10-Q 1 txrh-20170328x10q.htm 10-Q txrh_Current_Folio_10Q

 

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 28, 2017

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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.  (Check one):

 

Large accelerated filer  ☒

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☐

(Do not check if a 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 70,922,789 on April 26, 2017.

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

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

 

3

Condensed Consolidated Balance Sheets — March 28, 2017 and December 27, 2016 

 

3

Condensed Consolidated Statements of Income and Comprehensive Income — For the 13 Weeks Ended March 28, 2017 and March 29, 2016 

 

4

Condensed Consolidated Statement of Stockholders’ Equity — For the 13 Weeks Ended March 28, 2017 

 

5

Condensed Consolidated Statements of Cash Flows — For the 13 Weeks Ended March 28, 2017 and March 29, 2016 

 

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 

 

29

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 

 

31

Item 5 — Other Information 

 

31

Item 6 — Exhibits 

 

31

 

 

 

Signatures 

 

32

 

 

2


 

PART I — FINANCIAL INFORMATION

 

ITEM 1 — FINANCIAL STATEMENTS

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 28, 2017

    

December 27, 2016

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,512

 

$

112,944

 

Receivables, net of allowance for doubtful accounts of $52 at March 28, 2017 and $33 at December 27, 2016

 

 

21,005

 

 

56,127

 

Inventories, net

 

 

14,869

 

 

16,088

 

Prepaid income taxes

 

 

 

 

954

 

Prepaid expenses

 

 

13,318

 

 

12,150

 

Deferred tax assets, net

 

 

 

 

1,996

 

Total current assets

 

 

186,704

 

 

200,259

 

Property and equipment, net of accumulated depreciation of $475,964 at March 28, 2017 and $457,102 at December 27, 2016

 

 

855,027

 

 

830,054

 

Goodwill

 

 

121,040

 

 

116,571

 

Intangible assets, net of accumulated amortization of $11,983 at March 28, 2017 and $11,753 at December 27, 2016

 

 

3,392

 

 

3,622

 

Other assets

 

 

31,725

 

 

29,465

 

Total assets

 

$

1,197,888

 

$

1,179,971

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt and obligation under capital lease

 

$

172

 

$

167

 

Accounts payable

 

 

54,379

 

 

50,789

 

Deferred revenue-gift cards

 

 

86,089

 

 

129,558

 

Accrued wages

 

 

30,805

 

 

26,039

 

Income taxes payable

 

 

13,855

 

 

 

Accrued taxes and licenses

 

 

21,591

 

 

19,698

 

Dividends payable

 

 

14,890

 

 

13,418

 

Other accrued liabilities

 

 

55,377

 

 

39,858

 

Total current liabilities

 

 

277,158

 

 

279,527

 

Long-term debt and obligation under capital lease, excluding current maturities

 

 

52,336

 

 

52,381

 

Stock option and other deposits

 

 

8,088

 

 

7,491

 

Deferred rent

 

 

37,716

 

 

36,103

 

Deferred tax liabilities, net

 

 

5,396

 

 

12,268

 

Other liabilities

 

 

35,572

 

 

33,959

 

Total liabilities

 

 

416,266

 

 

421,729

 

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, 70,910,994 and 70,619,737 shares issued and outstanding at March 28, 2017 and December 27, 2016, respectively)

 

 

71

 

 

71

 

Additional paid-in-capital

 

 

219,488

 

 

219,626

 

Retained earnings

 

 

550,077

 

 

530,723

 

Accumulated other comprehensive loss

 

 

(173)

 

 

(194)

 

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

 

769,463

 

 

750,226

 

Noncontrolling interests

 

 

12,159

 

 

8,016

 

Total equity

 

 

781,622

 

 

758,242

 

Total liabilities and equity

 

$

1,197,888

 

$

1,179,971

 

See accompanying notes to condensed consolidated financial statements.

3


 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

 

    

March 28, 2017

    

March 29, 2016

    

 

Revenue:

 

 

 

 

 

 

 

 

Restaurant sales

 

$

563,320

 

$

511,284

 

 

Franchise royalties and fees

 

 

4,366

 

 

4,275

 

 

Total revenue

 

 

567,686

 

 

515,559

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Cost of sales

 

 

184,193

 

 

173,128

 

 

Labor

 

 

170,347

 

 

147,546

 

 

Rent

 

 

10,869

 

 

10,027

 

 

Other operating

 

 

85,660

 

 

77,612

 

 

Pre-opening

 

 

4,740

 

 

4,825

 

 

Depreciation and amortization

 

 

22,596

 

 

19,539

 

 

Impairment and closure

 

 

11

 

 

11

 

 

General and administrative

 

 

40,248

 

 

30,060

 

 

Total costs and expenses

 

 

518,664

 

 

462,748

 

 

Income from operations

 

 

49,022

 

 

52,811

 

 

Interest expense, net

 

 

332

 

 

305

 

 

Equity income from investments in unconsolidated affiliates

 

 

(320)

 

 

(352)

 

 

Income before taxes

 

 

49,010

 

 

52,858

 

 

Provision for income taxes

 

 

12,987

 

 

15,857

 

 

Net income including noncontrolling interests

 

 

36,023

 

 

37,001

 

 

Less: Net income attributable to noncontrolling interests

 

 

1,710

 

 

1,408

 

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

34,313

 

$

35,593

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gain on derivatives, net of tax of ($-) and ($18), respectively

 

 

 

 

27

 

 

Foreign currency translation adjustment, net of tax of ($13) and $6, respectively

 

 

21

 

 

(11)

 

 

Total other comprehensive income, net of tax

 

 

21

 

 

16

 

 

Total comprehensive income

 

$

34,334

 

$

35,609

 

 

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

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

$

0.51

 

 

Diluted

 

$

0.48

 

$

0.50

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

70,779

 

 

70,169

 

 

Diluted

 

 

71,334

 

 

70,764

 

 

Cash dividends declared per share

 

$

0.21

 

$

0.19

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

Total Texas

    

 

 

    

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Roadhouse, Inc.

 

 

 

 

 

 

 

 

 

 

 

Par

 

Paid-in-

 

Retained

 

Comprehensive

 

and

 

Noncontrolling

 

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Loss

 

Subsidiaries

 

Interests

 

Total

 

Balance, December 27, 2016

 

70,619,737

 

$

71

 

$

219,626

 

$

530,723

 

$

(194)

 

$

750,226

 

$

8,016

 

$

758,242

 

Net income

 

 

 

 

 

 

 

34,313

 

 

 

 

34,313

 

 

1,710

 

 

36,023

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

21

 

 

21

 

 

 

 

21

 

Noncontrolling interests contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

3,457

 

 

3,457

 

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,024)

 

 

(1,024)

 

Dividends declared ($0.21 per share)

 

 

 

 

 

 

 

(14,890)

 

 

 

 

(14,890)

 

 

 

 

(14,890)

 

Shares issued under share-based compensation plans

 

448,265

 

 

 

 

563

 

 

 

 

 

 

563

 

 

 

 

563

 

Indirect repurchase of shares for minimum tax withholdings

 

(157,008)

 

 

 

 

(6,988)

 

 

 

 

 

 

(6,988)

 

 

 

 

(6,988)

 

Cumulative effect of change in accounting principle

 

 

 

 

 

69

 

 

(69)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

6,218

 

 

 

 

 

 

6,218

 

 

 

 

6,218

 

Balance, March 28, 2017

 

70,910,994

 

$

71

 

$

219,488

 

$

550,077

 

$

(173)

 

$

769,463

 

$

12,159

 

$

781,622

 

 

 

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 28, 2017

    

March 29, 2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

36,023

 

$

37,001

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,596

 

 

19,539

 

Deferred income taxes

 

 

(4,889)

 

 

(247)

 

Loss on disposition of assets

 

 

1,055

 

 

1,274

 

Equity income from investments in unconsolidated affiliates

 

 

(320)

 

 

(352)

 

Distributions of income received from investments in unconsolidated affiliates

 

 

162

 

 

136

 

Provision for doubtful accounts

 

 

19

 

 

(9)

 

Share-based compensation expense

 

 

6,218

 

 

5,788

 

Changes in operating working capital:

 

 

 

 

 

 

 

Receivables

 

 

35,103

 

 

26,235

 

Inventories

 

 

1,389

 

 

1,238

 

Prepaid expenses

 

 

(1,168)

 

 

(2,084)

 

Other assets

 

 

(2,068)

 

 

(607)

 

Accounts payable

 

 

3,059

 

 

(3,008)

 

Deferred revenue—gift cards

 

 

(43,860)

 

 

(33,728)

 

Accrued wages

 

 

4,766

 

 

(8,215)

 

Excess tax benefits from share-based compensation

 

 

 

 

(1,324)

 

Prepaid income taxes and income taxes payable

 

 

14,809

 

 

12,994

 

Accrued taxes and licenses

 

 

1,893

 

 

441

 

Other accrued liabilities

 

 

16,326

 

 

6,881

 

Deferred rent

 

 

1,613

 

 

1,070

 

Other liabilities

 

 

1,611

 

 

1,865

 

Net cash provided by operating activities

 

 

94,337

 

 

64,888

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures—property and equipment

 

 

(36,063)

 

 

(34,179)

 

Acquisition of franchise restaurants, net of cash acquired

 

 

(16,528)

 

 

 

Net cash used in investing activities

 

 

(52,591)

 

 

(34,179)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from revolving credit facility, net

 

 

 

 

25,000

 

Proceeds from noncontrolling interest contribution

 

 

3,457

 

 

 

Repurchase of shares of common stock

 

 

 

 

(4,110)

 

Distributions to noncontrolling interest holders

 

 

(1,024)

 

 

(1,173)

 

Excess tax benefits from share-based compensation

 

 

 

 

1,324

 

Proceeds from stock option and other deposits, net

 

 

272

 

 

240

 

Indirect repurchase of shares for minimum tax withholdings

 

 

(6,988)

 

 

(4,707)

 

Principal payments on long-term debt and capital lease obligation

 

 

(40)

 

 

(35)

 

Proceeds from exercise of stock options

 

 

563

 

 

1,329

 

Dividends paid to shareholders

 

 

(13,418)

 

 

(11,919)

 

Net cash (used in) provided by financing activities

 

 

(17,178)

 

 

5,949

 

Net increase in cash and cash equivalents

 

 

24,568

 

 

36,658

 

Cash and cash equivalents—beginning of period

 

 

112,944

 

 

59,334

 

Cash and cash equivalents—end of period

 

$

137,512

 

$

95,992

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

268

 

$

253

 

Income taxes paid

 

$

3,067

 

$

3,111

 

Capital expenditures included in current liabilities

 

$

5,823

 

$

5,065

 

 

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 28, 2017 and December 27, 2016 and for the 13 weeks ended March 28, 2017 and March 29, 2016.  

 

As of March 28, 2017, we owned and operated 441 restaurants and franchised an additional 84 restaurants in 49 states and six foreign countries.  Of the 441 company-owned restaurants that were operating at March 28, 2017, 423 were wholly-owned and 18 were majority-owned.

 

As of March 29, 2016, we owned and operated 408 restaurants and franchised an additional 83 restaurants in 49 states and four foreign countries.  Of the 408 company-owned restaurants that were operating at March 29, 2016, 392 were wholly-owned and 16 were majority-owned.

 

As of March 28, 2017 and March 29, 2016, we owned 5.0% to 10.0% equity interest in 24 franchise restaurants.  Additionally, as of March 28, 2017 and March 29, 2016, 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 28, 2017 are not necessarily indicative of the results that may be expected for the year ending December 26, 2017.  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 27, 2016.

 

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

 

(2)   Share-based Compensation

 

On May 16, 2013, our stockholders approved the Texas Roadhouse, Inc. 2013 Long-Term Incentive Plan (the "Plan").  The Plan provides for the granting of incentive and non-qualified stock options to purchase shares of common

7


 

stock, stock appreciation rights, and full value awards, including restricted stock, restricted stock units ("RSUs"), deferred stock units, performance stock and performance stock units ("PSUs").  This Plan replaced the Texas Roadhouse, Inc. 2004 Equity Incentive Plan.

 

The following table summarizes the share-based compensation expense recorded in the accompanying unaudited condensed consolidated statements of income and comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

 

    

March 28, 2017

    

March 29, 2016

    

 

Labor expense

 

$

1,694

 

$

1,399

 

 

General and administrative expense

 

 

4,524

 

 

4,389

 

 

Total share-based compensation expense

 

$

6,218

 

$

5,788

 

 

 

Effective December 28, 2016, we adopted Accounting Standards Update No. 2016-09, Compensation – Stock Compensation ("ASU 2016-09") which amends and simplifies the accounting for stock compensation.  As a result of the adoption of ASU 2016-09, we made a change in our accounting principle to account for forfeitures as they occur and, as a result, we recorded a $0.1 million cumulative-effect reduction to retained earnings under the modified retrospective approach.  We elected the prospective transition for the requirement to classify excess tax benefits as an operating activity.  No prior periods have been adjusted.  Additionally, as a result of the new guidance requirements, on a prospective basis, all excess tax benefits and tax deficiencies are recognized within the income tax provision in the income statement in the period in which the restricted shares vest or options are exercised.  See note 4 for further discussion.

 

Beginning in 2008, we changed the method by which we provide share-based compensation to our employees by granting RSUs as a form of share-based compensation.  Prior to 2008, we issued stock options as share-based compensation to our employees.  Beginning in 2015, we began granting PSUs to two of our executives.  An RSU is the conditional right to receive one share of common stock upon satisfaction of the vesting requirement. A PSU is the conditional right to receive one share of common stock upon meeting a performance obligation along with the satisfaction of the vesting requirement.  Share-based compensation activity by type of grant as of March 28, 2017 and changes during the 13 weeks then ended are presented below.

 

 

Summary Details for RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

    

Weighted-Average

    

 

 

 

 

 

 

 

Grant Date Fair

 

Remaining Contractual

 

Aggregate

 

 

 

Shares

 

Value

 

Term (years)

 

Intrinsic Value

 

Outstanding at December 27, 2016

 

919,463

 

$

37.06

 

 

 

 

 

 

Granted

 

131,627

 

 

42.82

 

 

 

 

 

 

Forfeited

 

(5,706)

 

 

39.40

 

 

 

 

 

 

Vested

 

(221,842)

 

 

36.29

 

 

 

 

 

 

Outstanding at March 28, 2017

 

823,542

 

$

38.10

 

1.3

 

$

36,362

 

 

As of March 28, 2017, with respect to unvested RSUs, there was $18.4 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 1.3 years.  The vesting terms of the RSUs range from approximately 1.0 to 5.0 years.  The total intrinsic value of RSUs vested during the 13 weeks ended March 28, 2017 and March 29, 2016 was $9.9 million and $8.1 million, respectively.  The excess tax benefit, which was recognized within the income tax provision, associated with vested restricted stock units was $0.6 million for the 13 weeks ended March 28, 2017.  The excess tax benefit for the 13 weeks ended March 29, 2016 was $0.3 million which was recorded in additional paid-in-capital in the unaudited condensed consolidated balance sheets.

 

8


 

Summary Details for PSUs

 

In 2015 and 2016, we granted PSUs to two of our executives subject to an approximate one-year vesting term and the achievement of certain earnings targets, which determine the number of units to vest at the end of the vesting period.  Share-based compensation is recognized for the number of units expected to vest at the end of the period and is expensed beginning on the grant date and through the performance period.  For each grant, PSUs vest after meeting the performance and service conditions. 

  

On November 19, 2015, we granted PSUs with a grant date fair value of approximately $3.9 million based on the grant date price per share of $34.11.  On January 8, 2017, 188,237 shares vested related to this PSU grant and were distributed during the 13 weeks ended March 28, 2017.  On November 9, 2016, we granted PSUs with a grant date fair value of $4.6 million based on a grant date price per share of $39.88.  As of March 28, 2017, with respect to unvested PSUs, there was $3.1 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 10 months.  The distribution of vested PSUs as common stock related to the November 9, 2016 grants will occur in the first quarter of 2018.  For the 13 weeks ended March 28, 2017, the excess tax benefit, recognized within the income tax provision, associated with vested PSUs was $0.8 million.  The excess tax loss realized from deductions associated with vested PSUs for the 13 weeks ended March 29, 2016 was $0.1 million which was recorded in additional paid-in-capital in the unaudited condensed consolidated balance sheets.

 

Summary Details for Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

    

Weighted-Average

    

 

 

 

 

 

 

 

Average Exercise

 

Remaining Contractual

 

Aggregate

 

 

 

Shares

 

Price

 

Term (years)

 

Intrinsic Value

 

Outstanding at December 27, 2016

 

118,073

 

$

13.57

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

Cancelled/Expired

 

(2,344)

 

 

15.74

 

 

 

 

 

 

Exercised

 

(38,186)

 

 

14.73

 

 

 

 

 

 

Outstanding at March 28, 2017

 

77,543

 

$

12.93

 

0.4

 

$

2,420

 

Exercisable at March 28, 2017

 

77,543

 

$

12.93

 

0.4

 

$

2,420

 

 

No stock options vested during the 13 weeks ended March 28, 2017 or March 29, 2016.  For the 13 weeks ended March 28, 2017 and March 29, 2016, the total intrinsic value of options exercised was $1.1 million and $3.3 million, respectively.

 

For the 13 weeks ended March 28, 2017 and March 29, 2016, cash received before tax withholdings from options exercised was $0.6 million and $1.3 million, respectively.  The excess tax benefit, recognized within the income tax provision, associated with options exercised was $0.2 million for the 13 weeks ended March 28, 2017.  The excess tax benefit for the 13 weeks ended March 29, 2016 was $1.0 million which was recorded in additional paid-in-capital in the unaudited condensed consolidated balance sheets.

 

(3)   Long-term Debt and Obligation Under Capital Lease

 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

March 28,

    

December 27,

 

 

 

2017

 

2016

 

Installment loan, due 2020

 

$

512

 

$

550

 

Obligation under capital lease

 

 

1,996

 

 

1,998

 

Revolver

 

 

50,000

 

 

50,000

 

 

 

 

52,508

 

 

52,548

 

Less current maturities

 

 

172

 

 

167

 

 

 

$

52,336

 

$

52,381

 

 

9


 

The interest rate for our installment loan outstanding at both March 28, 2017 and December 27, 2016 was 10.46%.  The debt is secured by certain land and building assets and is subject to certain prepayment penalties.

 

During the 52 weeks ended December 27, 2016, we amended an existing lease at one restaurant location to acquire additional square footage.  As a result of this amendment, the lease qualified as a capital lease.

 

On November 1, 2013, we entered into Omnibus Amendment No. 1 and Consent to Credit Agreement and Guaranty with respect to our revolving credit facility dated as of August 12, 2011 with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo, N.A. The amended revolving credit facility, which has a maturity date of November 1, 2018, remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million. The amendment provides us with the option to increase the revolving credit facility by $200.0 million, up to $400.0 million, subject to certain limitations.

 

The terms of the amended revolving credit facility require us to pay interest on outstanding borrowings at the London Interbank Offered Rate ("LIBOR") plus a margin of 0.875% to 1.875%, depending on our leverage ratio, or the Alternate Base Rate, which is the higher of the issuing bank’s prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. We are also required to pay a commitment fee of 0.125% to 0.30% per year on any unused portion of the amended revolving credit facility, depending on our leverage ratio. The weighted-average interest rate for the amended revolving credit facility at March 28, 2017 and December 27, 2016 was 1.82% and 1.57%, respectively. At March 28, 2017, we had $50.0 million outstanding under the amended revolving credit facility and $142.9 million of availability, net of $7.1 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit under the amended revolving credit facility 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.  Our amended revolving credit facility permits us to incur additional secured or unsecured indebtedness outside the facility, except for the incurrence of secured indebtedness that in the aggregate exceeds 15% of our consolidated tangible net worth or circumstances where the incurrence of secured or unsecured indebtedness would prevent us from complying with our financial covenants.  We were in compliance with all financial covenants as of March 28, 2017.

 

(4)     Income Taxes

 

A reconciliation of the statutory federal income tax rate to our effective tax rate for the 13 weeks ended March 28, 2017 and March 29, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

   

 

 

 

   

March 28, 2017

   

March 29, 2016

   

 

 

Tax at statutory federal rate

 

35.0

%  

35.0

%  

 

 

State and local tax, net of federal benefit

 

3.4

 

3.5

 

 

 

FICA tip tax credit

 

(7.0)

 

(7.0)

 

 

 

Work opportunity tax credit

 

(0.8)

 

(0.7)

 

 

 

Stock compensation

 

(3.2)

 

 

 

 

Net income attributable to noncontrolling interests

 

(1.1)

 

(0.9)

 

 

 

Other

 

0.2

 

0.1

 

 

 

Total

 

26.5

%  

30.0

%  

 

 

 

As a result of the adoption of ASU 2016-09, excess tax benefits and tax deficiencies from share-based compensation are recognized within the income tax provision in the period in which the restricted shares vest or options are exercised.  During the 13 weeks ended March 28, 2017, we recognized $1.6 million as an income tax benefit, which resulted in a 3.2% impact on the tax rate.  Prior to the adoption of ASU 2016-09, excess tax benefits and deficiencies were recognized in additional paid-in capital in the unaudited condensed consolidated balance sheets. 

 

10


 

During the 13 weeks ended March 28, 2017, we adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which required deferred tax assets and liabilities to be classified as noncurrent on our condensed consolidated balance sheet.  We adopted ASU 2015-17 on a prospective basis.

 

 

 

 

 

 

(5)Commitments and Contingencies

 

The estimated cost of completing capital project commitments at March 28, 2017 and December 27, 2016 was approximately $152.4 million and $157.5 million, respectively.

 

As of March 28, 2017 and December 27, 2016, we are contingently liable for $16.2 million and $16.4 million, respectively, for seven leases, 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 March 28, 2017 and December 27, 2016 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 2018

 

Longmont, Colorado (1)

 

October 2003

 

May 2019

 

Montgomeryville, Pennsylvania (1)

 

October 2004

 

June 2021

 

Fargo, North Dakota (1)(2)

 

February 2006

 

July 2021

 

Logan, Utah (1)

 

January 2009

 

August 2019

 

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 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 28, 2017, we bought most of our beef from three suppliers. Although there are a limited number of beef suppliers, we believe that other suppliers could provide a similar product on comparable terms. A change in suppliers, however, could cause supply shortages, 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.

 

On September 30, 2011, the U.S. Equal Employment Opportunity Commission ("EEOC") filed a lawsuit styled Equal Employment Opportunity Commission v. Texas Roadhouse, Inc., Texas Roadhouse Holdings LLC and Texas Roadhouse Management Corp. in the United States District Court, District of Massachusetts, Civil Action Number 1:11-cv-11732 (the "Lawsuit"). The Lawsuit alleged that applicants age 40 and over were denied employment by us at company owned or managed restaurants in bartender, host, server and server assistant positions due to their age, in violation of the Age Discrimination in Employment Act of 1967, as amended.   The EEOC sought injunctive relief, remedial actions, payment of damages to the applicants, and costs.  We denied liability.  A jury trial began on January 9, 2017 and culminated in the declaration of a mistrial on February 3, 2017, after the jury was unable to reach a unanimous verdict.  A second trial was scheduled for May 2017.

 

As previously reported on the Current Report on Form 8-K filed with the SEC on April 4, 2017, we and the EEOC entered into a consent decree dated March 31, 2017 (the "Consent Decree") to settle the Lawsuit in the United States

11


 

District Court, District of Massachusetts.  The Consent Decree resolves the issues litigated in the Lawsuit.  Under the Consent Decree, among other terms, we will establish a fund of $12.0 million, from which awards of monetary relief, allocated as wages for tax purposes, may be made to eligible claimants in accordance with procedures set forth in the Consent Decree.  We recorded a pre-tax charge of $14.9 million ($9.2 million after-tax) related to the Lawsuit and Consent Decree.  The pre-tax charge includes $12.6 million of costs associated with the legal settlement and $2.3 million of legal fees associated with the defense of the case during the 13 weeks ended March 28, 2017.  The pre-tax charge was recorded in general and administrative expense in our unaudited condensed consolidated statements of income and comprehensive income. 

 

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including "slip and fall" accidents, employment related claims 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.  

 

(6)   Acquisitions

 

On December 28, 2016, we acquired four franchise restaurants in Florida and Georgia.  Pursuant to the terms of the acquisition agreements, we paid a total purchase price of $16.5 million, net of cash acquired.  Two of the acquired restaurants are wholly-owned and the remaining two restaurants are majority-owned.  These acquisitions are consistent with our long-term strategy to increase net income and earnings per share.

 

These transactions were accounted for using the purchase method as defined in ASC 805, Business Combinations ("ASC 805"). Based on a purchase price of $16.5 million, $4.5 million of goodwill was generated by the acquisition, which is not amortizable for book purposes, but is deductible for tax purposes.

 

The purchase price has been preliminarily allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

 

Current assets

 

 

$

179

 

Property and equipment

 

 

 

12,281

 

Goodwill

 

 

 

4,469

 

Current liabilities

 

 

 

(392)

 

 

 

 

$

16,537

 

 

Pro forma results of operations and revenue and earnings for the 13 weeks ended March 28, 2017 have not been presented because the effect of the acquisitions was not material to our financial position, results of operations or cash flows.

 

(7)   Related Party Transactions

 

As of March 28, 2017 and March 29, 2016, we had 10 franchise restaurants owned in whole or part, by certain of our officers, directors and 5% stockholders of the Company.  For both of the 13 week periods ended March 28, 2017 and March 29, 2016, these entities paid us fees of approximately $0.5 million.  As disclosed in note 5, we are contingently liable on leases which are related to two of these 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 stock options  and RSUs outstanding from our equity incentive plans as discussed in note 2.

 

12


 

The following table summarizes the nonvested stock and options that were outstanding but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect:

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

    

March 28, 2017

    

March 29, 2016

 

Nonvested stock

 

 

38,180

 

Options

 

 

 

Total

 

 

38,180

 

 

PSUs are not included in the diluted earnings per share calculation until the performance-based criteria have been met.  See note 2 for further discussion of PSUs.

 

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 28, 2017

    

March 29, 2016

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

34,313

 

$

35,593

 

Basic EPS:

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

70,779

 

 

70,169

 

Basic EPS

 

$

0.48

 

$

0.51

 

Diluted EPS:

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

70,779

 

 

70,169

 

Dilutive effect of stock options and nonvested stock

 

 

555

 

 

595

 

Shares-diluted

 

 

71,334

 

 

70,764

 

Diluted EPS

 

$

0.48

 

$

0.50

 

 

 

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

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

Level 3Inputs that are unobservable for the asset.

 

There were no transfers among levels within the fair value hierarchy during the 13 weeks ended March 28, 2017.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

    

Level

    

March 28, 2017

    

December 27, 2016

 

Deferred compensation plan—assets

 

1

 

 

23,242

 

 

21,951

 

Deferred compensation plan—liabilities

 

1

 

 

(23,241)

 

 

(22,128)

 

 

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

13


 

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 accounts 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 28, 2017 and December 27, 2016, 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.  The fair value of our amended revolving credit facility at March 28, 2017 and December 27, 2016 approximated its carrying value since it is a variable rate credit facility (Level 2).  The fair value of our installment loan is estimated based on the current rates offered to us for instruments of similar terms and maturities. The carrying amounts and related estimated fair values for our installment loan are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 28, 2017

 

December 27, 2016

 

 

    

Carrying

    

Fair

    

Carrying

    

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Installment loan—Level 2

 

$

512

 

$

552

 

$

550

 

$

599

 

 

 

 

(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 period ended March 28, 2017.  As of March 28, 2017, we had approximately $69.9 million remaining under our authorized stock repurchase program.  For the 13 week period ended March 29, 2016, we paid approximately $4.1 million to repurchase 114,700 shares of our common stock.

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 27, 2016, in Part II, Item 1A in this Form 10-Q and 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 ("CEO"), 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 525 restaurants in 49 states and six 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 28, 2017, our 525 restaurants included:

 

·

441 "company restaurants," of which 423 were wholly-owned and 18 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 441 restaurants we owned and operated as of March 28, 2017, we operated 423 as Texas Roadhouse restaurants and operated 16 as Bubba’s 33 restaurants.  In addition, we operated two restaurants outside of the casual dining segment.

 

·

84 "franchise restaurants," 24 of which we have a 5.0% to 10.0% ownership interest.  The income derived from our minority interests in these 24 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 provide various management services to these franchise restaurants, as well as six additional franchise restaurants in which we have no ownership interest.  All of the franchise restaurants operated as Texas Roadhouse restaurants.

 

We have contractual arrangements which grant us the right to acquire at pre-determined formulas the remaining equity interests in 16 of the 18 majority-owned company restaurants and 66 of the 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 28, 2017 and March 29, 2016 are referred to as Q1 2017 and Q1 2016, respectively.

 

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.  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 2017, we opened six company restaurants while our franchise partners opened two restaurants.  We currently plan to open approximately 30 company restaurants in 2017 including approximately six Bubba’s 33 restaurants.  In addition, we anticipate that our existing franchise partners will open as many as seven, primarily international, Texas Roadhouse restaurants during 2017.

 

Our average capital investment for the 21 Texas Roadhouse restaurants opened during 2016, including pre‑opening expenses and a capitalized rent factor, was $5.0 million.  We expect our average capital investment for Texas Roadhouse restaurants opening in 2017 to be approximately $5.1 million.  For 2016, the average capital investment, including pre-opening expenses and a capitalized rent factor, for the nine Bubba’s 33 restaurants opened during the year was $6.6 million.  We expect our average capital investment for Bubba’s 33 restaurants opening in 2017 to be approximately $6.5 million.

We remain focused on driving sales and managing restaurant investment costs in order to maintain our restaurant development in the future.  For 2017, we expect a slight increase in the average investment cost for Texas Roadhouse restaurants due to higher costs at one urban site in New Jersey.  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 (union or non-union), local permitting requirements, our ability to negotiate with landlords, cost of liquor and other licenses and hook-up fees and geographical location.

We may, at our discretion, add franchise restaurants, domestically and/or internationally, primarily with franchisees who have demonstrated prior success with Texas Roadhouse or other restaurant concepts and in markets in which the franchisee demonstrates superior knowledge of the demographics and restaurant operating conditions. In conjunction with this strategy, we signed our first international franchise development agreement in 2010 for the development of Texas Roadhouse restaurants in eight countries in the Middle East over a 10-year period.  In 2015, we amended our agreement in the Middle East to add one country to the territory.  In addition to the Middle East, we currently have signed franchise development agreements for the development of Texas Roadhouse restaurants in Taiwan, the Philippines and Mexico.  We currently have 10 restaurants open in four countries in the Middle East, two restaurants open in Taiwan and two in the Philippines for a total of 14 restaurants in six foreign countries.  Additionally, in 2010, we entered into a joint venture agreement with a casual dining restaurant operator in China for a minority ownership in four non‑Texas Roadhouse restaurants, all of which are currently open. We continue to explore opportunities in other countries for international expansion. We may also look to acquire domestic franchise restaurants under terms favorable to us and our stockholders. In Q1 2017, we acquired four franchise restaurants located in Florida and Georgia for an aggregate purchase price of $16.5 million. Additionally, from time to time, we will evaluate potential mergers,

16


 

acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts domestically and/or internationally.

 

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.  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 sales, in any given year, depending on the level of inflation we experience.  In addition to restaurant margin, as a percentage of restaurant 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 higher guest traffic counts, 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.  In order to attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, to focus on speed of service and to increase throughput by adding seats in 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.  Our goal is for general and administrative costs to increase at a slower growth rate than our revenue. Whether we are able to leverage our infrastructure in future years 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 16, 2017, our Board of Directors declared a quarterly dividend of $0.21 per share of common stock.  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 a number of factors, including, but not limited to, earnings, financial condition, applicable covenants under our amended 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 28, 2017, 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 28, 2017, $69.9 million remains authorized for stock repurchases.

 

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 sales for company-owned 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 current

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interim period 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-owned 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-owned restaurants were open during the reporting period.

 

Restaurant Margin.  Restaurant margin (in dollars and as a percentage of restaurant sales) represents restaurant sales less operating costs, including cost of sales, labor, rent and other operating costs.  Depreciation and amortization expense, substantially all of which relates to restaurant-level assets, is excluded from restaurant operating costs and is shown separately as it represents a non-cash charge for the investment in our restaurants.  Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance.  Restaurant margin is not a measurement determined in accordance with U.S. generally accepted accounting principles ("GAAP") and should not be considered in isolation, or as an alternative, to income from operations or other similarly titled measures of other companies.  Restaurant margin, as a percentage of restaurant sales, may fluctuate based on many factors, including, but not limited to, inflationary pressures, commodity costs and wage rates.  As such, we also focus on the growth of restaurant margin dollars per store week as a measure of restaurant-level profitability as it provides additional insight on operating performance.

 

Other Key Definitions

 

Restaurant Sales.   Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company-owned 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 other comprehensive income.

 

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/or international franchisees also typically pay an initial franchise fee for each new restaurant.  The terms of the international agreements may vary significantly from our domestic agreements.

 

Restaurant Cost of Sales.   Restaurant cost of sales consists of food and beverage costs of which as much as 50% 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 and gift card fees and general liability insurance offset by gift card breakage income. Profit sharing incentive compensation expenses earned by our restaurant managing partners and market partners are also included in restaurant other operating expenses.

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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 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 a number of 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 less amounts remitted by franchise restaurants.   Supervision and accounting fees received from certain franchise restaurants are offset against G&A.  G&A also includes legal fees, settlement charges and share-based compensation expense related to executive officers, support center employees and area managers, including market partners. The realized and unrealized holding gains and losses related to the investments in our deferred compensation plan, as well as offsetting compensation expense, are also recorded in G&A.

 

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

 

Equity Income from Unconsolidated Affiliates.   As of March 28, 2017 and March 29, 2016, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants.  Additionally, as of March 28, 2017 and March 29, 2016, 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.

 

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 28, 2017 and March 29, 2016 included 18 and 16 majority-owned restaurants, respectively, all of which were open.

 

Q1 2017 Financial Highlights

 

Total revenue increased $52.1 million, or 10.1%, to $567.7 million in Q1 2017 compared to $515.6 million in Q1 2016 primarily due to the opening of new restaurants combined with an increase in average unit volume driven by comparable restaurant sales growth.  Store weeks and comparable restaurant sales increased 8.0% and 3.1%, respectively, at company restaurants in Q1 2017.

 

Restaurant margin, as a percentage of restaurant sales, decreased to 19.9% in Q1 2017 compared to 20.1% in Q1 2016 primarily attributable to higher labor costs due to higher average wage rates and a change in our compensation structure.  Higher labor costs were partially offset by commodity deflation of approximately 2.4% driven by lower food costs, primarily beef. 

 

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Net income decreased $1.3 million, or 3.6%, to $34.3 million in Q1 2017 compared to $35.6 million in Q1 2016 primarily due to higher general and administrative expenses and higher depreciation costs partially offset by lower income tax expense.  General and administrative expenses were higher due to a pre-tax charge of $14.9 million ($9.2 million after-tax) related to a legal matter and its settlement.  This charge had a $0.13 impact on diluted earnings per share and a negative impact of 25.5% on diluted earnings per share growth in Q1 2017.  Diluted earnings per share decreased 4.4% to $0.48 from $0.50 in the prior year.

   

 

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

 

March 28, 2017

 

March 29, 2016

 

 

  

$

  

%

  

$

  

%

  

 

 

(In thousands)

 

Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant sales

 

563,320

 

99.2

 

511,284

 

99.2

 

Franchise royalties and fees

 

4,366

 

0.8

 

4,275

 

0.8

 

Total revenue

 

567,686

 

100.0

 

515,559

 

100.0

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

(As a percentage of restaurant sales)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Cost of sales

 

184,193

 

32.7

 

173,128

 

33.9

 

Labor

 

170,347

 

30.2

 

147,546

 

28.9