Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the quarterly period ended July 12,
2009
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from
to
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Commission File Number: 0-49916
RED ROBIN GOURMET BURGERS, INC.
(Exact name of registrant
as specified in its charter)
Delaware
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84-1573084
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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6312 S. Fiddlers Green
Circle, Suite 200N
Greenwood Village, CO
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80111
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(Address of principal executive offices)
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(Zip Code)
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(303) 846-6000
(Registrants telephone
number, including area code)
(Former name, former
address and former fiscal year, if changed since last report)
Indicate by check mark
whether the 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
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
Class
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Outstanding at August 13, 2009
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Common Stock,
$0.001 par value per share
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15,553,974
shares
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Table of Contents
PART I FINANCIAL
INFORMATION
Item 1.
Financial Statements
RED ROBIN GOURMET
BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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July 12,
2009
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December 28,
2008
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Assets:
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Current Assets:
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Cash and cash
equivalents
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$
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9,937
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$
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11,158
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Accounts receivable,
net
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8,029
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5,611
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Inventories
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14,002
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13,123
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Prepaid expenses and
other current assets
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5,928
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9,032
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Income tax receivable
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2,159
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6,208
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Deferred tax asset
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4,143
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3,366
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Restricted current
assetsmarketing funds
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1,358
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1,590
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Total current assets
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$
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45,556
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$
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50,088
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Property and equipment,
net
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440,663
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442,012
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Goodwill
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61,769
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60,982
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Intangible assets, net
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50,505
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51,990
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Other assets, net
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3,544
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4,665
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Total assets
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$
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602,037
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$
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609,737
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Liabilities
and Stockholders Equity:
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Current Liabilities:
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Trade accounts payable
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$
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9,868
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$
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11,966
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Construction related
payables
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4,054
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9,747
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Accrued payroll and
payroll related liabilities
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27,078
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25,489
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Unredeemed gift
certificates
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8,587
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11,997
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Accrued liabilities
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23,574
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20,385
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Accrued
liabilitiesmarketing funds
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1,358
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1,590
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Current portion of term
loan notes payable
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18,739
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10,313
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Current portion of
long-term debt and capital lease obligations
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636
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696
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Total current
liabilities
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$
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93,894
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$
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92,183
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Deferred rent
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29,556
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26,790
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Long-term portion of
term loan notes payable
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108,639
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122,687
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Other long-term debt
and capital lease obligations
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80,410
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88,876
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Other non-current
liabilities
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8,017
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10,293
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Total liabilities
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$
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320,516
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$
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340,829
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Stockholders Equity:
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Common stock; $0.001
par value: 30,000,000 shares authorized; 17,044,370 and
16,954,205 shares issued; 15,552,090 and 15,461,925 shares outstanding
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17
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17
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Preferred stock, $0.001
par value: 3,000,000 shares authorized; no shares issued and outstanding
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Treasury stock,
1,492,280 shares, at cost
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(50,125
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)
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(50,125
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)
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Paid-in capital
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168,453
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165,932
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Accumulated other
comprehensive loss, net of tax
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(1,796
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)
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(1,622
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)
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Retained earnings
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164,972
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154,706
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Total stockholders
equity
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281,521
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268,908
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Total liabilities and
stockholders equity
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$
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602,037
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$
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609,737
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See notes to
condensed consolidated financial statements.
3
Table of Contents
RED ROBIN GOURMET
BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(In thousands, except per
share data)
(Unaudited)
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Twelve Weeks Ended
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Twenty-eight Weeks Ended
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July 12,
2009
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July 13,
2008
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July 12,
2009
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July 13,
2008
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Revenues:
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Restaurant revenue
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$
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197,963
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$
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202,898
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$
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464,558
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$
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453,800
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Franchise royalties and
fees
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3,078
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3,434
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7,230
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8,068
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Rent revenue
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47
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56
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113
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113
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Total revenues
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201,088
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206,388
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471,901
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461,981
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Costs and expenses:
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Restaurant operating
costs:
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Cost of sales
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48,228
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48,505
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113,511
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107,853
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Labor (includes $137,
$308, $1,123 and $663 of stock-based compensation, respectively)
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67,679
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68,956
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159,950
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154,095
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Operating
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32,008
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34,397
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75,026
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76,903
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Occupancy
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14,494
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13,216
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33,402
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29,218
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Depreciation and
amortization
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13,066
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11,680
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30,703
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26,529
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General and
administrative (includes $615, $1,041, $4,342, and $2,514 of stock-based compensation,
respectively)
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15,099
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14,454
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38,971
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36,929
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Pre-opening costs
|
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588
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2,041
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3,138
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4,604
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Reacquired franchise
and other acquisition costs
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451
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451
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Total costs and
expenses
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191,162
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193,700
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454,701
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436,582
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|
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Income from operations
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9,926
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12,688
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17,200
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25,399
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Other expense (income):
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|
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Interest expense, net
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1,559
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1,763
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3,673
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4,059
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Other
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9
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(38
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)
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19
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(25
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)
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Total other expenses
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1,568
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|
1,725
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3,692
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4,034
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|
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|
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Income before income
taxes
|
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8,358
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10,963
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13,508
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21,365
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Provision for income
taxes
|
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1,937
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|
3,047
|
|
3,242
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|
6,196
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Net income
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$
|
6,421
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$
|
7,916
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$
|
10,266
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$
|
15,169
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Earnings per share:
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Basic
|
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$
|
0.42
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$
|
0.49
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$
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0.67
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$
|
0.92
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Diluted
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$
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0.41
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$
|
0.49
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$
|
0.66
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$
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0.91
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Weighted average shares
outstanding:
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|
|
|
|
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|
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Basic
|
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15,380
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16,093
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15,366
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16,460
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Diluted
|
|
15,486
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16,221
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15,467
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16,586
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See notes to
condensed consolidated financial statements.
4
Table of Contents
RED ROBIN GOURMET
BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Twenty-eight Weeks Ended
|
|
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July 12,
2009
|
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July 13,
2008
|
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Cash Flows From
Operating Activities:
|
|
|
|
|
|
Net income
|
|
$
|
10,266
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|
$
|
15,169
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|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
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Depreciation and
amortization
|
|
30,703
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|
26,529
|
|
Stock-based
compensation expense
|
|
5,465
|
|
3,177
|
|
Restaurant closure
costs
|
|
598
|
|
|
|
Other, net
|
|
(1,224
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)
|
152
|
|
Changes in operating
assets and liabilities
|
|
3,479
|
|
7,349
|
|
Cash provided by
operating activities
|
|
49,287
|
|
52,376
|
|
|
|
|
|
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Cash Flows From
Investing Activities:
|
|
|
|
|
|
Changes in marketing
fund restricted cash
|
|
|
|
45
|
|
Acquisition of
franchise restaurants, net of cash acquired of $0 and $55, respectively
|
|
(1,248
|
)
|
(30,257
|
)
|
Purchases of property
and equipment
|
|
(32,905
|
)
|
(41,765
|
)
|
Cash used in investing
activities
|
|
(34,153
|
)
|
(71,977
|
)
|
|
|
|
|
|
|
Cash Flows From
Financing Activities:
|
|
|
|
|
|
Borrowings of long-term
debt
|
|
97,500
|
|
125,900
|
|
Payments of long-term
debt
|
|
(110,730
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)
|
(58,025
|
)
|
Purchase of treasury
stock
|
|
|
|
(50,042
|
)
|
Payment for tender
offer for stock options
|
|
(3,498
|
)
|
|
|
Proceeds from exercise
of stock options and employee stock purchase plan
|
|
607
|
|
1,295
|
|
Excess tax benefit
related to exercise of stock options
|
|
76
|
|
232
|
|
Payments of other debt
and capital lease obligations
|
|
(310
|
)
|
(264
|
)
|
Cash provided (used) by
financing activities
|
|
(16,355
|
)
|
19,096
|
|
|
|
|
|
|
|
Net change in cash and
cash equivalents
|
|
(1,221
|
)
|
(505
|
)
|
Cash and cash
equivalents, beginning of period
|
|
11,158
|
|
12,914
|
|
Cash and cash
equivalents, end of period
|
|
$
|
9,937
|
|
$
|
12,409
|
|
|
|
|
|
|
|
Supplemental Disclosure
of Cash Flow Information:
|
|
|
|
|
|
Income taxes paid
|
|
$
|
936
|
|
$
|
1,364
|
|
Interest paid, net of
amounts capitalized
|
|
3,469
|
|
3,925
|
|
|
|
|
|
|
|
Supplemental Disclosure
of Non-Cash Items:
|
|
|
|
|
|
Capital lease
obligations incurred for equipment purchases
|
|
|
|
156
|
|
Unrealized gain (loss)
on cash flow hedge, net of tax
|
|
(174
|
)
|
1,203
|
|
See notes to condensed
consolidated financial statements.
5
Table of Contents
RED ROBIN
GOURMET BURGERS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Recent
Accounting Pronouncements
Red Robin Gourmet Burgers, Inc. (Red Robin
or the Company), a Delaware corporation, develops and operates casual-dining
restaurants. At July 12, 2009, the Company operated 304 company-owned
restaurants located in 31 states. The Company also franchises the Red Robin®
restaurant concept. As of July 12,
2009, 21 franchisees operated 131 franchised restaurants in 21 states and two
Canadian provinces. The Company
currently does not sell franchises to parties that do not already operate
franchised restaurants, but does grant current franchisees the right to develop
additional franchised restaurants from time to time. The Company operates its business as one
reportable segment.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements include the accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. The Companys financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Some of the more significant
estimates included in the preparation of these financial statements pertain to
recoverability of long-lived assets, fixed asset lives, recoverability of
goodwill, estimated useful lives of other intangible assets, bonus accruals,
self-insurance liabilities, stock-based compensation expense, legal contingencies,
fair value of assets acquired in a business combination and income taxes.
Actual results could differ from those estimates. The results of operations for
any interim period are not necessarily indicative of results for the full year.
The accompanying condensed consolidated financial
statements of Red Robin have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in the Companys
annual consolidated financial statements on Form 10-K have been condensed
or omitted. The condensed consolidated balance sheet as of December 28,
2008 has been derived from the audited consolidated financial statements as of
that date, but does not include all disclosures required by generally accepted
accounting principles. For further information, please refer to and read these
interim condensed consolidated financial statements in conjunction with the
Companys audited consolidated financial statements included in the Companys
annual report on Form 10-K for the year ended December 28, 2008.
The Companys quarter which
ended July 12, 2009, is referred to as second quarter 2009, or the twelve
weeks ended July 12, 2009; the first quarter ended April 19, 2009, is
referred to as first quarter 2009, or the sixteen weeks ended April 19,
2009; and, together the first and second quarters of 2009 are referred
to as the twenty-eight weeks ended July 12, 2009. The Companys quarter
which ended July 13, 2008, is referred to as second quarter 2008, or the
twelve weeks ended July 13, 2008; the first quarter
ended April 20, 2008, is referred to as first quarter 2008, or the sixteen
weeks ended April 20, 2008; and, together the first and second
quarters of 2008 are referred to as the twenty-eight weeks ended July 13,
2008.
Reclassifications
Certain reclassifications have been made to prior year
amounts in the condensed consolidated statements of cash flows to conform to
the current year presentation to reflect the gross borrowings and repayments of
long-term debt.
Recent Accounting Pronouncements
In June 2009,
Financial Accounting Standards Board (FASB) issued Statement of Accounting
Standards (SFAS) No. 168,
The FASB Accounting
Standards Codification
TM
and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162
, (SFAS 168). SFAS 168
provides for the FASB Accounting Standards Codification
TM
(the Codification)
to become the single official source of authoritative, nongovernmental U.S.
generally accepted accounting principles (GAAP). The Codification
did not change GAAP but reorganizes the literature. SFAS 168 is
effective for interim and annual periods ending after September 15,
6
Table
of Contents
2009. Beginning in the
third quarter of fiscal 2009, all references to authoritative accounting
literature in the Companys financial statements will be referenced in accordance
with the Codification. There will be no changes to the content of the
Companys financial statements or disclosures as a result of implementing the
Codification.
In May 2009, the
FASB issued
SFAS
No. 165,
Subsequent
Events,
(SFAS
165) which is effective for financial periods ending after June 15,
2009. SFAS 165 establishes general standards of accounting for and
disclosure of subsequent events that occur after the balance sheet date.
The Company adopted SFAS 165 during second quarter 2009. As required
by SFAS 165, the Company has evaluated subsequent events through the date of
issuance of this report, August 14, 2009.
In April 2009,
the FASB issued FASB Staff Position (FSP) Nos. 107-1 and Accounting Principles
Board (APB) 28-1,
Interim Disclosures about
Fair Value of Financial Instruments,
(FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
,
and APB No. 28,
Interim Financial
Reporting
. FSP FAS 107-1
requires fair value disclosures on an interim basis for financial instruments
that are not reflected in the condensed consolidated balance sheets at fair
value. Prior to the issuance of FSP FAS 107-1, the fair values of those
financial instruments were only disclosed on an annual basis. FSP FAS
107-1 is effective for interim reporting periods that end after the Companys
second quarter. The adoption of FSP FAS 107-1did not have a material
impact on its consolidated financial position, results of operations or cash
flows.
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
,
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). This change is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under
SFAS 141R and other Generally Accepted Accounting Principles (GAAP). The
requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure requirements
must be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years.
The adoption of FSP 142-3 at the beginning of fiscal 2009 did not have a
material impact on the Companys consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
, (SFAS 161). SFAS 161 provides companies with
requirements for enhanced disclosures about derivative instruments and hedging
activities to enable investors to better understand their effects on a companys
financial position, financial performance and cash flows. These requirements
include the disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. The Company adopted SFAS 161 at the
beginning of fiscal 2009.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
Business Combinations,
(SFAS 141R). SFAS 141R
provides companies with principles and requirements on how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
as well as the recognition and measurement of goodwill acquired in a business
combination. SFAS 141R also requires certain disclosures to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. Acquisition costs associated with the business
combination will generally be expensed as incurred. SFAS 141R is effective
for business combinations occurring in fiscal years beginning after December 15,
2008. Accordingly, beginning in fiscal
2009, the Company will record and disclose material business combinations under
the revised standard.
In December 2007, the FASB issued SFAS No. 160
, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
, (SFAS 160).
SFAS 160 changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. The Company adopted SFAS 160 at the beginning of
fiscal 2009. The adoption of
SFAS 160 did not impact the Companys consolidated financial statements.
2.
Acquisition of Red Robin
Franchised Restaurants
During the second quarter 2008, the Company completed its acquisitions
of 15 existing Red Robin
®
franchised restaurants
from three franchisees for a combined purchase price of $30.0 million. The
purchase price was paid in cash, funded primarily through borrowings under the
Companys credit facility. In addition, on April 15, 2008, the Company
completed the purchase of an entity that owned a Red Robin
®
franchise restaurant that was
7
Table of
Contents
under
construction in Eau Claire, Wisconsin, (Eau Claire) which was then opened by
the Company on May 5, 2008. The Company acquired the outstanding stock of
the entity in exchange for $247,000 in cash and the assumption of indebtedness
in the amount of approximately $850,000. In addition to the above-described
acquisitions of existing restaurants, the Company gained access to development
rights where these restaurants are locatedterritories that were formerly
subject to exclusivity provisions in the former area development agreements
with the selling franchisees. The financial results of all 15 restaurants have
been included in the Companys financial results from their acquisition dates
forward.
The acquisition of the 16 restaurants was accounted for using the
purchase method as defined in SFAS No. 141,
Business Combinations,
(SFAS 141). Based on a total
purchase price of $30.0 million, net of a $451,000 charge related to the
purchase of the restaurants, and the Companys estimates of the fair value of
net assets acquired, $4.7 million of goodwill was generated by the
acquisition, which is not amortizable for book purposes but is amortizable and
deductible for tax purposes. As a result
of the acquisition of the 16 restaurants, the Company incurred a total charge
in the second quarter of 2008 of $451,000, of which $402,000 is related to
avoided franchise fees.
Pro Forma Results (unaudited)
The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the 2008
acquisition of the 15 existing Red Robin
®
franchised restaurants occurred
at the beginning of each period presented as required by SFAS 141. Pro forma net income for the twelve and
twenty-eight weeks ended July 13, 2008 excludes a nonrecurring $451,000
pre-tax charge, $326,000 net of tax, related to the reacquired franchise rights
and other acquisition costs associated with the 2008 franchise
acquisitions. The pro forma financial
information is presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if the
acquisition had taken place at the beginning of the period presented, nor is it
indicative of future operating results.
|
|
Twelve Weeks
Ended
|
|
Twenty-eight Weeks Ended
|
|
(In thousands, except per share data)
|
|
July 13,
2008
|
|
July 13,
2008
|
|
Revenue
|
|
$
|
209,205
|
|
$
|
476,990
|
|
Net income
|
|
8,111
|
|
16,045
|
|
Basic EPS
|
|
0.50
|
|
0.97
|
|
Diluted EPS
|
|
$
|
0.50
|
|
$
|
0.97
|
|
3.
Restaurant Closures
The Company closed four restaurants during the first quarter of 2009.
This decision resulted from an initiative to identify those restaurants, new or
aged, that were located in declining trade areas, performed below acceptable
profitability levels and/or required significant capital expenditures. The
locations selected for closure represented older restaurants whose leases were
not extended, or were in need of significant capital improvement that were not
projected to provide acceptable returns in the foreseeable future. The Company recognized a charge of approximately
$598,000 during the first half of 2009 related to lease termination costs based
on estimated remaining lease obligations, net of estimated sublease income, and
other closing related costs. This charge
was recorded in the Companys condensed consolidated statements of income as
general and administrative expense for the twenty-eight weeks ended July 12,
2009.
4.
Cash Tender Offer
On February 11, 2009, the Company completed a cash tender offer
for out-of-the-money stock options held by 514 current employees and officers.
The stock options eligible for tender were granted prior to December 31,
2008 with an exercise price at or above $32.00 per share. Pursuant to the terms
of the tender offer, eligible employees and officers who elected to participate
were required to tender all of their eligible options. As a result of the tender offer, the Company
incurred a one-time charge of approximately $4.0 million for all unvested
eligible options that were tendered. This first quarter 2009 charge is reflected
in the financial results for the twenty-eight weeks ended July 12, 2009
and represents the compensation expense related to the acceleration of vesting
on the unvested options tendered in the offer, which would otherwise have been
expensed over their vesting period in the future if they had not been tendered.
The Company paid $3.5 million for the approximate 1.6 million options
tendered in the offer.
8
Table of Contents
5.
Stock-Based Compensation
During the twelve weeks ended July 12, 2009, the
Company issued approximately 27,000 options with a weighted average grant date
fair value of $6.46 per share and a weighted average exercise price of $18.50
per share. For
the twenty-eight weeks ended July 12, 2009, the Company issued
approximately 366,000 options with a weighted average grant date fair value of
$5.98 per share and a weighted average exercise price of $15.27 per share. Compensation expense for these options is recognized over the
remaining weighted average vesting period which is approximately 1.7 years.
The fair value of options
at the grant date was estimated utilizing the Black-Scholes multiple
option-pricing model with the following weighted average assumptions for the
periods presented:
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 12,
2009
|
|
July 13,
2008
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Risk-free interest rate
|
|
1.5
|
%
|
2.8
|
%
|
1.4
|
%
|
1.9
|
%
|
Expected years until
exercise
|
|
2.7
|
|
2.2
|
|
3.6
|
|
2.7
|
|
Expected stock
volatility
|
|
53.9
|
%
|
41.7
|
%
|
52.4
|
%
|
40.4
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Weighted-average
Black-Scholes fair value per share at date of grant
|
|
$
|
6.46
|
|
$
|
8.71
|
|
$
|
5.98
|
|
$
|
9.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the twelve weeks
ended July 12, 2009, the Company issued a total of 4,500 shares of
non-vested common stock to its board of directors under its Amended and
Restated 2007 Performance Incentive Plan (2007 Stock Plan) with weighted
average grant date fair value of $17.65.
The
non-vested
shares of common stock granted to directors are generally subject to a one year
vesting requirement, while non-vested shares of common stock granted to
executive officers and other key employees are generally subject to a four year
graded vesting requirement. Compensation expense for the
aggregate 153,000 shares of non-vested common stock outstanding at July 12,
2009, is recognized over the remaining weighted average vesting period which is
approximately 1.9 years.
During the twelve weeks
ended July 12, 2009, the Company issued approximately 1,400 restricted
stock units (RSUs) to certain employees under its
2007 Stock Plan with a weighted average
grant date fair value of $19.58. For the
twenty-eight weeks ended July 12, 2009, the Company
issued approximately 37,000 RSUs to certain employees under its 2007
Stock Plan with a weighted average grant date fair value of $15.11. The RSUs vest in equal installments over four
years on the anniversary date and upon vesting, one share of the Companys
common stock is issued for each RSU. The fair value of each RSU granted is
equal to the market price of the Companys stock at date of grant. Compensation expense for the RSUs is recognized over the
remaining weighted average vesting period which is approximately 2.1 years.
Included in restaurant labor and general and
administrative expenses
in the condensed consolidated statements of incom
e for the twenty-eight weeks ended July 12,
2009, is approximately $886,000 and $3.1 million respectively, of stock-based
compensation expense related to the cash tender offer discussed in Note 4.
Cash Tender Offer
.
This one-time charge
represents the compensation expense related
to the acceleration of vesting on the unvested options tendered in the offer,
which would otherwise have been expensed over their vesting period in the
future if they had not been tendered.
For the twelve and
twenty-eight weeks ended July 12, 2009, $24,000 and $48,000 of stock-based
compensation was recognized as capitalized development and is included in
property and equipment in the condensed consolidated balance sheet,
respectively. During the quarter ended July 12, 2009, approximately 5,000
options to purchase common shares were exercised and approximately 17,000
options were forfeited. During the
twenty-eight weeks ended July 12, 2009, approximately 24,000 options to
purchase common shares were exercised and approximately 1.6 million options
were cancelled due primarily to the cash tender offer discussed in Note 4.
Cash Tender Offer.
6.
Earnings Per Share
Basic
earnings per share amounts are calculated by dividing net income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share amounts are calculated based upon the
weighted-average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive shares are excluded from
the computation in periods in which they have an anti-dilutive effect.
9
Table of
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Diluted earnings per share reflect the potential dilution that could
occur if holders of options exercised their options into common stock. During
the twelve and twenty-eight weeks ended July 12, 2009, approximately
363,000 and 954,000, respectively, weighted stock options outstanding were not
included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. During the twelve and twenty-eight weeks ended
July 13, 2008, approximately 1.8 million and 1.7 million stock options
outstanding, respectively, were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
periods presented. The Company uses the
treasury stock method to calculate the impact of outstanding stock options. The
computations for basic and diluted earnings per share are as follows (in
thousands, except per share data):
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 12,
2009
|
|
July 13,
2008
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Net income
|
|
$
|
6,421
|
|
$
|
7,916
|
|
$
|
10,266
|
|
$
|
15,169
|
|
Basic weighted-average
shares outstanding
|
|
15,380
|
|
16,093
|
|
15,366
|
|
16,460
|
|
Dilutive effect of
stock options
|
|
106
|
|
128
|
|
101
|
|
126
|
|
Diluted weighted-average
shares outstanding
|
|
15,486
|
|
16,221
|
|
15,467
|
|
16,586
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
$
|
0.49
|
|
$
|
0.67
|
|
$
|
0.92
|
|
Diluted
|
|
$
|
0.41
|
|
$
|
0.49
|
|
$
|
0.66
|
|
$
|
0.91
|
|
7.
Advertising Costs
Costs
incurred in connection with the advertising and promotion of the Company are
included in operating expenses and expensed as incurred. Such costs amounted to $3.3 million and $7.9 million for the twelve and twenty-eight weeks ended July 12,
2009, respectively and $5.6 million and $12.5 million for the twelve and
twenty-eight weeks ended July 13, 2008, respectively.
Under the Companys franchise agreements, both the Company and the
franchisees must contribute a minimum percentage of revenues to two marketing
and national media advertising funds (the Marketing Funds). These Marketing
Funds are used to develop and distribute Red Robin
®
branded marketing materials, for media
purchases and for administrative costs. The Companys portion of costs incurred
by the Marketing Funds is recorded as operating and general and administrative
expenses in the Companys financial statements. Restricted assets represent
contributed funds held for future use.
8.
Derivative and Hedging Activities
The Company enters into derivative instruments for
risk management purposes only, including derivatives designated as hedging
instruments under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133)
.
The Company uses interest
rate-related derivative instruments to manage its exposure to fluctuations of
interest rates. By using these instruments, the Company exposes itself,
from time to time, to credit risk and market risk. Credit risk is the
failure of the counterparty to perform under the terms of the derivative
contract. When the fair value of a derivative contract is positive, the
counterparty owes the Company, which creates credit risk for the Company.
The Company minimizes the credit risk by entering into transactions with
high-quality counterparties whose credit rating is evaluated on a quarterly
basis. The Companys counterparty in the interest rate swap is SunTrust
Bank, National Association (SunTrust). Market risk is the adverse effect
on the value of a financial instrument that results from a change in interest
rates, commodity prices, or the market price of the Companys common
stock. The Company minimizes market risk by establishing and monitoring
parameters that limit the types and degree of market risk that may be taken.
In March 2008,
the Company entered into a variable-to-fixed interest rate swap agreement with
SunTrust to hedge the Companys floating interest rate on an aggregate of up to $120 million of debt that is currently outstanding
under the Companys amended and restated credit facility. The interest rate swap has an effective date
of March 19, 2008 and a termination date of March 19, 2010 for $50
million of the initial $120 million and March 19, 2011 for the remaining
$70 million. The agreement was
designated as a cash flow hedge under which the Company is required to make
payments based on a fixed interest rate of 2.7925% calculated on an initial
notional amount of $120 million. In exchange the Company will receive interest
on a $120 million of notional amount at a variable rate that is based on the
3-month LIBOR rate.
10
Table
of Contents
The
Company entered into the above interest rate swap with the objective of
offsetting the variability of its interest expense that arises because of
changes in the variable interest rate for the designated interest
payments. Changes in the fair value of the interest rate swap are
reported as a component of accumulated other comprehensive income (AOCI).
The Company reclassifies gain or loss from accumulated other comprehensive
income, net of tax, on the Companys consolidated balance sheet to interest
expense on the Companys consolidated statement of income as the interest
expense is recognized on the related debt.
The
following table summarizes the fair value and presentation in the condensed
consolidated balance sheets of the interest rate swap designated as hedging
instruments under SFAS 133 as of July 12, 2009:
Balance
Sheet Location
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
$
|
|
|
$
|
2,946
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the effect of the interest rate swap on the
condensed consolidated statements of income for the twelve weeks ended July 12,
2009:
|
|
Twelve
Weeks
|
|
Twenty-eight
Weeks
|
|
|
|
Ended
|
|
Ended
|
|
|
|
July 12,
2009
|
|
July 12,
2009
|
|
Loss recognized in AOCI
(effective portion)
|
|
$
|
(354
|
)
|
$
|
(187
|
)
|
Location of loss
reclassified from AOCI to income (effective portion)
|
|
Interest expense, net
|
|
Interest expense, net
|
|
Loss reclassified from
AOCI to income (effective portion)
|
|
$
|
(473
|
)
|
$
|
(956
|
)
|
During 2009, our interest
rate swap had no hedge ineffectiveness and no gains or losses were reclassified
into net earnings.
9.
Fair Value Measurement and Other
Comprehensive Income
The fair market
value of the Companys credit facility as of July 12, 2009 and December 28,
2008 was approximately $199.0 million and $200.0 million,
respectively. There is $6.5 million
of outstanding borrowings recorded for the Companys capital leases as of July 12,
2009, which have an estimated fair value of $8.1 million. At December 28,
2008, the carrying amount of the Companys capital lease obligations was
$7.6 million and the fair value was $8.8 million. Both the fair
values of the Companys credit facility in 2009 and capital leases have been
estimated using Level 2 inputs using discounted cash flow analyses based on
market rates obtained from independent third parties for similar type debt.
The Companys
deferred compensation plan is a nonqualified deferred compensation plan which
allows highly compensated employees to defer a portion of their base salary,
bonuses and commissions each plan year. At July 12, 2009 and December 28,
2008, a liability for participant contributions and investment income thereon
of $1.8 million and $1.7 million, respectively, is included in other
non-current liabilities. To fund this plan the Companys plan administrator
purchases corporate-owned whole-life insurance contracts on the related team
members. The cash surrender value of these policies at July 12, 2009 and December 28,
2008, $1.8 million and $1.6 million, respectively, is included in other
assets, net. The carrying value of both the liability for participant
contributions and investment income and the cash surrender value asset are
equal to their fair value. These agreements are required to be measured at fair
value on a recurring basis and are valued using Level 2 inputs.
The interest rate
swap discussed in Note 8 above falls into the Level 2 category under the
guidance of SFAS No. 157,
Fair Value
Measurements
. The fair market value of the interest rate swap, which is measured on a recurring bases, was an
unrealized loss of $2.9 million, $1.8 million net of tax, as of July 12,
2009 and an unrealized gain of $2.0 million, $1.2 million net of tax as of July 13,
2008, which is recorded in accrued liabilities and other assets, respectively,
in the Companys condensed consolidated balance sheet. The fair market value of the interest rate
swap was an unrealized loss of $2.8 million, $1.6 million net of tax, as of December 28,
2008. The unrealized gain (loss)
associated with this cash flow hedging instrument is recorded in accumulated
other comprehensive income (loss), net of tax, on the Companys condensed
consolidated balance sheet.
11
Table
of Contents
Comprehensive income consisted of (in
thousands):
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 12,
2009
|
|
July 13,
2008
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Net income
|
|
$
|
6,421
|
|
$
|
7,916
|
|
$
|
10,266
|
|
$
|
15,169
|
|
Unrealized gain (loss)
on cash flow hedge, net of tax
|
|
(216
|
)
|
519
|
|
(174
|
)
|
1,203
|
|
Total comprehensive
income
|
|
$
|
6,205
|
|
$
|
8,435
|
|
$
|
10,092
|
|
$
|
16,372
|
|
10.
Related Parties
On June 3,
2009, the Company announced the appointment of a new member to its board of
directors, which expanded the board from seven to eight members. This new board member is the former president
and majority owner of one of our franchises from which the Company purchased 13
Red Robin® restaurants in Washington in 2006.
The new board member is a principal of and holds, directly or
indirectly, interests of between 50% and 66 2/3% in each of three
privately-held entities that hold the leases for three of the restaurants that
were acquired in 2006. These leases were
assumed by the Company in connection with the acquisition. Under these leases, the Company recognized
rent and other related payments in the amounts of $266,000 and $578,000 during
the twelve and twenty-eight weeks ended July 12, 2009, respectively. For the twelve and twenty-eight weeks ended July 13,
2008, the Company recognized rent and other related payments in the amounts of
$299,000 and $701,000, respectively.
11.
Commitments and Contingencies
In the normal course of
business, the Company responds to claims, lawsuits and other contingencies.
Claims may arise from alleged slip and fall accidents, food borne illness or
injury, or other food quality, health or operational concerns. The Company
maintains insurance with respect to certain of these risks. To date, no claims
of these types have had a material adverse effect on us. While it is not
possible to predict the outcome of these outstanding claims, lawsuits, and
other contingencies with certainty, management is of the opinion that adequate
provision for potential losses associated with these matters has been made in
the financial statements and that the ultimate resolution of these matters will
not have a material adverse effect on the Companys financial position and
results of operations.
Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations provides a
narrative of our financial performance and condition that should be read in
conjunction with the accompanying condensed consolidated financial
statements. All comparisons under this
heading between 2009 and 2008 refer to the twelve and twenty-eight week periods
ending July 12, 2009 and July 13, 2008, respectively, unless
otherwise indicated.
12
Table of Contents
Overview
The following summarizes the operational and financial
highlights of the Company during the twenty-eight weeks of fiscal 2009:
·
New Restaurant Openings
. We opened six and 13 company-owned
restaurants during the twelve and twenty-eight weeks ended July 12, 2009
versus eight and 17 for the same time periods of fiscal 2008. We plan to open an additional two
company-owned restaurants in 2009. We
believe that the expense associated with the opening of all 2009 restaurants
will be funded from our operating cash flows.
·
Comparable
Restaurant Sales.
For the
twenty-eight weeks ended July 12, 2009, the 245 restaurants in our current
comparable base experienced a 9.6% decrease in sales from these same
restaurants last year. This decrease was driven by an 11.1% decrease in guest
counts partially offset by a 1.5% increase in the average guest check.
It is difficult to predict how long the current
economic conditions will persist, whether they will deteriorate further, and
the extent to which our operations will be adversely affected.
We expect overall comparable
restaurant sales to decline in fiscal 2009 based on our actual experience
through the second quarter 2009, the current macroeconomic environment
experienced by the restaurant industry and our significant reduction in
national cable advertising.
·
Food Cost.
We
continue to see upward pricing pressures in most of our food costs categories
during the twenty-eight weeks ended July 12, 2009. We believe our two largest cost pressures
during 2009 will be for ground beef used in our hamburgers and potatoes that
are used to make our steak fries. In 2008, we had favorable fixed pricing for
ground beef, well below the market spot rate.
For the first half of 2009, our ground beef costs were under a contract
that was less favorable than the 2008 contracted pricing. For the second half of 2009, approximately
40% of our ground beef volume remains contracted. We currently expect the remaining ground beef
volume to be purchased at market prices for the remainder of 2009. The cost of our steak fries have increased in
2009 as many farmers planted other higher profit crops during the 2008 planting
season and, in turn, reduced the potato supply available for our steak fries.
·
Marketing
Efforts.
In 2009, our marketing strategy is focused on
driving guest traffic and retention by expanding our national online and
digital media advertising efforts as well as introducing a targeted direct mail
campaign to support product specific news with limited support through national
cable advertising. In the first quarter
2009, we launched the direct mail campaign to drive incremental guest traffic
through the promotion of our limited time only Burnin Love burger. This campaign was also supported with a
strong online promotion. Additional
marketing efforts in 2009 include a focus on driving gift card sales in the
restaurants and with third party retailers, expanding our guest satisfaction
survey program and supporting new menu offerings. In an environment in which consumers have
pulled back on retail and restaurant spending, together with our desire to
reduce costs, we are doing more targeted and local marketing initiatives and
purchasing significantly less national cable advertising in 2009. We ran limited national cable advertising
during the second quarter 2009 to support our promotion of our Steak Sliders,
and currently are evaluating our tactics for the remainder of 2009. This reduced national television advertising
spending, offset by increases in other advertising tactics, is expected to
reduce restaurant operating costs by approximately 1.0% of restaurant revenue
in fiscal 2009.
·
Restaurant
Closings.
The Company closed four restaurants during
the first quarter 2009. This decision resulted from our identifying those
restaurants that were in declining trade areas, performing below acceptable
profitability levels and/or would require significant capital expenditures. The
locations selected for closure represented older restaurants whose leases were
not extended or were in need of significant capital improvement that were not
projected to provide acceptable returns in the foreseeable future. The Company recognized a charge of
approximately $598,000 during the first half of 2009 related to lease
termination costs based on estimated remaining lease obligations, net of
estimated sublease income, and other closing related costs. This charge is recorded in general and
administrative expense in our condensed consolidated statements of income for
the twenty-eight weeks ended July 12, 2009.
·
Cash
Tender Offer
. On February 11,
2009 we completed a cash tender offer for out-of-the-money stock options held
by 514 current employees and officers.
As a result of the tender offer, we incurred a one-time charge of
approximately $4.0 million for all unvested eligible options that were
tendered in the first quarter 2009. This
one-time charge represents the compensation expense related to the acceleration
of
13
Table of Contents
vesting on the unvested
options tendered in the offer, which would otherwise have been expensed over
their vesting period in the future if they had not been tendered. Approximately $0.9 million of the $4.0
million charge is recorded in labor expense and approximately $3.1 million is
recorded in general and administrative expense in our condensed consolidated
statements of income for the twenty-eight weeks ended July 12, 2009. We paid $3.5 million in cash for the
approximate 1.6 million options tendered in the offer.
In view of the foregoing, the Company is making
efforts to manage controllable costs and streamline operations, while our
restaurant teams focus on driving traffic through the quality and value of our
guest experience. Our reduced levels of
new restaurant openings and limited capital expenditures are expected to result
in cash flows that will be used primarily to reduce outstanding indebtedness.
Restaurant
Data
The following table details restaurant unit data for
our company-owned and franchise locations for the periods
indicated.
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 12,
2009
|
|
July 13,
2008
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Company-owned:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
298
|
|
258
|
|
294
|
|
249
|
|
Opened during period
|
|
6
|
|
8
|
|
13
|
|
17
|
|
Acquired during period
|
|
|
|
15
|
|
1
|
|
15
|
|
Closed during period
|
|
|
|
|
|
(4
|
)
|
|
|
End of period
|
|
304
|
|
281
|
|
304
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
Franchised:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
130
|
|
135
|
|
129
|
|
135
|
|
Opened during period
|
|
1
|
|
3
|
|
3
|
|
4
|
|
Sold or closed during
period
|
|
|
|
(15
|
)
|
(1
|
)
|
(16
|
)
|
End of period
|
|
131
|
|
123
|
|
131
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
Total number of Red
Robin® restaurants
|
|
435
|
|
404
|
|
435
|
|
404
|
|
On December 31, 2008, we acquired a restaurant that was managed by
the Company under a management agreement since June 2007 with a
franchisee.
14
Table of Contents
Results of Operations
Operating results for each period presented below are
expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed
as a percentage of restaurant revenues.
This information has been prepared on a basis consistent
with the audited 2008 annual financial statements and, in the opinion of
management, includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. Our operating results may fluctuate
significantly as a result of a variety of factors, and operating results for
any period presented are not necessarily indicative of results for a full
fiscal year.
|
|
Twelve Weeks Ended
|
|
Twenty-eight
Weeks Ended
|
|
|
|
July 12,
2009
|
|
July 13,
2008
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
98.5
|
%
|
98.3
|
%
|
98.5
|
%
|
98.2
|
%
|
Franchise royalties and
fees
|
|
1.5
|
|
1.7
|
|
1.5
|
|
1.8
|
|
Rent revenue
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
Restaurant operating
costs:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
24.4
|
|
23.9
|
|
24.4
|
|
23.8
|
|
Labor (includes 0.1%,
0.2%, 0.2% and 0.1% of stock-based compensation expense, respectively)
|
|
34.2
|
|
34.0
|
|
34.4
|
|
34.0
|
|
Operating
|
|
16.1
|
|
17.0
|
|
16.1
|
|
16.9
|
|
Occupancy
|
|
7.3
|
|
6.5
|
|
7.2
|
|
6.4
|
|
Total restaurant
operating costs
|
|
82.0
|
|
81.4
|
|
82.1
|
|
81.1
|
|
Depreciation and
amortization
|
|
6.5
|
|
5.7
|
|
6.5
|
|
5.7
|
|
General and
administrative (includes 0.3%, 0.5%, 0.9% and 0.5% of stock-based
compensation expense, respectively)
|
|
7.5
|
|
7.0
|
|
8.3
|
|
8.0
|
|
Pre-opening costs
|
|
0.3
|
|
1.0
|
|
0.7
|
|
1.0
|
|
Reacquired franchise
and other acquisition costs
|
|
|
|
0.2
|
|
|
|
0.1
|
|
Income from operations
|
|
4.9
|
|
6.1
|
|
3.6
|
|
5.5
|
|
Interest expense, net
|
|
0.8
|
|
0.8
|
|
0.8
|
|
0.9
|
|
Other
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
4.1
|
|
5.3
|
|
2.8
|
|
4.6
|
|
Provision for income
taxes
|
|
1.0
|
|
1.5
|
|
0.7
|
|
1.3
|
|
Net income
|
|
3.1
|
%
|
3.8
|
%
|
2.1
|
%
|
3.3
|
%
|
Certain
percentage amounts in the table above do not sum due to
rounding as well as the fact that restaurant operating costs are expressed as a
percentage of restaurant revenues, as opposed to total revenues.
15
Table of Contents
Total Revenues
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Restaurant revenue
|
|
197,963
|
|
202,898
|
|
(2.4
|
)%
|
464,558
|
|
453,800
|
|
2.4
|
%
|
Franchise royalties and
fees
|
|
3,078
|
|
3,434
|
|
(10.4
|
)%
|
7,230
|
|
8,068
|
|
(10.4
|
)%
|
Rent revenue
|
|
47
|
|
56
|
|
(16.1
|
)%
|
113
|
|
113
|
|
0.0
|
%
|
Total revenues
|
|
201,088
|
|
206,388
|
|
(2.6
|
)%
|
471,901
|
|
461,981
|
|
2.1
|
%
|
Average weekly sales
volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurants
|
|
56,335
|
|
64,842
|
|
(13.1
|
)%
|
57,330
|
|
64,674
|
|
(11.4
|
)%
|
Non-comparable
restaurants
|
|
56,053
|
|
56,233
|
|
(0.3
|
)%
|
55,611
|
|
55,633
|
|
0.0
|
%
|
2007 Acquired
Restaurants (1)
|
|
|
|
61,254
|
|
|
|
|
|
61,335
|
|
|
|
2008 Acquired
Restaurants (2)
|
|
49,842
|
|
54,905
|
|
(9.2
|
)%
|
51,392
|
|
54,905
|
|
(6.4
|
)%
|
(1)
|
2007
Acquired Restaurants refers to 16 franchised Red Robin
®
restaurants we acquired during 2007 and one
restaurant that we operated under a management agreement with a franchisee
until we acquired it on December 31, 2008. Beginning the third quarter
2008, these restaurants entered into the comparable restaurant population and
their average weekly sales volumes, from that time forward, are included in
the comparable restaurant category.
|
|
|
(2)
|
2008
Acquired Restaurants refers to 15 franchised Red Robin® restaurants we
acquired during 2008.
|
For the twelve and twenty eight weeks ended July 12, 2009,
restaurant revenue, which is comprised almost entirely of food and beverage
sales, decreased by $4.9 million, or 2.4%, and increased by $10.8 million,
or 2.4%, respectively, from the same periods of 2008. Sales for non-comparable
restaurants contributed an increase of $17.6 million and $46.0 million for the
twelve and twenty-eight weeks ended July 12, 2009, respectively, of which
$4.1 million was attributable to six restaurants opened during the twelve weeks
ended July 12, 2009 and of which $15.6 million was attributable to the 13
restaurants opened during the twenty-eight weeks ended July 12, 2009.
Sales in the comparable restaurant base experienced a decrease of approximately
$24.7 million or 13.3% during the second quarter 2009 and approximately
$49.9 million or 11.5 % during the twenty-eight weeks ended July 12, 2009
over prior year periods. The decrease in comparable restaurant sales in 2009 was primarily
the result of the lower guest counts driven by the macroeconomic environment
and our significant reduction in national cable advertising in 2009. This decrease was partially offset by an
increase in the average guest check. We
anticipate that our full year fiscal 2009 comparable sales will be
negative. The 2008 Acquired Restaurants
contributed an increase of $2.2 million and $14.7 million of restaurant
revenue during the twelve and twenty-eight weeks ended July 12, 2009,
respectively.
Average weekly sales volumes represent the total restaurant revenue
excluding discounts for a population of restaurants in both a comparable and
non-comparable category for each time period presented
divided by the number of operating weeks in the period. Comparable restaurant
average weekly sales volumes include those restaurants that are in the
comparable base at the end of each period presented. At the end of the second
quarter 2009, there were 245 comparable restaurants compared to 207 comparable
restaurants at the end of the second quarter 2008. Non-comparable restaurants
presented include those restaurants that had not yet achieved the five full
quarters of operations during the periods presented. At the end of the second
quarter 2009, there were 44 non-comparable restaurants versus 43 at the end of
the second quarter 2008. Fluctuations in average weekly sales volumes for
comparable restaurants reflect the effect of same store sales changes as well
as the performance of new restaurants entering the comparable base during the
period.
Franchise royalties and
fees, which consist primarily of royalty income and
initial franchise fees, decreased 10.4% for the twelve and twenty-eight weeks
ended July 12, 2009. This decrease is primarily attributable to the
$276,000 quarter over quarter reductions and the $793,000 year over year
reduction in franchise royalties from the 2008 Acquired Restaurants. Our franchisees reported that comparable
restaurant sales decreased 10.3% for U.S. restaurants and decreased 1.6% for
Canadian restaurants in the second quarter of 2009 compared to the second
quarter of 2008. For the twenty-eight
weeks ended July 12, 2009 and July 13, 2008, our franchisees reported
that comparable restaurant sales for U.S. restaurants decreased 8.5% and
Canadian restaurants decreased 0.3%.
16
Table of Contents
Cost
and Expenses
Cost
of Sales
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Cost of sales
|
|
$
|
48,228
|
|
$
|
48,505
|
|
(0.6
|
)%
|
$
|
113,511
|
|
$
|
107,853
|
|
5.2
|
%
|
As a percent of
restaurant revenue
|
|
24.4
|
%
|
23.9
|
%
|
0.5
|
%
|
24.4
|
%
|
23.8
|
%
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, comprised of food and beverage
expenses, are variable and generally fluctuate with sales volume. For the
twelve and twenty-eight weeks ended July 12, 2009, cost of sales increased
as a percentage of restaurant revenues over prior year
due to higher raw material costs, particularly ground beef and steak fries,
partially offset by menu price increases taken in early 2008. Higher ground beef and potato costs are
expected to continue through fiscal 2009 given higher pricing in 2009 compared
to lower contracted fixed prices in 2008.
Labor
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Labor
|
|
$
|
67,679
|
|
$
|
68,956
|
|
(1.9
|
)%
|
$
|
159,950
|
|
$
|
154,095
|
|
3.8
|
%
|
As a percent of
restaurant revenue
|
|
34.2
|
%
|
34.0
|
%
|
0.2
|
%
|
34.4
|
%
|
34.0
|
%
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor costs
include restaurant hourly wages, fixed management salaries, stock-based compensation,
bonuses, taxes and benefits for restaurant team members. For the twelve and
twenty-eight weeks ended July 12, 2009, labor costs
as a percentage of restaurant revenue increased from prior year due primarily
to increased fixed expenses such as managers salaries, higher benefit costs
and increased minimum wage that was effective January 1, 2009. A stock based compensation charge of
$886,000, or 0.2% of restaurant revenue, related to the stock option tender
offer in the first quarter 2009, also increased labor costs as a percentage of
restaurant revenue for the twenty-eight weeks ended July 12, 2009. This year over year increase is partially
offset by improved productivity of hourly labor for non-management team members
and decreased restaurant-level bonuses, as well as lower vacation expense.
Operating
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Operating
|
|
$
|
32,008
|
|
$
|
34,397
|
|
(6.9
|
)%
|
$
|
75,026
|
|
$
|
76,903
|
|
(2.4
|
)%
|
As a percent of
restaurant revenue
|
|
16.1
|
%
|
17.0
|
%
|
(0.9
|
)%
|
16.1
|
%
|
16.9
|
%
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs include variable costs such as
contributions to the advertising funds, local marketing expenses, restaurant
supplies, travel costs, and fixed costs such as repairs
and maintenance and utility costs. For the twelve
and twenty-eight weeks ended July 12, 2009,
operating costs decreased as a percentage of restaurant revenue due primarily
to a 1.1% effective decrease in 2009 contributions to the national advertising
fund partially offset by higher repairs and maintenance costs and higher
utility costs.
Occupancy
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Occupancy
|
|
$
|
14,494
|
|
$
|
13,216
|
|
9.7
|
%
|
$
|
33,402
|
|
$
|
29,218
|
|
14.3
|
%
|
As a percent of
restaurant revenue
|
|
7.3
|
%
|
6.5
|
%
|
0.8
|
%
|
7.2
|
%
|
6.4
|
%
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs include fixed rents, percentage rents,
common area maintenance charges, real estate and personal property taxes,
general liability insurance and other property costs. As
a percentage of restaurant revenue, occupancy costs for the twelve and
twenty-eight weeks ended July 12, 2009 increased
over the prior year periods due to a decline in average restaurant revenues on
partially fixed costs and higher fixed rents related to new and
17
Table of Contents
acquired restaurants for both the land and
building. Many of the restaurants
acquired from franchisees are build to suit locations that typically bear a
higher occupancy cost as a percentage of restaurant revenue. We believe occupancy costs for the remainder
of 2009 as a percentage of restaurant revenue will exceed 2008 levels.
Depreciation
and Amortization
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Depreciation and
amortization
|
|
$
|
13,066
|
|
$
|
11,680
|
|
11.9
|
%
|
$
|
30,703
|
|
$
|
26,529
|
|
15.7
|
%
|
As a percent of total
revenues
|
|
6.5
|
%
|
5.7
|
%
|
0.8
|
%
|
6.5
|
%
|
5.7
|
%
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization includes depreciation on
capital expenditures for restaurants and corporate assets as well as amortization of acquired intangible assets and
liquor licenses. Depreciation and amortization expense increased as a percentage
of total revenues for the twelve and twenty-eight weeks ended July 12,
2009 compared to prior year due primarily to increased depreciation and
amortization expense related to new and acquired restaurants and lower average
restaurant sales volumes. We expect
higher depreciation and amortization expense as a percentage of total revenues
to continue for the remainder of fiscal 2009 and lower average restaurant sales
volumes.
General and Administrative
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
General and
administrative
|
|
$
|
15,099
|
|
$
|
14,454
|
|
4.5
|
%
|
$
|
38,971
|
|
$
|
36,929
|
|
5.5
|
%
|
As a percent of total
revenues
|
|
7.5
|
%
|
7.0
|
%
|
0.5
|
%
|
8.3
|
%
|
8.0
|
%
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative costs include all corporate and administrative functions that support existing restaurant operations, franchises, and provide infrastructure to facilitate our future growth. Components of this category include corporate management, supervisory and staff salaries, bonuses, stock-based compensation and related employee benefits, travel, information systems, training, office rent, franchise administrative support, legal, leadership conference, professional and consulting fees and marketing costs. For the twelve weeks ended July 12, 2009, general and administrative costs increased as a percentage of total revenues due primarily to increased marketing and bonus expenses partially offset by lower salary and travel related costs. For the twenty-eight weeks ended July 12, 2009, general and administrative costs increased as a percentage of total revenues due to increased stock-based compensation expense from a $3.1 million, or 0.7% of total revenue, charge related to the stock tender offer in February 2009. Also contributing to the increase in general and administrative costs as a percentage of total revenues was higher performance-based bonus expenses partially offset by lower salary and travel related expenses.
Pre-opening Costs
|
|
Twelve
Weeks Ended
|
|
|
|
Twenty-eight
Weeks Ended
|
|
|
|
(In
thousands, except percentages)
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
July 12,
2009
|
|
July 13,
2008
|
|
Percent
Change
|
|
Pre-opening costs
|
|
$
|
588
|
|
$
|
2,041
|
|
(71.2
|
)%
|
$
|
3,138
|
|
$
|
4,604
|
|
(31.8
|
)%
|
As a percent of total
revenues
|
|
0.3
|
%
|
1.0
|
%
|
(0.7
|
)%
|
0.7
|
%
|
1.0
|
%
|
(0.3
|
)%
|
Average per restaurant Pre-opening
costs
|
|
$
|
258
|
|
$
|
254
|
|
1.6
|
%
|
$
|
267
|
|
$
|
275
|
|
(2.9
|
)%
|
Pre-opening costs, which are expensed as incurred,
consist of the costs of labor, hiring and training the initial work force for
our new restaurants, travel expenses for our training teams, the cost of food
and beverages used in training, marketing costs, lease
costs incurred prior to opening and other direct costs related to the opening
of new restaurants. Pre-opening costs for the twelve weeks ended July 12,
2009 and July 13, 2008, reflect the opening of six
and eight new restaurants, respectively in each period presented. Pre-opening
costs for the twenty-eight weeks ended July 12, 2009 and July 13,
2008, reflect the opening of 13 and 17 new restaurants,
respectively in each period presented.
For the twelve weeks ended July 12, 2009, the average per
restaurant pre-opening costs increased over prior year due primarily to higher
pre-opening occupancy expenses and utility costs partially offset by lower
labor costs and marketing expenses. For
the twenty-eight weeks ended July 12, 2009, the average per restaurant
18
Table of Contents
pre-opening costs decreased over prior year due
primarily to lower labor costs and marketing expense partially offset by higher
pre-opening occupancy expenses and utility costs.
Reacquired Franchise and Other Acquisition Costs
As
a result of the acquisition of the 15 restaurants during the second quarter
2008, we incurred a total charge of $451,000, which is primarily related to
avoided franchise fees,
in
accordance with Emerging Issues Task Force (EITF) Issue 04-1,
Accounting for Preexisting Relationships between the
Parties to a Business Combination
(EITF 04-1). EITF 04-1 requires
that a business combination between two parties that have a preexisting
relationship be evaluated to determine if a settlement of a preexisting
relationship exists. The $451,000 charge
reflects the lower royalty rates applicable to certain of the acquired
restaurants compared to a standard royalty rate the Company would receive under
the Companys current royalty agreements.
See Note 2,
Acquisition of Red Robin
Franchised Restaurants
, in the Notes to Condensed Consolidated
Financial Statements for additional information regarding the acquisition and
related charge.
Interest Expense, net
Interest expense was $1.6 million and $1.8 million for
the twelve weeks ended July 12, 2009 and July 13, 2008, respectively
and $3.7 million and $4.1 million for the twenty-eight weeks ended July 12,
2009 and July 13, 2008, respectively. Interest expense
in 2009 decreased from prior year due to a lower average interest rate of 2.9%
versus 4.4% in 2008, partially offset by higher borrowings outstanding under
our revolving credit facility.
Provision for Income
Taxes
The
effective income tax rate for the second quarter 2009 is 23.2% compared to
27.8% for the second quarter 2008. The effective income tax rate for the
twenty-eight weeks ended July 12, 2009 and July 13, 2008 was 24.0%
and 29.0%, respectively. Our effective tax rate is significantly impacted
by the amount of the current years federal income tax credits. The
decrease in the effective tax rate from 2008 is primarily due to the amount of
federal income tax credits for 2009 being applied against a lower net income
before taxes. We anticipate that our full year fiscal 2009 effective tax
rate will be approximately 24.0%.
Liquidity and Capital Resources
Financial Condition and
Future Liquidity.
We require capital principally to grow the
business through new restaurant construction, as well as to maintain, improve
and refurbish existing restaurants, support for infrastructure needs, and for
general operating purposes. In addition, we have and may continue to use
capital to acquire franchise restaurants or repurchase our common stock. We
expect our primary short-term and long-term sources of liquidity to be cash
flows from operations and to a lesser extent, our revolving credit facility.
Based upon current levels of operations and our anticipated 2009 and 2010
restaurant opening schedule, we expect that cash flows from operations will be
sufficient to meet debt service, capital expenditures and working capital
requirements for at least the next twelve months. The Company and the
restaurant industry in general maintain relatively low levels of accounts
receivable and inventories, and vendors generally grant trade credit for
purchases, such as food and supplies. We also continually invest in our
business through the addition of new restaurants and refurbishment of existing
restaurants, which are reflected as long-term assets and not as part of working
capital.
Credit Facility.
O
ur existing credit facility permits us to have a more
flexible capital structure and facilitates our growth plans. The credit facility is comprised of (i) a
$150 million revolving credit facility maturing on June 15, 2012, and (ii) a
$150 million term loan maturing on June 15, 2012, both with rates based on
the London Interbank Offered Rate (LIBOR) plus 1.00% currently. The credit
agreement also allows us, subject to lender participation which is at their
sole discretion, to increase the revolving credit facility by up to an
additional $100 million in the future. As part of the credit agreement, we may
also request the issuance of up to $15 million in letters of credit, the
outstanding amount of which reduces the net borrowing capacity under the
agreement. The credit facility requires the payment of an annual commitment fee
based upon the unused portion of the credit facility. The credit facilitys
interest rates and the annual commitment rate are based on a financial leverage
ratio, as defined in the credit agreement. Our obligations under the credit
facility are secured by first priority liens and security interests in the
capital stock of subsidiaries of the Company. Additionally, the credit
agreement includes a negative pledge on all tangible and intangible assets
(including all real and personal property) with customary exceptions. Our credit facility is with a consortium of
banks that include Wells Fargo Bank N.A., Bank of America N.A., Keybank N.A.
and Suntrust Bank N.A among others.
19
Table of Contents
With regard to the
term loan facility, we are required to repay the principal amount of the term
loan in consecutive quarterly installments which began September 30, 2007
and will end on the maturity date of the term loan. At July 12, 2009, we
had $127.4 million of borrowings outstanding under our term loan, and
$72.0 million of borrowings, $4.8 million of letters of credit
outstanding under our revolving credit facility and $2.5 million outstanding
under a swingline loan. Loan origination costs associated with the credit
facility and the net outstanding balance of costs related to the original and
subsequent amendments to the credit facility are $1.0 million and are
included as deferred costs in other assets, net in the accompanying
consolidated balance sheet as of July 12, 2009. In addition to the
required repayments on the term loan, we expect to utilize excess cash flow
after capital expenditures to reduce our debt during 2009.
Covenants.
We are subject
to a number of customary covenants under our various credit agreements,
including limitations on additional borrowings, acquisitions, and dividend
payments. In addition, we are required to maintain two financial ratios: a
leverage ratio calculated as our debt outstanding including issued standby
letters of credit divided by the last twelve months earnings before interest,
taxes, depreciation and amortization (EBITDA) adjusted for certain non-cash
charges; and a fixed charge ratio calculated as our consolidated cash flow
divided by our consolidated debt service obligations. As of July 12,
2009, we were in compliance with all debt covenants.
Inflation
The primary
inflationary factors affecting our operations are food, labor costs, energy
costs, and materials used in the construction of new restaurants. A large
number of our restaurant personnel are paid at rates based on the applicable
minimum wage, and recent increases in applicable minimum wage levels have directly
affected our labor costs. Many of our leases require us to pay taxes and
charges for maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. We
believe inflation has had a negative impact on our financial condition and
results of operations in the current year, due primarily to increased commodity
prices for certain foods we purchase at market rates, including fuel
surcharges, increased labor costs, higher energy costs, higher costs for
certain supplies and petroleum based products, higher costs for materials and
labor related to construction of our new restaurants. Uncertainties related to
higher costs, including energy costs, commodity prices, annual indexed wage
increases and construction materials make it difficult to predict what impact
inflation may continue to have on our business during 2009.
Seasonality
Our business is subject to seasonal fluctuations.
Historically, sales in most of our restaurants have been higher during the
summer months and winter holiday season. Our quarterly and annual operating
results and comparable restaurant sales may fluctuate significantly as a result
of seasonality and other factors. Accordingly, results for any one quarter are
not necessarily indicative of results to be expected for any other quarter or
for any year and comparable restaurant sales for any
particular future period may decrease.
Off
Balance Sheet Arrangements
Except for operating leases (primarily restaurant
ground leases), we do not have any off balance sheet arrangements.
Critical
Accounting Policies and Estimates
Critical
accounting policies and estimates are those that we believe are both
significant and that require us to make difficult, subjective or complex
judgments, often because we need to estimate the effect of inherently uncertain
matters. We base our estimates and judgments on historical experiences and
various other factors that we believe to be appropriate under the
circumstances. Actual results may differ from these estimates, and we might
obtain different estimates if we used different assumptions or conditions. We
had no significant changes in our critical accounting policies and estimates
since our last annual report. Our critical accounting estimates are contained
in our annual report on Form 10-K for the year ended December 28,
2008.
Recent Accounting
Pronouncements
In June 2009,
Financial Accounting Standards Board (FASB) issued Statement of Accounting
Standards (SFAS) No. 168,
The FASB Accounting
Standards Codification
TM
and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162
, (SFAS 168). SFAS 168
provides for the FASB Accounting Standards Codification
TM
(the Codification)
to become the single official source of authoritative,
20
Table of Contents
nongovernmental U.S.
generally accepted accounting principles (GAAP). The Codification
did not change GAAP but reorganizes the literature. SFAS 168 is
effective for interim and annual periods ending after September 15, 2009.
Beginning in the third quarter of fiscal 2009, all references to authoritative
accounting literature in our financial statements will be referenced in
accordance with the Codification. There will be no changes to the content
of our financial statements or disclosures as a result of implementing the
Codification.
In May 2009, the
FASB issued
SFAS
No. 165,
Subsequent
Events,
(SFAS
165) which is effective for financial periods ending after June 15,
2009. SFAS 165 establishes general standards of accounting for and
disclosure of subsequent events that occur after the balance sheet date.
We adopted SFAS 165 during the second quarter 2009. As required by
SFAS 165, we have evaluated subsequent events through the date of issuance of
this report, August 14, 2009.
In April 2009,
the FASB issued FASB Staff Position (FSP) Nos. 107-1 and Accounting Principles
Board (APB) 28-1,
Interim Disclosures about
Fair Value of Financial Instruments,
(FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
,
and APB No. 28,
Interim Financial
Reporting
. FSP FAS 107-1
requires fair value disclosures on an interim basis for financial instruments
that are not reflected in the condensed consolidated balance sheets at fair
value. Prior to the issuance of FSP FAS 107-1, the fair values of those
financial instruments were only disclosed on an annual basis. FSP FAS 107-1
is effective for interim reporting periods that end after the Companys second
quarter. The adoption of FSP FAS 107-1 did not have a material impact on
our consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
,
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). This change is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under
SFAS 141R and other Generally Accepted Accounting Principles (GAAP). The
requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure requirements
must be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The adoption of FSP 142-3 at the
beginning of fiscal 2009 did not have a material impact on our consolidated
financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
, (SFAS 161). SFAS 161 provides companies with
requirements for enhanced disclosures about derivative instruments and hedging
activities to enable investors to better understand their effects on a companys
financial position, financial performance and cash flows. These requirements
include the disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. We adopted SFAS 161 at the beginning
of fiscal 2009.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations,
(SFAS 141R). SFAS 141R provides companies with principles and
requirements on how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. SFAS 141R also
requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. SFAS 141R is effective for business combinations
occurring in fiscal years beginning after December 15, 2008. Accordingly, we will record and disclose
business combinations occurring in fiscal 2009 and thereafter under the revised
standard beginning December 29, 2008.
In December 2007, the FASB issued SFAS No. 160
, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
, (SFAS 160).
SFAS 160 changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. We adopted SFAS 160 at the beginning of fiscal 2009. The adoption of SFAS 160 did not impact
our consolidated financial statements.
21
Table of Contents
Forward-Looking Statements
Certain
information and statements contained in this report that reflect the Companys current expectations regarding, among
other things, future results of operations, economic performance, liquidity and
capital resources, financial condition and achievements of the Company, are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
regarding our expectations, beliefs, intentions, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. These
statements may be identified, without limitation, by the use of forward-looking
terminology such as believe, estimates, expect, future, intend, plan,
will, would or comparable and similar terms or the negative thereof.
Certain forward-looking statements are included in this Form 10-Q,
principally in the sections captioned Financial Statements and Managements
Discussion and Analysis. All forward-looking statements included in this Form 10-Q
are based on information available to the Company on the date hereof. Such
statements speak only as of the date hereof and we undertake no obligation to
update any such statement to reflect events or circumstances arising after the
date hereof. These statements are based on assumptions believed by us to be
reasonable, and involve known and unknown risks and uncertainties that could
cause actual results to differ materially from those described in the
statements. These risks and uncertainties include, but are not limited to, the
following: potential fluctuation in our quarterly operating results due
to economic conditions, seasonality and other factors; downturn in general
economic conditions including severe volatility in financial markets and
decreasing consumer confidence, resulting in changes in consumer preferences,
or consumer discretionary spending; changes in availability of capital or
credit facility borrowings to us and to our franchisees; the continued adequacy
of cash flows generated by our business to fund operations and growth
opportunities; the concentration of our restaurants in the Western United
States and the associated disproportionate impact of macroeconomic factors; the
availability and costs of food; changes in labor and energy costs and changes
in the ability of our vendors to meet our supply requirements; lack of
awareness of our brand in new markets; higher percentage of operating weeks
from non-comparable restaurants; concentration of less
mature restaurants in the comparable restaurant base; effectiveness of our
initiative to normalize new restaurant operations; the effectiveness of our
national advertising strategy; health concerns about our food products and food
preparation; the effectiveness of our internal controls over financial
reporting; future changes in financial accounting standards; and other risk
factors described from time to time in the Companys Annual Report on Form 10-K
for 2008 filed with the SEC on February 26, 2009.
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk
Under our credit agreement, amended in June 2007, we are exposed
to market risk from changes in interest rates on borrowings, which bear
interest at one of the following rates we select: an Alternate Base Rate (ABR),
based on the Prime Rate plus 0.00% to 0.25%, or a LIBOR, based on the relevant
one, two, three or six-month LIBOR, at our discretion, plus 0.50% to 1.00%. The
spread, or margin, for ABR and LIBOR loans under the credit agreement is
subject to quarterly adjustment based on our then current leverage ratio, as
defined by the credit agreement. As of July 12, 2009, we had $81.9 million
of borrowings subject to variable interest rates, and a plus or minus 1.0%
change in the effective interest rate applied to these loans would have
resulted in pre-tax interest expense fluctuation of $819,000 on an annualized
basis.
Our objective in managing exposure to interest rate changes is to limit
the impact of interest rate changes on earnings and cash flows and to lower
overall borrowing costs. To achieve this objective, we use an interest rate
swap and may use caps to manage our net exposure to interest rate changes
related to our borrowings.
During March 2008, the Company entered into a variable-to-fixed
interest rate swap agreement with SunTrust Bank, National Association
(SunTrust) to mitigate our floating interest rate on an aggregate of up to
$120 million of our debt that is currently or expected to be outstanding
under our amended and restated credit facility. The interest rate swap has an
effective date of March 19, 2008 and a termination date of March 19,
2010 for $50 million of the initial $120 million and March 19,
2011 for the remaining $70 million. The agreement was designated as a cash
flow hedge under which we are required to make payments based on a fixed
interest rate of 2.7925% calculated on an initial notional amount of
$120 million, in exchange we will receive interest on a $120 million
of notional amount at a variable rate. The variable rate interest we receive is
based on the 3-month LIBOR rate. This hedge is highly effective as defined by
SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities.
The Company reclassifies gain or loss from accumulated other
comprehensive income, net of tax, on our consolidated balance sheet to interest
expense on our consolidated statement of income as the interest expense is
recognized on
22
Table of Contents
the
related debt. As of July 12,
2009, the $1.8 million unrealized loss, net of taxes, on cash flow hedging
instrument is reported in accumulated other comprehensive income (loss).
Primarily all of our transactions are conducted, and our accounts are
denominated, in United States dollars. Accordingly, we are not exposed to
significant foreign currency risk.
Many of the food products purchased by us are affected by changes in
weather, production, availability, seasonality and other factors outside our
control. In an effort to control some of this risk, we have entered into some
fixed price product purchase commitments some of which exclude fuel surcharges
and other fees. In addition, we believe that almost all of our food and
supplies are available from several sources, which helps to control food
commodity risks.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is
accumulated and communicated to the management of Red Robin Gourmet Burgers, Inc.
(Management), including the Companys Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, Management recognizes that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objectives. As a result, the Companys CEO and
CFO have concluded that, based upon the evaluation of disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Exchange Act), the Companys disclosure controls and procedures were effective
as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
The Companys
Management, with the participation of the CEO and CFO, have evaluated whether
any change in the Companys internal control over financial reporting occurred
during the fiscal quarter ended July 12, 2009. Based on that evaluation,
Management concluded that there has been no change in the
Companys internal control over financial reporting during the fiscal quarter
ended July 12, 2009 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
In the normal course of
business, the Company responds to claims, lawsuits and other contingencies.
Claims may arise from alleged slip and fall accidents, food borne illness or
injury, or other food quality, health or operational concerns. The Company
maintains insurance with respect to certain of these risks. To date, no claims
of these types have had a material adverse effect on us. While it is not
possible to predict the outcome of these outstanding claims, lawsuits, and
other contingencies with certainty, management is of the opinion that adequate
provision for potential losses associated with these matters has been made in
the financial statements and that the ultimate resolution of these matters will
not have a material adverse effect on our financial position and results of
operations.
Item 1A.
Risk Factors
A
description of the risk factors associated with our business is contained in
Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal
year ended December 28, 2008 filed with the Securities and Exchange
Commission on February 26, 2009. There have
been no material changes in our Risk Factors disclosed in our 2008 Annual
Report on Form 10-K.
23
Table of Contents
Item 4. Submission of Matters to a Vote of Security
Holders
The following matters were
submitted to a vote of security holders during the Companys annual meeting of
stockholders held on May 28, 2009.
|
|
Number of Shares
|
|
Description of Matter
|
|
Voted For
|
|
Votes
Withheld
|
|
Abstentions
|
|
|
|
|
|
|
|
|
|
1.
|
Election
of Class I Directors
|
|
|
|
|
|
|
|
|
J. Taylor
Simonton
|
|
6,311,368
|
|
8,164,435
|
|
|
|
|
James
T. Rothe
|
|
5,014,209
|
|
9,461,594
|
|
|
|
|
Richard
J. Howell
|
|
6,311,353
|
|
8,164,450
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
Ratification
of Appointment of Independent Registered Public Accounting Firm
|
|
14,451,172
|
|
21,409
|
|
1,972
|
|
In the election of
directors, candidates are elected by a plurality of affirmative votes. In
addition to the elected directors, directors whose terms continued following
the meeting are Dennis B. Mullen, Edward T. Harvey Jr., Gary J. Singer and
Pattye L. Moore. Subsequent to the meeting, Marc Zanner was appointed to the
board of directors for a term ending upon the 2011 Annual Meeting of
Stockholders.
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of Chief Financial Officer
|
|
|
|
32.1
|
|
Section 1350
Certifications of Chief Executive Officer and Chief Financial Officer
|
24
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
|
Red Robin Gourmet Burgers, Inc.
|
|
|
|
August 14, 2009
|
|
/s/ Katherine L. Scherping
|
(Date)
|
|
Katherine L. Scherping
|
|
|
Chief Financial Officer
|
25
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