10-Q 1 ruth-10q_20180701.htm 10-Q ruth-10q_20180701.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended July 1, 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 000-51485

 

Ruth’s Hospitality Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

72-1060618

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1030 W. Canton Avenue, Suite 100,

Winter Park, FL

32789

(Address of principal executive offices)

(Zip code)

(407) 333-7440

Registrant’s telephone number, including area code

None

Former name, former address and former fiscal year, if changed since last report

 

Indicate by check mark whether the 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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, smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large 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

(Do not check if a smaller reporting company)

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 outstanding of the registrant’s common stock as of August 3, 2018 was 30,675,560, which includes 947,906 shares of unvested restricted stock.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

Part I — Financial Information

 

3

 

 

 

 

Item 1

Financial Statements:

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of July 1, 2018 and December 31, 2017

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Thirteen and Twenty-six Week Periods ended July 1, 2018 and June 25, 2017

 

4

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Twenty-six Week Periods ended July 1, 2018 and June 25, 2017

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Twenty-six Week Periods ended July 1, 2018 and June 25, 2017

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

 

24

 

 

 

 

Item 4

Controls and Procedures

 

25

 

 

 

Part II — Other Information

 

26

 

 

 

 

Item 1

Legal Proceedings

 

26

 

 

 

 

Item 1A

Risk Factors

 

26

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

26

 

 

 

 

Item 4

Mine Safety Disclosures

 

26

 

 

 

 

Item 5

Other Information

 

26

 

 

 

 

Item 6

Exhibits

 

26

 

 

 

 

Signatures

 

28

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

(Amounts in thousands, except share and per share data)

 

 

 

July 1,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,045

 

 

$

4,051

 

Accounts receivable, less allowance for doubtful accounts 2018 - $358; 2017 - $361

 

 

10,800

 

 

 

21,626

 

Inventory

 

 

8,105

 

 

 

8,688

 

Prepaid expenses and other

 

 

2,971

 

 

 

2,680

 

Total current assets

 

 

24,921

 

 

 

37,045

 

Property and equipment, net of accumulated depreciation 2018 - $152,481; 2017 -

   $144,373

 

 

114,748

 

 

 

112,212

 

Goodwill

 

 

36,522

 

 

 

36,522

 

Franchise rights, net of accumulated amortization 2018 - $1,338; 2017 - $396

 

 

45,880

 

 

 

46,822

 

Other intangibles, net of accumulated amortization 2018 - $1,288; 2017 - $1,181

 

 

4,968

 

 

 

3,904

 

Deferred income taxes

 

 

5,754

 

 

 

4,947

 

Other assets

 

 

603

 

 

 

644

 

Total assets

 

$

233,396

 

 

$

242,096

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,118

 

 

$

10,510

 

Accrued payroll

 

 

13,326

 

 

 

15,903

 

Accrued expenses

 

 

8,045

 

 

 

11,203

 

Deferred revenue

 

 

33,812

 

 

 

42,596

 

Other current liabilities

 

 

4,751

 

 

 

8,313

 

Total current liabilities

 

 

68,052

 

 

 

88,525

 

Long-term debt

 

 

50,000

 

 

 

50,000

 

Deferred rent

 

 

22,741

 

 

 

21,993

 

Unearned franchise fees

 

 

2,859

 

 

 

 

Other liabilities

 

 

1,955

 

 

 

2,074

 

Total liabilities

 

 

145,607

 

 

 

162,592

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,696,429

   shares issued and outstanding at July 1, 2018, 29,645,790 shares issued and

   outstanding at December 31, 2017

 

 

297

 

 

 

296

 

Additional paid-in capital

 

 

71,194

 

 

 

77,017

 

Retained earnings

 

 

16,298

 

 

 

2,191

 

Treasury stock, at cost; 71,950 shares at July 1, 2018 and December 31, 2017

 

 

 

 

 

 

Total shareholders' equity

 

 

87,789

 

 

 

79,504

 

Total liabilities and shareholders' equity

 

$

233,396

 

 

$

242,096

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income—Unaudited

(Amounts in thousands, except share and per share data)

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

July 1,

 

 

June 25,

 

 

July 1,

 

 

June 25,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

103,538

 

 

$

94,145

 

 

$

213,902

 

 

$

193,600

 

Franchise income

 

 

4,457

 

 

 

4,257

 

 

 

8,874

 

 

 

8,647

 

Other operating income

 

 

1,640

 

 

 

1,613

 

 

 

3,384

 

 

 

3,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

109,635

 

 

 

100,015

 

 

 

226,160

 

 

 

205,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and beverage costs

 

 

29,049

 

 

 

28,114

 

 

 

60,454

 

 

 

56,693

 

Restaurant operating expenses

 

 

50,022

 

 

 

45,005

 

 

 

101,702

 

 

 

90,452

 

Marketing and advertising

 

 

4,640

 

 

 

3,412

 

 

 

8,117

 

 

 

5,859

 

General and administrative costs

 

 

9,274

 

 

 

8,035

 

 

 

18,248

 

 

 

16,171

 

Depreciation and amortization expenses

 

 

4,673

 

 

 

3,731

 

 

 

9,134

 

 

 

7,236

 

Pre-opening costs

 

 

272

 

 

 

173

 

 

 

412

 

 

 

1,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

97,930

 

 

 

88,470

 

 

 

198,067

 

 

 

177,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

11,705

 

 

 

11,545

 

 

 

28,093

 

 

 

27,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(403

)

 

 

(144

)

 

 

(783

)

 

 

(324

)

Other

 

 

22

 

 

 

14

 

 

 

34

 

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax expense

 

 

11,324

 

 

 

11,415

 

 

 

27,344

 

 

 

27,505

 

Income tax expense

 

 

1,763

 

 

 

3,611

 

 

 

4,147

 

 

 

8,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

9,561

 

 

 

7,804

 

 

 

23,197

 

 

 

18,889

 

Income (loss) from discontinued operations, net of income taxes

 

 

12

 

 

 

7

 

 

 

22

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,573

 

 

$

7,811

 

 

$

23,219

 

 

$

18,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.32

 

 

$

0.26

 

 

$

0.78

 

 

$

0.62

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.32

 

 

$

0.26

 

 

$

0.78

 

 

$

0.62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.32

 

 

$

0.25

 

 

$

0.76

 

 

$

0.60

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.32

 

 

$

0.25

 

 

$

0.76

 

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,713,825

 

 

 

30,548,258

 

 

 

29,701,847

 

 

 

30,561,741

 

Diluted

 

 

30,375,306

 

 

 

31,264,266

 

 

 

30,377,194

 

 

 

31,255,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.11

 

 

$

0.09

 

 

$

0.22

 

 

$

0.18

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited  

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Accumulated

 

 

Treasury Stock

 

 

Shareholders'

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit)

 

 

Shares

 

 

Value

 

 

Equity

 

Balance at December 31, 2017

 

 

29,646

 

 

$

296

 

 

$

77,017

 

 

$

2,191

 

 

 

72

 

 

$

 

 

$

79,504

 

Net income

 

 

 

 

 

 

 

 

 

 

 

23,219

 

 

 

 

 

 

 

 

 

23,219

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(6,787

)

 

 

 

 

 

 

 

 

(6,787

)

Repurchase of common stock

 

 

(225

)

 

 

(2

)

 

 

(5,941

)

 

 

 

 

 

 

 

 

 

 

 

(5,943

)

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

275

 

 

 

3

 

 

 

(3,752

)

 

 

 

 

 

 

 

 

 

 

 

(3,749

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,870

 

 

 

 

 

 

 

 

 

 

 

 

3,870

 

Cumulative effect of a change in accounting principle (Note 2)

 

 

 

 

 

 

 

 

 

 

 

(2,324

)

 

 

 

 

 

 

 

 

(2,324

)

Balance at July 1, 2018

 

 

29,696

 

 

$

297

 

 

$

71,194

 

 

$

16,298

 

 

 

72

 

 

$

 

 

$

87,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 25, 2016

 

 

30,549

 

 

$

305

 

 

$

95,266

 

 

$

(16,562

)

 

 

72

 

 

$

 

 

$

79,009

 

Net income

 

 

 

 

 

 

 

 

 

 

 

18,859

 

 

 

 

 

 

 

 

 

18,859

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(5,724

)

 

 

 

 

 

 

 

 

(5,724

)

Repurchase of common stock

 

 

(400

)

 

 

(4

)

 

 

(8,428

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,432

)

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

211

 

 

 

3

 

 

 

(527

)

 

 

 

 

 

 

 

 

 

 

 

(524

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,369

 

 

 

 

 

 

 

 

 

 

 

 

3,369

 

Balance at June 25, 2017

 

 

30,360

 

 

$

304

 

 

$

89,680

 

 

$

(3,427

)

 

 

72

 

 

$

 

 

$

86,557

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Amounts in thousands)

 

 

 

26 Weeks Ended

 

 

 

July 1,

 

 

June 25,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

23,219

 

 

$

18,859

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,134

 

 

 

7,236

 

Deferred income taxes

 

 

(61

)

 

 

916

 

Non-cash interest expense

 

 

41

 

 

 

76

 

Debt issuance costs written-off

 

 

 

 

 

16

 

Amortization of below market lease

 

 

39

 

 

 

 

Stock-based compensation expense

 

 

3,870

 

 

 

3,369

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,826

 

 

 

12,004

 

Inventories

 

 

583

 

 

 

(158

)

Prepaid expenses and other

 

 

(291

)

 

 

(220

)

Other assets

 

 

 

 

 

356

 

Accounts payable and accrued expenses

 

 

(8,600

)

 

 

(4,531

)

Deferred revenue

 

 

(8,996

)

 

 

(9,198

)

Deferred rent

 

 

630

 

 

 

283

 

Other liabilities

 

 

(1,861

)

 

 

2,176

 

Net cash provided by operating activities

 

 

28,533

 

 

 

31,184

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(11,889

)

 

 

(10,649

)

Acquisition of intangible assets

 

 

(1,171

)

 

 

 

Net cash used in investing activities

 

 

(13,060

)

 

 

(10,649

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal borrowings on long-term debt

 

 

15,000

 

 

 

18,000

 

Principal repayments on long-term debt

 

 

(15,000

)

 

 

(22,000

)

Repurchase of common stock

 

 

(5,943

)

 

 

(8,432

)

Cash dividend payments

 

 

(6,787

)

 

 

(5,724

)

Tax payments from the vesting of restricted stock and option exercises

 

 

(3,759

)

 

 

(1,364

)

Proceeds from the exercise of stock options

 

 

10

 

 

 

838

 

Deferred financing costs

 

 

 

 

 

(413

)

Net cash used in financing activities

 

 

(16,479

)

 

 

(19,095

)

Net (decrease) increase in cash and cash equivalents

 

 

(1,006

)

 

 

1,440

 

Cash and cash equivalents at beginning of period

 

 

4,051

 

 

 

3,788

 

Cash and cash equivalents at end of period

 

$

3,045

 

 

$

5,228

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

753

 

 

$

141

 

Income taxes

 

$

6,123

 

 

$

5,840

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued acquisition of property and equipment

 

$

1,229

 

 

$

838

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

(1) The Company and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of July 1, 2018 and December 31, 2017 and for the thirteen and twenty-six week periods ended July 1, 2018 and June 25, 2017 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of July 1, 2018, there were 154 Ruth’s Chris Steak House restaurants, including 77 Company-owned restaurants, two restaurants operating under contractual agreements and 75 franchisee-owned restaurants, including 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Panama, Singapore and Taiwan. All Company-owned restaurants are located in the United States.  A new franchisee-owned Ruth’s Chris Steak House restaurant was opened in Ft. Wayne, IN in May 2018.  

The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended July 1, 2018 and June 25, 2017 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended July 1, 2018 and June 25, 2017 each contained thirteen weeks and are referred to herein as the second quarter of fiscal year 2018 and the second quarter of fiscal year 2017, respectively. Fiscal year 2018 is a 52-week year.  Fiscal year 2017 was a 53-week year.

Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the periods to prepare these condensed consolidated financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the carrying amounts of property and equipment, goodwill, franchise rights, and obligations related to gift cards, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

Recent Adopted Accounting Standard

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and replaces most existing revenue recognition guidance in GAAP.  The Company adopted this new revenue recognition standard on January 1, 2018.  See Note 2 for further information about our transition to this new revenue recognition standard.

Recent Accounting Pronouncements for Future Application

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset.  The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases.  This update is effective for annual and interim periods beginning after December 15, 2018, which will require the Company to adopt these provisions in the first quarter of fiscal year 2019.  In July 2018, the FASB issued ASU 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating which transition method it will use. The Company’s restaurants operate under facility lease agreements that provide for material future lease payments.  The restaurant facility leases comprise the

7


majority of the Company’s material lease agreements.  The Company is currently evaluating the effect of the standard on its ongoing financial reporting, but expects that the adoption of ASU 2016-02 will have a material effect on its consolidated financial statements.  The Company expects that the most significant changes relate to 1) the recognition of new right–of–use assets and lease liabilities on the consolidated balance sheet for restaurant facility operating leases; and 2) the derecognition of existing lease liabilities on the consolidated balance sheet related to scheduled rent increases.

(2) Revenue

The Company adopted FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) with an initial date of application of January 1, 2018.  As a result, the Company has changed its accounting policy for revenue recognition.  The Company applied Topic 606 using the cumulative effect method to contracts that were not completed at January 1, 2018, which resulted in the recognition of the cumulative effect of initially adopting Topic 606 as an adjustment to the opening balance of shareholders’ equity at January 1, 2018.  Therefore, the comparative information has not been adjusted and continues to be reported under the Company’s revenue recognition policy in effect prior to the adoption of Topic 606.  The Company adopted Topic 606 using the practical expedient in paragraph 606-10-65-1(f)(4), under which the Company aggregated all contract modifications that occurred before January 1, 2018 to identify the satisfied and unsatisfied performance obligations, to determine the transaction price, and to allocate the transaction price to the satisfied and unsatisfied performance obligations.  The details of the significant changes as a result of adopting Topic 606 are provided below.

Franchise Income.  Prior to the adoption of Topic 606, the Company recognized franchise development and opening fees when a franchisee-owned restaurant opened.  Under Topic 606, the Company now recognizes franchise development and opening specific fees over the life of the applicable franchise agreements.  The Company increased its deferred revenue liability by $3.1 million, increased its deferred tax assets by $746 thousand and decreased the opening balance of shareholders’ equity by $2.3 million for previously recognized franchise development and opening fees that will now be recognized over the life of the applicable franchise agreements.  The adoption of Topic 606 also impacts the classification of advertising contributions from franchisees.  Prior to the adoption of Topic 606, the Company recorded advertising contributions from franchisees as a liability against which specific marketing and advertising costs were charged, which reduced the Company’s marketing expense on the consolidated statements of income.  Under Topic 606, advertising contributions from franchisees are classified as franchise income on the consolidated statements of income in fiscal year 2018.  The Company recognized $764 thousand of advertising contributions from franchisees in the twenty-six weeks of fiscal year 2018.  Because of the offsetting adjustments, the reclassification of advertising contributions from franchisees will have no impact to the Company’s net income for fiscal year 2018.

Gift Cards.  Under Topic 606, the Company now classifies certain discounts recognized on the sale of gift cards, historically recognized as marketing expense, as a reduction to restaurant sales on the consolidated statements of income.  The reclassification of discounts recognized on the sale of gift cards from marketing expense to restaurant sales on the consolidated statements of income totaled $470 thousand in the first twenty-six weeks of fiscal year 2018.  Because of the offsetting adjustments, the reclassification of discounts recognized on the sale of gift cards will have no impact to the Company’s net income for fiscal year 2018.

Impacts on Financial Statements

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the first twenty-six weeks of fiscal year 2018.

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July 1, 2018              As Reported

 

 

Adjustments

 

 

 

Balances without adoption of Topic 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,045

 

 

$

 

 

 

$

3,045

 

Accounts receivable, less allowance for doubtful accounts 2018 - $358; 2017 - $361

 

 

10,800

 

 

 

 

 

 

 

10,800

 

Inventory

 

 

8,105

 

 

 

 

 

 

 

8,105

 

Prepaid expenses and other

 

 

2,971

 

 

 

 

 

 

 

2,971

 

Total current assets

 

 

24,921

 

 

 

 

 

 

 

24,921

 

Property and equipment, net of accumulated depreciation 2018 - $152,481; 2017 -

   $144,373

 

 

114,748

 

 

 

 

 

 

 

114,748

 

Goodwill

 

 

36,522

 

 

 

 

 

 

 

36,522

 

Franchise rights, net of accumulated amortization 2018 - $1,338; 2017 - $396

 

 

45,880

 

 

 

 

 

 

 

45,880

 

Other intangibles, net of accumulated amortization 2018 - $1,288; 2017 - $1,181

 

 

4,968

 

 

 

 

 

 

 

4,968

 

Deferred income taxes

 

 

5,754

 

 

 

(725

)

 

 

 

5,029

 

Other assets

 

 

603

 

 

 

 

 

 

 

603

 

Total assets

 

$

233,396

 

 

$

(725

)

 

 

$

232,671

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,118

 

 

$

 

 

 

$

8,118

 

Accrued payroll

 

 

13,326

 

 

 

 

 

 

 

13,326

 

Accrued expenses

 

 

8,045

 

 

 

 

 

 

 

8,045

 

Deferred revenue

 

 

33,812

 

 

 

(126

)

 

 

 

33,686

 

Other current liabilities

 

 

4,751

 

 

 

 

 

 

 

4,751

 

Total current liabilities

 

 

68,052

 

 

 

(126

)

 

 

 

67,926

 

Long-term debt

 

 

50,000

 

 

 

 

 

 

 

50,000

 

Deferred rent

 

 

22,741

 

 

 

 

 

 

 

22,741

 

Unearned franchise fees

 

 

2,859

 

 

 

(2,859

)

 

 

 

 

Other liabilities

 

 

1,955