Table of
Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
|
For the quarterly period ended October 4,
2009
|
|
|
or
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
|
For the transition period from
to
|
Commission File Number: 0-49916
RED ROBIN
GOURMET BURGERS, INC.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
84-1573084
|
(State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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|
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6312
S. Fiddlers Green Circle, Suite 200N
Greenwood Village, CO
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80111
|
(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)
|
|
|
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
|
|
Outstanding at November 3, 2009
|
Common Stock,
$0.001 par value per share
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|
15,580,644
shares
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Table of Contents
PART I FINANCIAL
INFORMATION
Item 1.
Financial Statements
RED ROBIN GOURMET
BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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|
October 4,
2009
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December 28,
2008
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Assets:
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|
|
|
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Current
Assets:
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|
|
|
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Cash
and cash equivalents
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$
|
8,860
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|
$
|
11,158
|
|
Accounts
receivable, net
|
|
7,944
|
|
5,611
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|
Inventories
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13,739
|
|
13,123
|
|
Prepaid
expenses and other current assets
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7,714
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9,032
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|
Income
tax receivable
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1,120
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|
6,208
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|
Deferred
tax asset
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6,502
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3,366
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Restricted
current assetsmarketing funds
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1,132
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1,590
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|
Total
current assets
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$
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47,011
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$
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50,088
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Property
and equipment, net
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434,965
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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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49,478
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|
51,990
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Other
assets, net
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3,728
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|
4,665
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|
Total
assets
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$
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596,951
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$
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609,737
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|
|
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Liabilities and Stockholders Equity:
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|
|
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Current
Liabilities:
|
|
|
|
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Trade
accounts payable
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|
$
|
9,742
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|
$
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11,966
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|
Construction
related payables
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|
2,485
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|
9,747
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|
Accrued
payroll and payroll related liabilities
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26,082
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25,489
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|
Unearned
revenue
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8,649
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11,997
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Accrued
liabilities
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22,476
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|
20,385
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|
Accrued
liabilitiesmarketing funds
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1,132
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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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654
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|
696
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Total
current liabilities
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$
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89,959
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|
$
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92,183
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Deferred
rent
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30,017
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26,790
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Long-term
portion of term loan notes payable
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103,954
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122,687
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Other
long-term debt and capital lease obligations
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74,239
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88,876
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Other
non-current liabilities
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10,167
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10,293
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Total
liabilities
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$
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308,336
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$
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340,829
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|
|
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Stockholders
Equity:
|
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Common
stock; $0.001 par value: 30,000,000 shares authorized; 17,072,249 and
16,954,205 shares issued; 15,579,969 and 15,461,925 shares outstanding
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17
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17
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Preferred
stock, $0.001 par value: 3,000,000 shares authorized; no shares issued and
outstanding
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Treasury
stock, 1,492,280 shares, at cost
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(50,125
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)
|
(50,125
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)
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Paid-in
capital
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169,612
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165,932
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|
Accumulated
other comprehensive loss, net of tax
|
|
(1,563
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)
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(1,622
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)
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Retained
earnings
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170,674
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154,706
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|
Total
stockholders equity
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288,615
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268,908
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Total
liabilities and stockholders equity
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$
|
596,951
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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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|
Forty Weeks Ended
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October 4,
2009
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October 5,
2008
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October 4,
2009
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October 5,
2008
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Revenues:
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Restaurant
revenue
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$
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183,878
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$
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205,286
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$
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648,436
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$
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659,086
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Franchise
royalties and fees
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3,035
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3,299
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10,265
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11,367
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Rent
revenue
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34
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|
53
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|
147
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|
166
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Total
revenues
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186,947
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208,638
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658,848
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670,619
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|
|
|
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Costs
and expenses:
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Restaurant
operating costs:
|
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|
|
|
|
|
|
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Cost
of sales
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|
42,961
|
|
48,705
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|
156,472
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|
156,558
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|
Labor
(includes $126, $298, $1,249 and $961 of stock-based compensation,
respectively)
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64,113
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68,300
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|
224,063
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|
222,395
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|
Operating
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31,950
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|
36,236
|
|
106,976
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|
113,139
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|
Occupancy
|
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14,434
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|
13,977
|
|
47,836
|
|
43,195
|
|
Depreciation
and amortization
|
|
13,112
|
|
12,248
|
|
43,815
|
|
38,777
|
|
General
and administrative (includes $600, $1,886, $4,942, and $4,400 of stock-based compensation,
respectively)
|
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12,109
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|
15,659
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|
51,080
|
|
52,588
|
|
Pre-opening
costs
|
|
125
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|
2,661
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|
3,263
|
|
7,265
|
|
Asset
impairment charge
|
|
|
|
928
|
|
|
|
928
|
|
Reacquired
franchise and other acquisition costs
|
|
|
|
|
|
|
|
451
|
|
Total
costs and expenses
|
|
178,804
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|
198,714
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|
633,505
|
|
635,296
|
|
|
|
|
|
|
|
|
|
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|
Income
from operations
|
|
8,143
|
|
9,924
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|
25,343
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|
35,323
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
|
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Interest
expense, net
|
|
1,321
|
|
2,045
|
|
4,994
|
|
6,104
|
|
Other
|
|
10
|
|
7
|
|
29
|
|
(18
|
)
|
Total
other expenses
|
|
1,331
|
|
2,052
|
|
5,023
|
|
6,086
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
6,812
|
|
7,872
|
|
20,320
|
|
29,237
|
|
Provision
for income taxes
|
|
1,110
|
|
1,698
|
|
4,352
|
|
7,894
|
|
Net
income
|
|
$
|
5,702
|
|
$
|
6,174
|
|
$
|
15,968
|
|
$
|
21,343
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
$
|
0.40
|
|
$
|
1.04
|
|
$
|
1.32
|
|
Diluted
|
|
$
|
0.37
|
|
$
|
0.40
|
|
$
|
1.03
|
|
$
|
1.31
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
15,408
|
|
15,303
|
|
15,379
|
|
16,113
|
|
Diluted
|
|
15,535
|
|
15,415
|
|
15,488
|
|
16,251
|
|
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)
|
|
Forty
Weeks Ended
|
|
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
Net
income
|
|
$
|
15,968
|
|
$
|
21,343
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
43,815
|
|
38,777
|
|
Stock-based
compensation expense
|
|
6,191
|
|
5,361
|
|
Asset
impairment charge
|
|
|
|
928
|
|
Restaurant
closure costs
|
|
598
|
|
|
|
Other,
net
|
|
(3,557
|
)
|
231
|
|
Changes
in operating assets and liabilities
|
|
3,495
|
|
219
|
|
Cash
provided by operating activities
|
|
66,510
|
|
66,859
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
Changes
in marketing fund restricted cash
|
|
|
|
81
|
|
Acquisition
of franchise restaurants, net of cash acquired of $0 and $55, respectively
|
|
(1,248
|
)
|
(30,389
|
)
|
Purchases
of property and equipment
|
|
(40,776
|
)
|
(65,223
|
)
|
Cash
used in investing activities
|
|
(42,024
|
)
|
(95,531
|
)
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
147,900
|
|
155,900
|
|
Payments
of long-term debt
|
|
(171,815
|
)
|
(85,387
|
)
|
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
|
|
937
|
|
1,456
|
|
Excess
tax benefit related to exercise of stock options
|
|
155
|
|
278
|
|
Payments
of other debt and capital lease obligations
|
|
(463
|
)
|
(414
|
)
|
Cash
provided (used) by financing activities
|
|
(26,784
|
)
|
21,791
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(2,298
|
)
|
(6,881
|
)
|
Cash
and cash equivalents, beginning of period
|
|
11,158
|
|
12,914
|
|
Cash
and cash equivalents, end of period
|
|
$
|
8,860
|
|
$
|
6,033
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
2,103
|
|
$
|
4,216
|
|
Interest
paid, net of amounts capitalized
|
|
5,089
|
|
5,959
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Items:
|
|
|
|
|
|
Capital
lease obligations incurred for equipment purchases
|
|
|
|
156
|
|
Unrealized
gain (loss) on swap, net of tax
|
|
53
|
|
356
|
|
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 October 4, 2009, the Company operated 304 company-owned
restaurants located in 31 states. The Company also franchises the Red Robin®
restaurant concept. As of October 4,
2009, 21 franchisees operated 132 franchised restaurants in 21 states and two
Canadian provinces. The Company
currently does not sell new franchises, but does grant current franchisees the
right to develop additional franchised restaurants from time to time. The Company operates its business as one
operating segment and one reporting unit.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements include the accounts of Red Robin and its majority owned
and controlled 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 October 4, 2009, is referred to as third quarter 2009, or the twelve
weeks ended October 4, 2009; the second quarter ended July 12, 2009,
is referred to as second quarter 2009 or the twelve weeks ended July 12,
2009; and 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, second, and third quarters of 2009 are referred to as the
forty weeks ended October 4, 2009. The Companys quarter which ended October 5,
2008, is referred to as third quarter 2008, or the twelve weeks ended October 5,
2008; the second quarter ended July 13, 2008, is referred to as second
quarter 2008 or twelve weeks ended July 13, 2008; and 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, second, and third quarters of 2008 are referred to as the forty
weeks ended October 5, 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 ASC) to become the single official
source of authoritative, nongovernmental U.S. generally accepted accounting
principles (GAAP). The ASC did not change GAAP but reorganizes the
literature. SFAS 168 is incorporated into section 105 of the ASC and
is effective for interim and annual periods ending after September 15,
2009. Beginning in the third quarter of
fiscal 2009, all references to authoritative
6
Table
of Contents
accounting literature in
the Companys financial statements are referenced in accordance with the
ASC. There are no changes to the content of the Companys financial
statements or disclosures as a result of implementing the ASC.
In August 2009,
the FASB issued the Accounting Standards Update (Update) No. 2009-05,
Measuring Liabilities at Fair Value,
(Update 2009-05). This update amends ASC 820,
Fair Value Measurements and Disclosures
. Update 2009-5 provides additional
clarification for the fair value measurement of liabilities, specifically in
circumstances in which a quoted price in an active market is not available or
when the liability contains transfer restrictions. Update 2009-5 is effective for financial
reporting periods beginning the period after issuance of the update. The Company will adopt this update in the
fourth quarter of 2009 and does not expect the adoption of Update 2009-5 to
have a material impact on its consolidated financial statements.
In May 2009, the
FASB issued
SFAS
No. 165,
Subsequent
Events,
(which is
now found under ASC 855,
Subsequent Events
),
which was effective for financial periods ending after June 15,
2009. The guidance establishes general standards of accounting for and
disclosure of subsequent events that occur after the balance sheet date.
The Company adopted SFAS 165 during the second quarter 2009. Refer
to Note 11
Subsequent Events
for disclosure.
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). This guidance is now found under ASC 825,
Financial Instruments
. FSP FAS 107-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
,
and APB No. 28,
Interim Financial
Reporting
(also found under the topic ASC 825,
Financial
Instruments
). The guidance
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 the Companys 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). This guidance is now found under ASC 350,
Intangibles
Goodwill and Other
. 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), which is also found under ASC
350. 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. This guidance is
effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The adoption of this guidance 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). This guidance is now found under ASC
815
Derivatives and Hedging
. This guidance 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 the guidance at the
beginning of fiscal 2009.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
Business Combinations,
(SFAS 141R). This guidance is
now found under ASC 805,
Business Combinations
.
This guidance
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. The guidance 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. This guidance 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). This
guidance is now found under ASC 810,
Consolidation
. This guidance 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 the guidance at the beginning of fiscal 2009. The adoption of this guidance did not impact
the Companys consolidated financial statements.
7
Table of Contents
2.
Restaurant Closures
The Company closed four company-owned restaurants during the first
quarter of 2009. This decision resulted
from an initiative to identify those restaurants 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 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 forty weeks ended October 4, 2009.
3.
Cash Tender Offer
On February 11, 2009, the Company completed a cash tender offer
for out-of-the-money stock options held by 514 then 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 forty weeks ended October 4,
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.
4.
Stock-Based Compensation
During the twelve weeks ended October 4, 2009,
the Company issued approximately 36,000 options with a weighted average grant
date fair value of $8.58 per share and a weighted average exercise price of
$19.97 per share. For
the forty weeks ended October 4, 2009, the Company issued approximately
402,000 options with a weighted average grant date fair value of $6.22 per
share and a weighted average exercise price of $15.69 per share. Compensation expense for these options is recognized over the
remaining weighted average vesting period which is approximately 1.5 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
|
|
Forty
Weeks Ended
|
|
|
|
October 4,
2009
|
|
October 5,
2008
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Risk-free
interest rate
|
|
1.7
|
%
|
2.3
|
%
|
1.5
|
%
|
1.9
|
%
|
Expected
years until exercise
|
|
3.6
|
|
2.7
|
|
3.6
|
|
2.7
|
|
Expected
stock volatility
|
|
58.2
|
%
|
42.7
|
%
|
52.9
|
%
|
40.5
|
%
|
Dividend
yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Weighted-average
Black-Scholes fair value per share at date of grant
|
|
$
|
8.58
|
|
$
|
7.52
|
|
$
|
6.22
|
|
$
|
9.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the twelve weeks
ended October 4, 2009, the Company did not issue any shares of non-vested
common stock under its Amended and Restated 2007 Performance Incentive Plan
(the 2007 Stock Plan). The Company has
issued approximately 34,500 shares of non-vested common stock under the 2007
Stock Plan with a weighted average grant date fair value of $15.28 for the
forty weeks ended, October 4, 2009.
Compensation expense for the aggregate 151,000 shares of non-vested
common stock outstanding at October 4, 2009, is recognized over the
remaining weighted average vesting period which is approximately 1.7
years. The outstanding
non-vested shares of common stock granted
to directors are generally subject to a one year vesting requirement, while
outstanding non-vested shares of common stock granted to executive officers and
other key employees are generally subject to a four year graded vesting
requirement.
During the twelve weeks
ended October 4, 2009, the Company issued approximately 600 restricted
stock units (RSUs) to certain employees under its
2007 Stock Plan with a weighted average
grant date fair value of $18.99. For the
forty weeks ended October 4, 2009, the Company
issued approximately 38,000 RSUs to certain employees under its 2007
Stock Plan with a weighted average grant date fair value of $15.18. 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 the date of grant. Compensation expense for the RSUs is recognized over the
remaining weighted average vesting period which is approximately 1.9 years.
8
Table of Contents
Included in restaurant labor and general and
administrative expenses
in the condensed consolidated statements of incom
e for the forty weeks ended October 4,
2009, is approximately $886,000 and $3.1 million respectively, of stock-based
compensation expense related to the cash tender offer discussed in Note 3
Cash Tender Offer
.
This one-time charge incurred in the first quarter 2009,
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 forty
weeks ended October 4, 2009, $24,000 and $72,000 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 twelve weeks ended October 4, 2009, approximately
28,000 options to purchase common shares were exercised and approximately
55,000 options were forfeited. During
the forty weeks ended October 4, 2009, approximately 52,000 options to
purchase common shares were exercised and approximately 1.7 million options
were cancelled due primarily to the cash tender offer discussed in Note 3
Cash Tender Offer.
5.
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 by dividing net income by 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.
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
forty weeks ended October 4, 2009, approximately 363,000 and 864,000,
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 forty weeks ended October 5, 2008,
approximately 1.9 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
|
|
Forty
Weeks Ended
|
|
|
|
October 4,
2009
|
|
October 5,
2008
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Net
income
|
|
$
|
5,702
|
|
$
|
6,174
|
|
$
|
15,968
|
|
$
|
21,343
|
|
Basic
weighted-average shares outstanding
|
|
15,408
|
|
15,303
|
|
15,379
|
|
16,113
|
|
Dilutive
effect of stock options and awards
|
|
127
|
|
112
|
|
109
|
|
138
|
|
Diluted
weighted-average shares outstanding
|
|
15,535
|
|
15,415
|
|
15,488
|
|
16,251
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
$
|
0.40
|
|
$
|
1.04
|
|
$
|
1.32
|
|
Diluted
|
|
$
|
0.37
|
|
$
|
0.40
|
|
$
|
1.03
|
|
$
|
1.31
|
|
6.
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 $3.9 million and $11.8 million for the twelve and forty weeks ended October 4,
2009, respectively and $5.7 million and $18.2 million for the twelve and forty
weeks ended October 5, 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.
7.
Derivative and Hedging Activities
The Company enters into derivative instruments for
risk management purposes only, including derivatives designated as hedging
instruments under ASC 815,
Derivatives and
Hedging
.
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
9
Table of Contents
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, as it relates to the Companys
interest-rate derivative, 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.
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 ASC 815 as of October 4, 2009 (in thousands):
Balance Sheet Location
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
|
|
$
|
2,111
|
|
Other
non-current liabilities
|
|
|
|
453
|
|
Total
derivatives
|
|
$
|
|
|
$
|
2,564
|
|
The
following table summarizes the effect of the interest rate swap on the
condensed consolidated statements of income for the twelve and forty weeks
ended October 4, 2009 (in thousands):
|
|
Twelve
Weeks
|
|
Forty
Weeks
|
|
|
|
Ended
|
|
Ended
|
|
|
|
October 4,
2009
|
|
October 4,
2009
|
|
Unrealized
loss on swap in AOCI (pretax)
|
|
$
|
(353
|
)
|
$
|
(1,496
|
)
|
|
|
|
|
|
|
Realized
loss (pretax effective portion) recognized in interest expense
|
|
$
|
(626
|
)
|
$
|
(1,582
|
)
|
As a result of this
activity, accumulated other comprehensive income in equity increased by
approximately $273,000 and $86,000 for the twelve and forty weeks ended October 4,
2009 on a pretax basis or $167,000 and $53,000 on an after tax basis (see Note
8
Fair Value
Measurement and Other Comprehensive Income
).
During 2009, our interest
rate swap had no hedge ineffectiveness and no gains or losses were reclassified
into net earnings. Additionally, the
Company had no obligation as of October 4, 2009 to post collateral under
the terms of the Interest Rate Swap Agreement.
8.
Fair Value Measurement and Other Comprehensive Income
The fair value of
the Companys credit facility as of October 4, 2009 and December 28,
2008 was approximately $177.6 million and $200.0 million,
respectively. There are
$6.4 million of outstanding borrowings recorded for the Companys capital
leases as of October 4, 2009, which have an estimated fair value of
$7.8 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.
10
Table of
Contents
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 October 4, 2009 and December 28,
2008, a liability for participant contributions and investment income thereon
of $2.2 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 October 4, 2009 and
December 28, 2008, $2.2 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 7 above is measured using Level 2 category
inputs. The fair value of the interest rate swap, which is measured on a recurring bases, was an
unrealized loss of $2.6 million, $1.6 million net of tax, as of October 4,
2009, which is recorded in accrued liabilities and other non-current
liabilities, 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.
Comprehensive income
consisted of (in thousands):
|
|
Twelve Weeks Ended
|
|
Forty
Weeks Ended
|
|
|
|
October 4,
2009
|
|
October 5,
2008
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Net
income
|
|
$
|
5,702
|
|
$
|
6,174
|
|
$
|
15,968
|
|
$
|
21,343
|
|
Unrealized
gain (loss) on swap, net of tax
|
|
167
|
|
(842
|
)
|
53
|
|
356
|
|
Total
comprehensive income
|
|
$
|
5,869
|
|
$
|
5,332
|
|
$
|
16,021
|
|
$
|
21,699
|
|
9.
Related Parties
On June 3,
2009, the Company expanded its board of directors from seven to eight members
and announced the appointment of a new member to the board to fill the new
seat. This new board member is the
former president and majority owner of one of our former 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 Washington
restaurants that the Company 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 $229,000
and $807,000 during the twelve and forty weeks ended October 4, 2009,
respectively. For the twelve and forty
weeks ended October 5, 2008, the Company recognized rent and other related
payments in the amounts of $238,000 and $939,000, respectively.
10.
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.
11.
Subsequent Events
The
Company has evaluated subsequent events and found there to be no events
requiring recognition or disclosure through the date of issuance of this
report, November 6, 2009.
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 forty week periods ending
October 4, 2009 and October 5, 2008, respectively, unless otherwise
indicated.
11
Table of Contents
Overview
The following summarizes the operational and financial
highlights of the Company during the forty weeks of fiscal 2009:
·
New Restaurant Openings
. We opened 13 company-owned
restaurants during the twenty-eight weeks ended July 12, 2009 and did not open any additional new
restaurants during the third quarter of fiscal 2009. Comparatively, we opened 10 and 27
restaurants for the twelve and forty weeks ended October 5, 2008. We will open an additional two company-owned
restaurants in the fourth quarter of 2009.
All expenses associated with the opening of our 2009 restaurants have
been funded directly or indirectly from our operating cash flows.
·
Comparable
Restaurant Sales.
For the twelve
weeks ended October 4, 2009, the 269 restaurants in our current comparable
sales base experienced a 14.9% decrease in sales from these same restaurants in
the comparable period last year. This
decrease was driven by a 13.8% decrease in guest count and 1.1% decrease in the
average guest check. For the forty weeks
ended October 4, 2009, our current comparable base experienced an 11.2%
decrease in sales from these same restaurants in the prior year period. This decrease was driven by an 11.9% decrease
in guest counts partially offset by a 0.7% increase in the average guest
check. We believe these declines are
primarily the result of the macroeconomic environment and our significant
reduction in national cable advertising in 2009.
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 by such
conditions. We expect continued negative
comparable sales trends in the fourth quarter 2009.
·
Food Cost.
For the twelve weeks ended October 4,
2009, we saw a decrease in the cost of certain commodities, particularly ground
beef and cheese. Prior to this quarter,
our contracted ground beef pricing had been higher than 2008 levels. In the third quarter, both ground beef and
cheese prices declined below 2008 levels and we expect that trend to continue
for the remainder of the 2009 fiscal year.
During the third quarter, we also entered into contracts for chicken and
potatoes that give us pricing at or below the prices we paid in 2008 and
earlier this year.
·
Marketing
Efforts.
For 2009, our marketing strategy has been
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.
We supported this strategy during the third quarter 2009 by introducing
limited-time offers on promotional products through local restaurant market
television and radio advertising; reaching approximately 30% of our restaurant
base. The $1.1 million in television advertising campaign began in the last
week of the third quarter 2009 and continued through the first two weeks of the
fourth quarter 2009. We are pleased by
the positive traffic and sales results from this three week campaign. In the
ten T.V. markets where our television advertising ran we had meaningful
improvements in guest counts and comparable restaurant revenue compared to the
four week period just prior to the television campaign.
·
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 forty weeks ended October 4,
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 forty weeks ended October 4, 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 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 forty weeks ended October 4, 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. In addition, the
Company will continue to drive guest traffic through the use of marketing
efforts described above.
The Company will maintain flexibility with respect to
its development plan for new restaurants in 2010 and will adjust the
development plan as the Company deems necessary to respond to the challenging
consumer environment. Our reduced levels
of new restaurant openings in 2009 and the resulting reduction in capital
expenditures have resulted in increased available cash flow which we applied to
reduce outstanding indebtedness by approximately $23.9 million during the forty
weeks ended October 4, 2009.
12
Table of Contents
Restaurant
Data
The following table details restaurant unit data for
our company-owned and franchise locations for the periods
indicated.
|
|
Twelve Weeks Ended
|
|
Forty
Weeks Ended
|
|
|
|
October 4,
2009
|
|
October 5,
2008
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Company-owned:
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
304
|
|
281
|
|
294
|
|
249
|
|
Opened
during period
|
|
|
|
10
|
|
13
|
|
27
|
|
Acquired
during period
|
|
|
|
|
|
1
|
|
15
|
|
Closed
during period
|
|
|
|
|
|
(4
|
)
|
|
|
End
of period
|
|
304
|
|
291
|
|
304
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
Franchised:
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
131
|
|
123
|
|
129
|
|
135
|
|
Opened
during period
|
|
1
|
|
3
|
|
4
|
|
7
|
|
Sold
or closed during period
|
|
|
|
|
|
(1
|
)
|
(16
|
)
|
End
of period
|
|
132
|
|
126
|
|
132
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of Red Robin® restaurants
|
|
436
|
|
417
|
|
436
|
|
417
|
|
On December 31, 2008, we acquired a franchisee restaurant that was
managed by the Company under a management agreement since June 2007 with a
franchisee.
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.
13
Table of Contents
|
|
Twelve Weeks Ended
|
|
Forty
Weeks Ended
|
|
|
|
October 4,
2009
|
|
October 5,
2008
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
98.4
|
%
|
98.4
|
%
|
98.4
|
%
|
98.3
|
%
|
Franchise
royalties and fees
|
|
1.6
|
|
1.6
|
|
1.6
|
|
1.7
|
|
Rent
revenue
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
Restaurant
operating costs:
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
23.4
|
|
23.7
|
|
24.1
|
|
23.8
|
|
Labor
(includes 0.1%, 0.1%, 0.2% and 0.1% of stock-based compensation expense,
respectively)
|
|
34.9
|
|
33.3
|
|
34.6
|
|
33.7
|
|
Operating
|
|
17.4
|
|
17.7
|
|
16.5
|
|
17.2
|
|
Occupancy
|
|
7.8
|
|
6.8
|
|
7.4
|
|
6.6
|
|
Total
restaurant operating costs
|
|
83.5
|
|
81.5
|
|
82.6
|
|
81.3
|
|
Depreciation
and amortization
|
|
7.0
|
|
5.9
|
|
6.7
|
|
5.8
|
|
General
and administrative (includes 0.3%, 0.9%, 0.8% and 0.7% of stock-based
compensation expense, respectively)
|
|
6.5
|
|
7.5
|
|
7.8
|
|
7.8
|
|
Pre-opening
costs
|
|
0.1
|
|
1.3
|
|
0.5
|
|
1.1
|
|
Asset
impairment charge
|
|
|
|
0.4
|
|
|
|
0.1
|
|
Reacquired
franchise and other acquisition costs
|
|
|
|
|
|
|
|
0.1
|
|
Income
from operations
|
|
4.4
|
|
4.8
|
|
3.8
|
|
5.3
|
|
Interest
expense, net
|
|
0.7
|
|
1.0
|
|
0.8
|
|
0.9
|
|
Other
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
3.7
|
|
3.8
|
|
3.0
|
|
4.4
|
|
Provision
for income taxes
|
|
0.6
|
|
0.8
|
|
0.7
|
|
1.2
|
|
Net
income
|
|
3.1
|
%
|
3.0
|
%
|
2.3
|
%
|
3.2
|
%
|
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.
Total Revenues
|
|
Twelve Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Restaurant
revenue
|
|
$
|
183,878
|
|
$
|
205,286
|
|
(10.4
|
)%
|
$
|
648,436
|
|
$
|
659,086
|
|
(1.6
|
)%
|
Franchise
royalties and fees
|
|
3,035
|
|
3,299
|
|
(8.0
|
)%
|
10,265
|
|
11,367
|
|
(9.7
|
)%
|
Rent
revenue
|
|
34
|
|
53
|
|
(35.8
|
)%
|
147
|
|
166
|
|
(11.4
|
)%
|
Total
revenues
|
|
$
|
186,947
|
|
$
|
208,638
|
|
(10.4
|
)%
|
$
|
658,848
|
|
$
|
670,619
|
|
(1.8
|
)%
|
Average
weekly sales volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable
restaurants
|
|
$
|
51,964
|
|
$
|
62,182
|
|
(16.4
|
)%
|
$
|
55,610
|
|
$
|
63,852
|
|
(12.9
|
)%
|
Non-comparable
restaurants
|
|
49,385
|
|
56,111
|
|
(12.0
|
)%
|
53,893
|
|
55,776
|
|
(3.4
|
)%
|
2007
Acquired Restaurants (1)
|
|
|
|
|
|
|
|
|
|
61,335
|
|
|
|
2008
Acquired Restaurants (2)
|
|
|
|
54,562
|
|
|
|
51,392
|
|
54,701
|
|
(6.0
|
)%
|
(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. Beginning the third quarter 2009, 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.
|
14
Table of
Contents
For the twelve and forty weeks ended October 4, 2009, restaurant
revenue, which is comprised almost entirely of food and beverage sales,
decreased by $21.4 million, or 10.4%, and by $10.7 million, or 1.6%,
respectively, from the same periods of 2008. Sales in the comparable restaurant
base experienced a decrease of approximately $32.3 million or 16.5% during
the third quarter 2009 and approximately $64.7 million or 10.0% during the
forty weeks ended October 4, 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. Sales
for non-comparable restaurants contributed an increase of $10.9 million and
$53.3 million for the twelve and forty weeks ended October 4, 2009
respectively, of which $9.0 million and $24.6 million was attributable to the
13 restaurants opened during the forty weeks ended October 4, 2009.
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 third
quarter 2009, there were 269 comparable restaurants compared to 233 comparable
restaurants at the end of the third 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 third
quarter 2009, there were 35 non-comparable restaurants versus 44 at the end of
the third 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 8.0% and 9.7%, respectively, for the twelve
and forty weeks ended October 4, 2009.
For the twelve weeks ended October 4, 2009, this decrease is primarily
attributable to declining sales in our U.S. franchise restaurant base. For the forty weeks ended October 4,
2009, this decrease is primarily attributable to the $793,000 year over year
reduction in franchise royalties from the 2008 Acquired Restaurants as well as
lower current quarter sales revenue. Our
franchisees reported that comparable restaurant sales decreased 14.4% for U.S.
restaurants and decreased 0.2% for Canadian restaurants in the third quarter of
2009 compared to the third quarter of 2008.
For the forty weeks ended October 4, 2009 and October 5, 2008,
our franchisees reported that comparable restaurant sales for U.S. restaurants
decreased 10.3% and Canadian restaurants decreased 0.2%.
Cost
and Expenses
Cost
of Sales
|
|
Twelve
Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Cost
of sales
|
|
$
|
42,961
|
|
$
|
48,705
|
|
(11.8
|
)%
|
$
|
156,472
|
|
$
|
156,558
|
|
-0.1
|
%
|
As a
percent of restaurant revenue
|
|
23.4
|
%
|
23.7
|
%
|
(0.3
|
)%
|
24.1
|
%
|
23.8
|
%
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, comprised of food and beverage
expenses, are variable and generally fluctuate with sales volume. For the
twelve weeks ended October 4, 2009, cost of sales decreased as a percentage
of restaurant revenues over prior year due primarily to improved beverage and
cheese pricing. We also realized
improved pricing on our ground beef which was offset by a shift in our sales
mix to our premium burgers. For the
forty weeks ended October 4, 2009, cost of sales increased as a percentage
of restaurant revenues over prior year due primarily to
higher contracted raw material pricing for ground beef and steak fries earlier
in the fiscal year. We expect the more
favorable ground beef pricing we realized in the third quarter of 2009 will
stabilize to levels below our 2008 pricing for the remainder of fiscal
2009. Effective beginning with the
fourth quarter 2009, we also entered into new contracts for chicken and
potatoes that give us pricing at or below the prices we paid in 2008 and
earlier this year.
Labor
|
|
Twelve
Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Labor
|
|
$
|
64,113
|
|
$
|
68,300
|
|
(6.1
|
)%
|
$
|
224,063
|
|
$
|
222,395
|
|
0.8
|
%
|
As a
percent of restaurant revenue
|
|
34.9
|
%
|
33.3
|
%
|
1.6
|
%
|
34.6
|
%
|
33.7
|
%
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor costs
include restaurant hourly wages, fixed management salaries, stock-based
compensation, bonuses, taxes and benefits for restaurant team members. For the
twelve weeks ended October 4, 2009, labor costs as a
percentage of restaurant revenue
15
Table
of Contents
increased from prior year due primarily to the impact of fixed expenses
such as managers salaries, on a lower revenue volume. In addition, minimum wage increases and
higher benefit costs also increased our labor as a percentage of revenue. For the forty weeks ended October 4,
2009, labor as a percentage of restaurant revenue increased due to fixed salary
and minimum wages and higher benefit costs on a lower revenue volume base. A stock based compensation charge of $886,000,
also increased labor costs as a percentage of restaurant revenue for the forty
weeks ended October 4, 2009 by 0.1% of restaurant revenue. 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
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Operating
|
|
$
|
31,950
|
|
$
|
36,236
|
|
(11.8
|
)%
|
$
|
106,976
|
|
$
|
113,139
|
|
(5.4
|
)%
|
As a
percent of restaurant revenue
|
|
17.4
|
%
|
17.7
|
%
|
(0.3
|
)%
|
16.5
|
%
|
17.2
|
%
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs include variable costs such as
advertising, local marketing expenses, restaurant supplies, travel costs, and fixed costs such as repairs and maintenance and utility costs. For the twelve and forty weeks ended October 4,
2009, operating costs decreased as a percentage of
restaurant revenue due primarily to a 0.8% and 1.25% effective decrease in 2009
advertising activities for the twelve and forty weeks, respectively. This decreased spending has been offset by
higher repairs and maintenance costs.
Occupancy
|
|
Twelve
Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Occupancy
|
|
$
|
14,434
|
|
$
|
13,977
|
|
3.3
|
%
|
$
|
47,836
|
|
$
|
43,195
|
|
10.7
|
%
|
As a
percent of restaurant revenue
|
|
7.8
|
%
|
6.8
|
%
|
1.0
|
%
|
7.4
|
%
|
6.6
|
%
|
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
forty weeks ended October 4, 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 acquired
restaurants. Many of the restaurants
acquired from franchisees in previous years are build to suit locations that
typically bear a higher occupancy cost as a percentage of restaurant revenue.
Depreciation
and Amortization
|
|
Twelve
Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Depreciation
and amortization
|
|
$
|
13,112
|
|
$
|
12,248
|
|
7.1
|
%
|
$
|
43,815
|
|
$
|
38,777
|
|
13.0
|
%
|
As a
percent of total revenues
|
|
7.0
|
%
|
5.9
|
%
|
1.1
|
%
|
6.7
|
%
|
5.8
|
%
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 forty weeks ended October 4, 2009
compared to prior year due primarily to increased depreciation and amortization
expense related to new restaurants and the 2008 Acquired Restaurants and lower
average restaurant sales volumes.
General and Administrative
|
|
Twelve
Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
General
and administrative
|
|
$
|
12,109
|
|
$
|
15,659
|
|
(22.7
|
)%
|
$
|
51,080
|
|
$
|
52,588
|
|
(2.9
|
)%
|
As a
percent of total revenues
|
|
6.5
|
%
|
7.5
|
%
|
(1.0
|
)%
|
7.8
|
%
|
7.8
|
%
|
(0.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative costs include all corporate and administrative functions that support existing restaurant operations,
16
Table of Contents
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 certain marketing costs. For the twelve weeks ended October 4, 2009, general and administrative costs decreased as a percentage of total revenues and in absolute terms due primarily to lower national advertising marketing activities, reduced salary and travel costs related to our training activities and lower stock compensation expense. For the forty weeks ended October 4, 2009, general and administrative costs decreased as a percentage of total revenues in absolute terms due to lower national advertising marketing activities, reduced salary and travel costs related to our training activities, offset by increased performance based bonus awards.
Pre-opening Costs
|
|
Twelve
Weeks Ended
|
|
|
|
Forty
Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
October 4,
2009
|
|
October 5,
2008
|
|
Percent
Change
|
|
Pre-opening
costs
|
|
$
|
125
|
|
$
|
2,661
|
|
(95.3
|
)%
|
$
|
3,263
|
|
$
|
7,265
|
|
(55.1
|
)%
|
As a
percent of total revenues
|
|
0.1
|
%
|
1.3
|
%
|
(1.2
|
)%
|
0.5
|
%
|
1.1
|
%
|
(0.6
|
)%
|
Average
per restaurant pre-opening costs (1)
|
|
$
|
|
|
$
|
262
|
|
|
|
$
|
267
|
|
$
|
270
|
|
(1.1
|
)%
|
(1)
|
Average
per restaurant pre-opening costs reflect the average pre-opening costs of
those restaurants opened during the quarter and year-to-date.
|
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 expense
for the twelve weeks ended October 4, 2009
reflect expenses for two restaurants scheduled to open in the fourth quarter of
2009 as compared to the ten restaurants that were opened during the twelve
weeks ended October 5, 2008.
Pre-opening costs for the forty weeks ended October 4, 2009
and October 5, 2008, reflect the opening of 13 and
27 new restaurants, respectively in each period presented.
Asset Impairment Charge
During the third quarter of fiscal 2008, we determined that
two company-owned restaurants were impaired in accordance with ASC 360,
Property, Plant, and
Equipment
. The Company
recognized a non-cash impairment charge of $928,000 related to the impairment
of these two restaurants. We reviewed
each restaurants past and present operating performance combined with
projected future results, primarily through projected undiscounted cash flows,
which indicated possible impairment. The
carrying amount of each restaurant was compared to its fair value as determined
by management with the assistance of a third-party valuation firm. The impairment charge represents the excess
of the restaurants carrying amount over their fair value. There have been no such impairment charges
during fiscal 2009.
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, that was accounted for
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 (which has now been superseded by ASC 805,
Business Combinations
), 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.
Interest Expense, net
Interest expense was $1.3 million and $2.0 million for
the twelve weeks ended October 4, 2009 and October 5, 2008, respectively. Interest expense for the third quarter 2009
decreased as compared to the third quarter 2008 due to a lower average interest
rate of 3.1% versus 3.9% as well as a lower average borrowings outstanding. Interest expense was $5.0 million and $6.1 million
for the forty weeks ended October 4, 2009 and October 5, 2008,
respectively. Interest expense for the forty weeks ended October 4, 2009
decreased from the same period prior year due to a lower average interest rate
of 3.1% versus 4.2% in 2008, partially offset by higher average borrowings
outstanding under our revolving credit facility during fiscal 2009.
Provision for Income
Taxes
The
effective income tax rate for the third quarter 2009 was 16.3% compared to
21.6% for the third quarter 2008. The effective income tax rate for the
forty weeks ended October 4, 2009 and October 5, 2008 was 21.4% and
27.0%, respectively. The decrease in the effective tax rate from 2008 is
primarily due to the leverage of increased federal income tax credits, specifically
FICA tip tax credits, for 2009 as a percentage of net income before
taxes.
Offsetting
these credits in the third quarter of fiscal 2009 was additional expense of approximately
$500,000 related to the third quarter filing, of our 2008 federal and state
income tax returns. We anticipate that
our full year fiscal 2009 effective tax rate will be approximately 21%.
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Liquidity and Capital Resources
Financial Condition and
Future Liquidity.
We require capital principally to grow our
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, from time to time, 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.
Despite a decrease in total revenues of approximately $11.8 million, or
1.8% for the forty weeks ended October 4, 2009 as compared to the forty
weeks ended October 5, 2008, we have generated approximately $66.5 million
in cash flows from operations for the forty weeks ended October 4, 2009, a
decrease of approximately 0.6% from the same period 2008. This has allowed us to reduce our
indebtedness by $23.9 million for the forty weeks ended October 4, 2009.
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.
As a result, we typically maintain current
liabilities in excess of our current assets that result in a working capital
deficit. We are able to operate with a substantial working capital deficit
because restaurant operations are primarily conducted on a cash basis; rapid
turnover results in limited investment in inventories; and cash from sales is
usually received before related liabilities for food, supplies and payroll
become due.
Credit Facility.
O
ur existing credit facility permits us to have a
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 and
to extend the agreement for up to two one-year periods after the original
maturity. 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.
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, unless extended. At October 4, 2009, we had
$122.7 million of borrowings outstanding under our term loan and
$62.0 million of borrowings, including $5.1 million of letters of
credit outstanding under our revolving credit facility. We also had $6.5 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 approximately $921,000 and are included
as deferred costs in other assets, net in the accompanying consolidated balance
sheet as of October 4, 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 under the revolver during the fourth quarter 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 October 4,
2009, we were in compliance with all covenants under our credit agreement.
Inflation
The primary
inflationary factors that affect our operations are food costs, 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
18
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construction of our new restaurants.
During the third quarter, we have seen a decrease in cost for our food
commodities as well as reduced energy rates.
It is uncertain what impact inflation will have on these costs during
the remainder of 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 ASC) to become the single official
source of authoritative, nongovernmental U.S. generally accepted accounting
principles (GAAP). The ASC did not change GAAP but reorganizes the
literature. SFAS 168 is incorporated into the section 105 of the ASC
and 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 ASC. There is no change to the content
of our financial statements or disclosures as a result of implementing the ASC.
In August 2009,
the FASB issued the Accounting Standards Update (Update) No. 2009-05,
Measuring Liabilities at Fair Value,
(Update 2009-05). This update amends ASC 820,
Fair Value Measurements and Disclosures
. Update 2009-5 provides additional
clarification for the fair value measurement of liabilities, specifically in
circumstances in which a quoted price in an active market is not available or
when the liability contains transfer restrictions. Update 2009-5 is effective for financial
reporting periods beginning the period after issuance of the update. We will adopt this update in the fourth quarter
of 2009 and do not expect the adoption of Update 2009-5 to have a material
impact on our consolidated financial statement.
In May 2009, the
FASB issued
SFAS
No. 165,
Subsequent
Events,
(which is
now found under ASC 855,
Subsequent Events
),
which was effective for financial periods ending after June 15,
2009. The guidance establishes general standards of accounting for and
disclosure of subsequent events that occur after the balance sheet date.
We adopted SFAS 165 during second quarter 2009. Refer to Note 11.
Subsequent
Events
, for disclosure.
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). This guidance is now found under ASC 825,
Financial Instruments
. FSP FAS 107-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
,
and APB No. 28,
Interim Financial
Reporting
(also found under ASC 825). The guidance 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 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). This guidance is now found under ASC 350,
Intangibles
Goodwill and Other
. 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), which is also found under ASC
350. 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
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Table of
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prospectively
to all intangible assets recognized as of, and subsequent to, the effective
date. This guidance is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The adoption of this guidance 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). This guidance is now found under ASC
815,
Derivatives and Hedging
. This guidance 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 the guidance at the beginning
of fiscal 2009.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
Business Combinations,
(SFAS 141R). This guidance is
now found under ASC 805,
Business Combinations
.
This guidance
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. The guidance 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. This guidance is effective
for business combinations occurring in fiscal years beginning after December 15,
2008. Accordingly, beginning in fiscal
2009, we 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). This
guidance is now found under ASC 810,
Consolidation
. This guidance changes the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. We adopted the guidance at the beginning of
fiscal 2009. The adoption of this
guidance did not impact our consolidated financial statements.
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, anticipated sales trends, commodity
prices, 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 continuing volatility in financial markets and decreased
consumer confidence, resulting in changes in consumer preferences and 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; higher
percentage of operating weeks from non-comparable
restaurants; concentration of less mature restaurants in the comparable
restaurant base; 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 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 October 4, 2009, we had
$71.2 million of borrowings subject to variable
20
Table of
Contents
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
$712,000 on an annualized basis, after consideration of interest rate swaps.
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 ASC
815,
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 the
related debt. As of October 4,
2009, the $1.6 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 October 4, 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 October 4, 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
21
Table of
Contents
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.
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
10.1
|
|
First Amendment to Red Robin Gourmet Burgers, Inc. Employee
Stock Purchase Plan dated as of August 4, 2009. Incorporated by
reference from our Form 8-K Current Report filed with the SEC on
August 7, 2009.
|
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
|
22
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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.
|
|
|
|
November 6, 2009
|
|
/s/ Katherine L. Scherping
|
(Date)
|
|
Katherine L. Scherping
|
|
|
Chief Financial Officer
|
23
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