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 July 11, 2010
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
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84-1573084
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(State or other jurisdiction of incorporation or organization)
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|
(I.R.S. Employer Identification No.)
|
|
|
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6312 S. Fiddlers Green
Circle, Suite 200N
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Greenwood Village, CO
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80111
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(Address of principal executive offices)
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(Zip Code)
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(303) 846-6000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in
Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
o
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Accelerated filer
x
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|
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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
|
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Outstanding at August 11, 2010
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Common Stock, $0.001 par value per share
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15,621,938 shares
|
Table of
Contents
PART I
FINANCIAL INFORMATION
Item 1.
Financial
Statements
RED ROBIN
GOURMET BURGERS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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July 11, 2010
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December 27,
2009
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Assets:
|
|
|
|
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Current Assets:
|
|
|
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Cash and cash equivalents
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$
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11,923
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$
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20,268
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Accounts receivable, net
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5,689
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4,703
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|
Inventories
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14,761
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14,526
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Prepaid expenses and other current assets
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6,560
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6,203
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Income tax receivable
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1,276
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4,713
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|
Deferred tax asset
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3,080
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4,127
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Restricted current assetsmarketing funds
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4,718
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665
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Total current assets
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$
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48,007
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$
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55,205
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|
|
|
|
|
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Property and equipment, net
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424,146
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431,536
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Goodwill
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61,769
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61,769
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Intangible assets, net
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45,190
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47,426
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|
Other assets, net
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3,489
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4,159
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Total assets
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$
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582,601
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$
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600,095
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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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$
|
10,399
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$
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10,891
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|
Construction related payables
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4,270
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|
3,181
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|
Accrued payroll and payroll related liabilities
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26,670
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|
26,912
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Unearned revenue
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6,139
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15,437
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|
Accrued liabilities
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22,658
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18,818
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Accrued liabilitiesmarketing funds
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4,718
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|
665
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Current portion of term loan notes payable
|
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18,739
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18,739
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|
Current portion of long-term debt and capital
lease obligations
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819
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|
779
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|
Total current liabilities
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$
|
94,412
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$
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95,422
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|
|
|
|
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Deferred rent
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32,936
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30,996
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Long-term portion of term loan notes payable
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89,899
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103,954
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Other long-term debt and capital lease obligations
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54,410
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67,862
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Other non-current liabilities
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9,807
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13,239
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Total liabilities
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$
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281,464
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$
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311,473
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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; 17,113,278 and 17,079,267 shares issued; 15,621,020 and
15,586,948 shares outstanding
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17
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17
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Preferred stock, $0.001 par value: 3,000,000
shares authorized; no shares issued and outstanding
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Treasury stock, 1,492,280 shares, at cost
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(50,125
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)
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(50,125
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)
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Paid-in capital
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170,093
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|
167,637
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|
Accumulated other comprehensive loss, net of tax
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(438
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)
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(1,212
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)
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Retained earnings
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|
181,590
|
|
172,305
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|
Total stockholders equity
|
|
301,137
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288,622
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|
Total liabilities and stockholders equity
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$
|
582,601
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|
$
|
600,095
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|
See notes to condensed consolidated financial statements.
2
Table of
Contents
RED ROBIN
GOURMET BURGERS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
|
Twelve Weeks Ended
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Twenty-eight Weeks Ended
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|
|
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July 11, 2010
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July 12, 2009
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July 11, 2010
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July 12, 2009
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Revenues:
|
|
|
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Restaurant revenue
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$
|
197,977
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$
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197,963
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$
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465,482
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$
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464,558
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Franchise royalties and fees
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3,122
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3,078
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7,291
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7,230
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|
Other revenue
|
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244
|
|
47
|
|
|
4,080
|
|
113
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|
Total revenues
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201,343
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201,088
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476,853
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471,901
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|
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|
|
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Costs and expenses:
|
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|
|
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Restaurant operating costs (exclusive of
depreciation and amortization shown separately below):
|
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|
|
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Cost of sales
|
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48,697
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48,228
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113,709
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113,511
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Labor (includes $211, $137, $420, and $1,123 of
stock- based compensation, respectively)
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69,488
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67,679
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164,849
|
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159,950
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Operating
|
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28,976
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28,590
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|
67,615
|
|
67,005
|
|
Occupancy
|
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14,579
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|
14,494
|
|
34,287
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|
33,402
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|
Depreciation and amortization
|
|
13,185
|
|
13,066
|
|
30,436
|
|
30,703
|
|
Selling, general, and administrative (includes
$857, $615, $1,751, and $4,342 of stock-based compensation, respectively)
|
|
20,008
|
|
18,517
|
|
50,843
|
|
46,992
|
|
Pre-opening costs
|
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375
|
|
588
|
|
1,252
|
|
3,138
|
|
Total costs and expenses
|
|
195,308
|
|
191,162
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|
462,991
|
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454,701
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|
|
|
|
|
|
|
|
|
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Income from operations
|
|
6,035
|
|
9,926
|
|
13,862
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|
17,200
|
|
|
|
|
|
|
|
|
|
|
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Other expense (income):
|
|
|
|
|
|
|
|
|
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Interest expense, net
|
|
1,257
|
|
1,559
|
|
3,142
|
|
3,673
|
|
Other
|
|
10
|
|
9
|
|
(20
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)
|
19
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|
Total other expenses
|
|
1,267
|
|
1,568
|
|
3,122
|
|
3,692
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|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
4,768
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|
8,358
|
|
10,740
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|
13,508
|
|
Provision for income taxes
|
|
435
|
|
1,937
|
|
1,455
|
|
3,242
|
|
Net income
|
|
$
|
4,333
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|
$
|
6,421
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|
$
|
9,285
|
|
$
|
10,266
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
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$
|
0.42
|
|
$
|
0.60
|
|
$
|
0.67
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|
Diluted
|
|
$
|
0.28
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|
$
|
0.41
|
|
$
|
0.59
|
|
$
|
0.66
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
15,494
|
|
15,380
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|
15,484
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|
15,366
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|
Diluted
|
|
15,671
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|
15,486
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|
15,654
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|
15,467
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|
See notes to condensed consolidated financial statements.
3
Table of
Contents
RED ROBIN
GOURMET BURGERS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 11, 2010
|
|
July 12, 2009
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
Net income
|
|
$
|
9,285
|
|
$
|
10,266
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
30,436
|
|
30,703
|
|
Gift card breakage
|
|
(3,973
|
)
|
|
|
Stock-based compensation expense
|
|
2,171
|
|
5,465
|
|
Restaurant closure costs
|
|
95
|
|
598
|
|
Other, net
|
|
(1,817
|
)
|
(1,224
|
)
|
Changes in operating assets and liabilities
|
|
(1,338
|
)
|
3,479
|
|
Cash provided by operating activities
|
|
34,859
|
|
49,287
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
Changes in marketing fund restricted cash
|
|
3,084
|
|
|
|
Acquisition of franchise restaurants, net of cash
acquired
|
|
|
|
(1,248
|
)
|
Purchases of property and equipment
|
|
(17,243
|
)
|
(32,905
|
)
|
Cash used in investing activities
|
|
(14,159
|
)
|
(34,153
|
)
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Borrowings of long-term debt
|
|
93,200
|
|
97,500
|
|
Payments of long-term debt
|
|
(122,346
|
)
|
(110,730
|
)
|
Payment for tender offer for stock options
|
|
|
|
(3,498
|
)
|
Proceeds from exercise of stock options and
employee stock purchase plan
|
|
596
|
|
607
|
|
Excess tax benefit related to exercise of stock
options
|
|
|
|
76
|
|
Payments of other debt and capital lease
obligations
|
|
(495
|
)
|
(310
|
)
|
Cash used in financing activities
|
|
(29,045
|
)
|
(16,355
|
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(8,345
|
)
|
(1,221
|
)
|
Cash and cash equivalents, beginning of period
|
|
20,268
|
|
11,158
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,923
|
|
$
|
9,937
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
Income taxes paid
|
|
$
|
647
|
|
$
|
936
|
|
Interest paid, net of amounts capitalized
|
|
2,810
|
|
3,469
|
|
Purchases of property and equipment on account
|
|
4,270
|
|
4,054
|
|
See notes to condensed consolidated financial statements.
4
Table
of Contents
RED ROBIN GOURMET BURGERS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Recent Accounting Pronouncements
Red Robin Gourmet Burgers, Inc. (Red Robin or the Company), a
Delaware corporation, develops and operates casual-dining restaurants. At July
11, 2010, the Company operated 309 company-owned restaurants located in 31
states. The Company operates its business as one operating and one reportable
segment. The Company also sells
franchises, of which there were 134 restaurants, in 21 states and two Canadian
provinces as of July 11, 2010.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
The Companys financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Some of the more
significant estimates included in the preparation of these financial statements
pertain to recoverability of long-lived assets, recoverability of goodwill,
estimated useful lives of other intangible assets, bonus accruals,
self-insurance liabilities, stock-based compensation expense, estimating
breakage on unredeemed gift cards, legal contingencies, 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 27, 2009, 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 fiscal year ended
December 27, 2009.
The
Companys quarter which ended July 11, 2010, is referred to as second quarter
2010, or the twelve weeks ended July 11, 2010; the first quarter ended April
18, 2010, is referred to as first quarter 2010, or the sixteen weeks ended
April 18, 2010; and, together the first and second quarters of 2010 are
referred to as the twenty-eight weeks ended July 11, 2010. The Companys quarter which ended July 12,
2009, is referred to as second quarter 2009, or the twelve weeks ended July 12,
2009; the first quarter ended April 19, 2009, is referred to as first quarter
2009, or the sixteen weeks ended April 19, 2009; and, together the first and
second quarters of 2009 are referred to as the twenty-eight weeks ended July
12, 2009.
Reclassifications
The
following table provides the effects of the reclassification of marketing
expenses from restaurant operating expenses to the selling, general, and
administrative expense category for the twelve and twenty-eight weeks ended
July 12, 2009. This reclassification has
been previously disclosed in the Companys audited consolidated financial
statements included in the Companys annual report on Form 10-K for the
fiscal year ended December 27, 2009 and had no effect on previously
reported net income.
5
Table of Contents
|
|
Twelve Weeks Ended
|
|
|
|
July 12, 2009
|
|
(In thousands)
|
|
As
Reported
|
|
Reclassification
|
|
As
Presented
|
|
Restaurant operating costs
|
|
$
|
32,008
|
|
$
|
(3,418
|
)
|
$
|
28,590
|
|
Selling, general, and administrative costs
|
|
$
|
15,099
|
|
$
|
3,418
|
|
$
|
18,517
|
|
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 12, 2009
|
|
(In thousands)
|
|
As
Reported
|
|
Reclassification
|
|
As
Presented
|
|
Restaurant operating costs
|
|
$
|
75,026
|
|
$
|
(8,021
|
)
|
$
|
67,005
|
|
Selling, general, and administrative costs
|
|
$
|
38,971
|
|
$
|
8,021
|
|
$
|
46,992
|
|
6
Table of
Contents
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued authoritative guidance on the consolidation of variable interest
entities (VIE), which was effective beginning fiscal year 2010. The new guidance requires a qualitative
approach to identifying a controlling financial interest in a VIE, and it
requires ongoing assessment of whether an entity is a VIE and whether an
interest in a VIE makes the holder the primary beneficiary of the VIE. This new guidance does not have a material
effect on the Company.
In
January 2010, the FASB issued an update regarding guidance over the
disclosure requirements of fair value measurements. This update adds new requirements for disclosure
about transfers into and out of Levels One and Two and also adds additional
disclosure requirements about purchases, sales, issuances, and settlements
relating to Level Three measurements.
The guidance is effective beginning fiscal year 2010 for the disclosure
requirements around Levels One and Two measurements, and is effective beginning
fiscal year 2011 for the disclosure requirements around Level Three. This new guidance currently has no impact on
the fair value disclosures of the Company, as there have been no transfers out
of Levels One or Two.
2.
Restaurant Closures
The Company closed one restaurant in the first quarter of 2010. The closed location was an older restaurant
with a lease that was not extended, was in need of significant capital
improvements, and was not projected to provide acceptable returns in the
foreseeable future. There was no
associated amount of goodwill to write off in connection with this
closure. The Company has incurred
$95,000 in expenses related to the restaurant closure for the twenty-eight
weeks ended July 11, 2010.
The Company closed four restaurants in the first quarter of 2009. There was no associated amount of goodwill to
write off in connection with these closures.
The Company recognized charges of $598,000 for the twenty eight weeks
ended July 12, 2009, related to lease terminations and other closing related
costs.
3.
Stock-Based Compensation
Stock
Options
During
the twelve weeks ended July 11, 2010, the Company issued 11,000 options with a
weighted average grant date fair value of $8.80 per share and a weighted
average exercise price of $20.69 per share.
Compensation expense for these options is recognized over the remaining
weighted average vesting period for all options outstanding which is approximately
1.52 years. The Company issued 27,000
options with a weighted average grant date fair value of $6.46 per share and a
weighted average exercise price of $18.50 per share during the twelve weeks
ended July 12, 2009.
During
the twenty-eight weeks ended July 11, 2010, the Company has issued 253,000
options with a weighted average grant date fair value of $9.17 per share and a
weighted average exercise price of $21.71per share. Compensation expense for these options is
recognized over the remaining weighted average vesting period for all options
outstanding which is approximately 1.52 years.
The Company issued 366,000 options with a weighted average grant date
fair value of $5.98 per share and a weighted average exercise price of $15.27
per share during the twelve weeks ended July 12, 2009.
The
fair value of options at the grant date was estimated utilizing the
Black-Scholes multiple option-pricing model with the following weighted average
assumptions for the periods presented:
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks
Ended
|
|
|
|
July 11,
2010
|
|
July 12,
2009
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Risk-free interest rate
|
|
1.3
|
%
|
1.5
|
%
|
1.7
|
%
|
1.4
|
%
|
Expected years until exercise
|
|
3.6
|
|
2.7
|
|
3.5
|
|
3.6
|
|
Expected stock volatility
|
|
58.0
|
%
|
53.9
|
%
|
57.2
|
%
|
52.4
|
%
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Weighted-average Black-Scholes fair value per
share at date of grant
|
|
$
|
8.80
|
|
$
|
6.46
|
|
$
|
9.17
|
|
$
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Table of
Contents
Restricted
Stock
In the first quarter of 2009, the Company completed a cash tender
offer for out-of-the-money stock options held by approximately 514 then current
employees and officers. As a result of
the tender offer, the Company incurred a one-time pre-tax charge of
approximately $4.0 million for all unvested eligible options that were
tendered. This was reflected as a charge
of $886,000 to labor expense and a charge of $3.1 million to selling, general,
and administrative expense in the first quarter 2009 financial results. It represented 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.
The
Company did not issue any shares of non-vested common stock during the twelve
or twenty-eight weeks ended July 11, 2010.
Compensation expense for the aggregate 111,000 shares of non-vested
common stock outstanding at July 11, 2010, is recognized over the remaining
weighted average vesting period which is approximately 1.46 years. The Company issued 4,500 and 35,000 shares of
non-vested common stock during the twelve and twenty-eight weeks ended July 12,
2009. These awards had a weighted
average grant date fair value of $17.65 and $15.28 for the twelve and
twenty-eight weeks ended July 12, 2009, respectively. These vest in installments over four years on
the anniversary dates.
Time
Based Awards
During
the twelve weeks ended July 11, 2010, the Company granted 28,000 restricted
stock units (RSUs) to certain non-employee directors, and employees under the
Amended and Restated 2007 Performance Incentive Plan (the Stock Plan) with a
weighted average grant date fair value of $20.40. The fair value of each RSU granted is equal
to the market price of the Companys stock at date of grant. Compensation expense for the RSUs is recognized
over the remaining weighted average vesting period for all RSUs outstanding which
is approximately 1.98 years. The RSUs
granted to employees 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 RSUs granted to
non-employee directors are scheduled to vest in three equal installments on the
first, second, and third anniversaries of the date of grant, and the shares underlying
the units will be distributed to the reporting person in three equal
installments on or following the third, fourth, and fifth anniversaries of the
date of grant, unless earlier per the terms of the award agreement. The Company granted 1,400 RSUs with a
weighted average grant date fair value of $19.58 during the twelve weeks ended
July 12, 2009.
During
the twenty-eight weeks ended July 11, 2010, the Company granted 90,000 RSUs or
131,000 RSUs inclusive of the performance based RSUs granted during first
quarter 2010, under the 2007 Stock Plan with a weighted average grant date fair
value of $25.68. The RSUs vest in equal
installments over four years on the anniversary date and upon vesting, one
share of the Companys common stock is issued for each RSU. The fair value of each RSU granted is equal
to the market price of the Companys stock at date of grant. Compensation expense for the RSUs is
recognized over the remaining weighted average vesting period for all RSUs
outstanding which is approximately 1.98 years.
The Company granted 37,000 RSUs with a weighted average grant date fair
value of $15.11 during the twenty-eight weeks ended July 12, 2009.
Performance
Based Awards
In
March 2010, the Company granted performance based restricted stock units
(PSUs) to executives and other key employees.
These PSUs contain a market condition based on Total Shareholder Return
and measure the overall stock price performance of the Company to the stock
price performance of a selected industry peer group. The actual number of PSUs subject to the awards
will be determined at the end of the performance period based on these
performance metrics. The fair value of
the PSUs is calculated using the Monte Carlo valuation method. This method utilizes multiple input variables
to determine the probability of the Company achieving the market condition and
the fair value of the awards. These
awards have a three-year performance period and are classified as equity as
each unit is convertible into one share of the Companys common stock upon
vesting. Compensation expense is
recognized on a straight-line basis over the requisite service period (or to an
employees eligible retirement date, if earlier). During the first quarter 2010, the Company
issued 40,500 PSUs under its 2007 Stock Plan with a grant date fair value of
$35.90. The Company issued no additional
PSUs during the second quarter 2010.
4.
Earnings
Per Share
Basic
earnings per share amounts are calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted earnings per share amounts are
calculated based upon the weighted-average number of common and potentially
dilutive shares of common stock 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 twenty-eight weeks ended July 11, 2010, 571,000 and 504,000,
respectively, weighted stock options outstanding were not included in the
computation of diluted earnings per share because to do so would have been
anti-dilutive for the periods presented.
During the twelve and twenty-eight weeks ended July 12, 2009, 363,000
and 954,000, respectively, weighted stock options outstanding were not included
in the
8
Table of Contents
computation
of diluted earnings per share because to do so would have been anti-dilutive
for the periods presented. The Company
uses the treasury stock method to calculate the impact of outstanding stock
options. The computations for basic and
diluted earnings per share are as follows (in thousands, except per share
data):
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 11,
2010
|
|
July 12,
2009
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Net income
|
|
$
|
4,333
|
|
$
|
6,421
|
|
$
|
9,285
|
|
$
|
10,266
|
|
Basic weighted-average shares outstanding
|
|
15,494
|
|
15,380
|
|
15,484
|
|
15,366
|
|
Dilutive effect of stock options and awards
|
|
177
|
|
106
|
|
170
|
|
101
|
|
Diluted weighted-average shares outstanding
|
|
15,671
|
|
15,486
|
|
15,654
|
|
15,467
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
$
|
0.42
|
|
$
|
0.60
|
|
$
|
0.67
|
|
Diluted
|
|
$
|
0.28
|
|
$
|
0.41
|
|
$
|
0.59
|
|
$
|
0.66
|
|
5.
Gift Card Breakage
The
Company sells gift cards which do not have an expiration date, and it does not
deduct dormancy fees from outstanding gift card balances. The Company recognizes revenue from gift
cards when: (i) the gift card is
redeemed by the customer; or (ii) the likelihood of the gift card being
redeemed by the customer is remote (gift card breakage), and the Company
determines that there is not a legal obligation to remit the unredeemed gift
card balance to the relevant jurisdiction.
The determination of the gift card breakage rate is based upon the
Companys specific historical redemption patterns. The Company recognizes
gift card breakage by applying its estimate of the rate of gift card breakage
over the period of estimated performance (24 months as of the end of the second
quarter 2010). The Company completed its initial analysis of unredeemed
gift card liabilities for gift cards that it sold in its restaurants during the
first quarter 2010, and recognized $3.5 million into revenue as a one time
adjustment. For the twelve and
twenty-eight weeks ended July 11, 2010, the Company recognized $200,000 and
$4.0 million (inclusive of the one time adjustment) respectively, into revenue
for the amortization of the unredeemed gift card liability. The Company has not recognized breakage on
third party gift card sales due to the relatively young age of the third party
gift card program. Gift card breakage is
included in other revenue in the consolidated statement of income.
6.
Advertising Costs
Costs
incurred in connection with the advertising and marketing of the Company are
included in selling, general, and administrative expenses and expensed as
incurred. Such costs amounted to $6.4
million and $16.9 million for the twelve and twenty-eight weeks ended July 11,
2010, respectively, and $3.3 million and $7.9 million for the twelve and
twenty-eight weeks ended July 12, 2009, respectively.
Under the Companys franchise agreements, both the Company and the
franchise partners 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 selling, general, and administrative expenses in the Companys
financial statements. Restricted assets
represent contributed funds held for future use.
7.
Derivative and Other Comprehensive Income
The Company enters into derivative instruments for risk management
purposes only, including derivatives designated as a cash flow hedge under
guidance for derivative instruments and hedging activities. The Company uses interest rate-related
derivative instruments to manage its exposure to fluctuations in interest
rates. By using these instruments, the
Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract
is positive, the counterparty owes the Company, which creates credit risk for
the Company. The Company minimizes the
credit risk by entering into transactions with high-quality counterparties
whose credit rating is evaluated on a quarterly basis. The Companys counterparty in the interest
rate swap is SunTrust Bank, National Association (SunTrust). Market risk, as it relates to the Companys
interest-rate derivative, is the adverse effect on the value of a financial
instrument that results from changes in interest rates. 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 the 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 $50 million of the initial
9
Table of Contents
$120 million
expired on March 19, 2010, in accordance with its original term, and the
remaining $70 million will expire on March 19, 2011. The Company is required to make payments
based on a fixed interest rate of 2.7925% calculated on the remaining notional
amount of $70 million. In exchange,
the Company will receive interest on $70 million of the 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.
Accordingly, changes in fair value of the interest rate swap contract
were recorded, net of taxes, as a component of accumulated other comprehensive
loss (AOCL) in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain
or loss from AOCL, net of tax, on the Companys consolidated balance sheet to
interest expense on the Companys consolidated statements 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 as hedging
instruments as of July 11, 2010, and December 27, 2009, (in thousands):
|
|
Derivative Liability
|
|
Balance Sheet Location
|
|
Fair value at
July 11, 2010
|
|
Fair value at
December 27,
2009
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
1,087
|
|
$
|
1,833
|
|
Other non-current liabilities
|
|
|
|
222
|
|
Total derivatives
|
|
$
|
1,087
|
|
$
|
2,055
|
|
The
following table summarizes the effect of the interest rate swap on the
condensed consolidated statements of income for the twelve and twenty-eight
weeks ended July 11, 2010, and July 12, 2009, (in thousands):
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks
Ended
|
|
|
|
July 11,
2010
|
|
July 12,
2009
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Unrealized gain (loss) on swap in AOCL (pretax)
|
|
$
|
93
|
|
$
|
(354
|
)
|
$
|
(308
|
)
|
$
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
Realized loss (pretax effective portion)
recognized in interest expense
|
|
$
|
(401
|
)
|
$
|
(473
|
)
|
$
|
(1,239
|
)
|
$
|
(956
|
)
|
As a result of this activity, AOCL decreased by $494,000 and $931,000
on a pretax basis or $278,000 and $774,000 on an after tax basis for the twelve
and twenty-eight weeks ended July 11, 2010, respectively, and increased by
$354,000 and $187,000 on a pretax basis or $216,000 and $174,000 on an after
tax basis for the twelve and twenty-eight weeks ended July 12, 2009,
respectively. The interest rate swap has
no hedge ineffectiveness, and as a result, no unrealized gains or losses were
reclassified into net earnings as a result of hedge ineffectiveness.
Additionally, the Company had no obligations at July 11, 2010, to post
collateral under the terms of the Interest Rate Swap Agreement.
Comprehensive income consists of net income and other gains and losses
affecting stockholders equity that are excluded from net income. Comprehensive income consisted of (in thousands):
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks
Ended
|
|
|
|
July 11, 2010
|
|
July 12, 2009
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Net income
|
|
$
|
4,333
|
|
$
|
6,421
|
|
$
|
9,285
|
|
$
|
10,266
|
|
Unrealized gain (loss) on cash flow swap, net of
tax
|
|
278
|
|
(216
|
)
|
774
|
|
(174
|
)
|
Total comprehensive income
|
|
$
|
4,611
|
|
$
|
6,205
|
|
$
|
10,059
|
|
$
|
10,092
|
|
8.
Fair Value Measurement
Fair value measurements are made under a three-tier fair value
hierarchy, which prioritizes the inputs used in the measuring of
10
Table of Contents
fair
value:
Level One: Observable inputs that reflect unadjusted quoted prices
in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level Two: Inputs other than quoted prices included in
Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level Three: Inputs that are generally unobservable. These inputs
may be used with internally developed methodologies that result in managements
best estimate of fair value.
Assets and Liabilities Measured at Fair Value
The derivative liability associated with the interest rate swap is
considered to be a Level Two instrument. The interest rate swap is a
standard cash flow hedge whose fair value is estimated using industry-standard
valuation models. Such models project future cash flows and discount the future
amounts to a present value using market-based observable inputs, including
interest rate curves. See Note 7,
Derivative and Other
Comprehensive Income
, for
the discussion of the derivative liability.
The carrying value of both the liability for the deferred compensation
plan and associated life insurance policy 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 Two inputs. The Companys deferred compensation
plan is a nonqualified deferred compensation plan which allows highly compensated
employees to defer a portion of their base salary, bonuses, and commissions
each plan year. At July 11, 2010, and
December 27, 2009, a liability for participant contributions and
investment income thereon of $2.0 million and $2.4 million, respectively,
is included in other non-current liabilities.
To offset its obligation, the Companys plan administrator purchases
corporate-owned whole-life insurance contracts on certain team members. The cash surrender value of these policies at
July 11, 2010, and December 27, 2009, was $2.0 million and
$2.3 million, respectively, is included in other assets, net.
As of July 11, 2010, the Company had no financial assets or liabilities
that were measured using Level One or Level Three inputs. The Company also had no non-financial assets
or liabilities that were required to be measured on a recurring basis.
The following table presents our assets and liabilities that are fair
valued on a recurring basis for the quarter ended July 11, 2010, and for the
fiscal year ended December 27, 2009, (in thousands):
|
|
July 11, 2010
|
|
Level
One
|
|
Level
Two
|
|
Level
Three
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Life insurance policy
|
|
$
|
1,976
|
|
$
|
|
|
$
|
1,976
|
|
$
|
|
|
Total assets measured at fair value
|
|
$
|
1,976
|
|
$
|
|
|
$
|
1,976
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
1,087
|
|
|
|
1,087
|
|
|
|
Deferred compensation plan
|
|
1,988
|
|
|
|
1,988
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
3,075
|
|
$
|
|
|
$
|
3,075
|
|
$
|
|
|
|
|
December
27, 2009
|
|
Level
One
|
|
Level
Two
|
|
Level
Three
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Life insurance policy
|
|
$
|
2,317
|
|
$
|
|
|
$
|
2,317
|
|
$
|
|
|
Total assets measured at fair value
|
|
$
|
2,317
|
|
$
|
|
|
$
|
2,317
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
2,055
|
|
|
|
2,055
|
|
|
|
Deferred compensation plan
|
|
2,358
|
|
|
|
2,358
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
4,413
|
|
$
|
|
|
$
|
4,413
|
|
$
|
|
|
11
Table of Contents
Disclosures of Fair Value of Other Assets and
Liabilities
The Companys liabilities under its credit facility and capital leases
are carried at historical cost in the accompanying consolidated balance
sheet. For disclosure purposes, we
estimate the fair value of the credit facility and capital lease obligations
using discounted cash flow analysis based on market rates obtained from
independent third parties for similar types of debt. Both the credit facility and the Companys
capital lease obligations are considered to be Level 2 instruments. The fair value of the Companys credit
facility as of July 11, 2010, and December 27, 2009, was
approximately $152.3 million and $179.5 million, respectively. There are $8.3 million of outstanding
borrowings recorded for the Companys capital leases as of July 11, 2010,
which have an estimated fair value of $8.3 million. At December 27, 2009, the carrying
amount of the Companys capital lease obligations was $6.6 million, and
the fair value was $7.7 million.
9.
Related Party Transactions
In 2009, the Company appointed a member to its board of directors who
qualifies as a related party. This 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 Company-owned
restaurants. Under these leases, the
Company recognized rent and other related payments in the amounts of $289,000
and $640,000 for the twelve and twenty-eight weeks ended July 11, 2010,
respectively, and $266,000 and $578,000 for the twelve and twenty-eight weeks
ended July 12, 2009, respectively.
Future minimum lease commitments under these leases are
$4.5 million as of July 11, 2010.
10.
Commitments and Contingencies
In
the normal course of business, there are various legal claims in process,
matters in litigation, and other contingencies.
These include claims resulting from employment related claims and claims
from guests or team members alleging illness, injury or other food quality,
health, or operational concerns. To
date, no claims of these types of litigation, certain of which are covered by
insurance policies, have had a material effect on us. While it is not possible to predict the
outcome of these suits, legal proceedings, and claims with certainty,
management is of the opinion that adequate provision for potential losses
associated with these matters has been made in the financial statements and
that the ultimate resolution of these matters will not have a material adverse
effect on our financial position and results of operations.
11.
Subsequent Events
The Company has evaluated subsequent events and identified the
following two events:
On August 12, 2010, the
Company announced that it extended its previously announced share repurchase
plan to December 31, 2011. The Company is authorized to repurchase
shares of common stock up to $50 million.
Such repurchases may be made from time to time in open market
transactions and through privately negotiated transactions.
On
August 11, 2010, the Board of Directors (Board) of the Company entered
into a Rights Agreement. The Rights Agreement sets forth the terms under
which the Company would issue preferred share purchase rights (the Rights).
Immediately after the execution of the Rights Agreement, the Board declared a
dividend of one Right for each outstanding share of common stock, par value
$0.001 per share, payable on August 23, 2010 to holders of record on that
date.
The
Board has authorized the adoption of the Rights Agreement to protect
stockholders from coercive or otherwise unfair takeover tactics. In
general terms, the Rights will impose a significant penalty upon any person or group
which acquires beneficial ownership of 15% or more of the Companys outstanding
common stock without the prior approval of the Board. The Rights
Agreement provides an exemption for any person who is, as of the date of the
Rights Agreement, the beneficial owner of 15% or more of the Companys
outstanding common stock, so long as such Person does not, subject to certain
exceptions, acquire additional common stock of the Company. The Rights
Agreement will not interfere with any merger or other business combination
approved by the Board.
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 2010 and 2009 refer to the twelve and twenty-eight week periods
ending July 11, 2010, and July 12, 2009, respectively, unless
otherwise indicated.
12
Table
of Contents
Overview
The
following summarizes the operational and financial highlights during the twelve
and twenty-eight weeks of fiscal 2010:
·
New Restaurant Openings
. We
opened one and four company-owned restaurants during the twelve and
twenty-eight weeks ended July 11, 2010, respectively, versus six and
thirteen opened in the same time period of 2009. We have opened one additional company-owned
restaurant in the third quarter of 2010, and we plan to open up to six additional
company-owned restaurants for the remainder of 2010. We believe all remaining 2010 restaurant
openings will be funded from our operating cash flows.
·
Comparable
Restaurant Sales.
For the twelve
weeks ended July 11, 2010, the 290 restaurants in our current comparable
base experienced a 1.2% decrease in sales from these same restaurants last
year. This decrease was driven by a 2.1%
decrease in the average guest check partially offset by a 0.9% increase in
guest counts. For the twenty-eight weeks
ended July 11, 2010, the restaurants in our current comparable based
experienced a 1.8% decrease in sales from these same restaurants last
year. This decrease was driven by a 2.2%
decrease in the average guest check partially offset by a 0.4% increase in
guest counts. For the second quarter
2010, we believe the restaurant sales results were negatively impacted by lower
restaurant sales in California and Arizona, which have been more heavily
impacted by macroeconomic factors.
Excluding the impact from our comparable restaurants in these markets,
comparable restaurant sales would have been approximately 1.5% higher, or 0.3%,
while our guest counts would have been positive 2.5%. Our 72 restaurants in California and Arizona
represent 25% of our total company-owned comparable restaurants in the second
quarter 2010.
·
Marketing
Efforts.
For 2010,
our marketing strategy is focused on product news with an emphasis on quality,
value, and variety to drive guest traffic, retention, and loyalty, which are
key components of our YUMMM advertising campaign. During the second quarter 2010, we launched a
Limited Time Offer (LTO) promotion featuring two products at a $6.99 price
point. This was the second LTO promotion
of fiscal year 2010. The LTO campaign
included four weeks of media over a five week period. Three of the weeks of television were in the
second quarter and one was in the first week of the third quarter. Our investment in the second quarter 2010
advertising campaign was $3.3 million.
For the twenty-eight week period ended July 11, 2010, our
television advertising support of our 2010 LTO promotions have increased our
marketing spend by $9.5 million over the same period of 2009. We continue to believe our 2010 LTO
promotional plan, supported by national television and digital advertising have
contributed to the increased guest counts and restaurant sales. Restaurant sales and guest counts during the
promotional campaigns have continued to run higher than pre- and
post-promotional periods.
·
Labor.
Labor costs as a percentage
of restaurant revenue increased 0.9% and 1.0% for the twelve and twenty-eight
weeks ended July 11, 2010, as compared to the same period 2009 primarily
due to reduced productivity in hourly labor costs as we increased staffing to
accommodate the increased guest counts generated from our media campaigns as
well as increased wages and training expense for our restaurant managers. We believe that our LTO promotions increased
our labor expenses as a percentage of revenue by approximately 0.2% for the
second quarter and approximately 0.4% year-to-date.
·
Food Cost.
For the twelve and twenty-eight weeks ended July 11,
2010, we saw an increase in the cost of ground beef and produce compared to
2009 prices. Additionally, we believe
that our LTO promotions increased our cost of goods sold as a percentage of
revenue by approximately 0.1% for the second quarter and approximately 0.3% for
the year-to-date. Our ground beef was
bought on the spot market in the second quarter of 2010 and ran above our
second quarter 2009 pricing. We expect
ground beef prices to decline in the remainder of 2010, but will still trend
above the 2009 prices. We also
experienced increased produce prices early in the second quarter due to
inclement weather earlier in the year in produce growing states.
In
view of the foregoing, the Company continues to make every effort to manage
controllable costs and streamline operations, while our restaurant teams focus
on driving traffic through the quality and value of our guest experience. Our reduced levels of new restaurant openings
and limited capital expenditures are expected to result in significant free
cash flow, the majority of which will be used to reduce outstanding
indebtedness or opportunistically repurchase some of our common stock during
the remainder of 2010.
Restaurant Data
The
following table details restaurant unit data for our company-owned and
franchise locations for the periods indicated.
13
Table of Contents
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 11,
2010
|
|
July 12, 2009
|
|
July 11, 2010
|
|
July 12,
2009
|
|
Company-owned:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
308
|
|
298
|
|
306
|
|
294
|
|
Opened during period
|
|
1
|
|
6
|
|
4
|
|
13
|
|
Acquired during period
|
|
|
|
|
|
|
|
1
|
|
Closed during period
|
|
|
|
|
|
(1
|
)
|
(4
|
)
|
End of period
|
|
309
|
|
304
|
|
309
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
Franchised:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
131
|
|
130
|
|
133
|
|
129
|
|
Opened during period*
|
|
3
|
|
1
|
|
3
|
|
3
|
|
Sold or closed during period
|
|
|
|
|
|
(2
|
)
|
(1
|
)
|
End of period
|
|
134
|
|
131
|
|
134
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
Total number of Red Robin® restaurants
|
|
443
|
|
435
|
|
443
|
|
435
|
|
*
Includes one franchised restaurant that was re-opened during the second quarter
2010.
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 revenue.
This
information has been prepared on a basis consistent with our audited 2009
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.
14
Table of Contents
|
|
Twelve Weeks Ended
|
|
Twenty-eight Weeks Ended
|
|
|
|
July 11,
2010
|
|
July 12,
2009
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
98.3
|
%
|
98.5
|
|
97.6
|
%
|
98.5
|
%
|
Franchise royalties and fees
|
|
1.6
|
|
1.5
|
|
1.5
|
|
1.5
|
|
Other revenue
|
|
0.1
|
|
|
|
0.9
|
|
|
|
Total revenues
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
Restaurant operating costs (exclusive of
depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
24.6
|
|
24.4
|
|
24.4
|
|
24.4
|
|
Labor (includes 0.1%, 0.1%, 0.1%, and 0.2% of
stock- based compensation expense, respectively)
|
|
35.1
|
|
34.2
|
|
35.4
|
|
34.4
|
|
Operating
|
|
14.6
|
|
14.4
|
|
14.5
|
|
14.4
|
|
Occupancy
|
|
7.4
|
|
7.3
|
|
7.4
|
|
7.2
|
|
Total restaurant operating costs
|
|
81.7
|
|
80.3
|
|
81.7
|
|
80.4
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
6.5
|
|
6.5
|
|
6.4
|
|
6.5
|
|
Selling, general, and administrative (includes
0.4%, 0.3%, 0.4%, and 0.9% of stock-based compensation expense, respectively)
|
|
9.9
|
|
9.2
|
|
10.7
|
|
10.0
|
|
Pre-opening costs
|
|
0.2
|
|
0.3
|
|
0.3
|
|
0.7
|
|
Income from operations
|
|
3.0
|
|
4.9
|
|
2.9
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
0.6
|
|
0.8
|
|
0.7
|
|
0.8
|
|
Other
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
2.4
|
|
4.1
|
|
2.3
|
|
2.8
|
|
Provision for income taxes
|
|
0.2
|
|
1.0
|
|
0.3
|
|
0.7
|
|
Net income
|
|
2.2
|
%
|
3.1
|
%
|
1.9
|
%
|
2.1
|
%
|
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 revenue, as opposed to total revenues.
Total Revenues
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11, 2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Restaurant revenue
|
|
$
|
197,977
|
|
$
|
197,963
|
|
0.0
|
%
|
$
|
465,482
|
|
$
|
464,558
|
|
0.2
|
%
|
Franchise royalties and fees
|
|
3,122
|
|
3,078
|
|
1.4
|
%
|
7,291
|
|
7,230
|
|
0.8
|
%
|
Other revenue
|
|
244
|
|
47
|
|
NM
|
(1)
|
4,080
|
|
113
|
|
NM
|
(1)
|
Total revenues
|
|
$
|
201,343
|
|
$
|
201,088
|
|
0.1
|
%
|
476,853
|
|
471,901
|
|
1.0
|
%
|
Average weekly sales volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurants
|
|
$
|
54,549
|
|
$
|
56,335
|
|
(3.2
|
)%
|
$
|
55,314
|
|
$
|
57,330
|
|
(3.5
|
)%
|
Non-comparable restaurants
|
|
58,449
|
|
56,053
|
|
4.3
|
%
|
57,343
|
|
55,611
|
|
3.1
|
%
|
2008 Acquired Restaurants (2)
|
|
|
|
49,842
|
|
(100.0
|
)%
|
|
|
51,392
|
|
(100.0
|
)%
|
(1)
Percentage change of more than 100% is considered
not meaningful
(2)
2008 Acquired Restaurants refers to 15 franchised
Red Robin® restaurants we acquired during fiscal year 2008. Beginning in the third quarter of fiscal year
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.
Restaurant revenue, which is comprised almost entirely of food and
beverage sales, increased by $14,000 from the second quarter of 2009. Sales in our comparable restaurant base
experienced a sales decrease of approximately $3.3 million or 1.7% during
15
Table of
Contents
the
second quarter 2010. This decrease was
primarily the result of a 2.1% decrease in the average guest check. Offsetting this decrease was a 0.9% increase
in guest counts for the second quarter of 2010. This increase, we believe, was driven by our
LTO promotion and the three weeks of television media support. During the first eight weeks of second
quarter, before our LTO campaign, guest counts and comparable restaurant sales
were down approximately 1.0% and 2.6%, respectively, as compared to the same
period in 2009. During the four weeks of
the LTO and national cable television advertising campaign, guest counts and
comparable restaurant sales were up approximately 4.7% and 1.6% respectively,
as compared to the same period in 2009.
Sales for non-comparable restaurants contributed an increase of $3.3
million.
Restaurant revenue for the twenty-eight week period ended July 11,
2010, increased $924,000 or 0.2% from the same period in 2009. Sales in our comparable restaurant base
experienced a sales decrease of approximately $12.7 million or 2.8% for the
period. This was primarily the result of
a decrease in the average guest check offset by an increase in guest counts. Sales for non-comparable restaurants
contributed an increase of $13.6 million, of which $5.1 million was
attributable to the four restaurants opened during the twenty-eight weeks ended
July 11, 2010, and $8.2 million attributable to additional sales from
those restaurants opened in 2008 and 2009 and remain in the non-comparable
base.
Average weekly sales volumes represent the total restaurant revenue,
excluding discounts, for a population of restaurants in both a comparable and
non-comparable category for each time period presented divided by the number of
operating weeks in the period.
Comparable restaurant average weekly sales volumes include those
restaurants that are in the comparable base at the end of each period
presented. At the end of the second
quarter 2010, there were 290 comparable restaurants compared to 245 comparable
restaurants at the end of the second quarter 2009. Non-comparable restaurants presented include
those restaurants that had not yet achieved the five full quarters of
operations during the periods presented.
At the end of the second quarter 2010, there were 19 non-comparable
restaurants versus 44 at the end of the second quarter 2009. 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, increased 1.4% and 0.8% for the twelve and twenty-eight weeks
ended July 11, 2010, respectively.
This increase is primarily attributable to the increase in the number of
franchised units. Our franchisees
reported that comparable restaurant sales decreased 2.0% for U.S. restaurants
and increased 0.8% for Canadian restaurants for the second quarter of 2010
compared to the second quarter of 2009.
For the twenty-eight weeks ended July 11, 2010, our franchisees
reported that comparable restaurant sales for U.S. restaurants decreased 2.1%
and Canadian restaurants increased 3.0% from the twenty-eight week period ended
July 12, 2009.
Other revenue consists primarily of gift card breakage. We recognize revenue when a gift card is
redeemed by a guest as restaurant revenue.
Gift card breakage revenue is recognized if the likelihood of gift card
redemption is remote and we determine that there is not a legal obligation to
remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage
rate is based upon specific historical redemption patterns. We recognize gift card breakage by applying
its estimate of the rate of gift card breakage over the period of estimated
performance (24 months as of the end of the second quarter 2010). We recognized $3.5 million as a one time
adjustment during the first quarter 2010.
We recognized $200,000 and $4.0 million (inclusive of the one time
adjustment) respectively, of gift card breakage for the twelve and twenty-eight
weeks ended July 11, 2010.
Cost and Expenses
Cost of Sales
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Cost of sales
|
|
$
|
48,697
|
|
$
|
48,228
|
|
1.0
|
%
|
$
|
113,709
|
|
$
|
113,511
|
|
0.2
|
%
|
As a percent of restaurant revenue
|
|
24.6
|
%
|
24.4
|
%
|
0.2
|
%
|
24.4
|
%
|
24.4
|
%
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, comprised of food and beverage expenses, are variable and generally
fluctuate with sales volume. For the
twelve weeks ended July 11, 2010, cost of sales as a percentage of
restaurant revenue increased 0.2%, or $469,000.
This increase was driven by a combined 0.5% percentage of restaurant
revenue increase in produce and ground beef, partially offset by a decrease as
a percentage of restaurant revenue of 0.3% in meats other than ground
beef. The increase in produce and ground
beef costs is due to higher raw materials costs and product mix. We believe that the $6.99 price point on the
LTO products resulted in an approximate 0.1% negative impact on the cost of
sales as a percentage of restaurant revenue.
Meats other than ground beef decreased in 2010 as compared to 2009 due
to a shift in the mix of products ordered during the summer 2009 LTO promotion
featuring steak sliders versus the summer 2010 LTO promotion featuring
hamburger and chicken sandwich.
16
Table
of Contents
For
the twenty-eight weeks ended July 11, 2010, cost of sales as a percentage
of restaurant revenue remained flat; however we believe that the spring and
summer LTO promotions resulted in an approximate 0.3% negative impact on the
year-to-date cost of sales expense as a percentage of restaurant revenue.
Labor
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Labor
|
|
$
|
69,488
|
|
$
|
67,679
|
|
2.7
|
%
|
$
|
164,849
|
|
$
|
159,950
|
|
3.1
|
%
|
As a percent of restaurant revenue
|
|
35.1
|
%
|
34.2
|
%
|
0.9
|
%
|
35.4
|
%
|
34.4
|
%
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 July 11,
2010, labor costs as a percentage of restaurant revenues increased 0.9%, or
$1.8 million. This increase is primarily
driven by an increase in administrative labor, including manager bonuses, of
0.5% and an increase in hourly labor of 0.2%.
These increases are primarily due to increases in wages and training
expense for our restaurant managers as well as reduced productivity in hourly
labor costs as we increased staffing to accommodate the increased guest counts
generated from our media campaign.
Additionally, we believe that the LTO promotions resulted in an approximate
0.2% negative impact to our second quarter 2010 labor expenses.
For
the twenty-eight weeks ended July 11, 2010, labor as a percentage of
revenue increased 1.0%, or $4.9 million.
This increase is driven by an increase administrative labor, including
manager bonuses and payroll taxes, of 0.6%.
Additionally, we believe that the LTO promotions resulted in an
approximate 0.4% negative impact to year-to-date labor expenses. These increases are offset by a decrease of
0.2% in stock compensation expense, which is the result of the first quarter 2009
tender offer.
Operating
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Operating
|
|
$
|
28,976
|
|
$
|
28,590
|
|
1.4
|
%
|
$
|
67,615
|
|
$
|
67,005
|
|
0.9
|
%
|
As a percent of restaurant revenue
|
|
14.6
|
%
|
14.4
|
%
|
0.2
|
%
|
14.5
|
%
|
14.4
|
%
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs include variable costs such as restaurant supplies, energy costs, and
other costs such as repairs and maintenance.
For the twelve and twenty-eight weeks ended July 11, 2010,
operating costs as a percentage of restaurant revenues increased 0.2% and 0.1%
respectively, over prior year. This is
the result of increased repairs and maintenance costs to maintain our
restaurant facilities.
Occupancy
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Occupancy
|
|
$
|
14,579
|
|
$
|
14,494
|
|
0.6
|
%
|
$
|
34,287
|
|
$
|
33,402
|
|
2.6
|
%
|
As a percent of restaurant revenue
|
|
7.4
|
%
|
7.3
|
%
|
0.1
|
%
|
7.4
|
%
|
7.2
|
%
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
costs include fixed rents, percentage rents, common area maintenance charges,
real estate and personal property taxes, general liability insurance, and other
property costs. For the twelve and
twenty-eight weeks ended July 11, 2010, the increase as a percentage of
revenues was driven by properties with higher fixed rents relative to their
sales volumes.
17
Table of Contents
Depreciation and Amortization
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Depreciation and amortization
|
|
$
|
13,185
|
|
$
|
13,066
|
|
0.9
|
%
|
$
|
30,436
|
|
$
|
30,703
|
|
(0.9
|
)%
|
As a percent of total revenues
|
|
6.5
|
%
|
6.5
|
%
|
0.0
|
%
|
6.4
|
%
|
6.5
|
%
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for the twelve and twenty-eight weeks ended July 11,
2010, remained flat over prior year.
Selling, General, and Administrative
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Selling, general, and administrative
|
|
$
|
20,008
|
|
$
|
18,517
|
|
8.1
|
%
|
$
|
50,843
|
|
$
|
46,992
|
|
8.2
|
%
|
As a percent of total revenues
|
|
9.9
|
%
|
9.2
|
%
|
0.7
|
%
|
10.7
|
%
|
10.0
|
%
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative costs include all corporate and administrative
functions that support our existing restaurant operations, our franchises, and
provide infrastructure to facilitate our future growth. Components of this category include corporate
management, supervisory and staff salaries, bonuses, marketing costs,
stock-based compensation and related employee benefits, travel, information
systems, training, office rent, franchise administrative support, Board of
Directors expenses, legal, leadership conference, and professional and
consulting fees. For the twelve weeks
ended July 11, 2010, selling, general, and administrative costs increased
8.1%, or $1.5 million, due primarily to our marketing and advertising campaign
related to television support for the summer LTO partially offset by reduced
bonuses at the corporate level.
For
the twenty-eight weeks ended July 11, 2010, selling, general, and
administrative costs increased 8.2%, or $3.9 million, due primarily to our
increase of $9.5 million over 2009 in the marketing and advertising campaign
related to television media support for the spring and summer LTOs. This increase was partially offset by a $2.0
million decrease in bonuses at the corporate level, $3.1 million decrease in
stock compensation expense related to the tender offer completed during the
first quarter 2009, and higher Board of Directors and governance related
expenses.
Pre-opening Costs
|
|
Twelve Weeks Ended
|
|
|
|
Twenty-eight Weeks
Ended
|
|
|
|
(In thousands, except percentages)
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
July 11,
2010
|
|
July 12,
2009
|
|
Percent
Change
|
|
Pre-opening costs
|
|
$
|
375
|
|
$
|
588
|
|
(36.2
|
)%
|
$
|
1,252
|
|
$
|
3,138
|
|
(60.1
|
)%
|
As a percent of total revenues
|
|
0.2
|
%
|
0.3
|
%
|
(0.1
|
)%
|
0.3
|
%
|
0.7
|
%
|
(0.4
|
)%
|
Average per restaurant pre-opening costs
|
|
$
|
288
|
|
$
|
258
|
|
11.6
|
%
|
$
|
265
|
|
$
|
267
|
|
(0.7
|
)%
|
Pre-opening
costs, which are expensed as incurred, consist of the costs of labor, hiring
and training the initial work force for our new restaurants, travel expenses
for our training teams, the cost of food and beverages used in training,
marketing costs, lease costs incurred prior to opening, and other direct costs
related to the opening of new restaurants.
Pre-opening costs for the twelve weeks ended July 11, 2010, and July 12,
2009, reflect the opening of one and six new restaurants, respectively, in each
period presented. For the twelve weeks
ended July 11, 2010, the increase in the average per restaurant opening
costs was driven by increased wages and occupancy costs. For the twenty-eight weeks ended July 11,
2010, the average per restaurant pre-opening costs was flat.
Interest Expense, net
Interest
expense was $1.3 million and $1.6 million for the twelve weeks ended July 11,
2010, and July 12, 2009, respectively, and $3.1 million and $3.7 million
for the twenty-eight weeks ended July 11, 2010, and July 12, 2009,
respectively. Interest expense decreased
19.4% and 14.5% over the quarter and year-to-date prior year period,
respectively, primarily due to reduced overall borrowings under our credit
facility. Our weighted average interest
rate was 2.9% and 3.0% for the twelve and twenty-eight weeks ended July 11,
2010, versus 3.0% and 2.9% for the twelve and twenty-eight weeks ended July 12,
2009, respectively.
18
Table of
Contents
Provision for Income Taxes
The effective income tax rate for the second quarter 2010 was 9.1%
compared to 23.2% for the second quarter 2009.
The effective income tax rate for the twenty-eight weeks ended July 11,
2010, and July 12, 2009, was 13.6% and 24.0%, respectively. This decrease from 2009 is primarily due to
more favorable general business and tax credits, primarily the FICA Tip Tax
Credit, as a percent of current year income before tax, which did not change at
the same rate as the change in income before income taxes. We anticipate that our full year fiscal 2010
effective tax rate will be approximately 13.6%.
Liquidity and Capital Resources
General.
Cash and cash equivalents decreased
$8.4 million to $11.9 million at July 11, 2010, from
$20.3 million at the beginning of the fiscal year. This decrease was due
primarily to $17.2 million used for the construction of new restaurants and
expenditures for facility improvements and $29.1 million net pay down of
debt offset by $34.9 million of cash provided by operating activities, as
well as an increase of $3.1 million in the marketing fund restricted cash. We
expect to continue to reinvest available cash flows from operations to develop
new restaurants or enhance existing restaurants, pay down debt, and maintain
the flexibility to opportunistically repurchase some of our common stock.
Financial Condition and
Future
Liquidity.
We require capital principally to grow the
business through new restaurant construction, as well as to maintain, improve
and refurbish existing restaurants, support for infrastructure needs, and for
general operating purposes. In addition,
we have and may continue to use capital to acquire franchise restaurants or
repurchase our common stock. Our primary
short-term and long-term sources of liquidity are expected to be cash flows
from operations and our revolving credit facility. Based upon current levels of operations and
anticipated growth, 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. We expect to open up
to an additional six restaurants in 2010 and expect to open up to 15 new
restaurants in fiscal year 2011. We
typically maintain current liabilities in excess of our current assets which
results in a working capital deficit. We
are able to operate with a substantial working capital deficit because
restaurant sales are primarily conducted on a cash basis. Rapid turnover results in limited investment
in inventories, and cash from sales is usually received before related accounts
payable for food, supplies and payroll become due.
Credit Facility.
Our existing credit facility has permitted us
to have a more flexible capital structure and facilitate 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 a margin that is currently 0.875%. 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 request maturity extensions. 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 of
the Company and its subsidiaries (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, National Association among others. We do not believe that any of
our lenders will be unable to fulfill their lending commitments under our
credit facility.
With
regard to the term loan facility, we are required to repay the principal amount
of the term loan in consecutive quarterly installments which began
September 30, 2007, and will end on the maturity date of the term
loan. At July 11, 2010, we had $108.7
million of borrowings outstanding under our term loan, $46.9 million of
borrowings, and $6.2 million of letters of credit outstanding under our revolving
credit facility. 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
$658,000 and are included as deferred costs in other assets, net in the
accompanying consolidated balance sheet as of July 11, 2010. In addition to the required repayments on the
term loan, we expect to utilize excess cash flow after capital expenditures to
reduce our debt during 2010.
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
19
Table of Contents
interest,
taxes, depreciation and amortization (EBITDA) adjusted for certain non-cash
charges; and a fixed charge ratio calculated as our consolidated cash flow
divided by our consolidated debt service obligations. As of July 11, 2010, we were in compliance
with all debt covenants.
Inflation
The primary inflationary factors affecting our operations are food,
labor costs, energy costs, and materials used in the construction of new
restaurants. A large number of our
restaurant personnel are paid at rates based on the applicable minimum wage,
and historically increases in the minimum wage have directly affected our labor
costs. Many of our leases require us to
pay taxes, maintenance, repairs, insurance, and utilities, all of which are
generally subject to inflationary increases.
We believe, however, that inflation did not have a negative impact on
our financial condition and results during the first half of 2010, due to the
macroeconomic environment. Uncertainties
related to fluctuations in costs, including energy costs, commodity prices,
annual indexed wage increases and construction materials make it difficult to
predict what impact, if any, inflation may have on our business during the
second half of 2010.
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, including our estimates
of future restaurant level cash flows, which are subject to the current economic
environment, 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 27, 2009.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued authoritative guidance on the consolidation of variable interest
entities (VIE), which was effective beginning fiscal year 2010. The new guidance requires a qualitative
approach to identifying a controlling financial interest in a VIE, and requires
ongoing assessment of whether an entity is a VIE and whether an interest in a
VIE makes the holder the primary beneficiary of the VIE. This new guidance does not have a material
impact on us.
In
January 2010, the FASB issued an update regarding guidance over the
disclosure requirements of fair value measurements. This update adds new requirements for
disclosure about transfers into and out of Levels One and Two and also adds
additional disclosure requirements about purchases, sales, issuances, and
settlements relating to Level Three measurements. The guidance is effective beginning fiscal
year 2010 for the disclosure requirements around Levels One and Two
measurements, and is effective beginning fiscal year 2011 for the disclosure
requirements around Level Three. This
new guidance currently has no impact on our fair value disclosures, as there
have been no transfers out of Levels One or Two.
Forward-Looking Statements
Certain information and statements contained in this report that
reflect the Companys current expectations regarding, among other things,
future restaurant sales and results of operations, economic performance,
liquidity and capital resources, ability to fund new restaurant growth and
repay debt from cash flows, anticipated gift card breakage revenue, anticipated
tax rates, advertising success, financial condition and achievements of the
Company, and the potential repurchase by
the Company of shares of its common stock 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
20
Table of
Contents
are
other than statements of historical facts.
These statements may be identified, without limitation, by the use of
forward-looking terminology such as anticipate, believe, estimates, expect,
ongoing, plan, projected, 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: business objectives and strategic plans, including the
strength of our long-term growth and profit opportunities; operating
strategies; our ability to open and operate additional restaurants in both new
and existing markets profitably, the anticipated number of new restaurants and
the timing of such openings; estimated costs of opening and operating new
restaurants, including general and administrative, marketing and, franchise
development costs; expected future revenues and earnings, comparable and
non-comparable restaurant sales, results of operations, and future restaurant
growth (both company-owned and franchised); anticipated restaurant operating
costs, including commodity and food prices, labor and energy costs and selling,
general and administrative expenses and the success of our advertising and
marketing activities and tactics, including the effect on revenue and guest
counts; anticipated advertising costs and plans to include television
advertising to support 2010 LTO promotions; our ability to attract new guests
and retain loyal guests; any future price increases and their impact on our revenue
and profit; future capital expenditures and the anticipated amounts of such
capital expenditures; our expectation that we will have adequate cash from
operations and credit facility borrowings to reduce our debt and to meet all
future debt service, capital expenditure, including restaurant development, and
working capital requirements in fiscal year 2010; anticipated compliance with
debt covenants; the sufficiency of the supply of commodities and labor pool to
carry on our business; anticipated restaurant closings and related impairment
charges; anticipated interest and tax expense; impact of the adoption of new
accounting standards and our financial and accounting systems and analysis
programs; expectations regarding competition and our competitive advantages;
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 2009 filed with the SEC on February 25, 2010.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
Under our credit agreement we are exposed to market risk from changes
in interest rates on borrowings, which bear interest at one of the following
rates we select: an Alternate Base Rate (ABR), based on the Prime Rate plus
0.00% to 0.25%, or a LIBOR, based on the relevant one, two, three or six-month
LIBOR, at our discretion, plus 0.50% to 1.00%.
The spread, or margin, for ABR and LIBOR loans under the credit
agreement is subject to quarterly adjustment based on our then current leverage
ratio, as defined by the credit agreement.
As of July 11, 2010, we had $85.5 million of borrowings subject to
variable interest rates, after considering the impact of variable-to-fixed
interest rate swaps. 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 $855,000 on an annualized
basis.
Our objective in managing exposure to interest rate changes is to limit
the impact of interest rate changes on earnings and cash flows and to lower
overall borrowing costs. To achieve this objective, we use an interest rate
swap and may use caps to manage our net exposure to interest rate changes
related to our borrowings. As appropriate, on the date derivative contracts are
entered into, we designate derivatives as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value
hedge), or a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability (cash
flow hedge).
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
$50 million of the initial $120 million expired on March 19,
2010, in accordance with its original term, and the remaining $70 million will
expire on March 19, 2011. 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 $70 million, in exchange we will receive interest on a
$70 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 under the guidance the guidance 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. For the twelve and twenty-eight weeks ended
July 11, 2010, respectively, the $278,000 and $774,000 unrealized gain, net of
taxes, on the cash flow hedging instrument is reported in accumulated other
comprehensive 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.
21
Table of Contents
Many of the food products purchased by us are affected by changes in
weather, production, availability, seasonality and other factors outside our
control. In an effort to control some of
this risk, we have entered into some fixed price product purchase commitments
some of which exclude fuel surcharges and other fees. In addition, we believe that almost all of
our food and supplies are available from several sources, which helps to
control food commodity risks.
Item 4.
Controls
and Procedures
Evaluation of Disclosure Controls
and Procedures
The
Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys reports under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to the management of Red Robin Gourmet Burgers, Inc. (Management), including the Companys Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, Management recognizes that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objectives. As a result, the Companys CEO and CFO have
concluded that, based upon the evaluation of disclosure controls and procedures
(as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange
Act), the Companys disclosure controls and procedures were effective as of the
end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
The
Companys Management, with the participation of the CEO and CFO, have evaluated
whether any change in the Companys internal control over financial reporting
occurred during the fiscal quarter ended July 11, 2010. Based on that evaluation, Management
concluded that there has been no change in the Companys internal control over
financial reporting during the fiscal quarter ended July 11, 2010, 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 December 2009, the Company was served with a purported class
action lawsuit,
Marcos R. Moreno vs. Red
Robin International, Inc.
The case was filed in Superior Court
in Ventura County, California and has been removed to Federal District Court
for the Central District of California under the Class Action Fairness Act
of 2005 (CAFA). Red Robin filed its
Answer and Affirmative Defenses on February 10, 2010. The lawsuit
alleges failure to pay wages and overtime, failure to provide rest and meal
breaks or to pay compensation in lieu of such breaks, failure to pay timely
wages on termination, failure to provide accurate wage statements, and unlawful
business practices and unfair competition. Plaintiff is seeking compensatory
and special damages, restitution for unfair competition, premium pay, penalties
and wages under the Labor Code, and attorneys fees, interest and
costs. On March 24, 2010, the Court granted a stay of the case
pending the outcome of a California case currently pending before
the California Supreme Court for review. That case involves
similar allegations regarding rest and meal breaks. It is
anticipated that the California Supreme Court will provide useful guidance
on rest and meal breaks when the opinion in that case is issued.
We believe the
Moreno
suit is
without merit. Although we plan to
vigorously defend against this suit, we cannot predict the outcome of this
lawsuit or whether we may be required to pay damages, settlement costs, legal
costs or other amounts that may not be covered by insurance.
In
the normal course of business, there are various other claims in process,
matters in litigation and other contingencies.
These include claims resulting from employment related claims and claims
from guests or team members alleging illness, injury or other food quality,
health or operational concerns. To date,
no claims of these types of litigation, certain of which are covered by
insurance policies, have had a material effect on us. While it is not possible to predict the
outcome of these other suits, legal proceedings and claims with certainty,
management is of the opinion that adequate provision for potential losses
associated with these other matters has been made in the financial statements
and that the ultimate resolution of these other 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 27, 2009, filed with the Securities and Exchange
Commission on February 25, 2010.
22
Table of
Contents
There
have been no material changes in our Risk Factors disclosed in our 2009 Annual
Report on Form 10-K.
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
3.1
|
|
Certificate
of Designations of Series A Junior Participating Preferred Stock, dated
August 11, 2010. Incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 12, 2010.
|
|
|
|
4.1
|
|
Rights
Agreement by and between Red Robin Gourmet Burgers, Inc. and American
Stock Transfer & Trust Company LLC, dated August 11, 2010.
Incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K filed with the Securities and Exchange Commission on August 12,
2010.
|
|
|
|
10.1
|
|
Form of
Red Robin Gourmet Burgers, Inc.s 2007 Amended and Restated Performance
Incentive Plan Outside Director Restricted Stock Unit Grant
|
|
|
|
10.2
|
|
Letter
Agreement among Red Robin Gourmet Burgers, Inc., Spotlight Advisors, LLC and
Clinton Group, Inc. dated as of August 5, 2010. Incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 5, 2010.
|
|
|
|
10.3
|
|
Employment
Agreement by and between Red Robin Gourmet Burgers, Inc. and Stephen E.
Carley, dated August 11, 2010. Incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 12, 2010.
|
|
|
|
10.4
|
|
Separation
Agreement by and between Red Robin Gourmet Burgers, Inc. and Dennis B.
Mullen, dated August 11, 2010. Incorporated by reference to Exhibit 10.2
to the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 12, 2010.
|
|
|
|
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
|
23
Table of Contents
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
Red Robin Gourmet Burgers, Inc.
|
|
|
|
August 13, 2010
|
|
/s/ Katherine L. Scherping
|
(Date)
|
|
Katherine L. Scherping
|
|
|
Chief Financial Officer
|
24
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