ITEM 1. FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements—Unaudited
(1) The Company and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of March 29, 2020 and December 29, 2019 and for the thirteen week periods ended March 29, 2020 and March 31, 2019 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of March 29, 2020, there were 159 Ruth’s Chris Steak House restaurants, including 83 Company-owned restaurants, three restaurants operating under contractual agreements and 73 franchisee-owned restaurants, including 21 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan. All Company-owned restaurants are located in the United States. During January 2020 a Company-owned Ruth’s Chris Steak House restaurant was relocated in Washington, D.C.
On July 29, 2019, the Company completed the acquisition of substantially all of the assets of three franchisee-owned Ruth’s Chris Steak House restaurants located in Philadelphia, PA, King of Prussia, PA and Garden City, NY (the “MBR Franchise Acquisition”) for a cash purchase price of $18.6 million. The acquisition was funded with debt through the Company’s senior credit facility. The results of operations, financial position and cash flows of the MBR Franchise Acquisition are included in the Company’s consolidated financial statements as of the date of the acquisition. For additional information, see Note 7.
The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended March 29, 2020 and March 31, 2019 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended March 29, 2020 and March 31, 2019 each contained thirteen weeks and are referred to herein as the first quarter of fiscal year 2020 and the first quarter of fiscal year 2019, respectively. Fiscal years 2020 and 2019 are both 52-week years.
COVID-19 Impact
In March 2020 the World Health Organization declared the novel coronavirus (“COVID-19”) a pandemic and the United States declared it a National Public Health Emergency, which has resulted in a significant reduction in revenue at our restaurants due to mandatory restaurant closures, capacity limitations, social distancing guidelines or other restrictions mandated by governments across the world, including federal, state and local governments in the United States. As a result of these developments, the Company is experiencing a significant negative impact on its revenues, results of operations and cash flows which could impact its ability to meet its obligations over the next twelve months.
In response to the business disruption caused by the COVID-19 outbreak, the Company has taken the following actions, which management expects will enable it to meet its obligations over the next twelve months.
Operating Initiatives. Due to the government mandates regarding limiting or prohibiting in-restaurant dining due to COVID-19, the Company is leveraging its Ruth’s Anywhere program in markets where take-out and delivery sales are sufficient to cover the costs of management staffing those locations. As of the date of this report the dining rooms in all of the Company-owned restaurants are closed. The Company is operating take-out and delivery in 56 Company-owned restaurants where it is permitted by local regulations and economically viable and 30 Company-owned and -managed restaurants are closed. As of the date of this report, our labor and supply chain have not been disrupted. Many of the franchisee-owned locations are experiencing similar disruptions to their business, and as a result, the Company has waived franchise royalty requirements until their dining rooms have re-opened. The Company currently expects the majority of its dining rooms to remain closed through most of the second fiscal quarter of 2020.
Capital and Expense Reductions. The Company has suspended all new restaurant construction and non-essential capital expenditures. The Company has also made significant reductions in ongoing operating expenses, including curtailing operations in
7
restaurants where take-out and delivery is not viable and furloughing a significant number of team members in the field and in the Company’s Home Office. In addition, the Company has also implemented pay reductions for all remaining Home Office and field employees. We have taken measures to reduce payments to our landlords and vendors in April 2020 and have begun discussions with our landlords and vendors to reduce or defer our payments. We are unable to predict the outcome of these discussions and the extent to which we will be able to negotiate to reduce or defer payments. With payments being delayed, landlords or vendors may terminate our leases and contracts or could take other actions that restrict our ability to access or reopen our stores in a timely manner.
Dividends and Share Buybacks. The Company suspended the quarterly cash dividend and there are no plans for share buybacks in the foreseeable future.
Balance Sheet. In March 2020, the Company entered into a Second Amendment to our Credit Agreement (‘Second Amendment”), which increased the Company’s borrowing capacity to $150.0 million and relaxed the leverage covenant restrictions to 4.0 times Bank Adjusted EBITDA through the first quarter of 2021. We borrowed the remaining available amount under the Revolving Credit Facility as a precautionary measure in order to increase the Company’s cash position and preserve financial flexibility. On May 7, 2020, the Company entered into a Third Amendment to our Credit Agreement (“Third Amendment”), which waived financial covenants until the first quarter of 2021, further relaxed the leverage covenant restrictions during the first and second quarters of 2021 and added a monthly liquidity covenant.
This is an unprecedented event in the Company’s history and it is uncertain how the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or closure requirements, when the Company’s dining rooms will re-open, and what level of customer demand the Company will experience once the dining rooms are permitted to re-open. Additionally, if the Company fails to comply with its financial covenants and is unable to remedy or obtain a waiver or amendment, an event of default would result. We have engaged in and are continuing to engage in discussions with various parties to explore financing opportunities to further enhance our liquidity. The Company’s operating results, financial position and liquidity over the next twelve months will depend upon a series of factors, including the duration of restaurant shutdowns; the speed with which, and the extent to which, customers return to its restaurants once the dining rooms re-open; the Company’s success in obtaining rent and other payment concessions from landlords and vendors; and the Company’s ability to raise additional capital.
Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these condensed consolidated financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the carrying amounts of property and equipment, goodwill, franchise rights, lease right of use assets and obligations related to gift cards, income taxes, lease liabilities, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This update requires immediate recognition of management’s estimates of current expected credit losses. The Company adopted this new standard on December 30, 2019. The adoption of ASU 2016-13 did not have a significant impact on the Company’s financial reporting.
In January 2017 the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Impairment Test for Goodwill. This update eliminated the calculation of implied goodwill fair value. The Company adopted this new standard on December 30, 2019. The adoption of ASU 2017-04 did not have a significant impact on the Company’s financial reporting.
In August 2018 the FASB issued ASU 2018-13, Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This update primarily amended the disclosures required surrounding Level 3 fair value measurements. The Company adopted this new standard on December 30, 2019. The adoption of ASU 2018-13 did not have a significant impact on the Company’s financial reporting.
In August 2018 the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted this new standard on December 30, 2019. The adoption of ASU 2018-15 did not have a significant impact on the Company’s financial reporting.
8
In August 2018 the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. This update clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842. The Company adopted this new standard on December 30, 2019. The adoption of ASU 2018-19 did not have a significant impact on the Company’s financial reporting.
In December 2019 the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update modifies Topic 740 to simplify the accounting for income taxes. This update is effective for the Company in the first quarter of fiscal year 2021. The adoption of ASU 2019-12 is not expected to have a significant impact on the Company’s ongoing financial reporting.
(2) Fair Value Measurements
The carrying amounts of cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to their short duration. Borrowings classified as long-term debt as of March 29, 2020 and December 29, 2019 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying amount of this debt is a reasonable estimate of its fair value (Level 2).
During the first quarter of fiscal year 2020, primarily due to the impacts of the COVID-19 pandemic, the Company determined that a triggering event had occurred requiring an impairment evaluation of its long-lived assets, territory rights, indefinite lived intangible assets and goodwill. After performing a Step 1 analysis the Company determined there was no impairment of goodwill and franchise rights with indefinite lives in the first quarter of fiscal year 2020. The Company recorded a $5.6 million impairment loss related to long-lived assets at seven restaurants and a $3.1 million impairment loss related to territory rights. The impairment was measured based on the amount by which the carrying amount of the assets exceeded fair value. Fair value was estimated based on both the market and income approaches utilizing market participant assumptions reflecting all available information as of the balance sheet date. The impairment losses are included in the loss on impairment caption in the accompanying condensed consolidated statement of operations.
The Company’s non-financial assets measured at fair value on a non-recurring basis as of March 29, 2020 were as follows (in thousands):
|
|
Fair Value as of March 29, 2020
|
|
|
Significant Other Observable Inputs (Level 3)
|
|
|
Total Losses on Impairment
|
|
Long-lived assets
|
|
$
|
4,689
|
|
|
$
|
4,689
|
|
|
$
|
5,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 29, 2020
|
|
|
Significant Other Observable Inputs (Level 3)
|
|
|
Total Losses on Impairment
|
|
Territory rights
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,101
|
|
9
As of December 29, 2019, the Company had no assets or liabilities measured on a recurring or nonrecurring basis subject to the disclosure requirements of “Fair Value Measurements and Disclosures,” FASB ASC Topic 820.
(3) Leases
The Company leases restaurant facilities and equipment. The Company determines whether an arrangement is or contains a lease at contract inception. The Company’s leases are all classified as operating leases, which are included as ROU assets and operating lease liabilities in the Company’s condensed consolidated balance sheet. Operating lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. ROU assets are measured based on the operating lease liabilities adjusted for lease incentives, initial indirect costs and impairments of operating lease assets. Minimum lease payments include only the fixed lease components of the agreements, as well as any variable rate payments that depend on an index, which are measured initially using the index at the lease commencement dates. To determine the present value of future minimum lease payments, the Company estimates incremental borrowing rates based on the information available at the lease commencement dates, or the transition date at adoption. The Company estimates its rates by starting with the interest rate on its senior revolving credit facility and makes adjustments to that rate to reflect the amount that it would pay to borrow the amount of the lease payments on a collateralized basis over similar terms. The Company validates such rates by determining its credit rating, adjusting the rating to capture payment terms on a collateralized basis and establishing a yield curve based on such rating. The expected lease terms include options to extend when it is reasonably certain the Company will exercise the options up to a total term of 20 years. For financial reporting purposes, minimum rent payments are expensed on a straight-line basis over the lives of the leases. Additionally, incentives received from landlords used to fund leasehold improvements reduce the ROU assets related to those leases and are amortized as reductions to rent expense over the lives of the leases. Variable lease payments that do not depend on a rate or index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.
At March 29, 2020, all of the Company-owned Ruth’s Chris Steak House restaurants operated in leased premises, with the exception of the restaurant in Ft. Lauderdale, FL, which is an owned property, and the restaurants in Anaheim, CA, Lake Mary, FL, Princeton, NJ and South Barrington, IL, which operate on leased land. The leases generally provide for minimum annual rental payments with scheduled minimum rent payment increases during the terms of the leases. Certain leases also provide for rent deferral during the initial term, lease incentives in the form of tenant allowances to fund leasehold improvements, and/or contingent rent provisions based on the sales at the underlying restaurants. Most of the Company’s restaurant leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The weighted average term and discount rate for operating leases is 13.3 years and 4.9%, respectively.
The components of lease expense are as follows (in thousands):
|
|
|
|
13 Weeks Ended
|
|
|
13 Weeks Ended
|
|
|
|
Classification
|
|
March 29, 2020
|
|
|
March 31, 2019
|
|
Operating lease cost
|
|
Restaurant operating expenses and General and administrative costs
|
|
$
|
7,152
|
|
|
$
|
6,380
|
|
Variable lease cost
|
|
Restaurant operating expenses and General and administrative costs
|
|
|
2,726
|
|
|
|
2,757
|
|
Total lease cost
|
|
|
|
$
|
9,878
|
|
|
$
|
9,137
|
|
As of March 29, 2020, maturities of lease liabilities are summarized as follows (in thousands):
|
Operating Leases
|
|
2020, excluding first thirteen weeks ended March 29, 2020
|
$
|
21,621
|
|
2021
|
|
28,290
|
|
2022
|
|
27,212
|
|
2023
|
|
24,290
|
|
2024
|
|
24,094
|
|
Thereafter
|
|
208,279
|
|
Total future minimum rental commitments
|
|
333,786
|
|
Imputed interest
|
|
(93,329
|
)
|
|
$
|
240,457
|
|
10
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
13 Weeks Ended
|
|
|
13 Weeks Ended
|
|
|
|
March 29, 2020
|
|
|
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
6,507
|
|
|
$
|
6,524
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
3,820
|
|
|
$
|
4,055
|
|
Additionally, at March 29, 2020 we have executed seven leases for new Ruth’s Chris Steak House Restaurant locations with undiscounted fixed payments over the initial term of $35.7 million. These leases are expected to have an economic lease term of 20 years. These leases will commence when the landlords make the property available to us for the new restaurant construction. We will assess the reasonably certain lease term at the lease commencement date.
(4) Revenue
In the following tables, the Company’s revenue is disaggregated by major component for each category on the consolidated statements of income (in thousands).
13 Weeks Ended March 29, 2020:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
103,040
|
|
|
$
|
—
|
|
|
$
|
103,040
|
|
Franchise income
|
|
|
3,059
|
|
|
|
567
|
|
|
|
3,626
|
|
Other operating income
|
|
|
1,870
|
|
|
|
—
|
|
|
|
1,870
|
|
Total revenue
|
|
$
|
107,969
|
|
|
$
|
567
|
|
|
$
|
108,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended March 31, 2019:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
112,986
|
|
|
$
|
—
|
|
|
$
|
112,986
|
|
Franchise income
|
|
|
3,819
|
|
|
|
739
|
|
|
|
4,558
|
|
Other operating income
|
|
|
2,197
|
|
|
|
—
|
|
|
|
2,197
|
|
Total revenue
|
|
$
|
119,002
|
|
|
$
|
739
|
|
|
$
|
119,741
|
|
The following table provides information about receivables and deferred revenue liabilities from contracts with customers (in thousands).
|
|
March 29,
|
|
|
December 29,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable, less allowance for doubtful accounts 2020 - $270; 2019 - $241
|
|
$
|
3,780
|
|
|
$
|
19,615
|
|
Deferred revenue
|
|
$
|
47,403
|
|
|
$
|
52,856
|
|
Unearned franchise fees
|
|
$
|
2,430
|
|
|
$
|
2,489
|
|
Significant changes in the deferred revenue balance and the unearned franchise fees balance during the first thirteen weeks of fiscal year 2020 are presented in the following table (in thousands).
|
|
Deferred
|
|
|
Unearned
|
|
|
|
Revenue
|
|
|
Franchise Fees
|
|
Balance at December 29, 2019
|
|
$
|
52,856
|
|
|
$
|
2,489
|
|
Decreases in the beginning balance from gift card redemptions
|
|
|
(11,522
|
)
|
|
|
—
|
|
Increases due to proceeds received, excluding amounts recognized during the period
|
|
|
6,115
|
|
|
|
—
|
|
Decreases due to recognition of franchise development and opening fees
|
|
|
—
|
|
|
|
(59
|
)
|
Increases due to proceeds received for franchise development and opening fees
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(46
|
)
|
|
|
—
|
|
Balance at March 29, 2020
|
|
$
|
47,403
|
|
|
$
|
2,430
|
|
Significant changes in the deferred revenue balance and the unearned franchise fees balance during the first thirteen weeks of fiscal year 2019 are presented in the following table (in thousands).
11
|
|
Deferred
|
|
|
Unearned
|
|
|
|
Revenue
|
|
|
Franchise Fees
|
|
Balance at December 30, 2018
|
|
$
|
48,370
|
|
|
$
|
2,680
|
|
Decreases in the beginning balance from gift card redemptions
|
|
|
(12,663
|
)
|
|
|
—
|
|
Increases due to proceeds received, excluding amounts recognized during the period
|
|
|
6,613
|
|
|
|
—
|
|
Decreases due to recognition of franchise development and opening fees
|
|
|
—
|
|
|
|
(125
|
)
|
Increases due to proceeds received for franchise development and opening fees
|
|
|
—
|
|
|
|
300
|
|
Other
|
|
|
186
|
|
|
|
—
|
|
Balance at March 31, 2019
|
|
$
|
42,506
|
|
|
$
|
2,855
|
|
(5) Long-term Debt
Long-term debt consists of the following (in thousands):
|
|
March 29,
|
|
|
December 29,
|
|
|
|
2020
|
|
|
2019
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
145,000
|
|
|
$
|
64,000
|
|
Less current maturities
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
145,000
|
|
|
$
|
64,000
|
|
As of March 29, 2020, the Company had $145.0 million of outstanding indebtedness under its senior credit facility with approximately $201 thousand of borrowings available, net of outstanding letters of credit of approximately $4.8 million. As of March 29, 2020, the weighted average interest rate on the Company’s outstanding debt was 3.1% and the weighted average interest rate on its outstanding letters of credit was 1.9%. In addition, the fee on the Company’s senior credit facility was 0.3%.
On February 2, 2017, the Company entered into a credit agreement with Wells Fargo Bank, National Association as administrative agent, and certain other lenders (the Credit Agreement). The Credit Agreement provides for a revolving credit facility of $90.0 million with a $5.0 million subfacility for letters of credit and a $5.0 million subfacility for swingline loans. The Credit Agreement has a maturity date of February 2, 2022. At the Company’s option, revolving loans may bear interest at (i) LIBOR, plus an applicable margin or (ii) the highest of (a) the rate publicly announced by Wells Fargo as its prime rate, (b) the average published federal funds rate in effect on such day plus 0.50% and (c) one month LIBOR plus 1.00%, plus an applicable margin. The applicable margin is based on the Company’s actual leverage ratio (“Consolidated Leverage Ratio”), ranging (a) from 1.50% to 2.25% above the applicable LIBOR rate or (b) at the Company’s option, from 0.50% to 1.25% above the applicable base rate.
On September 18, 2019, the Company entered into the First Amendment to Credit Agreement (the “First Amendment”) which amended its Credit Agreement, dated as of February 2, 2017. The First Amendment, among other changes, increased the amount of the revolving credit facility to $120.0 million. The amounts of the letters of credit subfacility and swingline subfacility remain unchanged at $5.0 million each.
On March 27, 2020, the Company, entered into the “Second Amendment” which amended its Credit Agreement, as amended by the First Amendment, with certain direct and indirect subsidiaries of the Company as guarantors, Wells Fargo Bank, National Association, as administrative agent, and the lenders and other agents party thereto. The Second Amendment, among other changes, increased the amount of the revolving credit facility to $150.0 million and relaxed the Consolidated Leverage Ratio restrictions to 4.0 times Bank Adjusted EBITDA through the first quarter of 2021. The amounts of the letters of credit subfacility and swingline subfacility under the Second Amendment remain unchanged at $5.0 million each.
The Second Amendment prohibits the Company from paying any dividends or repurchasing any shares of its common stock if the Company cannot demonstrate that its Consolidated Leverage Ratio is less than 2.50 to 1.00 (both before and after giving effect to the proposed repurchase or dividend), as determined commencing with the second fiscal quarter of 2020. The Second Amendment also prohibits the Company from making any capital expenditures other than maintenance capital expenditures if the Company cannot demonstrate that its Consolidated Leverage Ratio is less than 2.50 to 1.00 (both before and after giving effect to the proposed capital expenditure), as determined commencing with the second fiscal quarter 2020.
The Credit Agreement, as amended by the Second Amendment contains customary representations and affirmative and negative covenants (including limitations on indebtedness and liens) as well as financial covenants requiring a minimum fixed coverage charge ratio (“Fixed Charge Coverage Ratio”) and limiting the Company’s Consolidated Leverage Ratio. The Credit Agreement, as amended by the Second Amendment also contains events of default customary for credit facilities of this type (with customary grace periods, as applicable), including nonpayment of principal or interest when due; material incorrectness of representations and warranties when made; breach of covenants; bankruptcy and insolvency; unsatisfied ERISA obligations; unstayed material judgment beyond specified
12
periods; default under other material indebtedness; and certain changes of control of the Company. If any event of default occurs and is not cured within the applicable grace period, or waived, the outstanding loans may be accelerated by lenders holding a majority of the commitments under the Second Amendment and the lenders’ commitments may be terminated. The obligations under the Second Amendment are guaranteed by certain of the Company’s subsidiaries and are secured by a lien on substantially all of the Company’s personal property assets other than any equity interest in current and future subsidiaries of the Company.
Subsequent to the end of the first quarter of fiscal year 2020, on May 7, 2020, the Company entered into a Third Amendment to Credit Agreement (the “Third Amendment”) which amends its existing Credit Agreement, dated as of February 2, 2017 as amended by the First Amendment thereto, dated as of September 18, 2019 and the Second Amendment thereto dated as of March 27, 2020 (the “Existing Credit Agreement” and the Existing Credit Agreement as amended by the Third Amendment, the “Amended Credit Agreement”) with certain direct and indirect subsidiaries of the Company as guarantors, Wells Fargo Bank, National Association, as administrative agent, and the lenders and other agents party thereto. Like the Existing Credit Agreement, the Amended Credit Agreement provides for a $150.0 million revolving credit facility with a $5.0 million subfacility of letters of credit and a $5.0 million subfacility for swingline loans.
The Third Amendment provides relief from the financial covenants to maintain a specified quarterly minimum adjusted Fixed Charge Coverage Ratio and maximum Consolidated Leverage Ratio.
Under the Existing Credit Agreement, the Company had to maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.00. The Third Amendment waives the requirement to maintain any Fixed Charge Coverage Ratio for the remainder of fiscal year 2020 but, commencing with the fiscal quarter ending March 28, 2021, requires that the Company maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 on an annualized basis, which will exclude the impact of fiscal year 2020.
The Existing Credit Agreement required the Company to maintain a Consolidated Leverage Ratio of not more than 2.75 to 1.00. The Third Amendment waives any Consolidated Leverage Ratio requirement for the remainder of fiscal year 2020 but, commencing with the fiscal quarter ending March 28, 2021, requires a Consolidated Leverage Ratio based on annualized calculations, which will exclude the impact of fiscal year 2020, not to exceed the following thresholds for the periods indicated:
|
|
Period
|
Maximum Ratio
|
The last day of the first Fiscal Quarter of the 2021 Fiscal Year
|
5.00 to 1.00
|
The last day of the second Fiscal Quarter of the 2021 Fiscal Year
|
4.50 to 1.00
|
The last day of the third Fiscal Quarter of the 2021 Fiscal Year
|
4.00 to 1.00
|
The last day of the fourth Fiscal Quarter of the 2021 Fiscal Year and thereafter
|
3.00 to 1.00
|
The Third Amendment requires that the Company meet minimum cash holding requirements (“Minimum Scheduled Cash”)through December 2020 in an amount equal to (a) 50% of the net cash proceeds of any equity issuances by the Company or any of its subsidiaries effected between May 1, 2020 and December 31, 2020 (excluding certain amounts required to be used to make prepayments on loans outstanding under the Amended Credit Agreement) plus (b) the following amount for each month set forth below1:
|
|
May 2020
|
$34,000,000
|
June 2020
|
$29,000,000
|
July 2020
|
$21,000,000
|
August 2020
|
$19,000,000
|
September 2020
|
$15,000,000
|
October 20201
|
$13,000,000
|
November 20201
|
$13,000,000
|
December 2020
|
$14,000,000
|
1For each of October 2020 and November 2020, to the extent that any net cash proceeds of any equity issuances by the Company or any of its subsidiaries are included in the calculation of Minimum Scheduled Cash for such month, the amounts for such month in the chart above will be deemed to be $12,000,000 and $10,000,000, respectively.
13
Interest rates on loans under the Amended Credit Agreement are 2.75% and 1.75% above the LIBOR Rate and Base Rate, respectively, and the fee for the daily unused availability under the revolving credit facility is 0.40% until the Calculation Date for the fiscal quarter ending March 28, 2021. Thereafter, interest rate margins and the fee for the unused commitment will be calculated based on the Consolidated Leverage Ratio in accordance with the Existing Credit Agreement. The term “Calculation Date” means the date five (5) business days after the day on which the Company provides a compliance certificate required under the Amended Credit Agreement for its most recently ended fiscal quarter.
The Third Amendment also provides that if by September 27, 2020, the Company has not received at least $20 million in gross proceeds from equity issuances, then from the fiscal quarter ending on September 27, 2020 until the Calculation Date with respect to the fiscal quarter ending on March 28, 2021, interest rates will be 3.25% and 2.25% above the LIBOR Rate and Base Rate, respectively, and the fee for the daily unused availability under the revolving credit facility will be 0.40% until the Calculation Date for the fiscal quarter ending March 28, 2021 at which point interest rates and the unused commitment fee will be calculated based on the Leverage Ratio in accordance with the Existing Credit Agreement.
Until the Company can demonstrate compliance with both the minimum Fixed Coverage Charge Ratio and the maximum Consolidated Leverage Ratio following the end of the fiscal quarter ending March 28, 2021, the Third Amendment requires that the Company use 50% of the net cash proceeds of any equity issuances over $30.0 million (other than the exercise price on stock options issued as part of employee compensation) to make mandatory principal prepayments of loans outstanding under the Amended Credit Agreement (with a permanent reduction to the revolving credit commitment under the Amended Credit Agreement in an amount corresponding to the amount of such prepayment), and/or cash collateralize the letter of credit obligations outstanding under the Amended Credit Agreement.
The Third Amendment limits acquisitions by the Company until it can demonstrate compliance with the minimum Fixed Coverage Charge Ratio following the end of the fiscal quarter ending March 28, 2021.
(6) Shareholders’ Equity
In October 2019 the Company’s Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $60 million of outstanding common stock from time to time. The new share repurchase program replaces the previous share repurchase program announced in October 2017, which has been terminated. During the first thirteen weeks of fiscal year 2020, 902,000 shares were repurchased at an aggregate cost of $13.2 million, or an average cost of $14.66 per share. As of March 29, 2020, $41.6 million remained available for future purchases under the share repurchase program.
The Company’s Board of Directors declared the following dividends during the periods presented (amounts in thousands, except per share amounts):
Declaration Date
|
|
Dividend per Share
|
|
|
Record Date
|
|
Total Amount
|
|
|
Payment Date
|
Fiscal Year 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
February 21, 2020
|
|
$
|
0.15
|
|
|
March 6, 2020
|
|
$
|
4,428
|
|
|
March 20, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
February 22, 2019
|
|
$
|
0.13
|
|
|
March 7, 2019
|
|
$
|
3,967
|
|
|
March 21, 2019
|
As a result of the impacts to our business arising from the COVID-19 pandemic, the Company has suspended its share repurchase program and dividend payments. The recent amendments to the Company’s Revolving Credit Facility currently prohibit the payment of dividends and share repurchases until our leverage ratio is less than 2.5 times Bank Adjusted EBITDA. Outstanding unvested restricted stock is not included in common stock outstanding amounts. Restricted stock awards outstanding as of March 29, 2020 aggregated 921,329 shares. Restricted stock units outstanding as of March 29, 2020 aggregated 54,550 shares.
14
(7) Franchisee Acquisition
On July 29, 2019 the Company completed the acquisition of substantially all of the assets of the MBR Franchise Acquisition restaurants for a cash purchase price of $18.6 million. The acquisition was funded with borrowings under the Company’s senior credit facility.
The assets and liabilities of the MBR Franchise Acquisition restaurants were recorded at their respective fair values as of the date of the acquisition. The results of operations, financial position and cash flows of the MBR Franchise Acquisition restaurants are included in the Company’s consolidated financial statements as of the date of the acquisition.
The goodwill for the MBR Franchise Acquisition is all deductible for federal income tax purposes. Goodwill was measured as the excess of the consideration transferred over the net of the amounts assigned to identifiable assets acquired and the liabilities assumed as of the acquisition date, and includes the economic value of expected future cash flows not assigned to identifiable assets, efficiencies from combining the operations of the acquired restaurants with other Company-owned restaurants and an assembled workforce. The goodwill for the MBR Franchise Acquisition, which is included with the goodwill for the reporting unit identified as the steakhouse operating segment, will be reviewed for potential impairment annually or more frequently if triggering events are detected. The determination of the acquisition date fair value of the franchise and territory rights was based on a multi-period excess earnings approach and involved projected after-royalty future earnings discounted using a market discount rate, from which a contributory asset charge for net working capital, property and equipment and assembled workforce was subtracted. The reacquired franchise rights will be amortized over a weighted average term of 6.2 years, which reflects the remaining terms of the related franchise agreements, not including renewal options. The reacquired territory rights, which were valued at $3.3 million on the acquisition date, were impaired during the fiscal quarter ended March 29, 2020. Property and equipment will be depreciated over a period of two to twenty years.
(8) Segment Information
The Company has two reportable segments – the Company-owned steakhouse segment and the franchise operations segment. The Company does not rely on any major customers as a source of revenue. The Company-owned Ruth’s Chris Steak House restaurants, all of which are located in North America, operate within the full-service dining industry, providing similar products to similar customers. Revenues are derived principally from food and beverage sales. As of March 29, 2020, (i) the Company-owned steakhouse restaurant segment included 83 Ruth’s Chris Steak House restaurants and three Ruth’s Chris Steak House restaurants operating under contractual agreements and (ii) the franchise operations segment included 73 franchisee-owned Ruth’s Chris Steak House restaurants. Segment profits for the Company-owned steakhouse restaurant segments equal segment revenues less segment expenses. Segment revenues for the Company-owned steakhouse restaurants include restaurant sales, management agreement income and other restaurant income. Gift card breakage revenue is not allocated to operating segments. Not all operating expenses are allocated to operating segments. Segment expenses for the Company-owned steakhouse segment include food and beverage costs and restaurant operating expenses. No other operating costs are allocated to the Company-owned steakhouse segment for the purpose of determining segment profits because such costs are not directly related to the operation of individual restaurants. The accounting policies applicable to each segment are consistent with the policies used to prepare the consolidated financial statements. The profit of the franchise operations segment equals franchise income, which consists of franchise royalty fees and franchise opening fees. No costs are allocated to the franchise operations segment.
15
Segment information related to the Company’s two reportable business segments follows (in thousands):
|
|
13 Weeks Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
103,971
|
|
|
$
|
114,184
|
|
Franchise operations
|
|
|
3,626
|
|
|
|
4,558
|
|
Unallocated other revenue and revenue discounts
|
|
|
939
|
|
|
|
999
|
|
Total revenues
|
|
$
|
108,536
|
|
|
$
|
119,741
|
|
|
|
|
|
|
|
|
|
|
Segment profits:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
17,791
|
|
|
$
|
28,733
|
|
Franchise operations
|
|
|
3,626
|
|
|
|
4,558
|
|
Total segment profit
|
|
|
21,417
|
|
|
|
33,291
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating income
|
|
|
939
|
|
|
|
999
|
|
Marketing and advertising expenses
|
|
|
(3,438
|
)
|
|
|
(3,629
|
)
|
General and administrative costs
|
|
|
(8,031
|
)
|
|
|
(8,751
|
)
|
Depreciation and amortization expenses
|
|
|
(5,822
|
)
|
|
|
(4,969
|
)
|
Pre-opening costs
|
|
|
(477
|
)
|
|
|
(98
|
)
|
Loss on impairment
|
|
|
(8,697
|
)
|
|
|
—
|
|
Interest expense, net
|
|
|
(628
|
)
|
|
|
(405
|
)
|
Other income
|
|
|
33
|
|
|
|
2
|
|
Income (loss) before income tax expense
|
|
$
|
(4,704
|
)
|
|
$
|
16,440
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
3,767
|
|
|
$
|
5,096
|
|
Corporate assets
|
|
|
161
|
|
|
|
764
|
|
Total capital expenditures
|
|
$
|
3,928
|
|
|
$
|
5,860
|
|
|
|
March 29,
|
|
|
December 29,
|
|
|
|
2020
|
|
|
2019
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
455,562
|
|
|
$
|
471,756
|
|
Franchise operations
|
|
|
1,142
|
|
|
|
2,435
|
|
Corporate assets - unallocated
|
|
|
72,255
|
|
|
|
17,756
|
|
Deferred income taxes - unallocated
|
|
|
6,901
|
|
|
|
4,929
|
|
Total assets
|
|
$
|
535,860
|
|
|
$
|
496,876
|
|
(9) Stock-Based Employee Compensation
On May 15, 2018, the Company’s stockholders approved a new 2018 Omnibus Incentive Plan (2018 Plan) which replaced the Amended and Restated 2005 Equity Incentive Plan (2005 Plan), which expired on May 30, 2018. The 2018 Plan authorizes 2.5 million shares reserved for future grants. Awards that were previously awarded under the 2005 Plan that are forfeited or cancelled in the future will be made available for grant or issuance under the 2018 Plan. The 1,649,394 shares that were authorized but unissued under the 2005 Plan as of May 15, 2018 were cancelled. As of March 29, 2020, there were no shares of common stock issuable upon exercise of currently outstanding options, and 384,663 currently outstanding unvested restricted stock awards under the 2005 Plan. As of March 29, 2020, there were 536,666 currently outstanding unvested restricted stock awards and 54,550 restricted stock units under the 2018 Plan. As of March 29, 2020, the 2018 Plan has 2,171,715 shares available for future grants. During the first thirteen weeks of fiscal year 2020, the Company issued 208,249 restricted stock awards and units to directors, officers and other employees of the Company. Of the 208,249 restricted stock awards and units issued during the first thirteen weeks of fiscal year 2020, 50,419 shares will vest in fiscal year 2021, 99,040 shares will vest in fiscal year 2022, 50,426 shares will vest in fiscal year 2023 and 8,364 shares will vest in fiscal year 2025. Total stock compensation expense recognized during the first thirteen weeks of fiscal years 2020 and 2019 was $2.0 million, in each case.
16
(10) Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses (NOL)s, temporary modifications to the interest expense deduction limits, and technical amendments for qualified improvement property. Additionally, the CARES Act provides for refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes. The Company intends to take advantage of the ability to carryback to prior years federal NOLs generated in certain years, as well as the deferral offered for the employer-paid portion of social security tax. The Company continues to evaluate other provisions of the CARES Act and its impact on its effective tax rate.
Income tax expense differs from amounts computed by applying the federal statutory income tax rate to income from continuing operations before income taxes as follows:
|
|
13 Weeks Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax expense at statutory rates
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
3.1
|
%
|
|
|
3.8
|
%
|
Federal employment tax credits
|
|
|
(4.2
|
%)
|
|
|
(8.9
|
%)
|
Non-deductible executive compensation
|
|
|
0.9
|
%
|
|
|
1.9
|
%
|
Stock-based compensation
|
|
|
(6.2
|
%)
|
|
|
(1.3
|
%)
|
Other
|
|
|
4.2
|
%
|
|
|
(1.1
|
%)
|
Effective tax rate
|
|
|
18.8
|
%
|
|
|
15.4
|
%
|
The Employment-related tax credits line in the effective tax rate schedule above is comprised mainly of federal FICA tip credits which the Company utilizes to reduce its periodic federal income tax expense. A restaurant company employer may claim a credit against its federal income taxes for FICA taxes paid on certain wages (the FICA tip credit). The credit against income tax liability is for the full amount of eligible FICA taxes. Employers cannot deduct from taxable income the amount of FICA taxes taken into account in determining the credit.
Reflected in the Other line in the effective tax rate schedule above for the quarter ended March 29, 2020 is a tax benefit of $1.8 million related to the carryback of federal NOLs under the CARES Act, and a tax expense of $1.7 million related to changes in valuation allowances against deferred tax assets for certain state NOL carryforwards.
(11) Earnings Per Share
The following table sets forth the computation of earnings per share (amounts in thousands, except share and per share amounts):
|
|
13 Weeks Ended
|
|
|
|
March 29,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
(3,818
|
)
|
|
$
|
13,911
|
|
Shares:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding - basic
|
|
|
28,287,261
|
|
|
|
29,275,501
|
|
Weighted average number of common shares
outstanding - diluted
|
|
|
28,287,261
|
|
|
|
29,903,511
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.47
|
|
Diluted earnings per share for the first quarter of fiscal year 2020 and 2019 excludes restricted shares of 341,451 and 27,788 which were outstanding during the period but were anti-dilutive and had no exercise price.
17
(12) Commitments and Contingencies
The Company is subject to various claims, possible legal actions and other matters arising in the normal course of business. Management does not expect disposition of these other matters to have a material adverse effect on the financial position, results of operations or liquidity of the Company. The Company expenses legal fees as incurred.
The legislation and regulations related to tax and unclaimed property matters are complex and subject to varying interpretations by both government authorities and taxpayers. The Company remits a variety of taxes and fees to various governmental authorities, including excise taxes, property taxes, sales and use taxes, and payroll taxes. The taxes and fees remitted by the Company are subject to review and audit by the applicable governmental authorities which could assert claims for additional assessments. Although management believes that the tax positions are reasonable and consequently there are no accrued liabilities for claims which may be asserted, various taxing authorities may challenge certain of the positions taken by the Company which may result in additional liability for taxes and interest. These tax positions are reviewed periodically based on the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits, the identification of new tax contingencies, or the rendering of relevant court decisions. An unfavorable resolution of assessments by a governmental authority could negatively impact the Company’s results of operations and cash flows in future periods.
The Company is subject to unclaimed or abandoned property (escheat) laws which require the Company to turn over to certain state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. The Company is subject to audit by individual U.S. states with regard to its escheatment practices.
On February 26, 2018, a former restaurant hourly employee filed a class action lawsuit in the Superior Court of the State of California for the County of Riverside, alleging that the Company violated the California Labor Code and California Business and Professions Code, by failing to pay minimum wages, pay overtime wages, permit required meal and rest breaks and provide accurate wage statements, among other claims. This lawsuit seeks unspecified penalties under the California’s Private Attorney’s General Act in addition to other monetary payments (Quiroz Guerrero v. Ruth’s Hospitality Group, Inc., et al.; Case No RIC1804127). Although the ultimate outcome of this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, we intend to vigorously defend this matter.
The Company currently buys a majority of its beef from two suppliers. Although there are a limited number of beef suppliers, management believes that other suppliers could provide similar product on comparable terms. A change in suppliers, however, could cause supply shortages and a possible loss of sales, which would affect operating results adversely.
The COVID-19 outbreak and these responses have affected and will continue to adversely affect our revenue, operating costs and liquidity, and we cannot predict how long the outbreak will last or what other government responses may occur.
The COVID-19 outbreak has also adversely affected our ability to open new restaurants. Due to the uncertainty in the economy and to preserve liquidity, we have paused all construction of new restaurants and major remodel projects at existing restaurants. These changes may materially adversely affect our ability to grow our business, particularly if these construction pauses are in place for a significant amount of time.
As a result of the COVID-19 outbreak, we may be unable to secure additional liquidity. We have engaged in and are continuing to engage in discussions with various parties to explore financing opportunities to further enhance our liquidity. The COVID-19 outbreak is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 outbreak lasts. The equity markets in the United States have been extremely volatile due to the COVID-19 outbreak, and the Company’s stock price has fluctuated significantly. Continued volatility in the equity markets and our stock price could negatively impact our ability to raise capital.
Our restaurant operations could be further disrupted if large numbers of our employees are diagnosed with COVID-19. If a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting our liquidity, financial condition or results of operations. Team members might seek and find other employment during the COVID-19 business interruption, which could materially adversely affect our ability to properly staff and reopen our restaurants with experienced team members when the business interruptions caused by COVID-19 abate or end.
Our suppliers could be adversely impacted by the COVID-19 outbreak. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face shortages of food items or other supplies at our restaurants, and our operations and sales could be adversely impacted by such supply interruptions. We did not pay rent to our landlords in April 2020. We have begun discussions with our landlords to reduce or defer our rent payments. We are unable to predict the outcome of these discussions and the extent to which we will be able to negotiate to
18
reduce or defer rent. With rent payments being delayed, landlords may terminate our leases or could take other actions that restrict our ability to access or reopen our stores in a timely manner.
Additional government regulations or legislation as a result of COVID-19 in addition to decisions we have made and may make in the future relating to the compensation of and benefit offerings for our restaurant team members could also have an adverse effect on our business. We cannot predict the types of additional government regulations or legislation that may be passed relating to employee compensation as a result of the COVID-19 outbreak.
The Company could experience other potential impacts as a result of the COVID-19 pandemic that are not completely known at this time, including, but not limited to, charges from potential adjustments to the carrying amount of goodwill, indefinite-lived intangibles and long-lived asset impairment charges. Our actual results may differ materially from the Company’s current estimates as the scope of the COVID-19 pandemic evolves, depending largely though not exclusively on the duration of the disruption to its business.