Notes to Condensed Consolidated Financial Statements—Unaudited
(1) The Company and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of April 1, 2018 and December 31, 2017 and for the thirteen week periods ended April 1, 2018 and March 26, 2017 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of April 1, 2018, there were 153 Ruth’s Chris Steak House restaurants, including 77 Company-owned restaurants, two restaurants operating under contractual agreements and 74 franchisee-owned restaurants, including 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Panama, Singapore and Taiwan. All Company-owned restaurants are located in the United States. The Company terminated the franchise agreement of one of the international franchisee-owned Ruth’s Chris Steak House restaurants in the first quarter of fiscal year 2018. A franchisee-owned Ruth’s Chris Steak House restaurant was closed permanently in Ridgeland, MS in March 2018.
The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended April 1, 2018 and March 26, 2017 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended April 1, 2018 and March 26, 2017 each contained thirteen weeks and are referred to herein as the first quarter of fiscal year 2018 and the first quarter of fiscal year 2017, respectively. Fiscal year 2018 is a 52-week year. Fiscal year 2017 was a 53-week year.
Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these condensed consolidated financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the carrying amounts of property and equipment, goodwill, franchise rights, and obligations related to gift cards, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.
Recent Adopted Accounting Standard
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and replaces most existing revenue recognition guidance in GAAP. The Company adopted this new revenue recognition standard on January 1, 2018. See Note 2 for further information about our transition to this new revenue recognition standard.
Recent Accounting Pronouncements for Future Application
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require the Company to adopt these provisions in the first quarter of fiscal year 2019 using a modified retrospective approach. The Company’s restaurants operate under facility lease agreements that provide for material future lease payments. The restaurant facility leases comprise the majority of the Company’s material lease agreements. The Company is currently evaluating the effect of the standard on its ongoing financial reporting, but expects that the adoption of ASU 2016-02 will have a material effect on its consolidated financial statements. The Company expects that the most
7
significant changes relate to 1) the recognition of new right–of–use assets and lease liabilities on the consolidated balance sheet for restaurant facility operating leases; and 2) the derecognition of existing lease liabilities on the c
onsolidated balance sheet related to scheduled rent increases.
(2) Revenue
The Company adopted FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) with an initial date of application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition. The Company applied Topic 606 using the cumulative effect method to contracts that were not completed at January 1, 2018, which resulted in the recognition of the cumulative effect of initially adopting Topic 606 as an adjustment to the opening balance of shareholders’ equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under the Company’s revenue recognition policy in effect prior to the adoption of Topic 606. The Company adopted Topic 606 using the practical expedient in paragraph 606-10-65-1(f)(4), under which the Company aggregated all contract modifications that occurred before January 1, 2018 to identify the satisfied and unsatisfied performance obligations; determine the transaction price, and allocate the transaction price to the satisfied and unsatisfied performance obligations. The details of the significant changes as a result of adopting Topic 606 are provided below.
Franchise Income.
Prior to the adoption of Topic 606, the Company recognized franchise development and opening fees when a franchisee-owned restaurant opened. Under Topic 606, the Company now recognizes franchise development and opening specific fees over the life of the applicable franchise agreements. The Company increased its deferred revenue liability by $3.1 million, increased its deferred tax assets by $746 thousand and decreased the opening balance of shareholders’ equity by $2.3 million for previously recognized franchise development and opening fees that will now be recognized over the life of the applicable franchise agreements. The $3.1 million increase in deferred revenue is included in the following lines of the consolidated balance sheet: $3.0 million in unearned franchise fees and $36 thousand in deferred revenue. The adoption of Topic 606 also impacts the classification of advertising contributions from franchisees. Prior to the adoption of Topic 606, the Company recorded advertising contributions from franchisees as a liability against which specific marketing and advertising costs were charged, which reduced the Company’s marketing expense on the consolidated statements of income. Under Topic 606, advertising contributions from franchisees are classified as franchise income on the consolidated statements of income in fiscal year 2018. The Company recognized $381 thousand of advertising contributions from franchisees in the first quarter of fiscal year 2018. Because of the offsetting adjustments, the reclassification of advertising contributions from franchisees will have no impact to the Company’s net income for fiscal year 2018.
Gift Cards.
Under Topic 606, the Company now reclassifies certain discounts recognized on the sale of gift cards, historically recognized as marketing expense, as a reduction to restaurant sales on the consolidated statements of income. The reclassification of discounts recognized on the sale of gift cards from marketing expense to restaurant sales on the consolidated statements of income totaled $226 thousand in the first quarter of fiscal year 2018. Because of the offsetting adjustments, the reclassification of discounts recognized on the sale of gift cards will have no impact to the Company’s net income for fiscal year 2018.
Impacts on Financial Statements
The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the first quarter of fiscal year 2018.
8
|
|
As Reported
|
|
|
Adjustments
|
|
|
|
Balances without adoption of Topic 606
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,168
|
|
|
$
|
—
|
|
|
|
$
|
2,168
|
|
Accounts receivable, less allowance for doubtful accounts 2018 - $392; 2017 - $361
|
|
|
13,127
|
|
|
|
—
|
|
|
|
|
13,127
|
|
Inventory
|
|
|
8,368
|
|
|
|
—
|
|
|
|
|
8,368
|
|
Prepaid expenses and other
|
|
|
2,476
|
|
|
|
—
|
|
|
|
|
2,476
|
|
Total current assets
|
|
|
26,139
|
|
|
|
—
|
|
|
|
|
26,139
|
|
Property and equipment, net of accumulated depreciation 2018 - $148,338; 2017 -
$144,373
|
|
|
112,474
|
|
|
|
—
|
|
|
|
|
112,474
|
|
Goodwill
|
|
|
36,522
|
|
|
|
—
|
|
|
|
|
36,522
|
|
Franchise rights, net of accumulated amortization 2018 - $858; 2017 - $396
|
|
|
46,360
|
|
|
|
—
|
|
|
|
|
46,360
|
|
Other intangibles, net of accumulated amortization 2018 - $1,235; 2017 - $1,181
|
|
|
3,850
|
|
|
|
—
|
|
|
|
|
3,850
|
|
Deferred income taxes
|
|
|
5,843
|
|
|
|
(746
|
)
|
|
|
|
5,097
|
|
Other assets
|
|
|
623
|
|
|
|
—
|
|
|
|
|
623
|
|
Total assets
|
|
$
|
231,811
|
|
|
$
|
(746
|
)
|
|
|
$
|
231,065
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,384
|
|
|
$
|
—
|
|
|
|
$
|
7,384
|
|
Accrued payroll
|
|
|
13,018
|
|
|
|
—
|
|
|
|
|
13,018
|
|
Accrued expenses
|
|
|
8,687
|
|
|
|
—
|
|
|
|
|
8,687
|
|
Deferred revenue
|
|
|
36,579
|
|
|
|
(36
|
)
|
|
|
|
36,543
|
|
Other current liabilities
|
|
|
8,100
|
|
|
|
—
|
|
|
|
|
8,100
|
|
Total current liabilities
|
|
|
73,768
|
|
|
|
(36
|
)
|
|
|
|
73,732
|
|
Long-term debt
|
|
|
43,000
|
|
|
|
—
|
|
|
|
|
43,000
|
|
Deferred rent
|
|
|
22,406
|
|
|
|
—
|
|
|
|
|
22,406
|
|
Unearned franchise fees
|
|
|
3,034
|
|
|
|
(3,034
|
)
|
|
|
|
—
|
|
Other liabilities
|
|
|
2,014
|
|
|
|
—
|
|
|
|
|
2,014
|
|
Total liabilities
|
|
|
144,222
|
|
|
|
(3,070
|
)
|
|
|
|
141,152
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,789,715
shares issued and outstanding at April 1, 2018, 30,549,283 shares issued and
outstanding at December 31, 2017
|
|
|
298
|
|
|
|
—
|
|
|
|
|
298
|
|
Additional paid-in capital
|
|
|
77,169
|
|
|
|
—
|
|
|
|
|
77,169
|
|
Retained earnings
|
|
|
10,122
|
|
|
|
2,324
|
|
|
|
|
12,446
|
|
Treasury stock, at cost; 71,950 shares at April 1, 2018 and December 31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
Total shareholders' equity
|
|
|
87,589
|
|
|
|
2,324
|
|
|
|
|
89,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
231,811
|
|
|
$
|
(746
|
)
|
|
|
$
|
231,065
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Balances without
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
|
adoption of Topic 606
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
110,364
|
|
|
$
|
226
|
|
(1)
|
|
$
|
110,590
|
|
Franchise income
|
|
|
4,417
|
|
|
|
(439
|
)
|
(2)
|
|
|
3,978
|
|
Other operating income
|
|
|
1,745
|
|
|
|
—
|
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
116,526
|
|
|
|
(213
|
)
|
|
|
|
116,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and beverage costs
|
|
|
31,405
|
|
|
|
—
|
|
|
|
|
31,405
|
|
Restaurant operating expenses
|
|
|
51,679
|
|
|
|
—
|
|
|
|
|
51,679
|
|
Marketing and advertising
|
|
|
3,477
|
|
|
|
(155
|
)
|
(3)
|
|
|
3,322
|
|
General and administrative costs
|
|
|
8,976
|
|
|
|
—
|
|
|
|
|
8,976
|
|
Depreciation and amortization expenses
|
|
|
4,461
|
|
|
|
—
|
|
|
|
|
4,461
|
|
Pre-opening costs
|
|
|
140
|
|
|
|
—
|
|
|
|
|
140
|
|
Total costs and expenses
|
|
|
100,138
|
|
|
|
(155
|
)
|
|
|
|
99,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
16,388
|
|
|
|
(58
|
)
|
|
|
|
16,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(380
|
)
|
|
|
—
|
|
|
|
|
(380
|
)
|
Other
|
|
|
12
|
|
|
|
—
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
16,020
|
|
|
|
(58
|
)
|
|
|
|
15,962
|
|
Income tax expense
|
|
|
2,384
|
|
|
|
(14
|
)
|
(4)
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
13,636
|
|
|
|
(44
|
)
|
|
|
|
13,592
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
|
10
|
|
|
|
—
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,646
|
|
|
$
|
(44
|
)
|
|
|
$
|
13,602
|
|
|
(1)
|
The reclassification of discounts recognized on the sale of gift cards from marketing expense to restaurant sales on the consolidated statements of income totaled $226 thousand in the first quarter of fiscal year 2018.
|
|
(2)
|
The Company recognized $381 thousand of advertising contributions from franchisees in the first quarter of fiscal year 2018 and $58 thousand of franchise development and opening fees.
|
|
(3)
|
The Company recognized $381 thousand of advertising contributions from franchisees in the first quarter of fiscal year 2018 which prior to the adoption of Topic 606 were recognized as a reduction to marketing and advertising expense. Discounts recognized on the sale of gift cards were reclassified from marketing expense to restaurant sales on the consolidated statements of income, which totaled $226 thousand in the first quarter of fiscal year 2018.
|
|
(4)
|
Income tax expense related to the pre-tax income impact of the adjustments is calculated using the Company’s marginal federal and state income tax rates.
|
10
|
|
As Reported
|
|
|
Adjustments
|
|
|
|
Balances without adoption of Topic 606
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,646
|
|
|
$
|
(44
|
)
|
|
|
$
|
13,602
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,461
|
|
|
|
—
|
|
|
|
|
4,461
|
|
Deferred income taxes
|
|
|
(150
|
)
|
|
|
—
|
|
|
|
|
(150
|
)
|
Non-cash interest expense
|
|
|
21
|
|
|
|
—
|
|
|
|
|
21
|
|
Debt issuance costs written-off
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
Amortization of below market lease
|
|
|
20
|
|
|
|
—
|
|
|
|
|
20
|
|
Stock-based compensation expense
|
|
|
1,841
|
|
|
|
—
|
|
|
|
|
1,841
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,500
|
|
|
|
—
|
|
|
|
|
8,500
|
|
Inventories
|
|
|
320
|
|
|
|
—
|
|
|
|
|
320
|
|
Prepaid expenses and other
|
|
|
204
|
|
|
|
—
|
|
|
|
|
204
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
|
(8,771
|
)
|
|
|
—
|
|
|
|
|
(8,771
|
)
|
Deferred revenue
|
|
|
(6,055
|
)
|
|
|
58
|
|
|
|
|
(5,997
|
)
|
Deferred rent
|
|
|
355
|
|
|
|
—
|
|
|
|
|
355
|
|
Other liabilities
|
|
|
1,307
|
|
|
|
(14
|
)
|
|
|
|
1,293
|
|
Net cash provided by operating activities
|
|
|
15,699
|
|
|
|
—
|
|
|
|
|
15,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,505
|
)
|
|
|
—
|
|
|
|
|
(5,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(12,077
|
)
|
|
|
—
|
|
|
|
|
(12,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
(1,883
|
)
|
|
|
—
|
|
|
|
$
|
(1,883
|
)
|
Summary of significant revenue policies
Restaurant Sales.
Restaurant sales consist of food and beverage sales by Company-owned restaurants. Revenue from restaurant sales is recognized when food and beverage products are sold. Restaurant sales are presented net of sales taxes and discounts. Gratuities remitted by customers for the benefit of restaurant staff are not included in either revenues or operating expenses. Restaurant sales are primarily influenced by total operating weeks in the relevant period and comparable restaurant sales growth. Total operating weeks is the total number of Company-owned restaurants multiplied by the number of weeks each is in operation during the relevant period. Comparable restaurant sales growth reflects the change in year-over-year or quarter-over-quarter, as applicable, sales for the comparable restaurants. The Company defines comparable restaurants to be those Company-owned restaurants in operation for not less than eighteen months prior to the beginning of the fiscal year.
Franchise Income.
Franchise income includes (1) royalty income and (2) franchise and development fees charged to franchisees. Franchise royalties consist of 5.0% of adjusted gross sales from each franchisee-owned restaurant. In addition, our more recent franchise agreements require up to a 1.0% of adjusted gross sales advertising fee to be paid by the franchisee, which is applied to national advertising expenditures. Effective in fiscal year 2018, both the 5.0% royalty and the sales based advertising fees are included in franchise income on the consolidated statements of income. Prior to the adoption of Topic 606, the Company recorded advertising contributions from franchisees as a liability against which specific marketing and advertising costs were charged, which reduced the Company’s marketing expense on the consolidated statements of income. Effective with fiscal year 2018, the Company recognizes franchise development and opening specific fees over the life of the applicable franchise agreements. Prior to the adoption of Topic 606, the Company recognized franchise development and opening fees when a franchisee-owned restaurant opened.
Other Operating Income.
Other operating income consists primarily of breakage income associated with gift cards, and also includes fees earned from management agreements, banquet-related guarantee and services revenue and other incidental guest fees. The Company’s accounting method for recognizing gift card breakage revenue is the redemption method. Under the redemption method, gift card breakage revenue is recognized and the gift card liability is derecognized for unredeemed gift cards in proportion to actual gift card redemptions based on historical breakage rates.
Deferred Revenue.
Deferred revenue primarily includes (1) the Company’s liability for gift cards that have been sold but not yet redeemed and (2) the Company’s liability for franchise development and opening fees that will be recognized over the life of the applicable franchise agreements. When gift cards are redeemed (typically within five years), the Company recognizes restaurant sales and reduces the deferred revenue liability. A portion of gift cards redeemed are used by customers to pay for sales taxes and
11
gratuities,
neither of which results in Company restaurant sales. Company issued gift cards redeemed at franchisee-owned restaurants result in royalty based franchise income and reduce the deferred revenue liability. The expected redemption value of gift cards repr
esents the full consideration received for all gift cards issued less the amount the Company has recognized as other operating income for gift cards that are not expected to be redeemed (gift card breakage).
In the following tables, the Company’s revenue is disaggregated by major component for each category on the consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended April 1, 2018:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
110,364
|
|
|
$
|
—
|
|
|
$
|
110,364
|
|
Franchise income
|
|
|
3,703
|
|
|
|
714
|
|
|
|
4,417
|
|
Other operating income
|
|
|
1,745
|
|
|
|
—
|
|
|
|
1,745
|
|
Total revenue
|
|
$
|
115,812
|
|
|
$
|
714
|
|
|
$
|
116,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended March 26, 2017:
|
|
Domestic
|
|
|
International
|
|
|
Total Revenue
|
|
Restaurant sales
|
|
$
|
99,455
|
|
|
$
|
—
|
|
|
$
|
99,455
|
|
Franchise income
|
|
|
3,636
|
|
|
|
754
|
|
|
|
4,390
|
|
Other operating income
|
|
|
1,693
|
|
|
|
—
|
|
|
|
1,693
|
|
Total revenue
|
|
$
|
104,784
|
|
|
$
|
754
|
|
|
$
|
105,538
|
|
The following table provides information about receivables and deferred revenue liabilities from contracts with customers (in thousands).
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable, less allowance for doubtful accounts 2018 - $392; 2017 - $361
|
|
$
|
12,001
|
|
|
$
|
21,130
|
|
Deferred revenue
|
|
$
|
36,579
|
|
|
$
|
42,596
|
|
Unearned franchise fees
|
|
$
|
3,034
|
|
|
$
|
—
|
|
Significant changes in the deferred revenue balance during the period are presented in the following table (in thousands).
|
|
Deferred
|
|
|
Unearned
|
|
|
|
Revenue
|
|
|
Franchise Fees
|
|
Balance at December 31, 2017
|
|
$
|
42,596
|
|
|
$
|
—
|
|
Increase due to the cumulative effect of adopting Topic 606
|
|
|
36
|
|
|
|
3,034
|
|
Decreases in the beginning balance from gift card redemptions
|
|
|
(11,580
|
)
|
|
|
—
|
|
Increases due to proceeds received, excluding amounts recognized during the period
|
|
|
5,379
|
|
|
|
—
|
|
Other
|
|
|
148
|
|
|
|
—
|
|
Balance at April 1, 2018
|
|
$
|
36,579
|
|
|
$
|
3,034
|
|
The projected recognition of revenue related to deferred franchise development and opening fees is as follows (in thousands).
|
|
Balance as of
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
Fiscal Years
|
|
|
More Than
|
|
|
|
January 1, 2018
|
|
|
2018
|
|
|
2019
|
|
|
2020-2022
|
|
|
5 Years
|
|
Franchise development and opening fees
|
|
$
|
3,320
|
|
|
$
|
228
|
|
|
$
|
228
|
|
|
$
|
685
|
|
|
$
|
2,179
|
|
12
(3) Hawaii Acquisition
On December 12, 2017 the Company completed the acquisition of substantially all of the assets of six franchisee-owned Ruth’s Chris Steak House restaurants located in Hawaii (the “Hawaiian Restaurants”) for a cash purchase price of $35.4 million. The acquisition was funded with borrowings under the Company’s senior credit facility.
The assets and liabilities of the Hawaiian Restaurants were recorded at their respective fair values as of the date of the acquisition. The fair values recorded for the assets of the Hawaiian Restaurants, including working capital, restaurant related fixed assets, leasehold improvements, franchise rights and goodwill, are based on preliminary valuations and are subject to adjustments as additional information is obtained. The Company is in the process of confirming the fair values using a combination of internal analysis and third party valuations. Once the process is complete, any adjustments to fair value of assets acquired or liabilities assumed may also result in adjustments to goodwill. The preliminary allocation of the purchase price did not change during the first thirteen weeks of fiscal year 2018.
Goodwill was measured as the excess of the consideration transferred over the net of the amounts assigned the identifiable assets acquired and the liabilities assumed as of the acquisition date. The goodwill for the Hawaiian Restaurants, which is included with the goodwill for the reporting unit identified as the steakhouse operating segment, will be reviewed for potential impairment annually or more frequently if triggering events are detected. Reacquired franchise rights will be amortized over the remaining terms of the related franchise agreements, not including renewal options. Property and equipment will be depreciated over a period of three to twenty years.
As a result of the acquisition and related integration efforts, we incurred expenses of approximately $452 thousand during the first thirteen weeks of fiscal year 2018, which are included in general and administrative expenses in the Company’s consolidated statements of income.
(4) Long-term Debt
Long-term debt consists of the following (in thousands):
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
43,000
|
|
|
$
|
50,000
|
|
Less current maturities
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
43,000
|
|
|
$
|
50,000
|
|
As of April 1, 2018, the Company had $43.0 million of outstanding indebtedness under its senior credit facility with approximately $42.8 million of borrowings available, net of outstanding letters of credit of approximately $4.2 million. As of April 1, 2018, the weighted average interest rate on the Company’s outstanding debt was 3.3% and the weighted average interest rate on its outstanding letters of credit was 1.6%. In addition, the fee on the Company’s senior credit facility was 0.2%.
On February 2, 2017, the Company entered into a credit agreement with Wells Fargo Bank, National Association as administrative agent, and certain other lenders (the Credit Agreement). The Credit Agreement provides for a revolving credit facility of $90.0 million with a $5.0 million subfacility for letters of credit and a $5.0 million subfacility for swingline loans. Subject to the satisfaction of certain conditions and lender consent, the revolving credit facility may be increased up to a maximum of $150.0 million. The Credit Agreement has a maturity date of February 2, 2022. At the Company’s option, revolving loans may bear interest at (i) LIBOR, plus an applicable margin or (ii) the highest of (a) the rate publicly announced by Wells Fargo as its prime rate, (b) the average published federal funds rate in effect on such day plus 0.50% and (c) one month LIBOR plus 1.00%, plus an applicable margin. The applicable margin is based on the Company’s actual leverage ratio, ranging (a) from 1.50% to 2.25% above the applicable LIBOR rate or (b) at the Company’s option, from 0.50% to 1.25% above the applicable base rate.
The Credit Agreement contains customary representations and affirmative and negative covenants (including limitations on indebtedness and liens) as well as financial covenants requiring a minimum fixed coverage charge ratio and limiting the Company’s consolidated leverage ratio. The Credit Agreement also contains events of default customary for credit facilities of this type (with customary grace periods, as applicable), including nonpayment of principal or interest when due; material incorrectness of representations and warranties when made; breach of covenants; bankruptcy and insolvency; unsatisfied ERISA obligations; unstayed material judgment beyond specified periods; default under other material indebtedness; and certain changes of control of the Company. If any event of default occurs and is not cured within the applicable grace period, or waived, the outstanding loans may be accelerated by lenders holding a majority of the commitments under the Credit Agreement and the lenders’ commitments may be terminated. The obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries (the Guarantors), and
13
are secured by a lien on substantially all of t
he Company’s personal property assets other than any equity interest in current and future subsidiaries of the Company.
(5) Shareholders’ Equity
In October 2017, our Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $60 million of outstanding common stock from time to time. The new share repurchase program replaces the previous share repurchase program announced in April 2016, which was terminated. During the first thirteen weeks of fiscal year 2018, no shares were repurchased. As of April 1, 2018, $50.7 million remained available for future purchases under the new share repurchase program.
The Company’s Board of Directors declared the following dividends during the periods presented (amounts in thousands, except per share amounts):
Declaration Date
|
|
Dividend per Share
|
|
|
Record Date
|
|
Total Amount
|
|
|
Payment Date
|
Fiscal Year 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
February 21, 2018
|
|
$
|
0.11
|
|
|
March 8, 2018
|
|
$
|
3,390
|
|
|
March 22, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
February 17, 2017
|
|
$
|
0.09
|
|
|
February 23, 2017
|
|
$
|
2,862
|
|
|
March 9, 2017
|
Subsequent to the end of the first quarter of fiscal year 2018, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.11 per common and restricted share, or approximately $3.4 million in the aggregate based on the number of shares currently outstanding, payable on June 7, 2018 to stockholders of record as of the close of business on May 24, 2018.
Outstanding unvested restricted stock is not included in common stock outstanding amounts. Restricted stock outstanding as of April 1, 2018 aggregated 1,149,693 shares.
(6) Fair Value Measurements
The carrying amounts of cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to their short duration. Borrowings classified as long-term debt as of April 1, 2018 and December 31, 2017 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying amount of this debt is a reasonable estimate of its fair value (Level 2).
The Company did not have any non-financial assets measured at fair value on a non-recurring basis as of April 1, 2018. The Company’s non-financial assets measured at fair value on a non-recurring basis as of December 31, 2017 were as follows:
|
|
Fair Value as of December 31, 2017
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Total Losses on Impairment
|
|
Long-lived assets held for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,904
|
|
(7) Segment Information
The Company has two reportable segments – the Company-owned steakhouse segment and the franchise operations segment. The Company does not rely on any major customers as a source of revenue. The Company-owned Ruth’s Chris Steak House restaurants, all of which are located in North America, operate within the full-service dining industry, providing similar products to similar customers. Revenues are derived principally from food and beverage sales. As of April 1, 2018, (i) the Company-owned steakhouse restaurant segment included 77 Ruth’s Chris Steak House restaurants and two Ruth’s Chris Steak House restaurants operating under contractual agreements and (ii) the franchise operations segment included 74 franchisee-owned Ruth’s Chris Steak House restaurants. Segment profits for the Company-owned steakhouse restaurant segments equal segment revenues less segment expenses. Segment revenues for the Company-owned steakhouse restaurants include restaurant sales, management agreement income and other restaurant income. Gift card breakage revenue is not allocated to operating segments. Not all operating expenses are allocated to operating segments. Segment expenses for the Company-owned steakhouse segment include food and beverage costs and restaurant operating expenses. No other operating costs are allocated to the Company-owned steakhouse segment for the purpose of determining segment profits because such costs are not directly related to the operation of individual restaurants. The accounting policies applicable to each segment are consistent with the policies used to prepare the consolidated financial statements. The profit of the franchise operations segment equals franchise income, which consists of franchise royalty fees and franchise opening fees. No costs are allocated to the franchise operations segment.
14
Segment information related to the Company’s two reportable business segments follows (in thousands):
|
|
13 Weeks Ended
|
|
|
|
April 1,
|
|
|
March 26,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
111,203
|
|
|
$
|
100,174
|
|
Franchise operations
|
|
|
4,417
|
|
|
|
4,390
|
|
Unallocated other revenue and revenue discounts
|
|
|
906
|
|
|
|
974
|
|
Total revenues
|
|
$
|
116,526
|
|
|
$
|
105,538
|
|
|
|
|
|
|
|
|
|
|
Segment profits:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
28,119
|
|
|
$
|
26,148
|
|
Franchise operations
|
|
|
4,417
|
|
|
|
4,390
|
|
Total segment profit
|
|
|
32,536
|
|
|
|
30,538
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating income
|
|
|
906
|
|
|
|
974
|
|
Marketing and advertising expenses
|
|
|
(3,477
|
)
|
|
|
(2,446
|
)
|
General and administrative costs
|
|
|
(8,976
|
)
|
|
|
(8,137
|
)
|
Depreciation and amortization expenses
|
|
|
(4,461
|
)
|
|
|
(3,505
|
)
|
Pre-opening costs
|
|
|
(140
|
)
|
|
|
(1,179
|
)
|
Interest expense, net
|
|
|
(380
|
)
|
|
|
(179
|
)
|
Other income
|
|
|
12
|
|
|
|
24
|
|
Income from continuing operations before income tax
expense
|
|
$
|
16,020
|
|
|
$
|
16,090
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
4,879
|
|
|
$
|
6,873
|
|
Corporate assets
|
|
|
626
|
|
|
|
297
|
|
Total capital expenditures
|
|
$
|
5,505
|
|
|
$
|
7,170
|
|
|
|
April 1,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Company-owned steakhouse restaurants
|
|
$
|
220,545
|
|
|
$
|
223,354
|
|
Franchise operations
|
|
|
2,401
|
|
|
|
3,021
|
|
Corporate assets - unallocated
|
|
|
3,022
|
|
|
|
10,774
|
|
Deferred income taxes - unallocated
|
|
|
5,843
|
|
|
|
4,947
|
|
Total assets
|
|
$
|
231,811
|
|
|
$
|
242,096
|
|
(8) Stock-Based Employee Compensation
Under the Amended and Restated 2005 Equity Incentive Plan, at April 1, 2018, there were 12,190 shares of common stock issuable upon exercise of currently outstanding options, 1,149,693 currently outstanding unvested restricted stock awards and 1,702,377 shares available for future grants. During the first thirteen weeks of fiscal year 2018, the Company issued 173,160 restricted stock awards to directors, officers and other employees of the Company. Of the 173,160 restricted stock awards issued during the first thirteen weeks of fiscal year 2018, 27,576 shares will vest in fiscal year 2019, 84,508 shares will vest in fiscal year 2020, 46,276 shares will vest in fiscal year 2021, and 14,800 will vest in 2023. Total stock compensation expense recognized during the first thirteen weeks of fiscal years 2018 and 2017 was $1.8 million and $1.6 million, respectively.
15
(9) Income Taxes
Income tax expense differs from amounts computed by applying the federal statutory income tax rate to income from continuing operations before income taxes as follows:
|
|
13 Weeks Ended
|
|
|
|
April 1,
|
|
|
March 26,
|
|
|
|
2018
|
|
|
2017
|
|
Income tax expense at statutory rates
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
3.2
|
%
|
|
|
3.0
|
%
|
Federal employment tax credits
|
|
|
(9.2
|
%)
|
|
|
(6.8
|
%)
|
Other
|
|
|
(0.1
|
%)
|
|
|
(0.1
|
%)
|
Effective tax rate
|
|
|
14.9
|
%
|
|
|
31.1
|
%
|
The Tax Cuts and Jobs Act (the “2017 Tax Act”), signed into law on December 22, 2017, significantly revised several aspects of U.S. tax law. Effective January 1, 2018, the 2017 Tax Act reduced the statutory corporate tax rate from 35% to 21%. The reduction in the statutory corporate tax rate is the principal driver for the decrease to the Company’s continuing operations quarterly effective tax rate illustrated above.
The Company utilizes the federal FICA tip credit to reduce its periodic federal income tax expense. A restaurant company employer may claim a credit against the company’s federal income taxes for FICA taxes paid on certain tip wages (the FICA tip credit). The credit against income tax liability is for the full amount of eligible FICA taxes. Employers cannot deduct from taxable income the amount of FICA taxes taken into account in determining the credit.
The Company files consolidated and separate income tax returns in the United States federal jurisdiction and many state jurisdictions, respectively. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for years before 2013.
(10) Earnings Per Share
The following table sets forth the computation of earnings per share (amounts in thousands, except share and per share amounts):
|
|
13 Weeks Ended
|
|
|
|
April 1,
|
|
|
March 26,
|
|
|
|
2018
|
|
|
2017
|
|
Income from continuing operations
|
|
$
|
13,636
|
|
|
$
|
11,085
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
|
10
|
|
|
|
(37
|
)
|
Net income
|
|
$
|
13,646
|
|
|
$
|
11,048
|
|
Shares:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding - basic
|
|
|
29,689,870
|
|
|
|
30,575,224
|
|
Weighted average number of common shares
outstanding - diluted
|
|
|
30,384,180
|
|
|
|
31,253,186
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.46
|
|
|
$
|
0.36
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Basic earnings per common share
|
|
$
|
0.46
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.35
|
|
Discontinued operations
|
|
|
-
|
|
|
|
—
|
|
Diluted earnings per common share
|
|
$
|
0.45
|
|
|
$
|
0.35
|
|
Diluted earnings per share for the first quarter of fiscal year 2018 excludes restricted shares of 1,185 which were outstanding during the period but were anti-dilutive and had a weighted average exercise price of $0 per share. Diluted earnings per share for the first quarter of fiscal year 2017 excludes stock options and restricted shares of 4,641 which were outstanding during the period but were anti-dilutive and had a weighted average exercise price of $19.51.
16
(11) Commitments and Contingencies
The Company is subject to various claims, possible legal actions and other matters arising in the normal course of business. Management does not expect disposition of these other matters to have a material adverse effect on the financial position, results of operations or liquidity of the Company. The Company expenses legal fees as incurred.
The legislation and regulations related to tax and unclaimed property matters are complex and subject to varying interpretations by both government authorities and taxpayers. The Company remits a variety of taxes and fees to various governmental authorities, including excise taxes, property taxes, sales and use taxes, and payroll taxes. The taxes and fees remitted by the Company are subject to review and audit by the applicable governmental authorities which could assert claims for additional assessments. Although management believes that the tax positions are reasonable and consequently there are no accrued liabilities for claims which may be asserted, various taxing authorities may challenge certain of the positions taken by the Company which may result in additional liability for taxes and interest. These tax positions are reviewed periodically based on the availability of new information, the lapsing of applicable statutes of limitations, the conclusion of tax audits, the identification of new tax contingencies, or the rendering of relevant court decisions. An unfavorable resolution of assessments by a governmental authority could negatively impact the Company’s results of operations and cash flows in future periods.
The Company is subject to unclaimed or abandoned property (escheat) laws which require the Company to turn over to certain state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. The Company is subject to audit by individual U.S. states with regard to its escheatment practices.
The Company currently buys a majority of its beef from two suppliers. Although there are a limited number of beef suppliers, management believes that other suppliers could provide similar product on comparable terms. A change in suppliers, however, could cause supply shortages and a possible loss of sales, which would affect operating results adversely.
The Company sold eighteen Mitchell’s Fish Markets and three Mitchell’s/Cameron’s Steakhouse restaurants (Mitchell’s Restaurants) on January 21, 2015 to Landry’s Inc. and Mitchell’s Entertainment, Inc., an affiliate of Landry’s Inc. (together with Landry’s Inc., Landry’s). The Company guaranteed Landry’s lease obligations aggregating $28.9 million under seven of the Mitchell’s Restaurant’s leases. The Company did not record a financial accounting liability for the lease guarantees, because the likelihood of Landry’s defaulting on the lease agreements was deemed to be remote. Landry’s also indemnified the Company in the event of a default under any of the leases.