Quarterly Report (10-q)

Date : 05/02/2019 @ 2:39PM
Source : Edgar (US Regulatory)
Stock : Texas Roadhouse Inc (TXRH)
Quote : 57.45  -0.99 (-1.69%) @ 3:28PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 26, 2019

 

OR

 

☐  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 000-50972

 

Texas Roadhouse, Inc.

(Exact name of registrant specified in its charter)

 

Delaware

 

20-1083890

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification Number)

 

6040 Dutchmans Lane, Suite 200

Louisville, Kentucky 40205

(Address of principal executive offices) (Zip Code)

 

(502) 426-9984

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

TXRH

Nasdaq Global Select Market

 

 

Indicate by check mark whether 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   ☒  No  ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   ☒  No  ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☒

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☐

 

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐  No  ☒.

 

The number of shares of common stock outstanding were 71,831,927 on April 24, 2019.

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  

 

 

 

 

 

Item 1 — Financial Statements (Unaudited) — Texas Roadhouse, Inc. and Subsidiaries  

 

3

Condensed Consolidated Balance Sheets — March 26, 2019 and December 25, 2018  

 

3

Condensed Consolidated Statements of Income and Comprehensive Income — For the 13 Weeks Ended March 26, 2019 and March 27, 2018  

 

4

Condensed Consolidated Statement of Stockholders’ Equity —  For the 13 Weeks Ended March 26, 2019 and March 27, 2018  

 

5

Condensed Consolidated Statements of Cash Flows — For the 13 Weeks Ended March  26, 2019 and March  27, 2018  

 

6

Notes to Condensed Consolidated Financial Statements  

 

7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

15

Item 3 — Quantitative and Qualitative Disclosures About Market Risk  

 

28

Item 4 — Controls and Procedures  

 

29

 

 

 

PART II. OTHER INFORMATION  

 

 

 

 

 

Item 1 — Legal Proceedings  

 

30

Item 1A — Risk Factors  

 

30

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds  

 

30

Item 3 — Defaults Upon Senior Securities  

 

30

Item 4 — Mine Safety Disclosures  

 

30

Item 5 — Other Information  

 

30

Item 6 — Exhibits  

 

31

 

 

 

Signatures  

 

32

 

 

2


 

PART I — FINANCIAL INFORMATIO N

 

ITEM 1 — FINANCIAL STATEMENT S

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Balance Sheet s

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

    

March 26, 2019

    

December 25, 2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

252,107

 

$

210,125

Receivables, net of allowance for doubtful accounts of $30 at March 26, 2019 and $34 at December 25, 2018

 

 

34,685

 

 

92,114

Inventories, net

 

 

17,521

 

 

18,827

Prepaid income taxes

 

 

 

 

7,569

Prepaid expenses

 

 

18,685

 

 

16,384

Total current assets

 

 

322,998

 

 

345,019

Property and equipment, net of accumulated depreciation of $623,515 at March 26, 2019 and $602,451 at December 25, 2018

 

 

971,135

 

 

956,676

Operating lease right-of-use asset

 

 

472,122

 

 

Goodwill

 

 

123,220

 

 

123,220

Intangible assets, net of accumulated amortization of $13,664 at March 26, 2019 and $13,416 at December 25, 2018

 

 

1,711

 

 

1,959

Other assets

 

 

46,764

 

 

42,402

Total assets

 

$

1,937,950

 

$

1,469,276

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of operating lease liabilities

 

$

15,955

 

$

Accounts payable

 

 

65,413

 

 

62,060

Deferred revenue-gift cards

 

 

128,613

 

 

192,242

Accrued wages

 

 

37,290

 

 

34,159

Income taxes payable

 

 

8,631

 

 

Accrued taxes and licenses

 

 

24,859

 

 

24,631

Dividends payable

 

 

21,548

 

 

17,904

Other accrued liabilities

 

 

60,141

 

 

54,146

Total current liabilities

 

 

362,450

 

 

385,142

Operating lease liabilities, net of current portion

 

 

506,973

 

 

Restricted stock and other deposits

 

 

8,434

 

 

7,703

Deferred rent

 

 

 

 

48,079

Deferred tax liabilities, net

 

 

15,298

 

 

17,268

Other liabilities

 

 

56,648

 

 

50,376

Total liabilities

 

 

949,803

 

 

508,568

Texas Roadhouse, Inc. and subsidiaries stockholders’ equity:

 

 

 

 

 

 

Preferred stock ($0.001 par value, 1,000,000 shares authorized; no shares issued or outstanding)

 

 

 

 

Common stock ($0.001 par value, 100,000,000 shares authorized, 71,827,836 and 71,617,510 shares issued and outstanding at March 26, 2019 and December 25, 2018, respectively)

 

 

72

 

 

72

Additional paid-in-capital

 

 

259,050

 

 

257,388

Retained earnings

 

 

714,502

 

 

688,337

Accumulated other comprehensive loss

 

 

(131)

 

 

(228)

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

 

973,493

 

 

945,569

Noncontrolling interests

 

 

14,654

 

 

15,139

Total equity

 

 

988,147

 

 

960,708

Total liabilities and equity

 

$

1,937,950

 

$

1,469,276

See accompanying notes to condensed consolidated financial statements.

3


 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Incom e

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

    

March 26, 2019

    

March 27, 2018

Revenue:

 

 

 

 

 

 

Restaurant and other sales

 

$

685,117

 

$

622,402

Franchise royalties and fees

 

 

5,491

 

 

5,303

Total revenue

 

 

690,608

 

 

627,705

Costs and expenses:

 

 

 

 

 

 

Restaurant operating costs (excluding depreciation and amortization shown separately below):

 

 

 

 

 

 

Cost of sales

 

 

223,712

 

 

202,786

Labor

 

 

223,880

 

 

196,030

Rent

 

 

13,128

 

 

11,851

Other operating

 

 

101,802

 

 

92,378

Pre-opening

 

 

3,868

 

 

5,044

Depreciation and amortization

 

 

27,773

 

 

24,484

Impairment and closure

 

 

17

 

 

86

General and administrative

 

 

35,983

 

 

30,175

Total costs and expenses

 

 

630,163

 

 

562,834

Income from operations

 

 

60,445

 

 

64,871

Interest income (expense), net

 

 

754

 

 

(359)

Equity income from investments in unconsolidated affiliates

 

 

113

 

 

324

Income before taxes

 

 

61,312

 

 

64,836

Provision for income taxes

 

 

9,119

 

 

8,457

Net income including noncontrolling interests

 

 

52,193

 

 

56,379

Less: Net income attributable to noncontrolling interests

 

 

1,803

 

 

1,838

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

50,390

 

$

54,541

Other comprehensive income, net of tax:

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax of ($33) and ($48), respectively

 

 

97

 

 

110

Total other comprehensive income, net of tax

 

 

97

 

 

110

Total comprehensive income

 

$

50,487

 

$

54,651

Net income per common share attributable to Texas Roadhouse, Inc. and subsidiaries:

 

 

 

 

 

 

Basic

 

$

0.70

 

$

0.76

Diluted

 

$

0.70

 

$

0.76

Weighted average shares outstanding:

 

 

 

 

 

 

Basic

 

 

71,753

 

 

71,333

Diluted

 

 

72,187

 

 

71,805

Cash dividends declared per share

 

$

0.30

 

$

0.25

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equit y

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the 13 Weeks Ended March 26, 2019

 

    

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

Total Texas

    

 

 

    

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Roadhouse, Inc.

 

 

 

 

 

 

 

 

 

 

 

Par

 

Paid-in-

 

Retained

 

Comprehensive

 

and

 

Noncontrolling

 

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Loss

 

Subsidiaries

 

Interests

 

Total

 

Balance, December 25, 2018

 

71,617,510

 

$

72

 

$

257,388

 

$

688,337

 

$

(228)

 

$

945,569

 

$

15,139

 

$

960,708

 

Net income

 

 

 

 

 

 

 

50,390

 

 

 

 

50,390

 

 

1,803

 

 

52,193

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

97

 

 

97

 

 

 

 

97

 

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,615)

 

 

(1,615)

 

Acquisition of noncontrolling interest and other

 

 

 

 

 

(70)

 

 

 

 

 

 

(70)

 

 

(673)

 

 

(743)

 

Dividends declared ($0.30 per share)

 

 

 

 

 

 

 

(21,547)

 

 

 

 

(21,547)

 

 

 

 

(21,547)

 

Shares issued under share-based compensation plans including tax effects

 

330,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(120,302)

 

 

 

 

(7,400)

 

 

 

 

 

 

(7,400)

 

 

 

 

(7,400)

 

Cumulative effect of adoption of ASC 842, Leases, net of tax

 

 

 

 

 

 

 

(2,678)

 

 

 

 

(2,678)

 

 

 

 

(2,678)

 

Share-based compensation

 

 

 

 

 

9,132

 

 

 

 

 

 

9,132

 

 

 

 

9,132

 

Balance, March 26, 2019

 

71,827,836

 

$

72

 

$

259,050

 

$

714,502

 

$

(131)

 

$

973,493

 

$

14,654

 

$

988,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the 13 Weeks Ended March 27, 2018

 

    

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

Total Texas

    

 

 

    

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Roadhouse, Inc.

 

 

 

 

 

 

 

 

 

 

 

Par

 

Paid-in-

 

Retained

 

Comprehensive

 

and

 

Noncontrolling

 

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

(Loss) Income

 

Subsidiaries

 

Interests

 

Total

 

Balance, December 26, 2017

 

71,168,897

 

$

71

 

$

236,548

 

$

602,499

 

$

(39)

 

$

839,079

 

$

12,312

 

$

851,391

 

Net income

 

 

 

 

 

 

 

54,541

 

 

 

 

54,541

 

 

1,838

 

 

56,379

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

110

 

 

110

 

 

 

 

110

 

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,507)

 

 

(1,507)

 

Dividends declared ($0.25 per share)

 

 

 

 

 

 

 

(17,853)

 

 

 

 

(17,853)

 

 

 

 

(17,853)

 

Shares issued under share-based compensation plans including tax effects

 

390,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(145,324)

 

 

 

 

(8,252)

 

 

 

 

 

 

(8,252)

 

 

 

 

(8,252)

 

Cumulative effect of adoption of ASC 606, Revenue from Contracts with Customers , net of tax

 

 

 

 

 

 

 

(878)

 

 

 

 

(878)

 

 

 

 

(878)

 

Share-based compensation

 

 

 

 

 

7,475

 

 

 

 

 

 

7,475

 

 

 

 

7,475

 

Balance, March 27, 2018

 

71,414,201

 

$

71

 

$

235,771

 

$

638,309

 

$

71

 

$

874,222

 

$

12,643

 

$

886,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

    

March 26, 2019

    

March 27, 2018

Cash flows from operating activities:

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

52,193

 

$

56,379

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

27,773

 

 

24,484

Deferred income taxes

 

 

(1,094)

 

 

3,349

Loss on disposition of assets

 

 

1,383

 

 

1,420

Impairment and closure costs

 

 

17

 

 

Equity income from investments in unconsolidated affiliates

 

 

(113)

 

 

(324)

Distributions of income received from investments in unconsolidated affiliates

 

 

171

 

 

181

Provision for doubtful accounts

 

 

(4)

 

 

35

Share-based compensation expense

 

 

9,132

 

 

7,475

Changes in operating working capital:

 

 

 

 

 

 

Receivables

 

 

57,433

 

 

50,401

Inventories

 

 

1,306

 

 

(160)

Prepaid expenses

 

 

(2,301)

 

 

(2,252)

Other assets

 

 

(4,739)

 

 

(2,770)

Accounts payable

 

 

2,830

 

 

3,170

Deferred revenue—gift cards

 

 

(63,629)

 

 

(51,976)

Accrued wages

 

 

3,131

 

 

4,511

Prepaid income taxes and income taxes payable

 

 

16,200

 

 

5,071

Accrued taxes and licenses

 

 

228

 

 

1,559

Other accrued liabilities

 

 

3,819

 

 

3,393

Operating lease right-of-use assets and lease liabilities

 

 

1,479

 

 

Deferred rent

 

 

 

 

1,083

Other liabilities

 

 

6,200

 

 

1,778

Net cash provided by operating activities

 

 

111,415

 

 

106,807

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures—property and equipment

 

 

(42,044)

 

 

(35,307)

Net cash used in investing activities

 

 

(42,044)

 

 

(35,307)

Cash flows from financing activities:

 

 

 

 

 

 

Distributions to noncontrolling interest holders

 

 

(1,615)

 

 

(1,507)

Acquisition of noncontrolling interest

 

 

(743)

 

 

Proceeds from restricted stock and other deposits, net

 

 

273

 

 

117

Indirect repurchase of shares for minimum tax withholdings

 

 

(7,400)

 

 

(8,252)

Principal payments on long-term debt and finance lease obligation

 

 

 

 

(2)

Dividends paid to shareholders

 

 

(17,904)

 

 

(14,945)

Net cash used in financing activities

 

 

(27,389)

 

 

(24,589)

Net increase in cash and cash equivalents

 

 

41,982

 

 

46,911

Cash and cash equivalents—beginning of period

 

 

210,125

 

 

150,918

Cash and cash equivalents—end of period

 

$

252,107

 

$

197,829

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

164

 

$

264

Income taxes (refunded) paid

 

$

(5,987)

 

$

36

Capital expenditures included in current liabilities

 

$

10,489

 

$

8,132

 

See accompanying notes to condensed consolidated financial statements.

6


 

 

Texas Roadhouse, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(tabular amounts in thousands, except share and per share data)

(unaudited)

(1)   Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Texas Roadhouse, Inc.  ("TRI"), our wholly-owned subsidiaries and subsidiaries in which we have a controlling interest (collectively the "Company," "we," "our" and/or "us") as of March 26, 2019 and December 25, 2018 and for the 13 weeks ended March 26, 2019 and March 27, 2018.  

 

As of March 26, 2019, we owned and operated 495 restaurants and franchised an additional 93 restaurants in 49 states and ten foreign countries.  Of the 495 company restaurants that were operating at March 26, 2019, 475 were wholly-owned and 20 were majority-owned.  Of the 93 franchise restaurants, 69 were domestic restaurants and 24 were international restaurants.

 

As of March 27, 2018, we owned and operated 469 restaurants and franchised an additional 89 restaurants in 49 states and eight foreign countries.  Of the 469 company restaurants that were operating at March 27, 2018, 451 were wholly-owned and 18 were majority-owned.  Of the 89 franchise restaurants, 70 were domestic restaurants and 19 were international restaurants.

 

As of March 26, 2019 and March 27, 2018, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants.  Additionally, as of March 26, 2019 and March 27, 2018, we owned a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China.  The unconsolidated restaurants are accounted for using the equity method.  Our investments in these unconsolidated affiliates are included in other assets in our unaudited condensed consolidated balance sheets, and we record our percentage share of net income earned by these unconsolidated affiliates in our unaudited condensed consolidated statements of income and comprehensive income under equity income from investments in unconsolidated affiliates.  All significant intercompany balances and transactions for these unconsolidated restaurants as well as the entities whose accounts have been consolidated have been eliminated. 

 

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these unaudited condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"). Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill, obligations related to insurance reserves, leases and leasehold improvements, legal reserves, gift card discounts and breakage and income taxes. Actual results could differ from those estimates.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented.  The unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, except that certain information and footnotes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC").  Operating results for the 13 weeks ended March 26, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2018.

 

Our significant interim accounting policies include the recognition of income taxes using an estimated annual effective tax rate.

 

7


 

(2)  Recent Accounting Pronouncements

 

Leases

(Accounting Standards Codification 842, "ASC 842")

On December 26, 2018, we adopted ASC 842,  Leases , which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases.  As further described in note 3, we lease land and/or buildings for the majority of our restaurants under non-cancelable lease agreements.  We adopted ASC 842 using a modified retrospective approach.  As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.

 

ASC 842 also permitted the election of certain practical expedients upon adoption. We elected the transition package of practical expedients which allowed us to carryforward the historical lease classification.  We also elected the practical expedient to not separate lease and non-lease components for all leases entered into after the date of adoption.  Finally, we elected the hindsight practical expedient which required us to assess the lease term for all existing leases.  This resulted in extending the terms for certain existing leases in which renewal options had already been exercised or were reasonably certain of being exercised and shortening the terms for certain existing leases in which renewal options were not reasonably certain of being exercised.  As a result of the hindsight election, we recorded a $2.7 million reduction, net of tax, to retained earnings as of the first day of fiscal 2019 to reflect the change in lease terms. 

 

The adoption of this standard had a significant impact on our consolidated balance sheet.  There was no significant impact to our results of operations or cash flows.  This standard did not have a significant impact on our liquidity or on our compliance with our financial covenants associated with our credit facility.

 

Financial Instruments

(Accounting Standards Update 2016-13, "ASU 2016-13")

 

In June 2016, the FASB issued ASU 2016-13,  Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires measurement and recognition of expected versus incurred losses for financial assets held.  ASU 2016-13 is effective for annual periods beginning after December 15, 2019 (our 2020 fiscal year), with early adoption permitted for annual periods beginning after December 15, 2018.  We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.

 

Goodwill

(Accounting Standards Update 2017-04, "ASU 2017-04")

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment and is expected to reduce the cost and complexity of accounting for goodwill.  ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.  Instead, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill.  ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 (our 2020 fiscal year) and will be applied on a prospective basis.  Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017.  We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.

Fair Value Measurement

(Accounting Standards Update 2018-13, "ASU 2018-13")

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements.  ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our 2020 fiscal year) and for interim periods within those years, with early adoption permitted.  We are currently assessing the impact of this new standard on our consolidated financial statements.

 

8


 

(3)  Leases

 

We recognize right-of-use assets and lease liabilities for both real estate and equipment leases that have a term in excess of one year.  As of March 26, 2019, these amounts were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Leases

 

Real estate

 

Equipment

 

Total

Operating lease right-of-use assets

$

468,472

 

$

3,650

 

$

472,122

 

 

 

 

 

 

 

 

 

Current portion of operating lease liabilities

 

14,758

 

 

1,197

 

 

15,955

Operating lease liabilities, net of current portion

 

504,520

 

 

2,453

 

 

506,973

  Total operating lease liabilities

$

519,278

 

$

3,650

 

$

522,928

 

 

 

 

 

 

 

 

 

Information related to our real estate leases as of and for the 13 week period ended March 26, 2019 was as follows (in thousands):

 

 

 

Real estate costs

 

 

Operating lease

$

13,427

Variable lease

 

448

Short-term lease

 

30

Total lease costs

$

13,905

 

 

 

 

 

 

Real estate lease liability maturity analysis

 

Total

2019

$

36,807

2020

 

49,504

2021

 

50,296

2022

 

51,141

2023

 

51,104

Thereafter

 

691,624

Total

$

930,476

Less interest

 

411,198

Total discounted operating lease liabilities

$

519,278

 

 

 

 

 

 

Real estate leases other information

 

 

Cash paid for amounts included in measurement of operating lease liabilities

$

11,948

Right-of-use assets obtained in exchange for new operating lease liabilities

$

8,340

Weighted-average remaining lease term (years)

 

17.81

Weighted-average discount rate

 

6.78

 

Operating lease payments exclude approximately $27.9 million of minimum lease payments for executed real estate leases that we have not yet taken possession.  In addition to the above operating leases, as of March 26, 2019 we had one finance lease with a right-of-use asset balance and lease liability balance of approximately $1.8 million and $2.1 million, respectively.  The right-of-use asset balance is included as a component of other assets and the lease liability balance as a component of other liabilities in the condensed consolidated balance sheets.

9


 

We lease land and/or buildings for the majority of our restaurants under non-cancelable lease agreements.  These leases typically have initial terms ranging from 10 to 15 years, and certain renewal options for one or more five-year periods.  When determining the lease term, we include option periods for which failure to renew the lease imposes a penalty on us in such an amount that renewal appears, at the inception of the lease, to be reasonably certain.  The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements which might become impaired if we choose not to continue the use of the leased property.  Our lease agreements do not contain any material residual value guarantees or material restrictive covenants that would impact lease classification.

Beginning in 2019, we recognize operating lease right-of-use assets and operating lease liabilities for real estate leases, including our restaurant leases and Support Center lease, as well as certain restaurant equipment leases based on the present value of the lease payments over the lease term.  We estimate the present value based on our incremental borrowing rate which corresponds to the underlying lease term.  In addition, operating lease right-of-use assets are reduced for accrued rent and increased for any initial direct costs recognized at lease inception.  For leases commencing in 2019 and later, we account for lease and non-lease components as a single lease component. 

Certain of our operating leases contain predetermined fixed escalations of the minimum rent over the lease term. For these leases, we recognize the related rent expense on a straight‑line basis over the lease term.  We may receive rent concessions or leasehold improvement incentives upon opening a restaurant that is subject to a lease which we consider when determining straight-line rent expense. We also may receive rent holidays, which would begin on the possession date and end when the store opens, during which no cash rent payments are typically due under the terms of the lease. Rent holidays are included in the lease term when determining straight‑line rent expense.  In recognizing straight-line rent expense, we record the difference between amounts charged to operations and amounts paid as accrued rent.  Straight-line rent expense is included as an operating lease cost in the table above.

Certain of our operating leases contain clauses that provide for additional contingent rent based on a percentage of sales greater than certain specified target amounts. We recognize contingent rent expense prior to the achievement of the specified target that triggers the contingent rent, provided achievement of the target is considered probable.  In addition, certain of our operating leases have variable escalations of the minimum rent that depend on an index or rate. We recognize variable rent expense when the escalation is determinable. Contingent rent and variable rent expense are included as variable lease costs in the table above. 

The following is a schedule of future minimum lease payments required for real estate and equipment operating leases that have a remaining term in excess of one year as of December 25, 2018 (in thousands):

 

 

 

 

Operating Leases

2019

$

50,030

2020

 

49,582

2021

 

49,917

2022

 

50,237

2023

 

49,854

Thereafter

 

677,710

Total

$

927,330

 

Rent expense for operating leases consisted of the following for the 13 week period ended March 27, 2018 (in thousands):

 

 

 

 

 

    

March 27, 2018

Minimum rent—occupancy

 

$

11,533

Contingent rent

 

 

318

Rent expense, occupancy

 

 

11,851

Minimum rent—equipment and other

 

 

1,560

Rent expense

 

$

13,411

 

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(4)   Long-term Debt

 

On August 7, 2017, we entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement") with respect to our revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. The revolving credit facility remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million with the option to increase the revolving credit facility by an additional $200.0 million subject to certain limitations.  The Amended Credit Agreement extends the maturity date of our revolving credit facility until August 5, 2022.

 

The terms of the Amended Credit Agreement require us to pay interest on outstanding borrowings at the London Interbank Offered Rate ("LIBOR") plus a margin of 0.875% to 1.875% and to pay a commitment fee of 0.125% to 0.30% per year on any unused portion of the revolving credit facility, in each case depending on our leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks’ prime lending rate, the Federal Reserve Bank of New York rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. In April 2018, we paid off our outstanding credit facility of $50.0 million.  The weighted-average interest rate for the amended revolving credit facility as of March 26, 2019 and December 25, 2018 was 3.37% and 3.81%, respectively. As of March 26, 2019, we had $191.6 million of availability, net of $8.4 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The Amended Credit Agreement permits us to incur additional secured or unsecured indebtedness outside the amended revolving credit facility, except for the incurrence of secured indebtedness that in the aggregate is equal to or greater than $125.0 million and 20% of our consolidated tangible net worth.  We were in compliance with all financial covenants as of March 26, 2019.

 

(5) Income Taxes

 

A reconciliation of the statutory federal income tax rate to our effective tax rate for the 13 weeks ended March 26, 2019 and March 27, 2018 is as follows:

 

 

 

 

 

 

 

 

 

13 Weeks Ended

   

 

   

March 26, 2019

   

March 27, 2018

   

Tax at statutory federal rate

 

21.0

%  

21.0

%  

State and local tax, net of federal benefit

 

3.6

 

4.0

 

FICA tip tax credit

 

(9.4)

 

(9.5)

 

Work opportunity tax credit

 

(1.4)

 

(1.1)

 

Stock compensation

 

(0.5)

 

(2.1)

 

Net income attributable to noncontrolling interests

 

(0.5)

 

(1.1)

 

Officers compensation

 

1.4

 

0.9

 

Other

 

0.7

 

0.9

 

Total

 

14.9

%  

13.0

%  

 

Our effective tax rate increased to 14.9% for the 13 weeks ended March 26, 2019 compared to 13.0% for the 13 weeks ended March 27, 2018.  This increase was primarily driven by lower excess tax benefits related to our share-based compensation program.

 

 

 

(6) Commitments and Contingencies

 

The estimated cost of completing capital project commitments at March 26, 2019 and December 25, 2018 was approximately $183.7 million and $168.3 million, respectively.

 

As of March 26, 2019 and December 25, 2018, we were contingently liable for $14.5 million and $14.8 million, respectively, for seven lease guarantees, listed in the table below.  These amounts represent the maximum potential liability of future payments under the guarantees.  In the event of default, the indemnity and default clauses in our

11


 

assignment agreements govern our ability to pursue and recover damages incurred.  No material liabilities have been recorded as of March 26, 2019 and December 25, 2018 as the likelihood of default was deemed to be less than probable and the fair value of the guarantees is not considered significant.

 

 

 

 

 

 

 

 

    

Lease
Assignment Date

    

Current Lease
Term Expiration

 

Everett, Massachusetts (1)(2)

 

September 2002

 

February 2023

 

Longmont, Colorado (1)

 

October 2003

 

May 2029

 

Montgomeryville, Pennsylvania (1)

 

October 2004

 

March 2021

 

Fargo, North Dakota (1)(2)

 

February 2006

 

July 2021

 

Logan, Utah (1)

 

January 2009

 

August 2024

 

Irving, Texas (3)

 

December 2013

 

December 2019

 

Louisville, Kentucky (3)(4)

 

December 2013

 

November 2023

 


(1)

Real estate lease agreements for restaurant locations which we entered into before granting franchise rights to those restaurants.  We have subsequently assigned the leases to the franchisees, but remain contingently liable under the terms of the lease if the franchisee defaults .

(2)

As discussed in note 7, these restaurants are owned, in whole or part, by certain officers, directors and 5% shareholders of the Company.

(3)

Leases associated with non-Texas Roadhouse restaurants which were sold.  The leases were assigned to the acquirer, but we remain contingently liable under the terms of the lease if the acquirer defaults.

(4)

We may be released from liability after the initial contractual lease term expiration contingent upon certain conditions being met by the acquirer.

 

During the 13 weeks ended March 26, 2019, we bought most of our beef from three suppliers.  A change in suppliers could cause supply shortages and/or higher costs to secure adequate supplies and a possible loss of sales, which would affect operating results adversely. We have no material minimum purchase commitments with our vendors that extend beyond a year.

 

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including "slip and fall" accidents, employment related claims, claims related to our service of alcohol, and claims from guests or employees alleging illness, injury or food quality, health or operational concerns.  None of these types of litigation, most of which are covered by insurance, has had a material effect on us and, as of the date of this report, we are not party to any litigation that we believe could have a material adverse effect on our business.  

(7)   Related Party Transactions

 

As of March 26, 2019, we had nine franchise restaurants and one majority-owned company restaurant owned in part by certain officers, directors and 5% stockholders of the Company.  As of March 27, 2018, we had 10 franchise restaurants owned in part by certain officers, directors and 5% stockholders of the Company.  For the 13 week periods ended March 26, 2019 and March 27, 2018, these franchise entities paid us fees of approximately $0.5 million and $0.6 million, respectively.  As disclosed in note 6, we are contingently liable on leases related to two of these franchise restaurants. 

 

(8)   Earnings Per Share

 

The share and net income per share data for all periods presented are based on the historical weighted-average shares outstanding.  The diluted earnings per share calculations show the effect of the weighted-average restricted stock units and stock options outstanding from our equity incentive plans.  Performance stock units are not included in the diluted earnings per share calculation until the performance-based criteria have been met.

 

For the 13 week periods ended March 26, 2019 and March 27, 2018, there were no shares of nonvested stock that were outstanding but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

 

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The following table sets forth the calculation of earnings per share and weighted-average shares outstanding (in thousands) as presented in the accompanying unaudited condensed consolidated statements of income and comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

    

March 26, 2019

    

March 27, 2018

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

50,390

 

$

54,541

Basic EPS:

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

71,753

 

 

71,333

Basic EPS

 

$

0.70

 

$

0.76

Diluted EPS:

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

71,753

 

 

71,333

Dilutive effect of stock options and nonvested stock

 

 

434

 

 

472

Shares-diluted

 

 

72,187

 

 

71,805

Diluted EPS

 

$

0.70

 

$

0.76

 

 

(9)  Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820 establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

 

Level 1 Inputs based on quoted prices in active markets for identical assets.

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the assets, either directly or indirectly.

Level 3 Inputs that are unobservable for the asset.

 

There were no transfers among levels within the fair value hierarchy during the 13 weeks ended March 26, 2019.

 

The following table presents the fair values for our financial assets and liabilities measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

    

Level

    

March 26, 2019

    

December 25, 2018

 

Deferred compensation plan—assets

 

1

 

$

36,409

 

$

31,632

 

Deferred compensation plan—liabilities

 

1

 

 

(36,419)

 

 

(31,721)

 

 

The Second Amended and Restated Deferred Compensation Plan of Texas Roadhouse Management Corp., as amended, (the "Deferred Compensation Plan") is a nonqualified deferred compensation plan which allows highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds held in a rabbi trust. We report the amounts of the rabbi trust in other assets and the corresponding liability in other liabilities in our unaudited condensed consolidated financial statements. These investments are considered trading securities and are reported at fair value based on quoted market prices.  The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, are recorded in general and administrative expense in the unaudited condensed consolidated statements of income and comprehensive income.

 

 

At March 26, 2019 and December 25, 2018, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values based on the short-term nature of these instruments.

 

13


 

 

 

(10)  Stock Repurchase Program

 

On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock.  This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. All repurchases to date under our stock repurchase program have been made through open market transactions.  The timing and the amount of any repurchases will be determined by management under parameters established by our Board of Directors, based on an evaluation of our stock price, market conditions and other corporate considerations.

 

We did not repurchase any shares of common stock during the 13 week periods ended March 26, 2019 or March 27, 2018, respectively.  As of March 26, 2019, we had approximately $69.9 million remaining under our authorized stock repurchase program.    

14


 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY STATEMENT

 

This report contains forward-looking statements based on our current expectations, estimates and projections about our industry and certain assumptions made by us.  Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.  The section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 25, 2018, and in Part II, Item 1A in this Form 10-Q, along with disclosures in our other Securities and Exchange Commission ("SEC " ) filings discuss some of the important risk factors that may affect our business, results of operations, or financial condition.  You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our Company or to maintain or increase your investment.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.  The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock.  We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

 

OVERVIEW

 

Texas Roadhouse, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman and chief executive officer, W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse restaurant in Clarksville, Indiana. Since then, we have grown to 588 restaurants in 49 states and ten foreign countries. Our mission statement is "Legendary Food, Legendary Service ® ." Our operating strategy is designed to position each of our restaurants as the local hometown favorite for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of March 26, 2019, our 588 restaurants included:

 

·

495 "company restaurants," of which 475 were wholly-owned and 20 were majority-owned.  The results of operations of company restaurants are included in our unaudited condensed consolidated statements of income and comprehensive income. The portion of income attributable to noncontrolling interests in company restaurants that are not wholly-owned is reflected in the line item entitled "Net income attributable to noncontrolling interests" in our unaudited condensed consolidated statements of income and comprehensive income.  Of the 495 restaurants we owned and operated as of March 26, 2019, we operated 468 as Texas Roadhouse restaurants and operated 25 as Bubba’s 33 restaurants.  In addition, we operated two restaurants outside of the casual dining segment.

 

·

93 "franchise restaurants," 24 of which we have a 5.0% to 10.0% ownership interest.  The income derived from our minority interests in these franchise restaurants is reported in the line item entitled "Equity income from investments in unconsolidated affiliates" in our unaudited condensed consolidated statements of income and comprehensive income. Additionally, we provided various management services to these 24 franchise restaurants, as well as six additional franchise restaurants in which we have no ownership interest.  All of the franchise restaurants are operated as Texas Roadhouse restaurants.  Of the 93 franchise restaurants, 69 were domestic restaurants and 24 were international restaurants.

 

We have contractual arrangements that grant us the right to acquire at pre-determined formulas the remaining equity interests in 18 of the 20 majority-owned company restaurants and 66 of the 69 domestic franchise restaurants.

 

15


 

Throughout this report, we use the term "restaurants" to include Texas Roadhouse and Bubba’s 33, unless otherwise noted.

 

Presentation of Financial and Operating Data

 

Throughout this report, the 13 weeks ended March 26, 2019 and March 27, 2018 are referred to as Q1 2019 and Q1 2018, respectively.  Fiscal year 2019 will be 53 weeks in length and, as such, the fourth quarter of fiscal 2019 will be 14 weeks in length.  Fiscal year 2018 was 52 weeks in length, while the quarters for the year were 13 weeks in length.

 

As further noted in note 2 to our unaudited condensed consolidated financial statements, in Q1 2019 we adopted Accounting Standards Codification 842, Leases ( "ASC 842") , which required an entity to recognize a right-of-use asset and a lease liability for virtually all leases.  We adopted this standard using a modified retrospective approach.  As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.  The adoption of this standard had a significant impact on our consolidated balance sheet. There was no significant impact to our results of operations or cash flows related to the adoption of this standard.

 

Long-Term Strategies to Grow Earnings Per Share and Create Shareholder Value

 

Our long-term strategies with respect to increasing net income and earnings per share, along with creating shareholder value, include the following:

 

Expanding Our Restaurant Base.    We will continue to evaluate opportunities to develop restaurants in existing markets and in new domestic and international markets. Domestically, we will remain focused primarily on markets where we believe a significant demand for our restaurants exists because of population size, income levels, and the presence of shopping and entertainment centers and a significant employment base.  In recent years, we have relocated several existing locations once the associated lease expired or as a result of eminent domain which allows us to update them to our current prototypical design and/or obtain more favorable lease terms.  We continue to evaluate these opportunities particularly as it relates to older locations with strong sales.  Our ability to expand our restaurant base is influenced by many factors beyond our control and, therefore, we may not be able to achieve our anticipated growth.

 

In Q1 2019, we opened four Texas Roadhouse restaurants while our franchise partners opened two international restaurants.  We currently plan to open 25 to 30 company restaurants in 2019 including as many as four Bubba’s 33 restaurants.  In addition, we anticipate that our existing franchise partners will open as many as eight Texas Roadhouse restaurants, primarily international, in 2019.

 

Our average capital investment for the 23 Texas Roadhouse restaurants opened during 2018, including pre‑opening expenses and a capitalized rent factor, was $5.2 million.  We expect our average capital investment for Texas Roadhouse restaurants opening in 2019 to be approximately $5.5 million.  The increase in our estimated 2019 average capital investment is due to the purchase of land and the related site improvement costs at more locations.

Our average capital investment for the five Bubba’s 33 restaurants opened during 2018, including pre-opening expenses and a capitalized rent factor, was $7.1 million.  This includes higher costs at one urban site in New Jersey.  Excluding this site, the average capital investment would have been $6.5 million.  We expect our average capital investment for Bubba’s 33 restaurants opened in 2019 to be approximately $6.6 million. We continue to evaluate our Bubba’s 33 prototypical asset design.

We remain focused on driving sales and managing restaurant investment costs to maintain our restaurant development in the future.  Our capital investment (including cash and non-cash costs) for new restaurants varies significantly depending on a number of factors including, but not limited to:  the square footage, layout, scope of required site work, type of construction labor, local permitting requirements, our ability to negotiate with landlords, cost of liquor and other licenses and hook-up fees and geographical location.

We have entered into area development and franchise agreements for the development and operation of Texas Roadhouse restaurants in several foreign countries.  We currently have signed franchise and/or development agreements

16


 

in nine countries in the Middle East as well as Taiwan, the Philippines, Mexico, China and South Korea. As of March  26, 2019, we had 16 restaurants open in five countries in the Middle East, three restaurants open in Taiwan, two in the Philippines and one in Mexico, China and South Korea for a total of 24 restaurants in 10 foreign countries.  For the existing international agreements, the franchisee is required to pay us a franchise fee for each restaurant to be opened, royalties on the gross sales of each restaurant and a development fee for our grant of development rights in the named countries. We anticipate that the specific business terms of any future franchise agreement for international restaurants might vary significantly from the standard terms of our domestic agreements and from the terms of existing international agreements, depending on the territory to be franchised and the extent of franchisor-provided services to each franchisee.

 

Maintaining and/or Improving Restaurant Level Profitability.    We plan to maintain, or possibly increase, restaurant-level profitability (restaurant margin) through a combination of increased comparable restaurant sales and operating cost management.  Restaurant margin is not a U.S. generally accepted accounting principle ("GAAP") measure and should not be considered in isolation, or as an alternative to income from operations.  See further discussion of restaurant margin below.  In general, we continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on our long-term success.  This may create a challenge in terms of maintaining and/or increasing restaurant margin, as a percentage of restaurant and other sales, in any given year, depending on the level of inflation we experience.  In addition to restaurant margin, as a percentage of restaurant and other sales, we also focus on the growth of restaurant margin dollars per store week as a measure of restaurant-level profitability.  In terms of driving comparable restaurant sales, we remain focused on encouraging repeat visits by our guests and attracting new guests through our continued commitment to operational standards relating to food and service quality.  To attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, focus on speed of service and increase throughput by adding seats and parking at certain restaurants.

 

Leveraging Our Scalable Infrastructure.    To support our growth, we continue to make investments in our infrastructure.  Over the past several years, we have made significant investments in our infrastructure, including information and accounting systems, real estate, human resources, legal, marketing, international and restaurant operations, including the development of new concepts.  In addition, in 2018 we increased our number of regional market partners, market partners, and regional support teams. Whether we are able to leverage our infrastructure in future years by growing our general and administrative costs at a slower rate than our revenue will depend, in part, on our new restaurant openings, our comparable restaurant sales growth rate going forward and the level of investment we continue to make in our infrastructure.

 

Returning Capital to Shareholders.  We continue to pay dividends and evaluate opportunities to return capital to our shareholders through repurchases of common stock. In 2011, our Board of Directors declared our first quarterly dividend of $0.08 per share of common stock. We have consistently grown our per share dividend each year since that time and our long-term strategy includes increasing our regular quarterly dividend amount over time. On February 13, 2019, our Board of Directors declared a quarterly dividend of $0.30 per share of common stock representing a 20% increase compared to the quarterly dividend declared in the prior year period.  The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on many factors, including, but not limited to, earnings, financial condition, applicable covenants under our revolving credit facility, other contractual restrictions and other factors deemed relevant.

 

In 2008, our Board of Directors approved our first stock repurchase program.  From inception through March 26, 2019, we have paid $216.6 million through our authorized stock repurchase programs to repurchase 14,844,851 shares of our common stock at an average price per share of $14.59.  On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock.  This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012.  All repurchases to date have been made through open market transactions.  As of March 26, 2019, approximately $69.9 million remains authorized for stock repurchases.

 

17


 

Key Measures We Use to Evaluate Our Company

 

Key measures we use to evaluate and assess our business include the following:

 

Number of Restaurant Openings.  Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings, we incur pre‑opening costs, which are defined below, before the restaurant opens. Typically, new Texas Roadhouse restaurants open with an initial start‑up period of higher than normalized sales volumes, which decrease to a steady level approximately three to six months after opening. However, although sales volumes are generally higher, so are initial costs, resulting in restaurant margins that are generally lower during the start‑up period of operation and increase to a steady level approximately three to six months after opening.

 

Comparable Restaurant Sales Growth.    Comparable restaurant sales growth reflects the change in restaurant sales for company restaurants over the same period in prior years for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the period measured excluding restaurants closed during the period. Comparable restaurant sales growth can be impacted by changes in guest traffic counts or by changes in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount. 

 

Average Unit Volume.    Average unit volume represents the average quarterly or annual restaurant sales for company restaurants open for a full six months before the beginning of the period measured excluding restaurants closed during the period.  Historically, average unit volume growth is less than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels lower than the company average.  At times, average unit volume growth may be more than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels higher than the company average.

 

Store Weeks.    Store weeks represent the number of weeks that our company restaurants were open during the reporting period.

 

Restaurant Margin.    Restaurant margin (in dollars and as a percentage of restaurant and other sales) represents restaurant and other sales less restaurant-level operating costs, including cost of sales, labor, rent and other operating costs. Restaurant margin is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income from operations.  This non-GAAP measure is not indicative of overall company performance and profitability in that this measure does not accrue directly to the benefit of shareholders due to the nature of the costs excluded.  Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance.  In calculating restaurant margin, we exclude certain non-restaurant-level costs that support operations, including pre-opening and general and administrative expenses, but do not have a direct impact on restaurant-level operational efficiency and performance.  We also exclude depreciation and amortization expense, substantially all of which relates to restaurant-level assets, as it represents a non-cash charge for the investment in our restaurants.  We also exclude impairment and closure expense as we believe this provides a clearer perspective of the Company’s ongoing operating performance and a more useful comparison to prior period results.  Restaurant margin as presented may not be comparable to other similarly titled measures of other companies in our industry.  A reconciliation of income from operations to restaurant margin is included in the Results of Operations section below.

 

Other Key Definitions

 

Restaurant and Other Sales.    Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company restaurants.  Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the unaudited condensed consolidated statements of income and comprehensive income.  Other sales include the amortization of fees associated with our third party gift card sales net of the amortization of gift card breakage income.  These amounts are amortized over a period consistent with the historic redemption pattern of the associated gift cards.

Franchise Royalties and Fees.    Franchise royalties consist of royalties, as defined in our franchise agreements, paid to us by domestic and international franchisees.  Domestic and international franchisees also typically pay an initial

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franchise fee and/or development fee for each new restaurant or territory.  The terms of the international agreements may vary significantly from our domestic agreements. Franchise fees also include advertising fees paid by domestic franchisees to our system-wide marketing and advertising fund and management fees paid by certain domestic franchisees for supervisory and administrative services that we perform.

 

Restaurant Cost of Sales.    Restaurant cost of sales consists of food and beverage costs of which approximately half relates to beef costs.

 

Restaurant Labor Expenses.    Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit-sharing incentive compensation expenses earned by our restaurant managing partners and market partners. These profit-sharing expenses are reflected in restaurant other operating expenses.  Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.

 

Restaurant Rent Expense.    Restaurant rent expense includes all rent, except pre-opening rent, associated with the leasing of real estate and includes base, percentage and straight-line rent expense.

 

Restaurant Other Operating Expenses.    Restaurant other operating expenses consist of all other restaurant-level operating costs, the major components of which are utilities, supplies, local store advertising, repairs and maintenance, equipment rent, property taxes, credit card fees and general liability insurance. Profit-sharing incentive compensation expenses earned by our restaurant managing partners and market partners are also included in restaurant other operating expenses.

 

Pre-opening Expenses.    Pre-opening expenses, which are charged to operations as incurred, consist of expenses incurred before the opening of a new restaurant and are comprised principally of opening team and training team compensation and benefits, travel expenses, rent, food, beverage and other initial supplies and expenses.  On average, over 70% of total pre-opening costs incurred per restaurant opening relate to the hiring and training of employees.  Pre-opening costs vary by location depending on many factors, including the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the availability of qualified restaurant staff members; the cost of travel and lodging for different geographic areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants.

 

Depreciation and Amortization Expenses.    Depreciation and amortization expenses ("D&A") include the depreciation of fixed assets and amortization of intangibles with definite lives, substantially all of which relates to restaurant-level assets.

 

Impairment and Closure Costs.  Impairment and closure costs include any impairment of long-lived assets, including goodwill, and expenses associated with the closure of a restaurant.  Closure costs also include any gains or losses associated with a relocated restaurant or the sale of a closed restaurant and/or assets held for sale as well as lease costs associated with closed or relocated restaurants.

 

General and Administrative Expenses.    General and administrative expenses ("G&A") are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth including certain advertising costs incurred.  G&A also includes legal fees, settlement charges and share-based compensation expense related to executive officers, support center employees, and market partners, and the realized and unrealized holding gains and losses related to the investments in our deferred compensation plan.

 

Interest Income (Expense), Net.    Interest income (expense), net includes earnings on cash and cash equivalents reduced by interest expense on our debt or financing obligations including the amortization of loan fees.

 

Equity Income from Unconsolidated Affiliates.    As of March 26, 2019 and March 27, 2018, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants.  Additionally, as of March 26, 2019 and March 27, 2018, we owned a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China.  Equity income from unconsolidated affiliates represents our percentage share of net income earned by these unconsolidated affiliates.

 

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Net Income Attributable to Noncontrolling Interests.    Net income attributable to noncontrolling interests represents the portion of income attributable to the other owners of the majority-owned restaurants.  Our consolidated subsidiaries at March 26, 2019 and March 27, 2018 included 20 and 18 majority-owned restaurants, respectively, all of which were open.

 

Q1 2019 Financial Highlights

 

Total revenue increased $62.9 million, or 10.0%, to $690.6 million in Q1 2019 compared to $627.7 million in Q1 2018 primarily due to an increase in average unit volume driven by comparable restaurant sales growth combined with the opening of new restaurants.  Store weeks and comparable restaurant sales increased 5.6% and 5.2%, respectively, at company restaurants in Q1 2019.

 

Restaurant margin dollars increased $3.2 million, or 2.7%, to $122.6 million in Q1 2019 compared to $119.4 million in Q1 2018 while restaurant margin, as a percentage of restaurant and other sales, decreased to 17.9% in Q1 2019 compared to 19.2% in Q1 2018.  The increase in restaurant margin dollars was primarily due to higher revenue.  The decrease in restaurant margin, as a percentage of restaurant and other sales, was primarily due to higher labor costs as a result of higher average wage rates and current staffing initiatives to increase sales and improve operations in the current challenging labor market.    

 

Net income decreased $4.2 million, or 7.6%, to $50.4 million in Q1 2019 compared to $54.5 million in Q1 2018 primarily due to higher general and administrative expenses and higher depreciation and amortization expense partially offset by higher restaurant margin dollars.  Diluted earnings per share decreased 8.1% to $0.70 in Q1 2019 from $0.76 in Q1 2018.

   

 

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Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

March 26, 2019

 

March 27, 2018

 

  

$

  

%

  

$

  

%

 

 

(In thousands)

Consolidated Statements of Income:

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

Restaurant and other sales

 

685,117

 

99.2

 

622,402

 

99.2

Franchise royalties and fees

 

5,491

 

0.8

 

5,303

 

0.8

Total revenue

 

690,608

 

100.0

 

627,705

 

100.0

Costs and expenses:

 

 

 

 

 

 

 

 

(As a percentage of restaurant and other sales)

 

 

 

 

 

 

 

 

Restaurant operating costs (excluding depreciation and amortization shown separately below):