Quarterly Report (10-q)

Date : 08/02/2019 @ 3:43PM
Source : Edgar (US Regulatory)
Stock : Texas Roadhouse Inc (TXRH)
Quote : 57.24  0.59 (1.04%) @ 9:04PM

Quarterly Report (10-q)

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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 June 25, 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 69,573,832 on July 24, 2019.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

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

3

Condensed Consolidated Balance Sheets — June 25, 2019 and December 25, 2018

3

Condensed Consolidated Statements of Income and Comprehensive Income — For the 13 and 26 Weeks Ended June 25, 2019 and June 26, 2018

4

Condensed Consolidated Statement of Stockholders’ Equity — For the 13 and 26 Weeks Ended June 25, 2019 and June 26, 2018

5

Condensed Consolidated Statements of Cash Flows — For the 26 Weeks Ended June 25, 2019 and June 26, 2018

7

Notes to Condensed Consolidated Financial Statements

8

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

17

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

30

Item 4 — Controls and Procedures

31

PART II. OTHER INFORMATION

Item 1 — Legal Proceedings

32

Item 1A — Risk Factors

32

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

32

Item 3 — Defaults Upon Senior Securities

32

Item 4 — Mine Safety Disclosures

32

Item 5 — Other Information

33

Item 6 — Exhibits

33

Signatures

34

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)

    

June 25, 2019

    

December 25, 2018

Assets

Current assets:

Cash and cash equivalents

$

144,839

$

210,125

Receivables, net of allowance for doubtful accounts of $15 at June 25, 2019 and $34 at December 25, 2018

 

39,409

 

92,114

Inventories, net

 

17,907

 

18,827

Prepaid income taxes

 

104

 

7,569

Prepaid expenses

 

15,169

 

16,384

Total current assets

 

217,428

 

345,019

Property and equipment, net of accumulated depreciation of $642,555 at June 25, 2019 and $602,451 at December 25, 2018

 

991,339

 

956,676

Operating lease right-of-use asset

485,818

Goodwill

 

123,220

 

123,220

Intangible assets, net of accumulated amortization of $13,862 at June 25, 2019 and $13,416 at December 25, 2018

 

1,513

 

1,959

Other assets

 

49,533

 

42,402

Total assets

$

1,868,851

$

1,469,276

Liabilities and Stockholders’ Equity

Current liabilities:

Current portion of operating lease liabilities

$

16,472

$

Accounts payable

 

65,799

 

62,060

Deferred revenue-gift cards

 

119,557

 

192,242

Accrued wages

 

35,892

 

34,159

Income taxes payable

4,687

Accrued taxes and licenses

 

24,250

 

24,631

Dividends payable

 

21,224

 

17,904

Other accrued liabilities

 

71,184

 

54,146

Total current liabilities

 

359,065

 

385,142

Operating lease liabilities, net of current portion

521,820

Restricted stock and other deposits

 

8,652

 

7,703

Deferred rent

 

 

48,079

Deferred tax liabilities, net

 

13,630

 

17,268

Other liabilities

 

60,066

 

50,376

Total liabilities

 

963,233

 

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, 69,801,550 and 71,617,510 shares issued and outstanding at June 25, 2019 and December 25, 2018, respectively)

 

70

 

72

Additional paid-in-capital

 

152,872

 

257,388

Retained earnings

 

738,123

 

688,337

Accumulated other comprehensive loss

 

(213)

 

(228)

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

890,852

 

945,569

Noncontrolling interests

 

14,766

 

15,139

Total equity

 

905,618

 

960,708

Total liabilities and equity

$

1,868,851

$

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

26 Weeks Ended

    

June 25, 2019

    

June 26, 2018

    

June 25, 2019

    

June 26, 2018

 

Revenue:

Restaurant and other sales

$

684,373

$

624,073

$

1,369,490

$

1,246,475

Franchise royalties and fees

5,455

5,164

10,946

10,467

Total revenue

 

689,828

 

629,237

 

1,380,436

 

1,256,942

Costs and expenses:

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

Cost of sales

 

221,266

204,048

444,978

406,834

Labor

 

225,490

199,647

449,370

395,677

Rent

 

13,051

12,119

26,179

23,970

Other operating

 

103,811

94,858

205,613

187,236

Pre-opening

 

4,197

4,107

8,065

9,151

Depreciation and amortization

 

28,454

25,165

56,227

49,649

Impairment and closure

 

316

 

22

333

108

General and administrative

 

39,960

 

35,004

75,943

65,179

Total costs and expenses

 

636,545

 

574,970

 

1,266,708

 

1,137,804

Income from operations

 

53,283

 

54,267

 

113,728

 

119,138

Interest income (expense), net

 

691

(283)

1,445

(642)

Equity income from investments in unconsolidated affiliates

 

141

445

254

769

Income before taxes

$

54,115

$

54,429

$

115,427

$

119,265

Provision for income taxes

 

7,427

8,466

16,546

16,923

Net income including noncontrolling interests

46,688

45,963

$

98,881

$

102,342

Less: Net income attributable to noncontrolling interests

 

1,843

1,736

3,646

3,574

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

$

44,845

$

44,227

$

95,235

$

98,768

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustment, net of tax of $28, $40, ($5) and ($9), respectively

(82)

(118)

15

(8)

Total other comprehensive (loss) income, net of tax

(82)

(118)

15

(8)

Total comprehensive income

$

44,763

$

44,109

$

95,250

$

98,760

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

Basic

$

0.63

$

0.62

$

1.33

$

1.38

Diluted

$

0.63

$

0.62

$

1.32

$

1.37

Weighted average shares outstanding:

Basic

 

71,362

71,445

71,558

71,389

Diluted

 

71,733

71,897

71,961

71,853

Cash dividends declared per share

$

0.30

$

0.25

$

0.60

$

0.50

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 June 25, 2019

    

    

    

    

    

Accumulated

    

Total Texas

    

    

 

Additional

Other

Roadhouse, Inc.

 

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

 

Shares

Value

Capital

Earnings

Loss

Subsidiaries

Interests

Total

 

Balance, March 26, 2019

 

71,827,836

$

72

$

259,050

$

714,502

$

(131)

$

973,493

$

14,654

$

988,147

Net income

 

 

 

 

44,845

 

 

44,845

 

1,843

 

46,688

Other comprehensive loss, net of tax

(82)

(82)

(82)

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(1,731)

 

(1,731)

Dividends declared ($0.30 per share)

 

 

 

 

(21,224)

 

 

(21,224)

 

 

(21,224)

Shares issued under share-based compensation plans including tax effects

 

103,289

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(32,898)

 

 

(1,869)

 

 

 

(1,869)

 

 

(1,869)

Repurchase of shares of common stock

(2,096,677)

(2)

(112,050)

(112,052)

(112,052)

Share-based compensation

 

 

 

7,741

 

 

 

7,741

 

 

7,741

Balance, June 25, 2019

 

69,801,550

$

70

$

152,872

$

738,123

$

(213)

$

890,852

$

14,766

$

905,618

For the 13 Weeks Ended June 26, 2018

    

    

    

    

    

Accumulated

    

Total Texas

    

    

Additional

Other

Roadhouse, Inc.

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

Shares

Value

Capital

Earnings

Income (Loss)

Subsidiaries

Interests

Total

Balance, March 27, 2018

 

71,414,201

$

71

$

235,771

$

638,309

$

71

$

874,222

$

12,643

$

886,865

Net income

 

 

 

 

44,227

 

 

44,227

 

1,736

 

45,963

Other comprehensive loss, net of tax

(118)

(118)

(118)

Noncontrolling interest contribution

865

865

Contribution from executive officer

1,000

1,000

1,000

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(1,695)

 

(1,695)

Dividends declared ($0.25 per share)

 

 

 

 

(17,868)

 

 

(17,868)

 

 

(17,868)

Shares issued under share-based compensation plans including tax effects

 

88,062

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(28,054)

 

 

(1,795)

 

 

 

(1,795)

 

 

(1,795)

Share-based compensation

 

 

 

8,381

 

 

 

8,381

 

 

8,381

Balance, June 26, 2018

 

71,474,209

$

71

$

243,357

$

664,668

$

(47)

$

908,049

$

13,549

$

921,598

See accompanying notes to condensed consolidated financial statements.

5

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

(in thousands, except share and per share data)

(unaudited)

For the 26 Weeks Ended June 25, 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

 

 

 

 

95,235

 

 

95,235

 

3,646

 

98,881

Other comprehensive income, net of tax

15

15

15

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(3,346)

 

(3,346)

Acquisition of noncontrolling interest and other

(70)

(70)

(673)

(743)

Dividends declared ($0.60 per share)

 

 

 

 

(42,771)

 

 

(42,771)

 

 

(42,771)

Shares issued under share-based compensation plans including tax effects

 

433,917

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(153,200)

 

 

(9,269)

 

 

 

(9,269)

 

 

(9,269)

Repurchase of shares of common stock

(2,096,677)

(2)

(112,050)

(112,052)

(112,052)

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

(2,678)

(2,678)

(2,678)

Share-based compensation

 

 

 

16,873

 

 

 

16,873

 

 

16,873

Balance, June 25, 2019

 

69,801,550

$

70

$

152,872

$

738,123

$

(213)

$

890,852

$

14,766

$

905,618

For the 26 Weeks Ended June 26, 2018

    

    

    

    

    

Accumulated

    

Total Texas

    

    

Additional

Other

Roadhouse, Inc.

Par

Paid-in-

Retained

Comprehensive

and

Noncontrolling

Shares

Value

Capital

Earnings

Loss

Subsidiaries

Interests

Total

Balance, December 26, 2017

 

71,168,897

$

71

$

236,548

$

602,499

$

(39)

$

839,079

$

12,312

$

851,391

Net income

 

 

 

 

98,768

 

 

98,768

 

3,574

 

102,342

Other comprehensive loss, net of tax

(8)

(8)

(8)

Noncontrolling interest contribution

865

865

Contribution from executive officer

1,000

1,000

1,000

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

(3,202)

 

(3,202)

Dividends declared ($0.50 per share)

 

 

 

 

(35,721)

 

 

(35,721)

 

 

(35,721)

Shares issued under share-based compensation plans including tax effects

 

478,690

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(173,378)

 

 

(10,047)

 

 

 

(10,047)

 

 

(10,047)

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

(878)

(878)

(878)

Share-based compensation

 

 

 

15,856

 

 

 

15,856

 

 

15,856

Balance, June 26, 2018

 

71,474,209

$

71

$

243,357

$

664,668

$

(47)

$

908,049

$

13,549

$

921,598

See accompanying notes to condensed consolidated financial statements.

6

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

26 Weeks Ended

    

June 25, 2019

    

June 26, 2018

Cash flows from operating activities:

Net income including noncontrolling interests

$

98,881

$

102,342

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

Depreciation and amortization

 

56,227

 

49,649

Deferred income taxes

 

(2,734)

 

3,609

Loss on disposition of assets

 

2,322

 

2,852

Impairment and closure costs

 

312

 

Contribution from executive officer

1,000

Equity income from investments in unconsolidated affiliates

 

(254)

 

(769)

Distributions of income received from investments in unconsolidated affiliates

 

346

 

367

Provision for doubtful accounts

 

(19)

 

17

Share-based compensation expense

 

16,873

 

15,856

Changes in operating working capital:

Receivables

 

53,894

 

44,328

Inventories

 

920

 

(719)

Prepaid expenses

 

1,215

 

870

Other assets

 

(7,653)

 

(4,600)

Accounts payable

 

(299)

 

(61)

Deferred revenue—gift cards

 

(72,685)

 

(59,082)

Accrued wages

 

1,733

 

3,066

Prepaid income taxes and income taxes payable

 

12,152

 

(980)

Accrued taxes and licenses

 

(381)

 

(765)

Other accrued liabilities

 

13,749

 

2,247

Operating lease right-of-use assets and lease liabilities

 

2,799

 

Deferred rent

2,382

Other liabilities

 

9,618

 

3,498

Net cash provided by operating activities

 

187,016

 

165,107

Cash flows from investing activities:

Capital expenditures—property and equipment

 

(87,782)

(66,718)

Net cash used in investing activities

 

(87,782)

 

(66,718)

Cash flows from financing activities:

Proceeds from noncontrolling interest contribution

865

Distributions to noncontrolling interest holders

 

(3,346)

(3,202)

Acquisition of noncontrolling interest

(743)

Proceeds from restricted stock and other deposits, net

 

340

 

232

Indirect repurchase of shares for minimum tax withholdings

 

(9,269)

 

(10,047)

Principal payments on long-term debt and finance lease obligation

 

 

(50,004)

Repurchase of shares of common stock

 

(112,050)

 

Dividends paid to shareholders

 

(39,452)

 

(32,798)

Net cash used in financing activities

 

(164,520)

 

(94,954)

Net (decrease) increase in cash and cash equivalents

 

(65,286)

 

3,435

Cash and cash equivalents—beginning of period

 

210,125

 

150,918

Cash and cash equivalents—end of period

$

144,839

$

154,353

Supplemental disclosures of cash flow information:

Interest paid, net of amounts capitalized

$

367

$

485

Income taxes paid

$

7,128

$

14,295

Capital expenditures included in current liabilities

$

15,267

$

14,268

See accompanying notes to condensed consolidated financial statements.

7

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 June 25, 2019 and December 25, 2018 and for the 13 and 26 weeks ended June 25, 2019 and June 26, 2018.

As of June 25, 2019, we owned and operated 498 restaurants and franchised an additional 93 restaurants in 49 states and ten foreign countries. Of the 498 company restaurants that were operating at June 25, 2019, 478 were wholly-owned and 20 were majority-owned. Of the 93 franchise restaurants, 70 were domestic restaurants and 23 were international restaurants.

As of June 26, 2018, we owned and operated 476 restaurants and franchised an additional 90 restaurants in 49 states and eight foreign countries. Of the 476 company restaurants that were operating at June 26, 2018, 458 were wholly-owned and 18 were majority-owned. Of the 90 franchise restaurants, 70 were domestic restaurants and 20 were international restaurants.

As of June 25, 2019 and June 26, 2018, we owned a 5.0% to 10.0% equity interest in 24 domestic franchise restaurants. Additionally, as of June 25, 2019 and June 26, 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 breakage and third party fees 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 and 26 weeks ended June 25, 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.

8

(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 statements.

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 statements.

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.

9

(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 June 25, 2019, these amounts were as follows (in thousands):

Leases

Real estate

Equipment

Total

Operating lease right-of-use assets

$

482,086

$

3,732

$

485,818

Current portion of operating lease liabilities

15,230

1,242

16,472

Operating lease liabilities, net of current portion

519,330

2,490

521,820

Total operating lease liabilities

$

534,560

$

3,732

$

538,292

Information related to our real estate leases as of and for the 13 and 26 week periods ended June 25, 2019 was as follows (in thousands):

13 Weeks Ended

26 Weeks Ended

Real estate costs

June 25, 2019

June 25, 2019

Operating lease

$

13,486

$

26,913

Variable lease

403

851

Short-term lease

30

60

Total lease costs

$

13,919

$

27,824

Real estate lease liability maturity analysis

Total

2019

$

24,955

2020

51,032

2021

51,659

2022

52,498

2023

52,462

Thereafter

725,365

Total

$

957,971

Less interest

423,411

Total discounted operating lease liabilities

$

534,560

13 Weeks Ended

26 Weeks Ended

Real estate leases other information

June 25, 2019

June 25, 2019

Cash paid for amounts included in measurement of operating lease liabilities

$

12,166

$

24,114

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

$

18,532

$

26,872

Weighted-average remaining lease term (years)

17.83

Weighted-average discount rate

6.77

Operating lease payments exclude approximately $18.3 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 June 25, 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,

10

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 unaudited condensed consolidated balance sheets.

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

11

Rent expense for operating leases consisted of the following for the 13 and 26 week periods ended June 26, 2018 (in thousands):

13 Weeks Ended

26 Weeks Ended

    

June 26, 2018

    

June 26, 2018

Minimum rent—occupancy

$

11,836

$

23,369

Contingent rent

 

283

 

601

Rent expense, occupancy

 

12,119

 

23,970

Minimum rent—equipment and other

 

1,399

 

2,959

Rent expense

$

13,518

$

26,929

(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 June 25, 2019 and December 25, 2018 was 3.32% and 3.81%, respectively. As of June 25, 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 June 25, 2019.

( 5) Revenue

The following table disaggregates our revenue by major source (in thousands):

13 weeks ended

26 weeks ended

June 25, 2019

June 26, 2018

June 25, 2019

June 25, 2019

Restaurant and other sales

$

684,373

$

624,073

$

1,369,490

$

1,246,475

Franchise royalties

4,814

4,336

9,671

8,820

Franchise fees

641

828

1,275

1,647

Total revenue

$

689,828

$

629,237

$

1,380,436

$

1,256,942

We record deferred revenue for gift cards which includes cards that have been sold but not yet redeemed, a breakage adjustment for a percentage of gift cards that are not expected to be redeemed, and fees paid on gift cards sold through third party retailers. When the gift cards are redeemed, we recognize restaurant sales and reduce deferred revenue. We amortize breakage and third party fees consistent with the historic redemption pattern of the associated gift card and recognize as a component of other sales. As of June 25, 2019 and December 25, 2018, our deferred revenue balance related to gift cards was approximately $119.6 million and $192.2 million, respectively. We recognized sales of

12

approximately $26.6 million and $105.0 million for the 13 and 26 weeks ended June 25, 2019, respectively, related to the amount in deferred revenue as of December 25, 2018. We recognized sales of approximately $21.8 million and $86.4 million for the 13 and 26 weeks ended June 26, 2018, respectively, related to the amount in deferred revenue as of December 26, 2017.

(6) Income Taxes

A reconciliation of the statutory federal income tax rate to our effective tax rate for the 13 and 26 weeks ended June 25, 2019 and June 26, 2018 is as follows:

13 Weeks Ended

   

26 Weeks Ended

   

June 25, 2019

   

June 26, 2018

   

June 25, 2019

   

June 26, 2018

Tax at statutory federal rate

21.0

%  

21.0

%  

21.0

%  

21.0

%

State and local tax, net of federal benefit

3.6

3.5

3.6

3.8

FICA tip tax credit

(10.3)

(9.2)

(9.9)

(9.4)

Work opportunity tax credit

(1.5)

(1.6)

(1.4)

(1.4)

Stock compensation

(0.6)

(0.3)

(1.4)

Net income attributable to noncontrolling interests

(0.6)

(0.2)

(0.5)

(0.7)

Officers compensation

0.7

1.3

1.1

1.1

Other

0.8

1.4

0.7

1.2

Total

13.7

%  

15.6

%  

14.3

%  

14.2

%

Our effective tax rate decreased to 13.7% for the 13 weeks ended June 25, 2019 compared to 15.6 % for the 13 weeks ended June 26, 2018. This decrease was primarily driven by higher FICA tip credits and lower non-deductible officers’ compensation partially offset by lower excess tax benefits related to our share-based compensation program. For the 26 weeks ended June 25, 2019 our effective tax rate increased to 14.3% compared to 14.2 % for the 26 weeks ended June 25, 2018. This increase was primarily driven by lower excess tax benefits related to our share-based compensation program partially offset by higher FICA tip credits.

(7)

Commitments and Contingencies

The estimated cost of completing capital project commitments at June 25, 2019 and December 25, 2018 was approximately $197.2 million and $168.3 million, respectively.

As of June 25, 2019 and December 25, 2018, we were contingently liable for $14.3 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 assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of June 25, 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.

13

    

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 8, these restaurants are owned, in part, by our founder or the former president 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 and 26 weeks ended June 25, 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.

(8)   Related Party Transactions

As of June 25, 2019, we had nine franchise restaurants and one majority-owned company restaurant owned in part by certain officers or the former president of the Company. As of June 26, 2018, we had 10 franchise restaurants owned in part by certain officers of the Company. For the 13 week periods ended June 25, 2019 and June 26, 2018, these franchise entities paid us fees of approximately $0.5 million and $0.6 million, respectively. For both 26 week periods ended June 25, 2019 and June 26, 2018, these franchise entities paid us fees of approximately $1.1 million. As disclosed in note 7, we are contingently liable on leases related to two of these franchise restaurants.

In addition, for the 13 weeks ended June 26, 2018, our founder made a personal contribution of $1.0 million to cover a portion of the planned expenses incurred as part of the 2018 annual managing partner conference which marked our 25th anniversary.  This amount was recorded as general and administrative expense on the unaudited condensed consolidated statement of income and as additional paid-in-capital on the unaudited condensed consolidated statement of stockholders’ equity. 

(9)   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 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 June 25, 2019 and June 26, 2018, there were 14,925 and 1,231 shares of nonvested stock that were outstanding but not included in the computation of diluted earnings per share because their inclusion

14

would have had an anti-dilutive effect. For the 26 week periods ended June 25, 2019 and June 26, 2018, there were 4,469 and 7,937 shares of nonvested stock, respectively, that were not included because they would have had an anti-dilutive effect.

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

26 Weeks Ended

    

June 25, 2019

    

June 26, 2018

June 25, 2019

    

June 26, 2018

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries