Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the consolidated financial condition and results of operations for Bojangles,
Inc. (Bojangles or the Company) should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this Quarterly Report. In this Quarterly Report, unless the context
otherwise requires, references to we, us, and our mean the Company, together with its subsidiaries, on a consolidated basis.
Operating results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for the fiscal year, and
our key performance indicators, as discussed below, may decrease for any future period. Unless otherwise stated, comparable restaurant sales and average unit volumes are presented on a system-wide basis, which means they include sales at both
company-operated restaurants and franchised restaurants. Franchise sales represent sales at all franchised restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise royalty revenues include
royalties based on a percentage of franchise sales.
While we do not record sales by franchisees as revenues, and such sales are not included in our
condensed consolidated financial statements, we believe that system-wide sales is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive franchise royalty
revenues and in evaluating our performance relative to competitors.
We adopted the new revenue recognition standard on January 1, 2018 using the full
retrospective transition method, which resulted in restating each prior reporting period presented in the year of adoption. See Note 2, Revenue Recognition, to our condensed consolidated financial statements contained elsewhere in this Form 10-Q for
further information.
Overview
Bojangles is a
highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from our Southern recipes. We opened our first store in Charlotte, North Carolina in 1977 and, as of April 1,
2018, have expanded our system-wide restaurants to 762 across eleven states, the District of Columbia and Roatan Island, Honduras. Our system of restaurants, which includes both company-operated and franchised restaurants, generated approximately
$313.8 million of system-wide sales during the thirteen weeks ended April 1, 2018. We offer fast-casual quality food and preparation combined with quick-service speed, convenience and value.
Key Performance Indicators
To evaluate the performance
of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenues, franchise royalty and other franchise revenues, system-wide average unit volumes (AUVs),
comparable restaurant sales, restaurant openings and net income. In addition, we also evaluate Adjusted Net Income and Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, and company-operated restaurant contribution and
company-operated restaurant contribution margin, which are considered to be
non-GAAP
financial measures.
Company-operated Restaurant Revenues
Company-operated restaurant revenues consists of sales of food and beverages in company-operated restaurants. Company-operated restaurant revenues in a period
are influenced by several factors, including the number of operating weeks in such period, the number of open restaurants and comparable restaurant sales.
Seasonal factors cause our revenues to fluctuate from quarter to quarter. Our revenues per restaurant are typically lower in the first quarter. As a result,
our quarterly and annual operating results and key performance indicators may fluctuate significantly.
Franchise Royalty and Other Franchise
Revenues
Franchise royalty and other franchise revenues represents royalty income and initial and renewal franchise license fees. While we expect
the majority of our total revenue growth will be driven by company-operated restaurants, our franchised restaurants and growth in franchise royalty and other franchise revenues remain an important part of our financial success.
20
System-wide Average Unit Volumes
We measure system-wide AUVs on a fiscal year basis and on a trailing twelve-month basis for each
non-fiscal
year-end
period for system-wide restaurants. Annual AUVs are calculated using the following methodology: first, we determine the domestic free-standing restaurants with both a drive-thru and interior seating that
have been open for a full twelve-month period (excluding Bojangles Express and drive-thru only units); and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV
calculation. Refranchised restaurants are excluded from our AUV calculation for the twelve-month period following the date of the refranchising. This methodology is similar for each trailing twelve-month period outside the fiscal year end.
|
|
|
|
|
|
|
|
|
|
|
Trailing Twelve Months Ended
|
|
|
|
April 1,
2018
|
|
|
March 26,
2017
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
Average Unit Volumes
|
|
|
|
|
|
|
|
|
Total system-wide
|
|
$
|
1,758
|
|
|
|
1,805
|
|
Comparable Restaurant Sales
Comparable restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base
the first full day of the month after being open for 15 months using a
mid-month
convention. Refranchised restaurants are excluded from our comparable restaurant base for the twelve-month period following the
date of the refranchising. The comparable restaurant base for company-operated restaurants is determined using our weekly reporting period, which is Monday through Sunday. If a company-operated restaurant is temporarily closed for a full calendar
week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is removed from the comparable restaurant sales calculations for the full weekly reporting period(s) impacted by
the temporary closure. If a franchised restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is removed from the
comparable restaurant sales calculations for the entire month(s) impacted by the temporary closure. In addition, comparable restaurant sales excludes the impact of any deferred revenue associated with our recently launched Bo Rewards customer
loyalty program. While we do not record franchised sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
April 1,
2018
|
|
|
March 26,
2017
|
|
Comparable Restaurant Sales:
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
(1.8
|
)%
|
|
|
(3.5
|
)%
|
Franchised
|
|
|
0.2
|
%
|
|
|
(0.5
|
)%
|
Total system-wide
|
|
|
(0.6
|
)%
|
|
|
(1.7
|
)%
|
21
Restaurant Openings
The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open company-operated restaurants,
we incur preopening costs. System-wide, some of our restaurants open with an initial
start-up
period of higher than normal sales volume, which subsequently decreases to stabilized levels. Newly opened
restaurants typically have lower annual sales volumes than our established company-operated restaurants. Newly opened company-operated restaurants typically experience normal inefficiencies such as higher food and supplies, labor and other direct
operating costs and, as a result, restaurant contribution margins are typically lower during the
start-up
period of operations. In addition, newly opened restaurants typically have high occupancy costs
compared to existing restaurants and may cannibalize sales of existing restaurants. When entering new markets, we may be exposed to longer
start-up
times and lower contribution margins than reflected in our
average historical experience.
The following is the number of Bojangles franchised,
company-operated
and
system-wide restaurants at the beginning and end of the thirteen weeks ended April 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
April 1, 2018
|
|
|
|
Franchised
|
|
|
Company-
Operated
|
|
|
System-
Wide
|
|
Restaurants at the beginning of the period
|
|
|
439
|
|
|
|
325
|
|
|
|
764
|
|
Opened during the period
|
|
|
5
|
|
|
|
1
|
|
|
|
6
|
|
Closed during the period
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
Refranchised during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants at the end of the period
|
|
|
436
|
|
|
|
326
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants closed during the period reflects permanent closures and excludes any temporary closures for items such as
remodels, scrape and rebuilds, casualty events, severe weather conditions or any other short-term closure. A relocation results in a closure and an opening. During the thirteen weeks ended April 1, 2018, our franchisees closed eight
restaurants, none of which were relocations.
Net Income, Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA
We consider net income to be a key performance indicator that shows the overall health of our entire business. We typically utilize net income in
conjunction with the
non-GAAP
financial measures Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA when assessing the operational strength and the performance of our
business.
Adjusted Net Income represents Company net income before items that we do not consider representative of our ongoing operating performance as
identified in the reconciliation table below. Adjusted Diluted Net Income per Share represents Company diluted net income per share before items that we do not consider representative of our ongoing operating performance as identified in the
reconciliation table below.
EBITDA represents Company net income before interest expense (net of interest income), provision for income taxes and
depreciation and amortization. Adjusted EBITDA represents Company net income before interest expense (net of interest income), provision for income taxes, depreciation and amortization, items that we do not consider representative of our ongoing
operating performance and certain
non-cash
items, as identified in the reconciliation table below.
Adjusted Net
Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA as presented in this Form
10-Q
are supplemental measures of our performance that are neither required by, nor presented in accordance
with, GAAP. Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other
performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in
22
evaluating Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added
back to calculate Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA. Our presentation of Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA should not be construed as an
inference that our future results will be unaffected by unusual or
non-recurring
items.
Adjusted Net Income,
Adjusted Diluted Net Income per share, EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations
are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and
Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA do not
reflect any cash requirements for such replacements, (v) they do not adjust for all
non-cash
income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the
impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as
comparative measures.
We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such
non-GAAP
financial measures. We further compensate for the limitations in our use of
non-GAAP
financial measures by presenting comparable GAAP measures more prominently.
We believe Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to
period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital
structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative
depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we
believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance
to that of our competitors.
23
The following tables set forth reconciliations of net income to Adjusted Net Income and diluted net income per
share to Adjusted Diluted Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
April 1,
2018
|
|
|
March 26,
2017
(As Adjusted)
|
|
Net income
|
|
$
|
4,694
|
|
|
|
7,530
|
|
|
|
|
|
|
|
|
|
|
Certain professional, transaction and other costs
(a)
|
|
|
|
|
|
|
3
|
|
Payroll taxes associated with stock option
exercises
(b)
|
|
|
5
|
|
|
|
26
|
|
Executive separation expenses
(c)
|
|
|
1,034
|
|
|
|
5
|
|
Modification of equity awards in connection with executive
separation
(d)
|
|
|
551
|
|
|
|
|
|
Adjustments to deferred tax assets associated with stock-based compensation
(e)
|
|
|
802
|
|
|
|
|
|
Tax impact of adjustments
(f)
|
|
|
(387
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
2,005
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
6,699
|
|
|
|
7,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
April 1,
2018
|
|
|
March 26,
2017
(As Adjusted)
|
|
Diluted net income per share
|
|
$
|
0.12
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Certain professional, transaction and other costs
(a)
|
|
|
|
|
|
|
|
|
Payroll taxes associated with stock option
exercises
(b)
|
|
|
|
|
|
|
0.01
|
|
Executive separation expenses
(c)
|
|
|
0.03
|
|
|
|
|
|
Modification of equity awards in connection with executive
separation
(d)
|
|
|
0.02
|
|
|
|
|
|
Adjustments to deferred tax assets associated with stock-based compensation
(e)
|
|
|
0.02
|
|
|
|
|
|
Tax impact of adjustments
(f)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
0.06
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted Net Income per Share
|
|
$
|
0.18
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes public offering expenses. We could incur similar expenses in future periods if we commence additional public offerings, financing transactions or other
one-time
projects.
|
(b)
|
Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our initial public offering (IPO). We expect to incur similar expenses in future
periods when stock options that were outstanding prior to our IPO are exercised.
|
(c)
|
Represents severance and legal fees associated with former executives departing the Company.
|
(d)
|
Represents net
non-cash,
stock-based compensation recorded in connection with the modification of certain equity awards associated with a former executive departing the
Company
.
|
(e)
|
In connection with a former executive departing the Company and the associated modification of equity awards, certain compensation costs related to the executive are no longer expected to be deductible for income tax
purposes. Accordingly, we recorded adjustments to previously recorded deferred tax assets. We could record similar adjustments in future periods if any of the compensation costs are ultimately deductible for income tax purposes.
|
(f)
|
Represents the income tax expense associated with the adjustments in (a) through (e) that are deductible for income tax purposes.
|
24
The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
April 1,
2018
|
|
|
March 26,
2017
(As Adjusted)
|
|
Net income
|
|
$
|
4,694
|
|
|
|
7,530
|
|
Income taxes
|
|
|
2,448
|
|
|
|
4,116
|
|
Interest expense, net
|
|
|
1,647
|
|
|
|
1,666
|
|
Depreciation and amortization
(a)
|
|
|
4,246
|
|
|
|
4,051
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
13,035
|
|
|
|
17,363
|
|
Non-cash
rent
(b)
|
|
|
334
|
|
|
|
404
|
|
Stock-based compensation
(c)
|
|
|
1,016
|
|
|
|
374
|
|
Payroll taxes associated with stock option exercises
(d)
|
|
|
5
|
|
|
|
26
|
|
Preopening expenses
(e)
|
|
|
101
|
|
|
|
375
|
|
Certain professional, transaction and other costs
(f)
|
|
|
|
|
|
|
3
|
|
Executive separation expenses
(g)
|
|
|
1,034
|
|
|
|
5
|
|
Impairment and dispositions
(h)
|
|
|
826
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,351
|
|
|
|
18,882
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes amortization of deferred debt issuance costs.
|
(b)
|
Includes deferred rent, which represents the extent to which our rent expense has been above or below our cash rent payments, amortization of favorable (unfavorable) leases and closed store reserves for rent net of cash
payments. We expect to continue to incur similar expenses in future periods as we record rent expense in accordance with GAAP, as well as continue to amortize favorable (unfavorable) leases and record closed store reserves.
|
(c)
|
Represents
non-cash,
stock-based compensation. We expect to incur similar expenses in future periods as we record stock-based compensation related to existing grants (and any
potential future grants) in accordance with GAAP.
|
(d)
|
Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our IPO. We expect to incur similar expenses in future periods when stock options that were
outstanding prior to our IPO are exercised.
|
(e)
|
Includes expenses directly associated with the opening of company-operated restaurants and incurred prior to the opening of a company-operated restaurant. We expect to continue to incur similar expenses as we open
company-operated restaurants.
|
(f)
|
Includes public offering expenses. We could incur similar expenses in future periods if we commence additional public offerings, financing transactions or other
one-time
projects.
|
(g)
|
Represents severance and legal fees associated with former executives departing the Company.
|
(h)
|
Includes (gain) loss on disposal of property and equipment and other, impairment and cash proceeds on disposals from disposition of property and equipment. We could continue to record impairment expense in future
periods if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets. We may incur future (gains) losses and receive cash proceeds on disposal of property and equipment associated
with retirement, replacement or
write-off
of fixed assets.
|
25
Company-operated Restaurant Contribution and Company-operated Restaurant Contribution Margin
Company-operated restaurant contribution and company-operated restaurant contribution margin are neither required by, nor presented in accordance with, GAAP.
Company-operated restaurant contribution represents our operating income excluding the impact of franchise royalty revenues, franchise marketing and
co-op
advertising fund contribution revenues and associated
costs, properties and equipment rental revenues, other franchise revenues, general and administrative expenses, costs associated with properties and equipment rentals, depreciation and amortization, impairment and (gain) loss on disposal of property
and equipment and other. Company-operated restaurant contribution margin is defined as company-operated restaurant contribution as a percentage of company-operated restaurant revenues. Fluctuations in company-operated restaurant contribution and
company-operated restaurant contribution margin can be attributed to changes in company-operated comparable restaurant sales, sales volumes of newly opened company-operated restaurants, and changes in company-operated restaurant food and supplies
costs, company-operated restaurant labor costs and company-operated restaurant operating costs.
Company-operated restaurant contribution and
company-operated restaurant contribution margin are supplemental measures of operating performance of our company-operated restaurants and our calculations thereof may not be comparable to those reported by other companies. Company-operated
restaurant contribution excludes certain costs, such as general and administrative expenses, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of our company-operated
restaurants. Therefore, this measure may not provide a complete understanding of the operating results of Bojangles as a whole and company-operated restaurant contribution and company-operated restaurant contribution margin should be reviewed
in conjunction with our GAAP financial results. Company-operated restaurant contribution and company-operated restaurant contribution margin have limitations as analytical tools, and should not be considered in isolation or as substitutes for
analysis of our results as reported under GAAP. We believe that company-operated restaurant contribution and company-operated restaurant contribution margin are important tools for investors as they are widely-used metrics within the restaurant
industry to evaluate restaurant-level productivity, efficiency and performance. We use company-operated restaurant contribution and company-operated restaurant contribution margin as key metrics to evaluate profitability and performance of our
restaurants across periods and to evaluate our restaurant financial performance compared to our competitors.
A reconciliation of operating income to
company-operated restaurant contribution is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
April 1,
2018
|
|
|
March 26,
2017
(As Adjusted)
|
|
Operating income
|
|
$
|
8,905
|
|
|
|
13,430
|
|
Less:
|
|
Franchise royalty revenues
|
|
|
(6,865
|
)
|
|
|
(6,513
|
)
|
|
|
Franchise marketing and
co-op
advertising fund contribution revenues
|
|
|
(2,663
|
)
|
|
|
(2,532
|
)
|
|
|
Properties and equipment rental revenues
|
|
|
(539
|
)
|
|
|
|
|
|
|
Other franchise revenues
|
|
|
(272
|
)
|
|
|
(60
|
)
|
Plus:
|
|
General and administrative
|
|
|
11,557
|
|
|
|
8,953
|
|
|
|
Franchise marketing and
co-op
advertising fund costs
|
|
|
2,663
|
|
|
|
2,532
|
|
|
|
Costs associated with properties and equipment rentals
|
|
|
421
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,130
|
|
|
|
3,933
|
|
|
|
Impairment
|
|
|
853
|
|
|
|
296
|
|
|
|
(Gain) loss on disposal of property and equipment and other
|
|
|
(27
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated restaurant contribution
|
|
$
|
18,163
|
|
|
|
20,061
|
|
|
|
|
|
|
|
|
|
|
Company-operated restaurant revenues
|
|
$
|
127,153
|
|
|
|
124,783
|
|
Company-operated restaurant contribution margin
|
|
|
14.3
|
%
|
|
|
16.1
|
%
|
26
Key Financial Definitions
Total Revenues
Our revenues are derived from two
primary sources: company-operated restaurant revenues and franchise revenues. Franchise revenues are comprised of franchise royalty revenues, franchise marketing and
co-op
advertising contribution revenues
and, to a lesser extent, properties and equipment rental revenues, which include revenues from properties and equipment we lease or sublease to franchisees, and other franchise revenues, which include initial and renewal franchisee license fees.
Prior to fiscal 2018, we recorded income from properties and equipment we lease or sublease to franchisees as a reduction to the associated rent expense since the amounts were not significant.
Franchise marketing and
co-op
advertising contribution revenues include contributions made by franchisees to marketing
and
co-op
advertising funds managed by us and are generally calculated as a percentage of franchise restaurant sales.
Company-operated Restaurant Food and Supplies Costs
Company-operated restaurant food and supplies costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated
restaurants. The components of company-operated restaurant food and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs.
Company-operated Restaurant Labor Costs
Company-operated restaurant labor costs, including preopening labor, consist of company-operated restaurant-level management and hourly labor costs, including
salaries, wages, payroll taxes, workers compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect company-operated restaurant labor costs to grow due to inflation
and as our company-operated restaurant revenues grows. Factors that influence company-operated restaurant labor costs include minimum wage and employer payroll tax legislation, exempt versus
non-exempt
classification, a tightening labor market, employee turnover levels, health care costs and the performance of our restaurants. In addition, the Patient Protection and Affordable Care Act (PPACA) has increased health care costs for our
restaurants, and we expect the PPACA will continue to result in increased health care costs for our restaurants in the future.
Overall labor inflation,
along with various labor initiatives we intend to implement, including service enhancements and employing more full-time versus part-time team members, and higher health care costs will increase our company-operated restaurant labor costs. The
Department of Labor (DOL) continues to consider regulations related to overtime and exempt versus
non-exempt
classification, and our company-operated restaurant labor costs could increase further
if new regulations are adopted and implemented. In addition, our employee turnover, which results in inefficiencies and higher labor costs, increased significantly in fiscal 2017 at company-operated restaurants and could negatively impact the future
performance of our company-operated restaurants.
Company-operated Restaurant Operating Costs
Company-operated restaurant operating costs include all other company-operated restaurant-level operating expenses, such as repairs and maintenance, utilities,
credit and debit card processing, occupancy expenses and other restaurant operating costs. In addition, our advertising costs are included in company-operated restaurant operating costs and are comprised of our company-operated restaurants
portion of spending on all advertising which includes, but is not limited to, television, radio, social media, billboards,
point-of-sale
materials, sponsorships, and
creation of media, such as commercials and marketing campaigns.
27
Company-operated Restaurant Depreciation and Amortization
Company-operated restaurant depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible
assets at the company-operated restaurant level. We expect that growth in company-operated restaurant count, as well as restaurant remodels, investments in technology and other initiatives, will increase company-operated restaurant depreciation and
amortization.
Franchise Marketing and
Co-op
Advertising Costs
Franchise marketing and
co-op
advertising costs include our franchisees portion of marketing advertising expenses
incurred in connection with the marketing and
co-op
advertising funds we manage.
Costs Associated with
Properties and Equipment Rentals
Costs associated with properties and equipment rentals primarily consists of rental expense associated with
properties and equipment leased or subleased to franchisees.
General and Administrative Expenses
General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including compensation
and benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. We expect we will incur incremental increases in general and administrative expenses as a result of being a public
company.
Other Depreciation and Amortization
Other depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets not directly located
at company-operated restaurants. We expect that growth in system-wide restaurant count, as well as investments in technology and other initiatives, will increase other depreciation and amortization.
Impairment
Long-lived assets such as property,
equipment and intangible assets are reviewed on a
unit-by-unit
basis for impairment. When circumstances indicate a carrying value of the assets may not be recoverable,
an appropriate impairment is recorded. Impairments could increase if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets.
(Gain) Loss on Disposal of Property and Equipment and Other
(Gain) loss on disposal of property and equipment and other includes the net (gain) loss on disposal of assets related to retirements and replacements or
write-off
of leasehold improvements, equipment and other fixed assets. These (gains) losses are related to normal disposals in the ordinary course of business and gains from insurance proceeds, if any.
Amortization of Deferred Debt Issuance Costs
Deferred debt issuance costs are amortized over the term of the related debt on the effective interest method.
Interest Expense
Interest expense primarily
consists of interest on our debt outstanding under our credit facility and capital lease obligations.
28
Income Taxes
Income taxes represent federal, state, and local current and deferred income tax expense.
Results of Operations
Thirteen Weeks Ended
April 1, 2018 Compared with the Thirteen Weeks Ended March 26, 2017
Our operating results for the thirteen weeks ended April 1,
2018 and March 26, 2017 are compared below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
April 1,
2018
|
|
|
March 26,
2017
(As Adjusted)
|
|
|
Increase/
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(Dollar amounts in thousands)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company-operated restaurant revenues
|
|
$
|
127,153
|
|
|
$
|
124,783
|
|
|
$
|
2,370
|
|
|
|
1.9
|
%
|
Franchise royalty revenues
|
|
|
6,865
|
|
|
|
6,513
|
|
|
|
352
|
|
|
|
5.4
|
%
|
Franchise marketing and
co-op
advertising contribution
revenues
|
|
|
2,663
|
|
|
|
2,532
|
|
|
|
131
|
|
|
|
5.2
|
%
|
Properties and equipment rental revenues
|
|
|
539
|
|
|
|
|
|
|
|
539
|
|
|
|
n/m
|
|
Other franchise revenues
|
|
|
272
|
|
|
|
60
|
|
|
|
212
|
|
|
|
353.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
137,492
|
|
|
|
133,888
|
|
|
|
3,604
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant operating expenses:
|
|
|
|
|
|
|
|
|
Company-operated restaurant food and supplies costs
|
|
|
39,986
|
|
|
|
38,684
|
|
|
|
1,302
|
|
|
|
3.4
|
%
|
Company-operated restaurant labor costs
|
|
|
37,465
|
|
|
|
36,347
|
|
|
|
1,118
|
|
|
|
3.1
|
%
|
Company-operated restaurant operating costs
|
|
|
31,539
|
|
|
|
29,691
|
|
|
|
1,848
|
|
|
|
6.2
|
%
|
Company-operated restaurant depreciation and amortization
|
|
|
3,465
|
|
|
|
3,208
|
|
|
|
257
|
|
|
|
8.0
|
%
|
Franchise marketing and
co-op
advertising costs
|
|
|
2,663
|
|
|
|
2,532
|
|
|
|
131
|
|
|
|
5.2
|
%
|
Costs associated with properties and equipment rentals
|
|
|
421
|
|
|
|
|
|
|
|
421
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restaurant operating expenses
|
|
|
115,539
|
|
|
|
110,462
|
|
|
|
5,077
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income before other operating expenses
|
|
|
21,953
|
|
|
|
23,426
|
|
|
|
(1,473
|
)
|
|
|
(6.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
11,557
|
|
|
|
8,953
|
|
|
|
2,604
|
|
|
|
29.1
|
%
|
Depreciation and amortization
|
|
|
665
|
|
|
|
725
|
|
|
|
(60
|
)
|
|
|
(8.3
|
)%
|
Impairment
|
|
|
853
|
|
|
|
296
|
|
|
|
557
|
|
|
|
188.2
|
%
|
(Gain) loss on disposal of property and equipment and other
|
|
|
(27
|
)
|
|
|
22
|
|
|
|
(49
|
)
|
|
|
(222.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
13,048
|
|
|
|
9,996
|
|
|
|
3,052
|
|
|
|
30.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
8,905
|
|
|
|
13,430
|
|
|
|
(4,525
|
)
|
|
|
(33.7
|
)%
|
Amortization of deferred debt issuance costs
|
|
|
(116
|
)
|
|
|
(118
|
)
|
|
|
2
|
|
|
|
(1.7
|
)%
|
Interest income
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
0.0
|
%
|
Interest expense
|
|
|
(1,648
|
)
|
|
|
(1,667
|
)
|
|
|
19
|
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,142
|
|
|
|
11,646
|
|
|
|
(4,504
|
)
|
|
|
(38.7
|
)%
|
Income tax expense
|
|
|
(2,448
|
)
|
|
|
(4,116
|
)
|
|
|
1,668
|
|
|
|
(40.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,694
|
|
|
$
|
7,530
|
|
|
$
|
(2,836
|
)
|
|
|
(37.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
Company-operated Restaurant Revenues
Company-operated restaurant revenues increased $2.4 million, or 1.9%, during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks
ended March 26, 2017. The increase in company-operated restaurant revenues was primarily due to an increase in the
non-comparable
restaurant base (net additions of 12 company-operated restaurants at
April 1, 2018 compared to March 26, 2017) accounting for $4.5 million, partially offset by a decrease in comparable company-operated restaurant sales of $2.1 million, or 1.8%, due to a decrease in transactions, partially offset
by increases in mix and price at our comparable restaurants.
29
Franchise Royalty Revenues
Franchise royalty revenues increased $0.4 million during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks ended March 26,
2017. The increase was primarily due to a net additional 22 franchised restaurants at April 1, 2018 compared to March 26, 2017 and an increase in franchised comparable restaurant sales of 0.2%.
Other Franchise Revenues
Other franchise revenues
increased $0.2 million during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks ended March 26, 2017. The increase was primarily due to the recognition of the deferred revenue associated with franchise license fees
related to franchised restaurants closed during the thirteen weeks ended April 1, 2018.
Company-operated Restaurant Food and Supplies Costs
Company-operated restaurant food and supplies costs increased $1.3 million during the thirteen weeks ended April 1, 2018 compared to the
thirteen weeks ended March 26, 2017. This increase was primarily driven by an increase in the number of company-operated restaurants. Company-operated restaurant food and supplies costs as a percentage of company-operated restaurant revenues
during the thirteen weeks ended April 1, 2018 was 31.4% versus 31.0% during the thirteen weeks ended March 26, 2017. This increase was primarily due to commodity inflation, partially offset by our menu price increases.
Company-operated Restaurant Labor Costs
Company-operated restaurant labor costs increased $1.1 million during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks ended
March 26, 2017, primarily due to an increase in the number of company-operated restaurants and wage inflation. As a percentage of company-operated restaurant revenues, company-operated restaurant labor costs increased to 29.5% during the
thirteen weeks ended April 1, 2018 from 29.1% during the thirteen weeks ended March 26, 2017. This increase was primarily driven by an increase in direct labor and higher incentive compensation, partially offset by lower medical costs.
We expect that our company-operated restaurant labor costs will continue to rise due to the tightening labor market and increases in medical costs, as
well as certain labor initiatives across company-operated restaurants, including service enhancements and increasing the number of full-time versus part-time team members. In addition, we expect that our company-operated restaurant labor costs will
increase as a result of overall labor inflation and inefficiencies due to higher employee turnover. We may incur increased labor costs if the DOL were to propose new regulations and those regulations are adopted and implemented.
Company-operated Restaurant Operating Costs
Company-operated restaurant operating costs increased $1.8 million during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks ended
March 26, 2017, primarily due to an increase in the number of company-operated restaurants. As a percentage of company-operated restaurant revenues, company-operated restaurant operating costs increased to 24.8% during the thirteen weeks ended
April 1, 2018 from 23.8% during the thirteen weeks ended March 26, 2017. The increase was primarily due to higher occupancy costs and utilities.
Company-operated Restaurant Depreciation and Amortization
Company-operated restaurant depreciation and amortization increased $0.3 million during the thirteen weeks ended April 1, 2018 compared to the
thirteen weeks ended March 26, 2017, due primarily to the increased number of company-operated restaurants. As a percentage of company-operated restaurant revenues, company-operated restaurant depreciation and amortization was 2.7% and 2.6%
during the thirteen weeks ended April 1, 2018 and March 26, 2017, respectively.
30
General and Administrative Expenses
General and administrative expenses increased $2.6 million during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks ended
March 26, 2017. The increase during the thirteen weeks ended April 1, 2018 was due primarily to $1.0 million of executive separation expenses, $0.6 million of higher stock-based compensation primarily associated with the
modification of certain equity awards in connection with a former executive departing the Company and headcount added to support an increased number of restaurants in our system. As a percentage of total revenues, general and administrative expenses
were 8.4% and 6.7% during the thirteen weeks ended April 1, 2018 and March 26, 2017, respectively.
We expect our recurring general and
administrative expenses will increase as we grow our business and incur additional expenses related to being a newer public company. In addition, our incentive compensation could increase in future periods upon the achievement of the performance
metrics indicated in our incentive compensation plan.
Interest Expense
Interest expense during the thirteen weeks ended April 1, 2018 was flat compared to the thirteen weeks ended March 26, 2017. The decrease due to
principal payments of $34.2 million on our long-term debt from March 27, 2017 to April 1, 2018 and lower interest expense associated with interest rate swaps was offset by increases in the LIBOR rate and our applicable rate under our
Credit Agreement.
Income Taxes
Income taxes
decreased $1.7 million during the thirteen weeks ended April 1, 2018 compared to the thirteen weeks ended March 26, 2017. Our effective income tax rates were 34.3% and 35.3% during the thirteen weeks ended April 1, 2018 and
March 26, 2017, respectively. In connection with a former executive departing the Company and the associated modification of equity awards, certain compensation costs related to the executive are no longer expected to be deductible for income
tax purposes. Accordingly, we recorded a $0.8 million adjustment to previously recorded deferred tax assets during the thirteen weeks ended April 1, 2018. In addition, the effective income tax rates for the thirteen weeks ended
April 1, 2018 and March 26, 2017 reflect the recognition of certain tax credits.
Contractual Obligations
During the thirteen weeks ended April 1, 2018, there were no material changes to the contractual obligations as disclosed in the Annual Report on Form
10-K
for the fiscal year ended December 31, 2017, other than those made in the ordinary course of business.
Off-Balance
Sheet Arrangements
We are not a party to any
off-balance
sheet
arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
31
Emerging Growth Company
We are an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended (the Securities Act) and
as modified by the Jumpstart our Business Startups Act of 2012, or the JOBS Act (the JOBS Act). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a
non-binding
advisory vote on executive compensation and of
stockholder approval of any golden parachute payments not previously approved.
In addition, Section 107 of the JOBS Act provides that an
emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth
company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption, and, therefore, we will be subject to the
same new or revised accounting standards as other public companies that are not emerging growth companies.
We will remain an emerging
growth company until the earliest of (a) December 27, 2020, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (c) the date that we become a large accelerated
filer as defined in Rule
12b-2
under the Securities Exchange Act of 1934, as amended (the Exchange Act), which would occur if the market value of our common stock that is held by
non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (d) the date on which we have issued more than $1 billion in
non-convertible
debt securities in the preceding three-year period.
Critical Accounting Policies and Use of
Estimates
Our discussion and analysis of operating results and financial condition are based upon our consolidated financial statements. The
preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and
liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
Accounting policies are an integral part of our consolidated financial statements. A thorough understanding of these accounting policies is essential when
reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed herein involve the most difficult management judgments due to the sensitivity of the methods
and assumptions used. Our significant accounting policies are described in Note 1 to our condensed consolidated financial statements contained elsewhere in this Form
10-Q.
Except for the adoption of the new revenue recognition standard (as noted below), there have been no material changes to our critical accounting policies
described in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2017.
New Accounting
Standards
In May 2014, the Financial Accounting Standards Board (the FASB) issued a new single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers (ASC 606). We adopted this new guidance on January 1, 2018. See Note 2, Revenue Recognition, to our condensed consolidated financial statements contained elsewhere in this
Form
10-Q
for further information about our transition to this new revenue recognition model using the full retrospective transition method.
In February 2016, the FASB issued
ASU 2016-02,
Leases (Topic
842)
(ASU 2016-02), which
requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements.
ASU 2016-02 establishes
a right-of-use model
(ROU) that requires a lessee to recognize a ROU
asset and corresponding lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition
in the
32
statement of operations.
ASU 2016-02 is
effective for annual
periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect to adopt
ASU 2016-02 on
December 31, 2018, which is
the first day of our fiscal year 2019. A modified retrospective transition was previously required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. In March 2018, the FASB approved an optional transition method that permits an entity to use its effective date as the date of initial application. We expect that
ASU 2016-02 will
have a material effect on our consolidated financial statements. While we are continuing to assess which transition method will be elected and the overall impact of adoption, we
currently believe the most significant changes relate to (1) the recognition of new ROU assets and lease liabilities on our consolidated balance sheet for real estate and equipment operating leases and (2) the derecognition of existing
assets and liabilities for certain assets under construction
in build-to-suit lease
arrangements that we will lease when construction is complete. We are also
reviewing other arrangements that could contain embedded lease arrangements to be considered under ASU
2016-02.
In February 2018, the FASB issued ASU
2018-02,
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income
(ASU
2018-02).
ASU
2018-02
provides companies the option to reclassify from accumulated other comprehensive income to retained
earnings the income tax effects arising from the change in the United States federal corporate tax rate as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act). ASU
2018-02
is
effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. We adopted ASU
2018-02
during the first
quarter of fiscal 2018, which resulted in a $0.1 million reclassification that increased accumulated other comprehensive income and decreased retained earnings.
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, financial
instruments and hedging. Some of the proposed changes are significant and could have a material impact on our reporting. We have not yet fully evaluated the potential impact of all of these proposals, but will make such an evaluation as the
standards are finalized.
Liquidity and Capital Resources
Our primary requirements for liquidity and capital are new company-operated restaurants, existing restaurant capital investments (remodels and maintenance),
information technology investments, principal and interest payments on our term debt and capital lease obligations, operating lease obligations, share repurchases, working capital and general corporate needs. Our customers pay primarily for their
purchases in cash or by payment card (credit or debit) at the time of sale. Therefore, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Our restaurants do not require significant inventories or
receivables. We do have accounts receivable from our franchisees which are primarily related to royalty revenues, as well as from certain vendors.
Our
growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance in our existing
restaurants as well as information technology and other general corporate expenditures. We primarily utilize
build-to-suit
developments and equipment financing leases
for our new company-operated restaurants, requiring minimal upfront cash investment. While we currently utilize a
build-to-suit
development strategy, our new restaurant
strategy may change over time.
We currently expect our cash capital expenditures for fiscal 2018 will range between $11.5 million and
$12.5 million excluding approximately $0.4 million to $0.6 million of restaurant preopening costs for restaurants that are not capitalized. These capital estimates are based on restaurant capital expenditures for the opening of 6 to
10 company-operated restaurants as well as investments to remodel and improve our existing restaurants, investments in technology and for general corporate purposes.
33
We believe that cash and cash equivalents and expected cash flow from operations are adequate to fund debt
service requirements, capital lease obligations, operating lease obligations, capital expenditures and working capital needs for at least the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on,
among other things, our ability to achieve anticipated levels of revenues and cash flow from operations, our ability to manage costs and working capital successfully and the continued availability of
build-to-suit
and equipment financing leases for our new company-operated restaurants. We have used excess cash flows to make payments on our outstanding long-term debt in advance of the required due date,
and we may continue to do so in future periods.
The following table presents summary cash flow information for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
April 1,
2018
|
|
|
March 26,
2017
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
16,095
|
|
|
$
|
14,236
|
|
Investing activities
|
|
|
(1,815
|
)
|
|
|
(3,001
|
)
|
Financing activities
|
|
|
(8,948
|
)
|
|
|
(3,720
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
5,332
|
|
|
$
|
7,515
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities increased from $14.2 million during the thirteen weeks ended March 26, 2017 to $16.1 million during
the thirteen weeks ended April 1, 2018. The increase was primarily attributable to lower working capital needs related to accounts payable and incentive compensation during the thirteen weeks ended April 1, 2018, as well as an increase in
franchise royalty revenues, partially offset by a decline in cash generated from our operations.
Investing Activities
Net cash used in investing activities decreased from $3.0 million during the thirteen weeks ended March 26, 2017 to $1.8 million during the
thirteen weeks ended April 1, 2018. The decline was attributable to lower purchases of property and equipment, including expenditures related to new company-operated restaurants and our technology initiatives, partially offset by an increase in
expenditures related to remodeled company-operated restaurants.
Financing Activities
Net cash used in financing activities increased from $3.7 million during the thirteen weeks ended March 26, 2017 to $8.9 million during the
thirteen weeks ended April 1, 2018. This increase was primarily due to $2.9 million of our common stock repurchased under our share repurchase program, $1.9 million of higher principal payments on long-term debt, $0.3 million of
higher principal payments on capital lease obligations, $0.2 million of lower proceeds from the exercise of stock options and $0.1 million of payments for withholding taxes related to net share settlement of equity awards.
Debt and Other Obligations
Credit Agreement
On October 9, 2012, we entered into a credit agreement (Credit Agreement) with several financial institutions. The Credit
Agreement is secured by substantially all of our assets and originally provided for borrowings under a term loan of $175.0 million, and a revolving credit facility of $25.0 million, with a maturity date of October 9, 2017. In May
2013, we amended the Credit Agreement to provide for an additional $50.0 million term loan, the
34
proceeds of which were used to fund a distribution to the holders of our Series A preferred stock. In April 2014,
we further amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were also used to fund a distribution to the holders of our Series A preferred stock, and to extend the maturity date to
October 9, 2018. On July 23, 2015, we amended the Credit Agreement in order to permit the merger of BHI Intermediate Holding Corp., our former wholly owned subsidiary into us. On September 25, 2015, we further amended the Credit
Agreement to, among other things, extend the maturity date on the Credit Agreement to October 9, 2020 and lower the applicable interest rate. On October 19, 2016, we further amended the Credit Agreement to, among other things, increase
allowable indebtedness associated with capital lease obligations, synthetic lease obligations and purchase money obligations, as well as to increase allowable cash capital expenditures during each fiscal year. On December 20, 2017, we further
amended the Credit Agreement to, among other things, extend its maturity date to December 20, 2022 and increase the revolving line of credit from up to $25.0 million to up to $50.0 million. We had $121.1 million of outstanding
term loans and no outstanding borrowings under our revolving credit facility as of April 1, 2018.
Borrowings under the Credit Agreement are allowed
under base rate and Eurodollar rate loans. Base rate loans bear interest at the higher of (1) the Bank of America prime rate, (2) the Federal Funds Rate plus 0.50%, or (3) the LIBOR rate for
one-month
loans plus 1.00% and an applicable rate. Eurodollar rate loans may be entered or converted into
one-,
two-,
three-, or
six-month
periods and are charged interest at the LIBOR rate on the effective date for the period selected, plus an applicable rate. As of April 1, 2018, all of our outstanding term loan debt was in
one-month
Eurodollar loans with an interest rate of approximately 4.13%.
Debt Covenants
Our Credit Agreement contains various covenants that, among other things, do not allow us to exceed a maximum consolidated total lease adjusted leverage ratio,
require us to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures and our ability to pay dividends. We were in compliance with all of the covenants under our Credit Agreement as of
April 1, 2018.
Hedging Arrangements
In
connection with our Credit Agreement, we have a
variable-to-fixed
interest rate swap agreement to manage fluctuations in cash flows resulting from changes in the
benchmark interest rate of LIBOR as of April 1, 2018. On October 26, 2015, we entered into an interest rate swap contract with an effective date of October 30, 2015, a termination date of October 31, 2019 and a notional amount of
$50.0 million, under which we pay interest fixed at 1.115% and receive the
one-month
LIBOR rate.
Share
Repurchase Program
On October 31, 2017, our board of directors authorized a share repurchase program under which we may purchase up to
$50.0 million of our outstanding common stock through April 30, 2019. The purchases may be made from time to time in the open market (including, without limitation, the use of Rule
10b5-1
plans),
depending on a number of factors, including our evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements, and compliance with the terms of our outstanding indebtedness. The share repurchase
program may be extended, modified, suspended or discontinued at any time. We expect to fund the share repurchase program with either, or a combination of, existing cash on hand, cash generated from operations, and borrowings under our revolving line
of credit. We repurchased 0.2 million shares at a total cost of $2.0 million under this program during the fourth quarter of fiscal 2017. Subsequent to December 31, 2017 and through April 1, 2018, we repurchased an additional
0.2 million shares at a total cost of $2.9 million. As of April 1, 2018, up to $45.1 million of our common stock remains available for purchase under the program.
35