10-Q 1 txrh-20180327x10q.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 27, 2018

 

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 71,414,201 on April 25, 2018.

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

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

 

3

Condensed Consolidated Balance Sheets — March 27, 2018 and December 26, 2017 

 

3

Condensed Consolidated Statements of Income and Comprehensive Income — For the 13 Weeks Ended March 27, 2018 and March 28, 2017 

 

4

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

 

5

Condensed Consolidated Statement of Cash Flows — For the 13 Weeks Ended March 27, 2018 and March 28, 2017 

 

6

Notes to Condensed Consolidated Financial Statements 

 

7

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

 

16

Item 3 — Quantitative and Qualitative Disclosures About Market Risk 

 

29

Item 4 — Controls and Procedures 

 

30

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

Item 1 — Legal Proceedings 

 

31

Item 1A — Risk Factors 

 

31

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

 

31

Item 3 — Defaults Upon Senior Securities 

 

31

Item 4 — Mine Safety Disclosures 

 

31

Item 5 — Other Information 

 

31

Item 6 — Exhibits 

 

32

 

 

 

Signatures 

 

33

 

 

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 27, 2018

    

December 26, 2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

197,829

 

$

150,918

 

Receivables, net of allowance for doubtful accounts of $78 at March 27, 2018 and $43 at December 26, 2017

 

 

26,060

 

 

76,496

 

Inventories, net

 

 

16,466

 

 

16,306

 

Prepaid expenses

 

 

15,613

 

 

13,361

 

Total current assets

 

 

255,968

 

 

257,081

 

Property and equipment, net of accumulated depreciation of $545,756 at March 27, 2018 and $527,710 at December 26, 2017

 

 

922,891

 

 

912,147

 

Goodwill

 

 

121,040

 

 

121,040

 

Intangible assets, net of accumulated amortization of $12,861 at March 27, 2018 and $12,675 at December 26, 2017

 

 

2,514

 

 

2,700

 

Other assets

 

 

40,729

 

 

37,655

 

Total assets

 

$

1,343,142

 

$

1,330,623

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

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

 

$

 9

 

$

 9

 

Accounts payable

 

 

60,170

 

 

57,579

 

Deferred revenue-gift cards

 

 

104,651

 

 

156,627

 

Accrued wages

 

 

34,189

 

 

29,678

 

Income taxes payable

 

 

7,565

 

 

2,494

 

Accrued taxes and licenses

 

 

23,556

 

 

21,997

 

Dividends payable

 

 

17,853

 

 

14,945

 

Other accrued liabilities

 

 

51,933

 

 

46,669

 

Total current liabilities

 

 

299,926

 

 

329,998

 

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

 

 

51,979

 

 

51,981

 

Stock option and other deposits

 

 

7,678

 

 

7,699

 

Deferred rent

 

 

43,224

 

 

42,141

 

Deferred tax liabilities, net

 

 

8,401

 

 

5,301

 

Other liabilities

 

 

45,069

 

 

42,112

 

Total liabilities

 

 

456,277

 

 

479,232

 

Texas Roadhouse, Inc. and subsidiaries stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

Common stock ($0.001 par value, 100,000,000 shares authorized, 71,414,201 and 71,168,897 shares issued and outstanding at March 27, 2018 and December 26, 2017, respectively)

 

 

71

 

 

71

 

Additional paid-in-capital

 

 

235,771

 

 

236,548

 

Retained earnings

 

 

638,309

 

 

602,499

 

Accumulated other comprehensive income (loss)

 

 

71

 

 

(39)

 

Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity

 

 

874,222

 

 

839,079

 

Noncontrolling interests

 

 

12,643

 

 

12,312

 

Total equity

 

 

886,865

 

 

851,391

 

Total liabilities and equity

 

$

1,343,142

 

$

1,330,623

 

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 27, 2018

    

March 28, 2017

    

 

Revenue:

 

 

 

 

 

 

 

 

Restaurant and other sales

 

$

622,402

 

$

563,320

 

 

Franchise royalties and fees

 

 

5,303

 

 

4,366

 

 

Total revenue

 

 

627,705

 

 

567,686

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Cost of sales

 

 

202,786

 

 

184,193

 

 

Labor

 

 

196,030

 

 

170,347

 

 

Rent

 

 

11,851

 

 

10,869

 

 

Other operating

 

 

92,378

 

 

85,660

 

 

Pre-opening

 

 

5,044

 

 

4,740

 

 

Depreciation and amortization

 

 

24,484

 

 

22,596

 

 

Impairment and closure

 

 

86

 

 

11

 

 

General and administrative

 

 

30,175

 

 

40,248

 

 

Total costs and expenses

 

 

562,834

 

 

518,664

 

 

Income from operations

 

 

64,871

 

 

49,022

 

 

Interest expense, net

 

 

359

 

 

332

 

 

Equity income from investments in unconsolidated affiliates

 

 

(324)

 

 

(320)

 

 

Income before taxes

 

 

64,836

 

 

49,010

 

 

Provision for income taxes

 

 

8,457

 

 

12,987

 

 

Net income including noncontrolling interests

 

 

56,379

 

 

36,023

 

 

Less: Net income attributable to noncontrolling interests

 

 

1,838

 

 

1,710

 

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

 

$

54,541

 

$

34,313

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax of ($48) and ($13), respectively

 

 

110

 

 

21

 

 

Total other comprehensive income, net of tax

 

 

110

 

 

21

 

 

Total comprehensive income

 

$

54,651

 

$

34,334

 

 

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

 

 

 

 

 

 

 

 

Basic

 

$

0.76

 

$

0.48

 

 

Diluted

 

$

0.76

 

$

0.48

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

71,333

 

 

70,779

 

 

Diluted

 

 

71,805

 

 

71,334

 

 

Cash dividends declared per share

 

$

0.25

 

$

0.21

 

 

 

 

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) Income

 

Subsidiaries

 

Interests

 

Total

 

Balance, December 26, 2017

 

71,168,897

 

$

71

 

$

236,548

 

$

602,499

 

$

(39)

 

$

839,079

 

$

12,312

 

$

851,391

 

Net income

 

 

 

 

 

 

 

54,541

 

 

 

 

54,541

 

 

1,838

 

 

56,379

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

110

 

 

110

 

 

 

 

110

 

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,507)

 

 

(1,507)

 

Dividends declared ($0.25 per share)

 

 

 

 

 

 

 

(17,853)

 

 

 

 

(17,853)

 

 

 

 

(17,853)

 

Shares issued under share-based compensation plans including tax effects

 

390,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings

 

(145,324)

 

 

 

 

(8,252)

 

 

 

 

 

 

(8,252)

 

 

 

 

(8,252)

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

(878)

 

 

 

 

(878)

 

 

 

 

(878)

 

Share-based compensation

 

 

 

 

 

7,475

 

 

 

 

 

 

7,475

 

 

 

 

7,475

 

Balance, March 27, 2018

 

71,414,201

 

$

71

 

$

235,771

 

$

638,309

 

$

71

 

$

874,222

 

$

12,643

 

$

886,865

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

    

March 27, 2018

    

March 28, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

56,379

 

$

36,023

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,484

 

 

22,596

 

Deferred income taxes

 

 

3,349

 

 

(4,889)

 

Loss on disposition of assets

 

 

1,420

 

 

1,055

 

Equity income from investments in unconsolidated affiliates

 

 

(324)

 

 

(320)

 

Distributions of income received from investments in unconsolidated affiliates

 

 

181

 

 

162

 

Provision for doubtful accounts

 

 

35

 

 

19

 

Share-based compensation expense

 

 

7,475

 

 

6,218

 

Changes in operating working capital:

 

 

 

 

 

 

 

Receivables

 

 

50,401

 

 

35,103

 

Inventories

 

 

(160)

 

 

1,389

 

Prepaid expenses

 

 

(2,252)

 

 

(1,168)

 

Other assets

 

 

(2,770)

 

 

(2,068)

 

Accounts payable

 

 

3,170

 

 

3,059

 

Deferred revenue—gift cards

 

 

(51,976)

 

 

(43,860)

 

Accrued wages

 

 

4,511

 

 

4,766

 

Income taxes payable

 

 

5,071

 

 

14,809

 

Accrued taxes and licenses

 

 

1,559

 

 

1,893

 

Other accrued liabilities

 

 

3,393

 

 

16,326

 

Deferred rent

 

 

1,083

 

 

1,613

 

Other liabilities

 

 

1,778

 

 

1,611

 

Net cash provided by operating activities

 

 

106,807

 

 

94,337

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures—property and equipment

 

 

(35,307)

 

 

(36,063)

 

Acquisition of franchise restaurants, net of cash acquired

 

 

 

 

(16,528)

 

Net cash used in investing activities

 

 

(35,307)

 

 

(52,591)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from noncontrolling interest contribution

 

 

 

 

3,457

 

Distributions to noncontrolling interest holders

 

 

(1,507)

 

 

(1,024)

 

Proceeds from stock option and other deposits, net

 

 

117

 

 

272

 

Indirect repurchase of shares for minimum tax withholdings

 

 

(8,252)

 

 

(6,988)

 

Principal payments on long-term debt and capital lease obligation

 

 

(2)

 

 

(40)

 

Proceeds from exercise of stock options

 

 

 

 

563

 

Dividends paid to shareholders

 

 

(14,945)

 

 

(13,418)

 

Net cash used in financing activities

 

 

(24,589)

 

 

(17,178)

 

Net increase in cash and cash equivalents

 

 

46,911

 

 

24,568

 

Cash and cash equivalents—beginning of period

 

 

150,918

 

 

112,944

 

Cash and cash equivalents—end of period

 

$

197,829

 

$

137,512

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

264

 

$

268

 

Income taxes paid

 

$

36

 

$

3,067

 

Capital expenditures included in current liabilities

 

$

8,132

 

$

5,823

 

 

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 27, 2018 and December 26, 2017 and for the 13 weeks ended March 27, 2018 and March 28, 2017.  

 

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

 

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 restaurants that were operating at March 28, 2017, 423 were wholly-owned and 18 were majority-owned.

 

As of March 27, 2018 and March 28, 2017, we owned 5.0% to 10.0% equity interest in 24 franchise restaurants.  Additionally, as of March 27, 2018 and March 28, 2017, 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 amounts of property and equipment and 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 weeks ended March 27, 2018 are not necessarily indicative of the results that may be expected for the year ending December 25, 2018.  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 26, 2017.

 

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

 

7


 

(2)  Recent Accounting Pronouncements

 

Revenue Recognition

(Accounting Standards Codification 606, "ASC 606")

 On December 27, 2017, we adopted ASC 606,  Revenue from Contracts with Customers.  This ASC requires an entity to allocate the transaction price received from customers to each separate and distinct performance obligation and recognize revenue as these performance obligations are satisfied.  This standard replaces most existing revenue recognition guidance in GAAP.  The adoption of this standard did not have an impact on our recognition of sales from company restaurants or our recognition of continuing fees from franchisees, which are based on a percentage of franchise restaurant sales.  As further detailed below, the adoption of this standard did have an impact on the recognition of initial franchise fees and upfront fees from international development agreements.  In addition, certain transactions that were previously recorded as expense are now classified as revenue.  We utilized the cumulative-effect method of adoption and recorded a $0.9 million reduction, net of tax, to retained earnings as of the first day of fiscal 2018 to reflect the change in the recognition pattern of initial franchise fees and upfront fees.  The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. 

 

The cumulative effect of the changes made to our unaudited condensed consolidated balance sheet as of December 26, 2017 as a result of the adoption of ASC 606 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

ASC 606

 

Balance at

 

    

December 26, 2017

    

Adjustments

    

December 27, 2017

Liabilities

 

 

 

 

 

 

 

 

 

Deferred tax liabilities, net

 

$

5,301

 

$

(299)

 

$

5,002

Other liabilities, non-current

 

 

42,112

 

 

1,177

 

 

43,289

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

602,499

 

$

(878)

 

$

601,621

 

 

Under ASC 606, because the services we provide related to initial franchise fees and upfront fees from international development agreements do not contain separate and distinct performance obligations from the franchise right, these fees will be recognized on a straight-line basis over the term of the associated franchise agreement.  Under previous guidance, initial franchise fees were recognized when the related services had been provided, which was generally upon the opening of the restaurant, and upfront fees were recognized on a pro-rata basis as restaurants under the development agreement were opened.  These fees will continue to be recorded as a component of franchise royalties and fees in our unaudited condensed consolidated statements of income and comprehensive income.  ASC 606 requires sales-based royalties to continue to be recognized as franchisee restaurant sales occur.

 

In addition, certain transactions that were previously recorded as expense will be classified as revenue.  These transactions include breakage income and third party gift card fees from our gift card program as well as accounting fees, supervision fees and advertising contributions received from our franchisees.  Under ASC 606, breakage income and third party gift card fees are recorded as a component of restaurant and other sales in our unaudited condensed consolidated statements of income and comprehensive income.  Under previous guidance, these transactions were recorded as a component of other operating expense.  Also under ASC 606, accounting fees, supervision fees and advertising contributions received from our franchisees are recorded as a component of franchise royalties and fees in our unaudited condensed consolidated statements of income and comprehensive income.   Under previous guidance, these transactions were recorded as a reduction of general and administrative expense.  As noted above, we adopted ASC 606 as of the first day of fiscal 2018.  The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. 

 

8


 

The impact of adopting ASC 606 as compared to the previous revenue recognition guidance on our unaudited condensed consolidated balance sheet and unaudited condensed consolidated statements of income and comprehensive income was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 27, 2018

 

 

 

 

 

 

Balances Without

 

Adoption Impact of

 

 

 

As Reported

 

Adoption of ASC 606

 

ASC 606

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

Liabilities

    

 

 

 

 

 

 

 

 

 

Deferred tax liabilities, net

 

$

8,401

 

$

8,709

 

$

(308)

 

Other liabilities, non-current

 

 

45,069

 

 

43,852

 

 

1,217

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

638,309

 

$

639,218

 

$

(909)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended March 27, 2018

 

 

 

 

 

 

Balances Without

 

Adoption Impact of

 

 

 

As Reported

 

Adoption of ASC 606

 

ASC 606

 

Income Statement

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

Restaurant and other sales

 

$

622,402

 

$

624,216

 

$

(1,814)

 

Franchise royalties and fees

 

 

5,303

 

 

4,721

 

 

582

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

Other operating

 

 

92,378

 

 

94,192

 

 

(1,814)

 

General and administrative

 

 

30,175

 

 

29,553

 

 

622

 

Provision for income taxes

 

 

8,457

 

 

8,468

 

 

(11)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

54,541

 

$

54,572

 

$

(31)

 

 

Statement of Cash Flows

(Accounting Standards Update 2016-15, "ASU 2016-15")

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows.  We adopted this guidance as of the beginning of our 2018 fiscal year.  The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

Income Taxes

(Accounting Standards Update 2016-16, "ASU 2016-16")

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which addresses the income tax consequences of intra-entity transfers of assets other than inventory.  Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party.  This standard will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs.  We adopted this guidance as of the beginning of our 2018 fiscal year.  The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

Compensation – Stock Compensation

(Accounting Standards Update 2017-09, "ASU 2017-09")

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when a change in the terms or conditions of a share-based payment award must

9


 

be accounted for as a modification.  ASU 2017-09 requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change in the terms and conditions of the award.  We adopted this guidance as of the beginning of our 2018 fiscal year.  The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

Leases

(Accounting Standards Update 2016-02, "ASU 2016-02")

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases.  This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (our 2019 fiscal year).  A modified retrospective approach is required for all leases existing or entered into after the beginning of the year of adoption or the earliest comparative period in the consolidated financial statements. 

 

We had operating leases with remaining rental payments of approximately $852.2 million as of March 27, 2018.  The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability.  While we are still in the process of assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows, we expect the adoption of this standard will have a material impact on our consolidated financial position due to the recognition of the right-of-use asset and lease liability related to operating leases.  While the new standard is also expected to impact the measurement and presentation of elements of expenses and cash flows related to leasing arrangements, we do not presently believe there will be a material impact on our consolidated results of operations, cash flows, or the related notes.

 

Financial Instruments

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

 

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

 

Goodwill

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

 

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

 

 

10


 

 

(3)  Revenues

 

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

 

 

 

 

13 Weeks Ended

 

March 27, 2018

Restaurant and other sales

$

622,402

Franchise royalties

 

4,484

Franchise fees

 

819

Total revenue

$

627,705

 

Restaurant sales include the sale of food and beverage products to our customers.  We recognize this revenue when the products are sold.   All sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the consolidated statements of income and comprehensive income.

Other sales include the amortization of gift card breakage and fees associated with third party gift card sales.  We record deferred revenue for gift cards that have been sold but not yet redeemed.  When the gift cards are redeemed, we recognize restaurant sales and reduce deferred revenue.  For some of the gift cards that are sold, the likelihood of redemption is remote.  When the likelihood of a gift card's redemption is determined to be remote, we record a breakage adjustment and reduce deferred revenue by the amount never expected to be redeemed.  We use historic gift card redemption patterns to determine when the likelihood of a gift card's redemption becomes remote and have determined that approximately 4% of the value of the gift cards sold by our company and our third party retailers will never be redeemed. This breakage adjustment is recorded consistent with the historic redemption pattern of the associated gift card.  In addition, we incur fees on all gift cards that are sold through third party retailers.  These fees are also deferred and recorded consistent with the historic redemption pattern of the associated gift cards.  For the 13 weeks ended March 27, 2018, we recognized gift card fees, net of gift card breakage income, of approximately $1.8 million.  Total deferred revenue related to our gift cards is included in deferred revenue-gift cards in our unaudited condensed consolidated balance sheets and includes the full value of unredeemed gift cards less the amortized portion of the breakage rates and the unamortized portion of third party fees.  As of March 27, 2018 and December 26, 2017, our deferred revenue balance related to gift cards was approximately $104.7 million and $156.6 million, respectively.  This change was primarily due to the redemption of gift cards partially offset by the sale of additional gift cards.  We recognized sales of approximately $64.6 million for the 13 weeks ended March 27, 2018 related to the amount in deferred revenue as of December 26, 2017.    

 

Franchise royalties include continuing fees received from our franchising of Texas Roadhouse restaurants. We execute franchise agreements for each franchise restaurant which sets out the terms of our arrangement with the franchisee. These agreements require the franchisee to pay ongoing royalties of generally 4.0% of gross sales from our domestic franchisees, along with royalties paid to us by our international franchisees.  Franchise royalties are recognized as revenue as the corresponding franchisee restaurant sales occur.

Franchise fees are all remaining fees from our franchisees including initial fees, upfront fees from international agreements, fees paid to our domestic marketing and advertising fund, and fees for supervisory and administrative services.  Our franchise agreements typically require the franchisee to pay an initial, non-refundable fee. Subject to our approval and payment of a renewal fee, a franchisee may generally renew the franchise agreement upon its expiration.  These initial fees and renewal fees are deferred and recognized over the term of the agreement.  We also enter into area development agreements for the development of international Texas Roadhouse restaurants.  Upfront fees from development agreements are deferred and recognized on a pro-rata basis over the term of the individual restaurant franchise agreement as restaurants under the development agreement are opened.  Our domestic franchise agreement also requires our franchisees to remit 0.3% of sales to our system-wide marketing and advertising fund.  These amounts are recognized as revenue as the corresponding franchisee restaurant sales occur.  Finally, we perform supervisory and administrative services for certain franchise restaurants for which we receive management fees, which are recognized as the services are performed.  Total deferred revenue related to our franchise agreements is included in other liabilities in our unaudited condensed consolidated balance sheets and was approximately $1.2 million as of March 27, 2018 and 

11


 

December 26, 2017.  We recognized revenue of approximately $0.1 million for the 13 weeks ended March 27, 2018 related to the amount in deferred revenue as of December 26, 2017.  

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

 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

March 27,

    

December 26,

 

 

 

2018

 

2017

 

Obligation under capital lease

 

$

1,988

 

$

1,990

 

Revolver

 

 

50,000

 

 

50,000

 

 

 

 

51,988

 

 

51,990

 

Less current maturities

 

 

 9

 

 

 9

 

 

 

$

51,979

 

$

51,981

 

 

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%. The weighted-average interest rate for the amended revolving credit facility as of March 27, 2018 and December 26, 2017 was 2.66% and 2.37%, respectively. As of March 27, 2018, we had $50.0 million outstanding under the revolving credit facility and $142.5 million of availability, net of $7.5 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The Amended Credit Agreement permits us to incur additional secured or unsecured indebtedness outside the amended revolving credit facility, except for the incurrence of secured indebtedness that in the aggregate is equal to or greater than $125.0 million and 20% of our consolidated tangible net worth.  We were in compliance with all financial covenants as of March 27, 2018.

 

(5)  Income Taxes

 

A reconciliation of the statutory federal income tax rate to our effective tax rate for the 13 weeks ended March 27, 2018 and March 28, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

   

 

 

 

   

March 27, 2018

   

March 28, 2017

   

 

 

Tax at statutory federal rate

 

21.0

%  

35.0

%  

 

 

State and local tax, net of federal benefit

 

4.0

 

3.4

 

 

 

FICA tip tax credit

 

(9.5)

 

(7.0)

 

 

 

Work opportunity tax credit

 

(1.1)

 

(0.8)

 

 

 

Stock compensation

 

(2.1)

 

(3.2)

 

 

 

Net income attributable to noncontrolling interests

 

(1.1)

 

(1.1)

 

 

 

Officer compensation

 

0.9

 

0.1

 

 

 

Other

 

0.9

 

0.1

 

 

 

Total

 

13.0

%  

26.5

%  

 

 

 

12


 

Our effective tax rate decreased to 13.0% for the 13 weeks ended March 27, 2018 compared to 26.5% for the 13 weeks ended March 28, 2017 due to new tax legislation that was enacted in late 2017.  As a result of the new tax legislation, significant tax changes were enacted including a reduction of the federal corporate tax rate from 35.0% to 21.0%.  These changes were generally effective at the beginning of our 2018 fiscal year.

 

 

 

(6)Commitments and Contingencies

 

The estimated cost of completing capital project commitments at March 27, 2018 and December 26, 2017 was approximately $143.7 million and $150.0 million, respectively.

 

As of March 27, 2018 and December 26, 2017, we were contingently liable for $15.4 million and $15.6 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 March 27, 2018 and December 26, 2017 as the likelihood of default was deemed to be less than probable and the fair value of the guarantees is not considered significant.

 

 

 

 

 

 

 

 

    

Lease
Assignment Date

    

Current Lease
Term Expiration

 

Everett, Massachusetts (1)(2)

 

September 2002

 

February 2023

 

Longmont, Colorado (1)

 

October 2003

 

May 2019

 

Montgomeryville, Pennsylvania (1)

 

October 2004

 

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

(4)

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

 

During the 13 weeks ended March 27, 2018, 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.

 

We and the U.S. Equal Employment Opportunity Commission entered into a consent decree dated March 31, 2017 (the "Consent Decree") to settle the 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 Consent Decree resolves the issues litigated in the Lawsuit.  Under the Consent Decree, among other terms, we have established 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. 

 

13


 

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

(7)   Related Party Transactions

 

As of March 27, 2018 and March 28, 2017, we had 10 franchise restaurants owned in whole or part, by certain officers, directors and 5% stockholders of the Company.  For the 13 week periods ended March 27, 2018 and March 28, 2017, these entities paid us fees of approximately $0.6 million and $0.5 million, respectively.  As disclosed in note 6, 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 restricted stock units outstanding from our equity incentive plans.  Performance stock units are not included in the diluted earnings per share calculation until the performance-based criteria have been met.

 

For both 13 week periods ended March 27, 2018 and March 28, 2017, there were no shares of nonvested stock that were outstanding, but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect. 

 

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 27, 2018

    

March 28, 2017

 

Net income attributable to Texas Roadhouse, Inc. and subsidiaries

$

54,541

 

$

34,313

 

Basic EPS:

 

 

 

 

 

 

Weighted-average common shares outstanding

 

71,333

 

 

70,779

 

Basic EPS

$

0.76

 

$

0.48

 

Diluted EPS:

 

 

 

 

 

 

Weighted-average common shares outstanding

 

71,333

 

 

70,779

 

Dilutive effect of stock options and nonvested stock

 

472

 

 

555

 

Shares-diluted

 

71,805

 

 

71,334

 

Diluted EPS

$

0.76

 

$

0.48

 

 

 

(9)  Fair Value Measurements

 

ASC 820, Fair Value Measurements ("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.

 

14


 

There were no transfers among levels within the fair value hierarchy during the 13 weeks ended March 27, 2018.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

    

Level

    

March 27, 2018

    

December 26, 2017

 

Deferred compensation plan—assets

 

1

 

$

30,472

 

$

28,754

 

Deferred compensation plan—liabilities

 

1

 

 

(30,508)

 

 

(28,829)

 

 

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

 

 

At March 27, 2018 and December 26, 2017, 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 revolving credit facility at March 27, 2018 and December 26, 2017 approximated its carrying value since it is a variable rate credit facility (Level 2). 

 

 

 

(10)  Stock Repurchase Program

 

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

 

We did not repurchase any shares of common stock during the 13 week periods ended March 27, 2018 or March 28, 2017, respectively.    As of March 27, 2018, we had approximately $69.9 million remaining under our authorized stock repurchase program.    

15


 

 

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 26, 2017, and in Part II, Item 1A in this Form 10-Q, along with disclosures in our other Securities and Exchange Commission ("SEC") filings discuss some of the important risk factors that may affect our business, results of operations, or financial condition.  You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our Company or to maintain or increase your investment.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.  The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock.  We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

 

OVERVIEW

 

Texas Roadhouse, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman and chief executive officer, W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse restaurant in Clarksville, Indiana. Since then, we have grown to 558 company and franchise restaurants in 49 states and eight 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 27, 2018, our 558 restaurants included:

 

·

469 "company restaurants," of which 451 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 469 restaurants we owned and operated as of March 27, 2018, we operated 446 as Texas Roadhouse restaurants and operated 21 as Bubba’s 33 restaurants.  In addition, we operated two restaurants outside of the casual dining segment.

 

·

89 "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 provided 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.  Of the 89 franchise restaurants, 70 are domestic restaurants and 19 are international 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 67 of the domestic franchise restaurants.

 

16


 

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 27, 2018 and March 28, 2017 are referred to as Q1 2018 and Q1 2017, respectively. 

 

As further noted in note 2 to the unaudited condensed consolidated financial statements, in Q1 2018 we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers.  As a result of this adoption, certain transactions that were previously recorded as expense are now classified as revenue.  These include breakage income and third party gift card fees from our gift card program which are included in other sales and previously were included in other operating expense as well as certain fees received from our franchisees which are included in franchise royalties and fees and previously were a reduction of general and administrative expense.  In addition, we reclassified certain amounts between restaurant operating costs and general and administrative expenses.  None of the above mentioned reclassifications had an impact to income before taxes and the comparative financial information has not been restated for these reclassifications.  The comparative impact of these reclassifications is further detailed below. 

 

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 2018, we opened seven company restaurants while our franchise partners opened two restaurants.  We currently plan to open approximately 30 company restaurants in 2018 including up to seven Bubba’s 33 restaurants.  In addition, we anticipate that our existing franchise partners will open as many as six, primarily international, Texas Roadhouse restaurants during 2018.

 

Our average capital investment for the 23 Texas Roadhouse restaurants opened during 2017, including pre‑opening expenses and a capitalized rent factor, was $5.3 million.  We expect our average capital investment for Texas Roadhouse restaurants opening in 2018 to be approximately $5.3 million.  For 2017, the average capital investment, including pre-opening expenses and a capitalized rent factor, for the four Bubba’s 33 restaurants opened during the year was $6.1 million.  We expect our average capital investment for Bubba’s 33 restaurants opened in 2018 to be approximately $6.7 million.  The increase in our 2018 average capital investment for our Bubba’s 33 restaurants is primarily due to higher costs at one urban site in New Jersey as well as higher rent and pre-opening costs.  We continue to evaluate our Bubba’s 33 prototype.

We remain focused on driving sales and managing restaurant investment costs to maintain our restaurant development in the future.  Our capital investment (including cash and non-cash costs) for new restaurants varies significantly depending on a number of factors including, but not limited to:  the square footage, layout, scope of required site work, type of construction labor (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 have entered into area development and/or franchise agreements for the development and operation of Texas Roadhouse restaurants in several foreign countries.  We currently have 19 restaurants open in eight foreign countries including 13 restaurants in five countries in the Middle East, three restaurants in Taiwan, two restaurants in the Philippines and one restaurant in Mexico.  For the existing international agreements, the franchisee is required to pay us a franchise fee for each restaurant to be opened, royalties on the gross sales of each restaurant and a development fee for

17


 

our grant of development rights in the named countries.  The term of the agreements may be extended.  We anticipate that the specific business terms of any future franchise agreement for international restaurants might vary significantly from the standard terms of our domestic agreements and from the terms of existing international agreements, depending on the territory to be franchised and the extent of franchisor-provided services to each franchisee.

 

Maintaining and/or Improving Restaurant Level Profitability.   We plan to maintain, or possibly increase, restaurant-level profitability (restaurant margin) through a combination of increased comparable restaurant sales and operating cost management.  Restaurant margin is not a U.S. generally accepted accounting principle ("GAAP") measure and should not be considered in isolation, or as an alternative to income from operations.  See further discussion of restaurant margin below.  In general, we continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on our long-term success.  This may create a challenge in terms of maintaining and/or increasing restaurant margin, as a percentage of restaurant and other sales, in any given year, depending on the level of inflation we experience.  In addition to restaurant margin, as a percentage of restaurant and other sales, we also focus on the growth of restaurant margin dollars per store week as a measure of restaurant-level profitability.  In terms of driving 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.  To attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, focus on speed of service and increase throughput by adding seats 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 to increase general and administrative costs at a slower growth rate than our revenue. Whether we can 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, 2018, our Board of Directors declared a quarterly dividend of $0.25 per share of common stock representing a 19% increase compared to the quarterly dividend declared in the prior year period.  The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on many factors, including, but not limited to, earnings, financial condition, applicable covenants under our revolving credit facility, other contractual restrictions and other factors deemed relevant.

 

In 2008, our Board of Directors approved our first stock repurchase program.  From inception through March 27, 2018, 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 27, 2018, $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,

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although sales volumes are generally higher, so are initial costs, resulting in restaurant margins that are generally lower during the start‑up period of operation and increase to a steady level approximately three to six months after opening.

 

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

 

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

 

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

 

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

 

Other Key Definitions

 

Restaurant and Other Sales.   Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company restaurants.  Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the unaudited condensed consolidated statements of income and comprehensive income.  Beginning in Q1 2018, with the adoption of new revenue recognition accounting guidance, other sales include the amortization of fees associated with our third party gift card sales net of the amortization of gift card breakage income which had previously been recorded in restaurant other operating expense.  These amounts are amortized over a period consistent with the historic redemption pattern of the associated gift cards.

Franchise Royalties and Fees.   Franchise royalties consist of royalties, as defined in our franchise agreements, paid to us by domestic and international franchisees.  Domestic and international franchisees also typically pay an initial franchise fee and/or development fee for each new restaurant or territory.  The terms of the international agreements may vary significantly from our domestic agreements. Beginning in Q1 2018, with the adoption of new revenue recognition accounting guidance, franchise royalties and fees include certain fees which had previously been recorded as a reduction of general and administrative expenses.  These include advertising fees paid by domestic franchisees to our system-wide marketing and advertising fund and management fees paid by certain domestic franchisees for supervisory and administrative services that we perform.

 

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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 fees and general liability insurance. Profit-sharing incentive compensation expenses earned by our restaurant managing partners and market partners are also included in restaurant other operating expenses.

 

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

 

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

 

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

 

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

 

Interest 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 27, 2018 and March 28, 2017, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants.  Additionally, as of March 27, 2018 and March 28, 2017, 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 27, 2018 and March 28, 2017 included 18 majority-owned restaurants all of which were open.

 

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Q1 2018 Financial Highlights

 

Total revenue increased $60.0 million, or 10.6%, to $627.7 million in Q1 2018 compared to $567.7 million in Q1 2017 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 6.5% and 4.9%, respectively, at company restaurants in Q1 2018.

 

Restaurant margin increased $7.1 million, or 6.3%, to $119.4 million in Q1 2018 compared to $112.3 million in Q1 2017 while restaurant margin, as a percentage of restaurant and other sales, decreased to 19.2% in Q1 2018 compared to 19.9% in Q1 2017.  The decrease in restaurant margin, as a percentage of restaurant and other sales, was primarily due to higher labor costs as a result of higher average wage rates and current staffing initiatives.  The decrease was partially offset by the reclassification of certain amounts between restaurant operating costs and general and administrative expenses as noted above.  These reclassifications impacted restaurant margin by approximately 0.2%, as a percentage of restaurant and other sales, and had no impact on income before taxes.

 

Net income increased $20.2 million, or 59.0%, to $54.5 million in Q1 2018 compared to $34.3 million in Q1 2017 primarily due to an increase in restaurant margin dollars, lower general and administrative expenses, and lower income tax expense.  General and administrative expenses were lower due to overlapping a pre-tax charge recorded in Q1 2017 of $14.9 million ($9.2 million after-tax) related to the settlement of a legal matter.  This charge had a $0.13 impact on diluted earnings per share and a favorable impact of 33.3% on diluted earnings per share growth in Q1 2018.  Income tax expense was lower due to a decrease in our effective income tax rate to 13.0% in Q1 2018 from 26.5% in Q1 2017 primarily due to the impact of new tax legislation.  Diluted earnings per share increased 57.9% to $0.76 in Q1 2018 from $0.48 in Q1 2017.

   

 

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Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

 

 

March 27, 2018

 

March 28, 2017

 

 

 

$

  

%

  

$

  

%

 

 

 

(In thousands)

 

 

Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant and other sales

622,402

 

99.2

 

563,320

 

99.2

 

 

Franchise royalties and fees

5,303

 

0.8

 

4,366

 

0.8

 

 

Total revenue

627,705

 

100.0

 

567,686

 

100.0

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

(As a percentage of restaurant and other sales)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Cost of sales

202,786

 

32.6

 

184,193

 

32.7

 

 

Labor

196,030

 

31.5

 

170,347

 

30.2