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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from           to

Commission File Number 000-50972

Texas Roadhouse, Inc.

(Exact name of registrant specified in its charter)

Delaware

20-1083890

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification Number)

6040 Dutchmans Lane, Suite 200

Louisville, Kentucky 40205

(Address of principal executive offices) (Zip Code)

(502) 426-9984

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

TXRH

NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No  .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  

Accelerated Filer  

Non-accelerated Filer  

Smaller Reporting Company  

Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

The number of shares of common stock outstanding were 69,403,969 on July 29, 2020.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

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

3

Condensed Consolidated Balance Sheets — June 30, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) — For the 13 and 26 Weeks Ended June 30, 2020 and June 25, 2019

4

Condensed Consolidated Statement of Stockholders’ Equity — For the 13 and 26 Weeks Ended June 30, 2020 and June 25, 2019

5

Condensed Consolidated Statements of Cash Flows — For the 26 Weeks Ended June 30, 2020 and June 25, 2019

7

Notes to Condensed Consolidated Financial Statements

8

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

16

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

31

Item 4 — Controls and Procedures

32

PART II. OTHER INFORMATION

Item 1 — Legal Proceedings

33

Item 1A — Risk Factors

33

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

34

Item 3 — Defaults Upon Senior Securities

34

Item 4 — Mine Safety Disclosures

35

Item 5 — Other Information

35

Item 6 — Exhibits

35

Signatures

36

2

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

    

June 30, 2020

    

December 31, 2019

 

Assets

Current assets:

Cash and cash equivalents

$

282,493

$

107,879

Receivables, net of allowance for doubtful accounts of $28 at June 30, 2020 and $12 at December 31, 2019

 

30,285

 

99,305

Inventories, net

 

23,102

 

20,267

Prepaid income taxes

 

9,306

 

2,015

Prepaid expenses

 

14,191

 

18,433

Total current assets

 

359,377

 

247,899

Property and equipment, net of accumulated depreciation of $723,320 at June 30, 2020 and $678,988 at December 31, 2019

 

1,072,173

 

1,056,563

Operating lease right-of-use assets, net

517,260

499,801

Goodwill

 

124,748

 

124,748

Intangible assets, net of accumulated amortization of $14,020 at June 30, 2020 and $14,141 at December 31, 2019

 

993

 

1,234

Other assets

 

55,933

 

53,320

Total assets

$

2,130,484

$

1,983,565

Liabilities and Stockholders’ Equity

Current liabilities:

Current portion of operating lease liabilities

$

17,913

$

17,263

Current maturities of long-term debt

50,000

Accounts payable

 

63,363

 

61,653

Deferred revenue-gift cards

 

156,362

 

209,258

Accrued wages

 

33,889

 

39,699

Income taxes payable

767

Accrued taxes and licenses

 

24,334

 

30,433

Other accrued liabilities

 

55,614

 

58,914

Total current liabilities

 

402,242

 

417,220

Operating lease liabilities, net of current portion

557,543

538,710

Long-term debt

 

190,000

 

Restricted stock and other deposits

 

8,339

 

8,249

Deferred tax liabilities, net

 

11,760

 

22,695

Other liabilities

 

77,881

 

65,522

Total liabilities

 

1,247,765

 

1,052,396

Texas Roadhouse, Inc. and subsidiaries stockholders’ equity:

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

 

 

Common stock ($0.001 par value, 100,000,000 shares authorized, 69,403,969 and 69,400,252 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)

 

69

 

69

Additional paid-in-capital

 

135,068

 

140,501

Retained earnings

 

733,136

 

775,649

Accumulated other comprehensive loss

 

(252)

 

(225)

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

868,021

 

915,994

Noncontrolling interests

 

14,698

 

15,175

Total equity

 

882,719

 

931,169

Total liabilities and equity

$

2,130,484

$

1,983,565

See accompanying notes to condensed consolidated financial statements.

3

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(in thousands, except per share data)

(unaudited)

13 Weeks Ended

26 Weeks Ended

    

June 30, 2020

    

June 25, 2019

    

June 30, 2020

    

June 25, 2019

 

Revenue:

Restaurant and other sales

$

473,090

$

684,373

$

1,120,716

$

1,369,490

Franchise royalties and fees

3,335

5,455

8,233

10,946

Total revenue

 

476,425

 

689,828

 

1,128,949

 

1,380,436

Costs and expenses:

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

Cost of sales

 

164,041

221,266

374,221

444,978

Labor

 

194,622

225,490

435,701

449,370

Rent

 

13,251

13,051

26,722

26,179

Other operating

 

89,348

103,811

193,637

205,613

Pre-opening

 

4,290

4,197

9,402

8,065

Depreciation and amortization

 

29,016

28,454

58,070

56,227

Impairment and closure, net

 

(440)

316

155

333

General and administrative

 

29,615

39,960

62,569

75,943

Total costs and expenses

 

523,743

 

636,545

 

1,160,477

 

1,266,708

(Loss) income from operations

 

(47,318)

 

53,283

 

(31,528)

 

113,728

Interest expense (income), net

 

1,030

(691)

1,099

(1,445)

Equity (loss) income from investments in unconsolidated affiliates

 

(90)

141

(598)

254

(Loss) income before taxes

$

(48,438)

$

54,115

$

(33,225)

$

115,427

Income tax (benefit) expense

 

(15,132)

7,427

(17,071)

16,546

Net (loss) income including noncontrolling interests

(33,306)

46,688

$

(16,154)

$

98,881

Less: Net income attributable to noncontrolling interests

 

247

1,843

1,370

3,646

Net (loss) income attributable to Texas Roadhouse, Inc. and subsidiaries

$

(33,553)

$

44,845

$

(17,524)

$

95,235

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustment, net of tax of $(4), $28, $9 and ($5), respectively

10

(82)

(27)

15

Total comprehensive (loss) income

$

(33,543)

$

44,763

$

(17,551)

$

95,250

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

Basic

$

(0.48)

$

0.63

$

(0.25)

$

1.33

Diluted

$

(0.48)

$

0.63

$

(0.25)

$

1.32

Weighted average shares outstanding:

Basic

 

69,361

71,362

69,391

71,558

Diluted

 

69,361

71,733

69,391

71,961

Cash dividends declared per share

$

$

0.30

$

0.36

$

0.60

See accompanying notes to condensed consolidated financial statements.

4

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

(in thousands, except share and per share data)

(unaudited)

For the 13 Weeks Ended June 30, 2020

    

    

    

    

    

Accumulated

    

Total Texas

    

    

 

Additional

Other

Roadhouse, Inc.

 

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

 

Shares

Value

Capital

Earnings

Loss

Subsidiaries

Interests

Total

 

Balance, March 31, 2020

 

69,310,804

$

69

$

129,796

$

766,689

$

(262)

$

896,292

$

14,451

$

910,743

Net (loss) income

 

 

 

 

(33,553)

 

 

(33,553)

 

247

 

(33,306)

Other comprehensive income, net of tax

10

10

10

Shares issued under share-based compensation plans including tax effects

 

136,685

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(43,520)

 

 

(1,971)

 

 

 

(1,971)

 

 

(1,971)

Share-based compensation

 

 

 

7,243

 

 

 

7,243

 

 

7,243

Balance, June 30, 2020

 

69,403,969

$

69

$

135,068

$

733,136

$

(252)

$

868,021

$

14,698

$

882,719

For the 13 Weeks Ended June 25, 2019

    

    

    

    

    

Accumulated

    

Total Texas

    

    

Additional

Other

Roadhouse, Inc.

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

Shares

Value

Capital

Earnings

Loss

Subsidiaries

Interests

Total

Balance, March 26, 2019

 

71,827,836

$

72

$

259,050

$

714,502

$

(131)

$

973,493

$

14,654

$

988,147

Net income

 

 

 

 

44,845

 

 

44,845

 

1,843

 

46,688

Other comprehensive loss, net of tax

(82)

(82)

(82)

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(1,731)

 

(1,731)

Dividends declared ($0.30 per share)

 

 

 

 

(21,224)

 

 

(21,224)

 

 

(21,224)

Shares issued under share-based compensation plans including tax effects

 

103,289

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(32,898)

 

 

(1,869)

 

 

 

(1,869)

 

 

(1,869)

Repurchase of shares of common stock

(2,096,677)

(2)

(112,050)

(112,052)

(112,052)

Share-based compensation

 

 

 

7,741

 

 

 

7,741

 

 

7,741

Balance, June 25, 2019

 

69,801,550

$

70

$

152,872

$

738,123

$

(213)

$

890,852

$

14,766

$

905,618

See accompanying notes to condensed consolidated financial statements.

5

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

(in thousands, except share and per share data)

(unaudited)

For the 26 Weeks Ended June 30, 2020

    

    

    

    

    

Accumulated

    

Total Texas

    

    

 

Additional

Other

Roadhouse, Inc.

 

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

 

Shares

Value

Capital

Earnings

Loss

Subsidiaries

Interests

Total

 

Balance, December 31, 2019

 

69,400,252

$

69

$

140,501

$

775,649

$

(225)

$

915,994

$

15,175

$

931,169

Net (loss) income

 

 

 

 

(17,524)

 

 

(17,524)

 

1,370

 

(16,154)

Other comprehensive loss, net of tax

(27)

(27)

(27)

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(1,847)

 

(1,847)

Dividends declared ($0.36 per share)

 

 

 

 

(24,989)

 

 

(24,989)

 

 

(24,989)

Shares issued under share-based compensation plans including tax effects

 

388,477

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(132,351)

 

 

(7,302)

 

 

 

(7,302)

 

 

(7,302)

Repurchase of shares of common stock

(252,409)

(12,621)

(12,621)

(12,621)

Share-based compensation

 

 

 

14,490

 

 

 

14,490

 

 

14,490

Balance, June 30, 2020

 

69,403,969

$

69

$

135,068

$

733,136

$

(252)

$

868,021

$

14,698

$

882,719

For the 26 Weeks Ended June 25, 2019

    

    

    

    

    

Accumulated

    

Total Texas

    

    

Additional

Other

Roadhouse, Inc.

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

Shares

Value

Capital

Earnings

Loss

Subsidiaries

Interests

Total

Balance, December 25, 2018

 

71,617,510

$

72

$

257,388

$

688,337

$

(228)

$

945,569

$

15,139

$

960,708

Net income

 

 

 

 

95,235

 

 

95,235

 

3,646

 

98,881

Other comprehensive income, net of tax

15

15

15

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(3,346)

 

(3,346)

Acquisition of noncontrolling interest holders

(70)

(70)

(673)

(743)

Dividends declared ($0.60 per share)

 

 

 

 

(42,771)

 

 

(42,771)

 

 

(42,771)

Shares issued under share-based compensation plans including tax effects

 

433,917

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(153,200)

 

 

(9,269)

 

 

 

(9,269)

 

 

(9,269)

Repurchase of shares of common stock

(2,096,677)

(2)

(112,050)

(112,052)

(112,052)

Cumulative effect of adoption of ASC 842, Leases, net of tax

(2,678)

(2,678)

(2,678)

Share-based compensation

 

 

 

16,873

 

 

 

16,873

 

 

16,873

Balance, June 25, 2019

 

69,801,550

$

70

$

152,872

$

738,123

$

(213)

$

890,852

$

14,766

$

905,618

See accompanying notes to condensed consolidated financial statements.

6

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

26 Weeks Ended

    

June 30, 2020

    

June 25, 2019

Cash flows from operating activities:

Net (loss) income including noncontrolling interests

$

(16,154)

$

98,881

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

58,070

 

56,227

Deferred income taxes

 

(10,926)

 

(2,734)

Loss on disposition of assets

 

2,165

 

2,322

Impairment and closure costs

 

89

 

312

Equity loss (income) from investments in unconsolidated affiliates

 

598

 

(254)

Distributions of income received from investments in unconsolidated affiliates

 

184

 

346

Provision for doubtful accounts

 

16

 

(19)

Share-based compensation expense

 

14,490

 

16,873

Changes in operating working capital:

Receivables

 

69,004

 

53,894

Inventories

 

(2,835)

 

920

Prepaid expenses

 

4,242

 

1,215

Other assets

 

(2,790)

 

(7,653)

Accounts payable

 

(91)

 

(299)

Deferred revenue—gift cards

 

(52,896)

 

(72,685)

Accrued wages

 

(5,810)

 

1,733

Prepaid income taxes and income taxes payable

 

(6,524)

 

12,152

Accrued taxes and licenses

 

(6,099)

 

(381)

Other accrued liabilities

 

2,280

 

13,749

Operating lease right-of-use assets and lease liabilities

 

2,257

 

2,799

Other liabilities

 

12,575

 

9,618

Net cash provided by operating activities

 

61,845

 

187,016

Cash flows from investing activities:

Capital expenditures—property and equipment

 

(81,833)

(87,782)

Proceeds from sale leaseback transaction

 

2,167

 

Net cash used in investing activities

 

(79,666)

 

(87,782)

Cash flows from financing activities:

Proceeds from revolving credit facility

240,000

Debt issuance costs

(641)

Distributions to noncontrolling interest holders

 

(1,847)

(3,346)

Acquisition of noncontrolling interest

(743)

Proceeds from restricted stock and other deposits, net

 

(165)

340

Indirect repurchase of shares for minimum tax withholdings

 

(7,302)

(9,269)

Repurchase of shares of common stock

 

(12,621)

(112,050)

Dividends paid to shareholders

 

(24,989)

(39,452)

Net cash provided by (used in) financing activities

 

192,435

 

(164,520)

Net increase (decrease) in cash and cash equivalents

 

174,614

 

(65,286)

Cash and cash equivalents—beginning of period

 

107,879

210,125

Cash and cash equivalents—end of period

$

282,493

$

144,839

Supplemental disclosures of cash flow information:

Interest paid, net of amounts capitalized

$

1,223

$

367

Income taxes paid

$

388

$

7,128

Capital expenditures included in current liabilities

$

11,516

$

15,267

See accompanying notes to condensed consolidated financial statements.

7

Texas Roadhouse, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(tabular amounts in thousands, except share and per share data)

(unaudited)

(1)  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Texas Roadhouse, Inc. ("TRI"), our wholly-owned subsidiaries and subsidiaries in which we have a controlling interest (collectively the "Company," "we," "our" and/or "us") as of June 30, 2020 and December 31, 2019 and for the 13 and 26 weeks ended June 30, 2020 and June 25, 2019.

As of June 30, 2020, we owned and operated 521 restaurants and franchised an additional 96 restaurants in 49 states and ten foreign countries. Of the 521 company restaurants that were operating at June 30, 2020, 501 were wholly-owned and 20 were majority-owned. Of the 96 franchise restaurants, 70 were domestic restaurants and 26 were international restaurants. Included within these restaurant totals are one company restaurant and five international franchise restaurants that remain temporarily closed due to the global COVID-19 pandemic (the "pandemic"). These stores continue to be included in the above totals as we believe they will re-open once it is considered safe to do so.

As of June 25, 2019, we owned and operated 498 restaurants and franchised an additional 93 restaurants in 49 states and ten foreign countries. Of the 498 company restaurants that were operating at June 25, 2019, 478 were wholly-owned and 20 were majority-owned. Of the 93 franchise restaurants, 70 were domestic restaurants and 23 were international restaurants.

As of June 30, 2020 and June 25, 2019, we owned a 5.0% to 10.0% equity interest in 24 domestic franchise restaurants. Additionally, as of June 30, 2020 and June 25, 2019, we owned a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China. The unconsolidated restaurants are accounted for using the equity method. Our investments in these unconsolidated affiliates are included in other assets in our unaudited condensed consolidated balance sheets, and we record our percentage share of net income earned by these unconsolidated affiliates in our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss) under equity income from investments in unconsolidated affiliates. All significant intercompany balances and transactions for these unconsolidated restaurants as well as the entities whose accounts have been consolidated have been eliminated.

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these unaudited condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"). Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill, obligations related to insurance reserves, leases and leasehold improvements, legal reserves, gift card breakage and third-party fees and income taxes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, except that certain information and footnotes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Operating results for the 13 and 26 weeks ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 29, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

8

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the pandemic. On March 13, 2020, the COVID-19 pandemic was declared a National Public Health Emergency. Shortly after the national emergency declaration, state and local officials began placing restrictions on restaurants, some of which allowed To-Go or curbside service only while others limited capacity in the dining room. By March 31, 2020, the last day of our Q1 2020 fiscal quarter, all of our domestic company and franchise restaurants were under state or local order which only allowed for To-Go or curbside service. Beginning in early May 2020, state and local guidelines began to allow dining rooms to re-open, typically at a limited capacity. By June 30, 2020, the last day of our Q2 2020 fiscal quarter, 499 of our 521 company-owned restaurants had re-opened their dining rooms under various limited capacity restrictions. Our remaining restaurants, with the exception of one that is temporarily closed, are limited to outdoor dining and/or To-Go or curbside service only.

We continue to monitor state and local plans as they move along their phased approach to re-open their economies. We have developed a hybrid operating model that accommodates our limited capacity dining rooms together with enhanced To-Go, which includes a curbside and/or drive-up operating model, as permitted by local guidelines. This includes design changes to our building to better accommodate the increased To-Go sales and the expansion of outdoor seating areas where allowed. We also installed booth partitions in all of our restaurants as an added safety measure for our guests. In addition, we have increased our already strict sanitation requirements, are conducting daily health and temperature checks for all employees before they begin their shift, and are requiring personal protective equipment to be worn by all restaurant employees at all times. As we work through the re-opening phases at each of our locations, the safety of our employees and guests remains our top priority.

As a result of the temporary dining room closures and the subsequent limited capacity restrictions for in-person dining, we have experienced a significant decrease in traffic which has impacted our operating results. While many of our dining rooms have re-opened, the capacity restrictions severely limit the number of guests we can serve. In addition, while we have seen significant sales growth in our To-Go program, even in those stores with dining rooms re-opened, we currently do not expect these sales will generate a similar profit margin and cash flows to our normal operating model. We expect our operating results to continue to be impacted until at least such time that state and local restrictions are lifted, and our dining rooms can re-open at full capacity. We cannot predict how long the pandemic will last, how long it will take until all state and local restrictions will be lifted, or if dining rooms will be required to close again in areas severely impacted by the pandemic. In addition, we cannot predict the overall impact on the economy or consumer spending habits. The extent of this re-opening process will determine the significance of the impact to our financial condition, financial results, and liquidity in future periods. In addition, significant items subject to estimates and assumptions including the carrying amount of property and equipment, goodwill, and lease related assets could be impacted.

(2) Recent Accounting Pronouncements

Financial Instruments

(Accounting Standards Update 2016-13, "ASU 2016-13")

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected versus incurred losses for financial assets held.  We adopted ASU 2016-13 as of the beginning of our 2020 fiscal year.  The adoption of this standard did not have a significant impact on our condensed consolidated financial statements.

Goodwill

(Accounting Standards Update 2017-04, "ASU 2017-04")

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment and is expected to reduce the cost and complexity of accounting for goodwill.  ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.  Instead, goodwill impairment will be the amount by which a reporting

9

unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill.  We adopted ASU 2017-04 as of the beginning of our 2020 fiscal year. The adoption of this standard did not have a significant impact on our condensed consolidated financial statements.

Fair Value Measurement

(Accounting Standards Update 2018-13, "ASU 2018-13")

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which changes disclosure requirements for fair value measurements. We adopted ASU 2018-13 as of the beginning of our 2020 fiscal year. The adoption of this standard did not have a significant impact on our condensed consolidated financial statements.

Income Taxes

(Accounting Standards Update 2019-12, "ASU 2019-12")

In December 2019. the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions related to the approach for intraperiod tax allocations, the calculation of income taxes in interim periods, and the recognition of deferred taxes for investments. This guidance also simplifies aspects of accounting for recognizing deferred taxes for taxable goodwill. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 (our 2021 fiscal year) and for interim periods within those years, with early adoption permitted. We are currently assessing the impact of this new standard on our consolidated financial statements.

Reference Rate Reform

(Accounting Standards Update 2020-04, "ASU 2020-04")

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting. These changes are intended to simplify the market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective upon issuance to modifications made as early as the beginning of the interim period through December 31, 2022. We are currently assessing the impact of this new standard on our consolidated financial statements.

(3)   Long-term Debt

On August 7, 2017, we entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement") with respect to our revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. The revolving credit facility remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million with the option to increase the revolving credit facility by an additional $200.0 million subject to certain limitations, including approval by the syndicate of lenders. On May 11, 2020, we amended the revolving credit facility to provide for an incremental revolving credit facility of up to $82.5 million. This amount reduced the additional $200.0 million that was available under the revolving credit facility. The maturity date for the incremental revolving credit facility is May 10, 2021. The maturity date for the original revolving credit facility remains August 5, 2022.

The terms of the amendment require us to pay interest on outstanding borrowings of the original revolving credit facility at LIBOR plus a margin of 1.50% and to pay a commitment fee of 0.25% per year on any unused portion of the revolving credit facility through the end of our Q1 2021 fiscal quarter. The amendment also provides an Alternate Base Rate that may be substituted for LIBOR. Subsequent to our Q1 2021 fiscal quarter, we are required to pay interest on outstanding borrowings at LIBOR plus a margin of 0.875% to 2.25% and to pay a commitment fee of 0.125% to 0.40% depending on our consolidated net leverage ratio. As of June 30, 2020, we had $190.0 million outstanding on the original revolving credit facility and $1.8 million of availability, net of $8.2 million of outstanding letters of credit. This outstanding amount is included as long-term debt on our condensed consolidated balance sheet.

10

The terms of the amendment also require us to pay interest on outstanding borrowings of the incremental revolving credit facility at LIBOR, which is subject to a floor of 1.0%, plus a margin of 2.25% and to pay a commitment fee of 0.50% per year on any unused portion of the incremental revolving credit facility through the maturity date. As of June 30, 2020, we had $50.0 million outstanding and $32.5 million of availability on the incremental revolving credit facility. This outstanding amount is included as current maturities of long-term debt on our condensed consolidated balance sheet.

The weighted-average interest rate for the $240.0 million of combined borrowings on our revolving credit facility as of June 30, 2020 was 2.01%.

The lenders’ obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants. The amendment to the revolving credit facility also modified the financial covenants through the end of our Q1 2021 fiscal quarter. We were in compliance with all financial covenants as of June 30, 2020.

(4) Revenue

The following table disaggregates our revenue by major source (in thousands):

13 weeks ended

26 weeks ended

June 30, 2020

June 25, 2019

June 30, 2020

June 25, 2019

Restaurant and other sales

$

473,090

$

684,373

$

1,120,716

$

1,369,490

Franchise royalties

2,766

4,814

7,054

9,671

Franchise fees

569

641

1,179

1,275

Total revenue

$

476,425

$

689,828

$

1,128,949

$

1,380,436

We record deferred revenue for gift cards which includes cards that have been sold but not yet redeemed, a breakage adjustment for a percentage of gift cards that are not expected to be redeemed, and fees paid on gift cards sold through third-party retailers. When the gift cards are redeemed, we recognize restaurant sales and reduce deferred revenue. We amortize breakage and third-party fees consistent with the historic redemption pattern of the associated gift card or on actual redemptions in periods where redemptions do not align with historic redemption patterns. We recognize these amounts as a component of other sales. As of June 30, 2020 and December 31, 2019, our deferred revenue balance related to gift cards was $156.4 million and $209.3 million, respectively. We recognized sales of $12.6 million and $86.1 million for the 13 and 26 weeks ended June 30, 2020, respectively, related to the amount in deferred revenue as of December 31, 2019. We recognized sales of $26.6 million and $105.0 million for the 13 and 26 weeks ended June 25, 2019, respectively, related to the amount in deferred revenue as of December 25, 2018.

(5) Income Taxes

For the 13 week periods ended June 30, 2020 and June 25, 2019, we recognized an income tax benefit of 31.2% and income tax expense of 13.7%, respectively. For the 26 week periods ended June 30, 2020 and June 25, 2019, we recognized an income tax benefit of 51.4% and income tax expense of 14.3%, respectively. For the 13 and 26 week periods ended June 30, 2020, we recognized income tax benefit using a discrete tax calculation as we were unable to reliably estimate our full year effective income tax rate. This was primarily due to the inability to estimate the increased impact of the FICA tip and Work opportunity tax credits on our effective tax rate as a result of the significant decrease in pre-tax income.

The effective tax rate decreased for the 13 and 26 week periods ended June 30, 2020, respectively, primarily due to a pre-tax loss in both periods. As a result, the impact of our FICA tip and Work opportunity tax credits had a more significant impact to our effective tax rate. In addition, the impact of these credits was the primary driver of the difference between our statutory and effective tax rates in both periods. Additionally, these credits exceeded our federal tax liability for both the 13 and 26 week periods ended June 30, 2020 but we expect to utilize these credits in the current or future years or by carrying back to our 2019 tax year.

11

(6)

Commitments and Contingencies

The estimated cost of completing capital project commitments at June 30, 2020 and December 31, 2019 was $133.2 million and $119.0 million, respectively. At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete. As of June 30, 2020, 14 restaurants, including one relocation site, had either resumed construction or were approved to resume construction. The estimated cost of completing these 14 restaurants at June 30, 2020 was $29.3 million.

As of June 30, 2020 and December 31, 2019, we were contingently liable for $13.5 million and $13.9 million, respectively, for seven lease guarantees, listed in the table below. These amounts represent the maximum potential liability of future payments under the guarantees. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of June 30, 2020 and December 31, 2019 as the likelihood of default was deemed to be less than probable and the fair value of the guarantees is not considered significant.

    

Lease
Assignment Date

    

Current Lease
Term Expiration

 

Everett, Massachusetts (1)(2)

 

September 2002

 

February 2023

Longmont, Colorado (1)

 

October 2003

 

May 2029

Montgomeryville, Pennsylvania (1)

 

October 2004

 

March 2021

Fargo, North Dakota (1)

 

February 2006

 

July 2021

Logan, Utah (1)

 

January 2009

 

August 2024

Irving, Texas (3)

December 2013

December 2024

Louisville, Kentucky (3)(4)

December 2013

November 2023

(1) Real estate lease agreements for restaurant locations which we entered into before granting franchise rights to those restaurants.  We have subsequently assigned the leases to the franchisees, but remain contingently liable under the terms of the lease if the franchisee defaults.
(2) As discussed in note 7, this restaurant is owned, in part, by our founder.
(3) Leases associated with non-Texas Roadhouse restaurants which were sold.  The leases were assigned to the acquirer, but we remain contingently liable under the terms of the lease if the acquirer defaults.
(4) We may be released from liability after the initial contractual lease term expiration contingent upon certain conditions being met by the acquirer.

During the 13 and 26 weeks ended June 30, 2020, we bought most of our beef from three suppliers. We have no material minimum purchase commitments with our vendors that extend beyond a year.

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including "slip and fall" accidents, employment related claims, claims related to our service of alcohol, and claims from guests or employees alleging illness, injury or food quality, health or operational concerns.  None of these types of litigation, most of which are covered by insurance, has had a material adverse effect on us during the periods covered by this report and, as of the date of this report, we are not party to any litigation that we believe could have a material adverse effect on our business.

(7)   Related Party Transactions

As of June 30, 2020 and June 25, 2019, we had six franchise restaurants and one majority-owned company restaurant owned in part by certain officers of the Company. For the 13 week periods ended June 30, 2020 and June 25, 2019, these franchise entities paid us fees of $0.2 million and $0.3 million, respectively. For the 26 week periods ended June 30, 2020 and June 25, 2019, these franchise entities paid us fees of $0.5 million and $0.7 million, respectively. As disclosed in note 6, we are contingently liable on a lease related to one of these franchise restaurants.

12

(8)   Earnings Per Share

The share and net income per share data for all periods presented are based on the historical weighted-average shares outstanding.  The diluted earnings per share calculations show the effect of the weighted-average restricted stock units from our equity incentive plans, except during loss periods as the effect would be anti-dilutive. Performance stock units are not included in the diluted earnings per share calculation until the performance-based criteria have been met.

For the 13 and 26 week periods ended June 30, 2020, there were 367,968 and 400,291 shares of nonvested stock, respectively, that were outstanding but not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect. This included all outstanding RSU grants as the Company was in a net loss position for both periods. For the 13 and 26 week periods ended June 25, 2019, there were 14,925 and 4,469 shares of nonvested stock, respectively, that were outstanding but not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect.

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

13 Weeks Ended

26 Weeks Ended

    

June 30, 2020

    

June 25, 2019

    

June 30, 2020

    

June 25, 2019

 

Net (loss) income attributable to Texas Roadhouse, Inc. and subsidiaries

$

(33,553)

$

44,845

$

(17,524)

$

95,235

Basic EPS:

Weighted-average common shares outstanding

 

69,361

71,362

69,391

71,558

Basic EPS

$

(0.48)

$

0.63

$

(0.25)

$

1.33

Diluted EPS:

Weighted-average common shares outstanding

 

69,361

71,362

69,391

71,558

Dilutive effect of nonvested stock

 

371

403

Shares-diluted

 

69,361

 

71,733

 

69,391

 

71,961

Diluted EPS

$

(0.48)

$

0.63

$

(0.25)

$

1.32

(9) Fair Value Measurements

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

Level 1

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

Level 2

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

Level 3

Inputs that are unobservable for the asset.

There were no transfers among levels within the fair value hierarchy during the 13 and 26 weeks ended June 30, 2020.

13

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

Fair Value Measurements

 

    

Level

    

June 30, 2020

    

December 31, 2019

 

Deferred compensation plan—assets

 

1

$

45,542

$

44,623

Deferred compensation plan—liabilities

 

1

 

(45,473)

 

(44,679)

The Second Amended and Restated Deferred Compensation Plan of Texas Roadhouse Management Corp., as amended, (the "Deferred Compensation Plan") is a nonqualified deferred compensation plan which allows highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds held in a rabbi trust. We report the amounts of the rabbi trust in other assets and the corresponding liability in other liabilities in our unaudited condensed consolidated financial statements. These investments are considered trading securities and are reported at fair value based on quoted market prices. The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, are recorded in general and administrative expense in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

The following table presents the fair value of our assets measured on a nonrecurring basis:

Fair Value Measurements

Total gain (loss)

13 Weeks Ended

26 Weeks Ended

    

    

June 30,

    

December 31,

    

June 30,

June 30,

Level

2020

2019

2020

2020

Long-lived assets held for use

 

1

$

$

1,684

$

$

Operating lease right-of-use assets

 

3

$

$

611

$

$

(501)

Investments in unconsolidated affiliates

3

$

2,000

$

$

$

(528)

Long-lived assets held for use include leasehold improvements for one restaurant that was subject to a forced relocation. This restaurant was relocated in February 2020 at which time the contractually negotiated amount for these assets was received.

Operating lease right-of-use assets include the lease related assets for one underperforming store that was permanently closed in April 2020 and one store that was relocated in February 2020. Both of these assets were reduced to a fair value of zero in Q1 2020. This resulted in a loss of $0.5 million which is included in impairment and closure, net in our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss) for the 26 weeks ended June 30, 2020. At December 31, 2019, operating lease right-of-use assets include the lease related assets for the underperforming store noted above.

Investments in unconsolidated affiliates include a 40% equity interest in a China joint venture that was reduced to fair value. This asset is valued using a Level 3 input, or the amount we expect to receive upon the sale of this investment. This resulted in a loss of $0.5 million which is included in equity income from investments in unconsolidated affiliates in our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss) for the 26 weeks ended June 30, 2020.

At June 30, 2020 and December 31, 2019, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values based on the short-term nature of these instruments. At June 30, 2020, the fair value of our revolving credit facility approximated its carrying value since it is a variable rate credit facility (Level 2).

(10) Share Based Compensation

On May 16, 2013, our stockholders approved the Texas Roadhouse, Inc. 2013 Long-Term Incentive Plan (the "Plan"). The Plan provides for the granting of various forms of equity awards including options, stock appreciation rights, full value awards, and performance based awards. The Company provides restricted stock units ("RSUs") to employees as a form of share-based compensation. An RSU is the conditional ri