales tax discounts as we did not participate in state tax prepayment programs fully in the quarter ended
March 15, 2017
; and (3) recording a net reduction in the fair value of our interest rate swap agreement; offset by (4) a decrease in discounts related to a lower volume of sales of pre-paid gift cards.
Taxes
For the quarter ended
March 15, 2017
, the income taxes related to continuing operations resulted in a tax
provision
of approximately
$3.6 million
compared to a tax
benefit
of approximately
$0.2 million
for the quarter ended
March 9, 2016
. For the
two
quarters ended
March 15, 2017
, the income taxes related to continuing operations resulted in a tax
provision
of approximately
$2.1 million
compared to a tax
benefit
of approximately
$0.8 million
for the
two
quarters ended
March 9, 2016
.
The effective tax rate, (ETR), from continuing operations was a negative
39.0%
and a negative
20.2%
for the quarter and
two quarters
ended
March 15, 2017
, respectively. The ETR for the quarter ended
March 15, 2017
differs from the federal statutory rate of 34% due to the federal jobs credits, state income taxes and other discrete items.
Discontinued Operations
Loss from discontinued operations was approximately
$0.3 million
in the quarter ended
March 15, 2017
compared to a loss of
$17 thousand
in the quarter ended
March 9, 2016
. The loss from discontinued operations of approximately
$0.3 million
in the quarter ended
March 15, 2017
was related to an approximate $0.3 million tax provision. The loss from discontinued operations of
$17 thousand
in the quarter ended
March 9, 2016
consisted of $29 thousand in carrying costs associated with assets related to discontinued operations partially offset by a $12 thousand tax benefit.
Loss from discontinued operations was approximately
$0.4 million
in the
two
quarters ended
March 15, 2017
compared to a loss of
$89 thousand
in the
two
quarters ended
March 9, 2016
. The loss from discontinued operations of approximately
$0.4 million
in the
two
quarters ended
March 15, 2017
was related to a tax provision of approximately $0.4 million. The loss from discontinued operations of
$89 thousand
in the
two
quarters ended
March 9, 2016
consisted of $147 thousand in carrying costs associated with assets related to discontinued operations partially offset by a $58 thousand tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
General.
Our primary sources of short-term and long-term liquidity are cash flows from operations, our Revolver (as defined below), and our Term Loan (as defined below). During the
two quarters
ended
March 15, 2017
, cash
provided by
operating activities was approximately
$6.6 million
offset by cash
used in
investing activities of approximately
$6.3 million
and cash
used in
financing activities of approximately
$0.3 million
. Cash and cash equivalents
remained relatively unchanged
in the
two quarters
ended
March 15, 2017
compared to an approximate
$0.1 million
decrease
in the
two quarters
ended
March 9, 2016
. We plan to continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently.
Our cash requirements consist principally of:
|
|
•
|
payments to reduce our debt;
|
|
|
•
|
capital expenditures for construction, restaurant renovations and upgrades, information technology and culinary contract services development; and
|
|
|
•
|
working capital primarily for our Company-owned restaurants and obligations under our Culinary Contract Services agreements.
|
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical for culinary contract services and franchises. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets.
The following table summarizes our cash flows from operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
March 15,
2017
|
|
March 9,
2016
|
|
(28 weeks)
|
|
(28 weeks)
|
|
(In thousands)
|
Total cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
6,603
|
|
|
$
|
7,191
|
|
Investing activities
|
(6,331
|
)
|
|
(6,786
|
)
|
Financing activities
|
(259
|
)
|
|
(467
|
)
|
Net increase (decrease) in cash and cash equivalents
|
$
|
13
|
|
|
$
|
(62
|
)
|
Operating Activities
. Cash
provided by
operating activities was approximately
$6.6 million
in the
two quarters
ended
March 15, 2017
, an approximate
$0.6 million
decrease
from the
two quarters
ended
March 9, 2016
. The
$0.6 million
decrease
in cash
provided by
operating activities is due to an approximate
$6.0 million
decrease
in cash
provided by
operations before changes in operating assets and liabilities less an approximate
$5.4 million
increase in cash provided by changes in operating assets and liabilities for the
two quarters
ended
March 15, 2017
.
Cash provided by operating activities before changes in operating assets and liabilities was approximately
$2.8 million
in the
two quarters
ended
March 15, 2017
, an approximate
$6.0 million
decrease
compared to the
two quarters
ended
March 9, 2016
. The
$6.0 million
decrease
in cash
provided by
operating activities before changes in operating assets and liabilities was primarily due to decreased store-level profit from our Company-owned restaurants.
Changes in operating assets and liabilities was an approximate
$3.8 million
source of
cash in the
two quarters
ended
March 15, 2017
and an approximate
$1.6 million
use of
cash in the
two quarters
ended
March 9, 2016
. The
$5.4 million
increase
in the source of cash was due to differences in the change in asset and liability balances between the
two quarters
ended
March 15, 2017
and the
two quarters
ended
March 9, 2016
. Increases in current asset accounts are a use of cash while decreases in current asset accounts are a source of cash. During the
two quarters
ended
March 15, 2017
, the change in trade accounts and other receivables was an approximate
$0.5 million
source of
cash which was an approximate
$0.7 million
increase over the
use of
cash in the
two quarters
ended
March 9, 2016
. The change in food and supplies inventory during the quarter ended
March 15, 2017
was approximately
zero
which was an approximate
$0.8 million
increase from the
use of
cash in the
two quarters
ended
March 9, 2016
. The change in prepaid expenses and other assets was an approximate
$0.2 million
source of
cash during the
two quarters
ended
March 15, 2017
, which was an approximate
$0.2 million
decrease in the
source of
cash from the
two quarters
ended
March 9, 2016
.
Increase in current liability accounts are a source of cash, while decreases in current liability accounts are a use of cash. During the
two quarters
ended
March 15, 2017
, changes in the balances of accounts payable, accrued expenses and other liabilities was an approximate
$3.1 million
source of
cash, compared to a
use of
cash of approximately
$1.0 million
during the
two quarters
ended
March 9, 2016
.
Investing Activities
. We generally reinvest available cash flows from operations to develop new restaurants, maintain and enhance existing restaurants and support Culinary Contract Services. Cash used by investing activities was approximately
$6.3 million
in the
two quarters
ended
March 15, 2017
and approximately
$6.8 million
in the
two quarters
ended
March 9, 2016
. Capital expenditures were approximately
$8.0 million
in the
two quarters
ended
March 15, 2017
and approximately
$11.0 million
in the
two quarters
ended
March 9, 2016
. Proceeds from the disposal of assets were approximately
$1.6 million
in the
two quarters
ended
March 15, 2017
and approximately
$4.2 million
in the
two quarters
ended
March 9, 2016
.
Financing Activities
. Cash
used in
financing activities was approximately
$0.3 million
in the
two quarters
ended
March 15, 2017
compared to an approximate
$0.5 million
use of cash
during the
two quarters
ended
March 9, 2016
. Cash flows from financing activities was primarily the result of borrowings and repayments related to the 2013 Credit Facility, our Revolver, and our Term Loan. During the
two quarters
ended
March 15, 2017
, cash provided by financing activities was approximately
$1.0 million
based on our total net borrowings. As a result of our first quarter 2017 refinancing, repayments on the 2013 Credit Facility and the Revolver exceeded borrowings by approximately
$34.0 million
and borrowing from the Term Loan provided
$35.0 million
. Principal payments on our Term Loan amounted to
$0.6 million
in the
two quarters
ended
March 15, 2017
. During the
two quarters
ended
March 9, 2016
, borrowings exceeded repayments of the 2013 Credit Facility by approximately
$0.5 million
.
Status of Long-Term Investments and Liquidity
At
March 15, 2017
, we did not hold any long-term investments.
Status of Trade Accounts and Other Receivables, Net
We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for uncollectable accounts, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
Working Capital
Current assets
decreased
approximately
$0.9 million
in the
two quarters
ended
March 15, 2017
compared to a decrease of approximately $0.1 million in the quarter ended
March 9, 2016
. In the
two quarters
ended
March 15, 2017
, trade accounts and other receivables, net, decreased approximately $0.5 million, deferred income taxes decreased approximately $0.3 million, and prepaid expenses decreased approximately $0.1 million. In the
two quarters
ended
March 9, 2016
, food and supply inventories and trade accounts and other receivables, net increased approximately $0.3 million and $0.2 million, respectively, partially offset by decreases in prepaid expenses and cash of approximately $0.5 million and $0.1 million, respectively.
Current liabilities
increased
approximately
$5.8 million
in the
two quarters
ended
March 15, 2017
compared to a decrease of approximately $0.6 million in the
two quarters
ended
March 9, 2016
. In the
two quarters
ended
March 15, 2017
, current portion of credit facility debt increased approximately $2.5 million, salaries and incentives increased approximately $1.2 million, unredeemed gift cards increased approximately $0.9 million, accounts payable increased approximately $0.8 million, accrued taxes other than income taxes increased approximately $0.3 million and accrued professional fees increased approximately $0.2 million; partially offset by an approximate $0.1 million decrease in operating expenses. In the
two quarters
ended
March 9, 2016
, unredeemed gift cards increased approximately $1.0 million, salaries and incentives increased approximately $0.7 million, income taxes and other increased approximately $0.3 million and accrued claims and insurance increased approximately $0.1 million; partially offset by decreases in taxes other than income of approximately $1.4 million, accounts payable of approximately $1.1 million and accrued operating expenses of approximately $0.2 million.
Capital Expenditures
Capital expenditures consist of purchases of real estate for future restaurant sites, Culinary Contract Services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for the
two quarters
ended
March 15, 2017
were approximately
$8.0 million
and related to recurring maintenance of our existing units, existing restaurant remodels and rollout of new point of sale and network equipment, improvement of our culinary contract services business and the development of future restaurant sites. We expect to be able to fund all capital expenditures in fiscal
2017
using proceeds from the sale of assets, cash flows from operations and our 2016 Credit Agreement. We expect to spend less than $14.0 million on capital expenditures in fiscal
2017
.
DEBT
The following table summarizes credit facility debt, less current portion at
March 15, 2017
and
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 15,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
2013 Credit Agreement - Revolver
|
$
|
—
|
|
|
$
|
37,000
|
|
2016 Credit Agreement - Revolver
|
3,000
|
|
|
—
|
|
2016 Credit Agreement - Term Loan
|
34,388
|
|
|
—
|
|
Total credit facility debt
|
37,388
|
|
|
37,000
|
|
Less unamortized debt issue costs
|
(321
|
)
|
|
—
|
|
Total credit facility debt, less unamortized debt issuance costs
|
37,067
|
|
|
37,000
|
|
Current portion of credit facility debt
|
(2,450
|
)
|
|
—
|
|
Total
|
$
|
34,617
|
|
|
$
|
37,000
|
|
On November 8, 2016, we refinanced our 2013 Credit Facility (as defined below) with a new $65.0 million Senior Secured Credit Agreement. The debt issue costs we incurred on the new 2016 Credit Agreement (as defined below) financing amounted to $0.6 million of which $0.3 million was applicable to the Term Loan and was setup on a pro-rata basis as a liability, which is included in credit facility debt, less current portion.
Senior Secured Credit Agreement
On November 8, 2016, we entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, as amended, is comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”). The maturity date of the 2016 Credit Agreement is November 8, 2021. For this section of this Form 10-Q, capitalized terms that are used but not otherwise defined shall have the meanings given to such terms in the 2016 Credit Agreement.
The Term Loan and/or Revolver commitments may be increased by up to an additional $10.0 million in the aggregate.
The 2016 Credit Agreement also provides for the issuance of letters of credit in an aggregate amount equal to the lesser of $5.0 million and the Revolving Credit Commitment, which is $30.0 million as of
March 15, 2017
. The 2016 Credit Agreement is guaranteed by all of the Company’s present subsidiaries and will be guaranteed by our future subsidiaries.
At any time throughout the term of the 2016 Credit Agreement, we have the option to elect one of two bases of interest rates. One interest rate option is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) 30-day LIBOR plus 1%, plus, in each case, the Applicable Margin, which ranges from 1.50% to 2.50% per annum. The other interest rate option is the LIBOR plus the Applicable Margin, which ranges from 2.50% to 3.50% per annum. The Applicable Margin under each option is dependent upon our Consolidated Total Lease Adjusted Leverage Ratio ("CTLAL") at the most recent quarterly determination date.
The Term Loan amortizes 7.0% per year (35.0% in 5 years) which includes the quarterly payment of principal. On December 14, 2016, we entered into an interest rate swap with a notional amount of $17.5 million, representing 50% of the initial outstanding Term Loan.
We are obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranging from 0.30% to 0.35% per annum depending on the CTLAL at the most recent quarterly determination date.
The proceeds of the 2016 Credit Agreement are available for us to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contains the following covenants among others:
|
|
•
|
CTLAL of not more than (i) 5.00 to 1.00, at the end of each fiscal quarter, through and including the third fiscal quarter of the Borrower’s fiscal year 2018, and (ii) 4.75 to 1.00 thereafter,
|
|
|
•
|
Consolidated Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, at the end of each fiscal quarter,
|
|
|
•
|
Limit on Growth Capital Expenditures so long as the CTLAL is at least 0.25x less than the then-applicable permitted maximum CTLAL,
|
|
|
•
|
restrictions on mergers, acquisitions, consolidations, and asset sales,
|
|
|
•
|
restrictions on the payment of dividends, redemption of stock, and other distributions,
|
|
|
•
|
restrictions on incurring indebtedness, including certain guarantees, and capital lease obligations,
|
|
|
•
|
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
|
|
|
•
|
restrictions on transactions with affiliates and materially changing our business,
|
|
|
•
|
restrictions on making certain investments, loans, advances, and guarantees,
|
|
|
•
|
restrictions on selling assets outside the ordinary course of business,
|
|
|
•
|
prohibitions on entering into sale and leaseback transactions, and
|
|
|
•
|
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.
|
The 2016 Credit Agreement is secured by an all asset lien on all of our real property and also includes customary events of default. If a default occurs and is continuing, the lenders’ commitments under the 2016 Credit Agreement may be immediately terminated, and, or we may be required to repay all amounts outstanding under the 2016 Credit Agreement.
As of
March 15, 2017
, we had
$37.4 million
in total outstanding loans and approximately
$1.3 million
committed under letters of credit, which we use as security for the payment of insurance obligations, and approximately
$0.2 million
in other indebtedness.
We were in compliance with the covenants contained in the 2016 Credit Agreement as of
March 15, 2017
and after applying the CTLAL, the available borrowing capacity was
$3.0 million
. At any determination date, if certain leverage and fixed charge ratios exceed the maximum permitted under our 2016 Credit Agreement, we would be considered in default under the terms of the agreement. Due to negative results in the first
two quarters
of fiscal 2017, continued under performance in the current fiscal year could cause our financial ratios to exceed the permitted limits under the terms of the 2016 Credit Agreement.
2013 Credit Facility
In August 2013, we entered into a $70.0 million revolving credit facility with Wells Fargo Bank, National Association, as Administrative Agent, and ZB, N.A. dba Amegy Bank (formerly Amegy Bank, N.A.), as Syndication Agent. Pursuant to the October 2, 2015 amendment, the total aggregate amount of the lenders' commitments was lowered to $60.0 million from $70.0 million. The following description summarizes the material terms of the revolving credit facility, as subsequently amended on March 21, 2014, November 7, 2014 and October 2, 2015, (the revolving credit facility is referred to as the “2013 Credit Facility”). The 2013 Credit Facility is governed by the credit agreement dated as of August 14, 2013 (the “2013 Credit Agreement”) among us, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as Administrative
Agent, and ZB, N.A. dba Amegy Bank (formerly Amegy Bank, N.A.), as Syndication Agent. The maturity date of the 2013 Credit Facility was September 1, 2017.
The 2013 Credit Facility also provided for the issuance of letters of credit in a maximum aggregate amount of $5.0 million outstanding as of August 14, 2013 and $15.0 million outstanding at any one time with prior written consent of the Administrative Agent and the Issuing Bank.
At any time throughout the term of the 2013 Credit Facility, we had the option to elect one of two bases of interest rates. One interest rate option was the greater of (a) the Federal Funds Effective Rate plus 0.50% or (b) prime plus, in either case, an applicable spread that ranged from 0.75% to 2.25% per annum. The other interest rate option is the London InterBank Offered Rate plus a spread that ranged from 2.50% to 4.00% per annum. The applicable spread under each option is dependent upon the ratio of our debt to EBITDA at the most recent determination date.
We were obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranging from 0.30% to 0.40% per annum depending on the Total Leverage Ratio at the most recent determination date.
The proceeds of the 2013 Credit Facility were available for our general corporate purposes, general working capital purposes and capital expenditures.
The 2013 Credit Agreement, as amended, contained the following covenants among others:
|
|
•
|
Debt Service Coverage Ratio of not less than (i) 1.10 to 1.00 at all times during the first, second and third fiscal quarters of the Borrower’s fiscal year 2015, (ii) 1.25 to 1.00 at all times during the fourth fiscal quarter of the Borrower’s fiscal year 2015, and (iii) 1.50 to 1.00 at all times thereafter,
|
|
|
•
|
Lease Adjusted Leverage Ratio of not more than (i) 5.75 to 1.00 at all times during the first, second and third fiscal quarters of the Borrower’s fiscal year 2015, (ii) 5.50 to 1.00 at all times during the fourth fiscal quarter of the Borrower’s fiscal year 2015, (iii) 5.25 to 1.00 at all times during the first fiscal quarter of the Borrower’s fiscal year 2016, (iv) 5.00 to 1.00 at all times during the second fiscal quarter of the Borrower’s fiscal year 2016, and (v) 4.75 to 1.00 at all times thereafter,
|
|
|
•
|
capital expenditures limited to $25.0 million per year,
|
|
|
•
|
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
|
|
|
•
|
restrictions on transactions with affiliates and materially changing our business,
|
|
|
•
|
restrictions on making certain investments, loans, advances and guarantees,
|
|
|
•
|
restrictions on selling assets outside the ordinary course of business,
|
|
|
•
|
prohibitions on entering into sale and leaseback transactions, and
|
|
|
•
|
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.
|
The 2013 Credit Agreement also included customary events of default. If a default occurred and was continuing, the lenders’ commitments under the 2013 Credit Facility may have been immediately terminated and, or we could have been required to repay all amounts outstanding under the 2013 Credit Facility.
The 2013 Credit Facility was secured by a perfected first priority lien on certain of our real property and all of the material personal property owned by us or any of our subsidiaries, other than certain excluded assets (as defined in the Credit Agreement).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements included in Item 1 of Part 1 of this Form 10-Q were prepared in conformity with GAAP. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Due to the significant, subjective and complex judgments and estimates used when preparing our Consolidated Financial Statements, management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board. Management believes the following are critical accounting policies used in the preparation of these financial statements. Actual results may differ from these estimates, including our estimates of future cash flows, which are subject to the current economic environment and changes in estimates. We had no changes in our critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2016
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NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. We have not yet decided on a method of transition upon adoption. The Company expects the pronouncement may impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a franchise restaurant. We are further evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The update also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right–of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. 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. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We are evaluating the impact on the Company’s consolidated financial statements and have not yet selected a transition method.
In March 2016, the FASB issued ASU No. 2016–04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored–Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored–value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. We are are evaluating the impact on the Company's consolidated financial statements and do not expect the adoption to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for purposes of these provisions, including any statements regarding:
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future operating results,
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future capital expenditures and expected sources of funds for capital expenditures,
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future debt, including liquidity and the sources and availability of funds related to debt, and expected repayment of debt, as well as our ability to refinance the existing credit facility or enter into a new credit facility on a timely basis,
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expected sources of funds for working capital requirements,
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plans for our new prototype restaurants,
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plans for expansion of our business,
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scheduled openings of new units,
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closing existing units,
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future sales of assets and the gains or losses that may be recognized as a result of any such sales, and
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continued compliance with the terms of our 2016 Credit Facility.
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In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are relevant. Although management believes that its assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of its control. The following factors, as well as the factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2016 and any other cautionary language in this Form 10-Q, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
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general business and economic conditions,
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the impact of competition,
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our operating initiatives, changes in promotional, couponing and advertising strategies and the success of management’s business plans,
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fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce,
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ability to raise menu prices and customer acceptance of changes in menu items,
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increases in utility costs, including the costs of natural gas and other energy supplies,
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changes in the availability and cost of labor, including the ability to attract qualified managers and team members,
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the seasonality of the business,
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collectability of accounts receivable,
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changes in governmental regulations, including changes in minimum wages and health care benefit regulation,
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the effects of inflation and changes in our customers’ disposable income, spending trends and habits,
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the ability to realize property values,
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the availability and cost of credit,
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effectiveness of the Cheeseburger in Paradise conversions to Fuddruckers restaurants,
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the effectiveness of our credit card controls and PCI compliance,
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weather conditions in the regions in which our restaurants operate,
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costs relating to legal proceedings,
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impact of adoption of new accounting standards,
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effects of actual or threatened future terrorist attacks in the United States,
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unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations, and
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the continued service of key management personnel.
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Each forward-looking statement speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-Q could have material adverse effect on our business, results of operations, cash flows and financial condition.