10-Q 1 dfrg-20160614x10q.htm 10-Q 20160614 10Q Q2 2016

 

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 June 14, 2016

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 001-35611

 

Del Frisco’s Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)



 





 

 



 

 

Delaware

 

20-8453116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)



 

920 S. Kimball Ave., Suite 100,

Southlake, TX

 

76092

(Address of principal executive offices)

 

(Zip code)



(817) 601-3421

(Registrant’s telephone number, including area code)

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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, or a smaller reporting company. See definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 



 

 

 

 

 

 



 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 



 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 



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

As of July 20, 2016, the latest practicable date, 23,352,814 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.





1


 



Table of Contents:

 



 

 

 

 



 

 

 

 

Part I – Financial Information

  

 

  

Item 1. Financial Statements (Unaudited)

  

 

  

Condensed Consolidated Balance Sheets

  

 

  

Condensed Consolidated Statements of Income and Comprehensive Income

  

 

  

Condensed Consolidated Statement of Changes in Stockholders’ Equity

  

 

  

Condensed Consolidated Statements of Cash Flows

  

 

  

Notes to Condensed Consolidated Financial Statements

  

 

  

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

  

 

14 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

 

19 

  

Item 4. Controls and Procedures

  

 

20 

  



 

Part II – Other Information

  

 

23 

  

Item 1. Legal Proceedings

  

 

23 

  

Item 1A. Risk Factors

  

 

23 

  

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

  

 

20 

  

Item 3. Defaults Upon Senior Securities

  

 

20 

  

Item 4. Mine Safety Disclosures

  

 

20 

  

Item 5. Other Information

  

 

20 

  

Item 6. Exhibits

  

 

21 

  



 

Signatures

  

 

22 

  





2


 

PART I

FINANCIAL INFORMATION



  Item 1.

Financial Statements

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)





 

 

 

 

 





June 14,

 

December 29,



2016

 

2015



 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

4,635 

 

$

5,176 

Inventory

 

16,193 

 

 

17,308 

Income taxes receivable

 

4,315 

 

 

5,487 

Prepaid expenses and other assets

 

5,557 

 

 

9,026 

Total current assets

 

30,700 

 

 

36,997 

Property and equipment, net of accumulated depreciation of $79,064 and $70,759 at June 14, 2016 (unaudited) and December 29, 2015, respectively

 

186,239 

 

 

183,191 

Goodwill

 

75,365 

 

 

75,365 

Intangible assets, net

 

37,418 

 

 

36,865 

Other assets

 

14,568 

 

 

14,237 

Total assets

$

344,290 

 

$

346,655 



 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

9,939 

 

 

16,486 

Deferred revenue

 

13,555 

 

 

17,635 

Other current liabilities

 

15,008 

 

 

13,266 

Total current liabilities

 

38,502 

 

 

47,387 

Long-term debt

 

 

 

4,500 

Deferred rent obligations

 

34,325 

 

 

34,336 

Deferred income taxes

 

16,578 

 

 

16,550 

Other liabilities

 

15,932 

 

 

16,183 

Total liabilities

 

105,337 

 

 

118,956 

Commitments and contingencies

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at June 14, 2016 (unaudited) or December 29, 2015

 

 

 

Common stock, $0.001 par value, 190,000,000 shares authorized, 24,007,337 shares issued and 23,352,814 shares outstanding at June 14, 2016 (unaudited) and 23,967,692 shares issued and 23,313,169 shares outstanding at December 29, 2015

 

24 

 

 

24 

Treasury stock at cost: 654,523 shares at June 14, 2016 (unaudited) and December 29, 2015

 

(13,000)

 

 

(13,000)

Additional paid in capital

 

139,000 

 

 

137,601 

Retained earnings

 

112,929 

 

 

103,074 

Total stockholders' equity

 

238,953 

 

 

227,699 

Total liabilities and stockholders' equity

$

344,290 

 

$

346,655 





See notes to condensed consolidated financial statements.

3


 

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income—Unaudited

(Dollars in thousands, except per share data)







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended

 

24 Weeks Ended



June 14,

 

June 16,

 

June 14,

 

June 16,



2016

 

2015

 

2016

 

2015

Revenues

$

79,916 

 

$

73,776 

 

$

161,110 

 

$

148,878 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Costs of sales

 

22,637 

 

 

21,276 

 

 

45,855 

 

 

42,938 

Restaurant operating expenses

 

38,017 

 

 

34,260 

 

 

76,643 

 

 

69,207 

Marketing and advertising costs

 

2,133 

 

 

1,746 

 

 

3,454 

 

 

3,117 

Pre-opening costs

 

591 

 

 

1,479 

 

 

685 

 

 

1,746 

General and administrative costs

 

6,030 

 

 

5,908 

 

 

11,780 

 

 

11,386 

Lease termination and closing costs

 

20 

 

 

 

 

41 

 

 

Depreciation and amortization

 

4,163 

 

 

3,613 

 

 

8,448 

 

 

7,190 

Operating income

 

6,325 

 

 

5,494 

 

 

14,204 

 

 

13,294 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

(24)

 

 

(7)

 

 

(55)

 

 

(32)

Other  

 

(5)

 

 

(88)

 

 

(5)

 

 

(177)

Net income before income taxes

 

6,296 

 

 

5,399 

 

 

14,144 

 

 

13,085 

Income tax expense

 

1,852 

 

 

1,686 

 

 

4,289 

 

 

3,978 

Net income

$

4,444 

 

$

3,713 

 

$

9,855 

 

$

9,107 



 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.19 

 

$

0.16 

 

$

0.42 

 

$

0.39 

Diluted earnings per common share

$

0.19 

 

$

0.16 

 

$

0.42 

 

$

0.39 



 

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

23,349,718 

 

 

23,445,716 

 

 

23,332,397 

 

 

23,444,381 

Diluted

 

23,436,983 

 

 

23,672,028 

 

 

23,418,735 

 

 

23,599,213 



 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

4,444 

 

$

3,713 

 

$

9,855 

 

$

9,107 



See notes to condensed consolidated financial statements.



4


 



DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity—Unaudited

(Dollars in thousands)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

Additional Paid

 

Treasury

 

Retained

 

 

 



Shares

 

Par Value

 

In Capital

 

Stock

 

Earnings

 

Total 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2015

23,313,169 

 

$

24 

 

$

137,601 

 

$

(13,000)

 

$

103,074 

 

$

227,699 

Net income

 

 

 

 

 

 

 

 

9,855 

 

 

9,855 

Share-based compensation costs

 

 

 

 

1,340 

 

 

 

 

 

 

1,340 

Stock option exercises, including tax effects

10,750 

 

 

 

 

140 

 

 

 

 

 

 

140 

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

28,895 

 

 

 

 

(81)

 

 

 

 

 

 

(81)

Balance at June 14, 2016

23,352,814 

 

$

24 

 

$

139,000 

 

$

(13,000)

 

$

112,929 

 

$

238,953 



See notes to condensed consolidated financial statements.



5


 



DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Dollars in thousands)







 

 

 

 

 



 

 

 

 

 



24 Weeks Ended



June 14,

 

June 16,



2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Net income

$

9,855 

 

$

9,107 

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

 

 

 

 

 

Depreciation and amortization

 

8,448 

 

 

7,190 

Loss on disposal of restaurant property

 

 —

 

 

25 

Loan cost amortization

 

 

 

Non-cash equity based compensation

 

1,386 

 

 

1,382 

Deferred income taxes

 

(18)

 

 

(282)

Amortization of deferred lease incentives

 

(496)

 

 

(475)

Changes in operating assets and liabilities:

 

 

 

 

 

Inventory

 

1,115 

 

 

924 

Prepaid expenses and other assets

 

3,286 

 

 

3,467 

Accounts payable

 

(4,733)

 

 

(865)

Income taxes

 

1,172 

 

 

658 

Deferred rent obligations

 

(1,469)

 

 

1,009 

Deferred revenue

 

(4,080)

 

 

(3,726)

Other liabilities

 

3,096 

 

 

894 

Net cash provided by operating activities

 

17,563 

 

 

19,316 



 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of trade name

 

(400)

 

 

 —

Purchases of property and equipment

 

(13,263)

 

 

(21,044)

Other investing activities

 

 —

 

 

35 

Net cash used in investing activities

 

(13,663)

 

 

(21,009)



 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net payments of credit facility

 

(4,500)

 

 

 —

Cash settlement for share-based awards

 

(81)

 

 

 —

Proceeds from exercise of stock options

 

140 

 

 

101 

Net cash (used in) provided by financing activities

 

(4,441)

 

 

101 



 

 

 

 

 

Net change in cash and cash equivalents

 

(541)

 

 

(1,592)

Cash and cash equivalents at beginning of period

 

5,176 

 

 

3,520 

Cash and cash equivalents at end of period

$

4,635 

 

$

1,928 



 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

$

54 

 

$

43 

Income taxes

$

3,203 

 

$

1,778 

Capital expenditures included in accounts payable at end of period

$

183 

 

$

1,425 

Non cash operating and investing activities:

 

 

 

 

 

Acquisition of trade name financed by current liabilities

$

200 

 

 

 —



See notes to condensed consolidated financial statements.

6


 

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited





1.

BUSINESS AND BASIS OF PRESENTATION

As of June 14, 2016, Del Frisco’s Restaurant Group, Inc. (the “Company”) owned and operated 50 restaurants under the concept names of Del Frisco’s Double Eagle Steak House (“Del Frisco’s”), Sullivan’s Steakhouse (“Sullivan’s”), and Del Frisco’s Grille (“Grille”). Of the 50 restaurants the Company operated at the end of the period covered by this report, there were 12 Del Frisco’s restaurants, 18 Sullivan’s restaurants and 20 Grille restaurants in operation in 23 states and the District of Columbia.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the 24 weeks ended June 14, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2016. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2015 filed with the SEC on March 3, 2016 (the “2015 10-K”).

The Company operates on a 52- or 53-week fiscal year ending the last Tuesday in December. The fiscal quarters ended June 14, 2016 and June 16, 2015 each contained 12 weeks and are referred to herein as the second quarter of fiscal year 2016 and the second quarter of fiscal year 2015, respectively. Fiscal year 2016 will be a 52-week fiscal year as was fiscal year 2015.

Accounting Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates.

There have been no material changes to the significant accounting policies from what was previously reported in the 2015 10-K.

Reclassifications

Certain amounts from the prior year have been reclassified to conform with the current year presentation.

Intangible Assets

On March 17, 2016, the Company entered into an agreement to obtain and clarify ownership of all naming rights for Del Frisco’s in certain counties of Kentucky, Indiana and Ohio for aggregate consideration of $600,000.  Under the terms of the agreement, the Company made a payment of $400,000 in April 2016, with the remaining $200,000 to be paid in two equal installments on August 1, 2016 and August 1, 2017. This intangible asset has been recorded as a trade name with an indefinite life.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which will supersede Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. In August 2015, the FASB deferred the effective date of this new standard by one year. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on an amount that depicts the consideration to which the entity expects to be entitled in exchange for each of those goods and services. For a contract that involves more than one performance obligation, the entity must (a) determine or, if necessary, estimate the standalone selling price at inception of the contract for the distinct goods or services underlying each performance obligation and (b) allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices. In addition, under the new guidance, an entity should recognize revenue when (or as) it satisfies each performance obligation under the contract by transferring the promised good or service to the customer. A good or service is deemed transferred when (or as) the customer obtains control of that good or service. The new standard permits the use of either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory, which is intended to limit the alternative methods available for valuing inventory. The new guidance does not apply to inventory currently measured using the last-in-first-out (LIFO) or the retail inventory valuation methods. Under the new standard, inventory valued using other methods, including the first-in-first-out (FIFO) method, must be valued at the lower of cost or net realizable value. This new guidance must be applied on a

7


 

prospective basis and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the impact of adopting this ASU to be material to the Company’s financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. This ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations. This ASU is intended to clarify revenue recognition accounting when a third party is involved in providing goods or services to a customer. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. This ASU is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, including interim periods within those annual periods, and early application is permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing. This ASU is intended to clarify two aspects of Topic 606: identifying performance obligations and licensing implementation guidance. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients. This ASU is intended to clarify two aspects of Topic 606: first, assessing the collectability criterion, options for the presentation of sales and similar taxes, noncash consideration, transition contract modifications, transition contract completion and secondly, technical corrections. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. The Company is currently assessing the impact of this ASU on its consolidated financial statements.



 



 

 



8


 



 

2.

EARNINGS PER SHARE



Basic earnings per share (“EPS”) data is computed based on the weighted average number of shares of common stock outstanding during the periods. Diluted EPS data is computed based on the weighted average number of shares of common stock outstanding, including all potentially issuable shares of common stock. Diluted EPS for the 12 and 24 weeks ended June 14, 2016 excludes 189,054 and 130,729 shares of restricted stock, respectively, and options to purchase 634,177 and 643,923 shares of common stock, respectively,  which were outstanding during the period, but were antidilutive. Diluted EPS for the 12 and 24 weeks ended June 16, 2015 excludes options to purchase 760,457 and 829,332 shares of common stock, respectively, which were outstanding during the period but were antidilutive.

(dollars in thousands, except per share data)





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended

 

24 Weeks Ended



June 14,

 

June 16,

 

June 14,

 

June 16,



2016

 

2015

 

2016

 

2015

Net income

$

4,444 

 

$

3,713 

 

$

9,855 

 

$

9,107 

Shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

23,349,718 

 

 

23,445,716 

 

 

23,332,397 

 

 

23,444,381 

Dilutive shares

 

87,265 

 

 

226,312 

 

 

86,338 

 

 

154,832 

Total Diluted Shares

 

23,436,983 

 

 

23,672,028 

 

 

23,418,735 

 

 

23,599,213 



 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.19 

 

$

0.16 

 

$

0.42 

 

$

0.39 

Diluted earnings per common share

$

0.19 

 

$

0.16 

 

$

0.42 

 

$

0.39 



































 

3.

STOCK-BASED EMPLOYEE COMPENSATION

2012 Long-Term Equity Incentive Plan

On July 16, 2012, the Company adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (the “2012 Plan”), which allows the Company to grant stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services for the Company. The 2012 Plan provides for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. Equity-based awards vest or become exercisable at various periods ranging from one to four years from the date of grant. The 2012 Plan has 2,232,800 shares of common stock authorized for issuance under the plan. There were 1,168,600 shares of common stock issuable upon exercise of outstanding options and 202,043 shares of unvested restricted stock outstanding at  June 14, 2016 with 644,562 shares of common stock available for future grants.



The following table details the Company’s total stock-based compensation cost during the 12 and 24 weeks ended June 14, 2016 and June 16, 2015 as well as where the costs were expensed (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 



12 Weeks Ended

 

24 Weeks Ended



June 14,

 

June 16,

 

June 14,

 

June 16,



2016

 

2015

 

2016

 

2015

Restaurant operating expenses

$

103 

 

$

115 

 

$

197 

 

$

223 

General and administrative costs

 

632 

 

 

687 

 

 

1,189 

 

 

1,159 

Total stock compensation cost

$

735 

 

$

802 

 

$

1,386 

 

$

1,382 



 

9


 

Restricted Stock

The following table summarizes restricted stock activity during the 24 weeks ended June 14, 2016:





 

 

 

 

 

 

 

 





24 Weeks Ended June 14, 2016



Shares

 

Weighted average grant date fair value

 

Aggregate intrinsic value ($000's)

Outstanding at beginning of period

 

90,379 

 

$

19.96 

 

 

 

Granted

 

153,229 

 

 

16.54 

 

 

 

Vested

 

(33,820)

 

 

20.30 

 

 

 

Forfeited

 

(7,745)

 

 

19.63 

 

 

 

Outstanding at end of period

 

202,043 

 

$

17.33 

 

$

3,150 



As of June 14, 2016,  there was $3.0 million of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a period of approximately 3.2 years. 

Stock Options

The following table summarizes stock option activity during the 24 weeks ended June 14, 2016:











 

 

 

 

 

 

 

 

 

 

 





24 Weeks Ended June 14, 2016



Shares

 

Weighted average exercise price

 

Weighted average remaining contractual term

 

Aggregate intrinsic value ($000's)

Outstanding at beginning of period

 

1,221,100 

 

$

17.44 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

Exercised

 

(10,750)

 

 

13.00 

 

 

 

 

 

 

Forfeited

 

(41,750)

 

 

19.89 

 

 

 

 

 

 

Outstanding at end of period

 

1,168,600 

 

$

17.40 

 

 

6.7 years

 

$

1,399 

Options exercisable at end of period

 

698,100 

 

$

16.69 

 

 

6.6 years

 

$

986 



A summary of the status of non-vested stock options as of June 14, 2016 and changes during the 24 weeks ended June 14, 2016 is presented below:







 

 

 

 



 

 

 

 



24 Weeks Ended



June 14, 2016



Shares

 

Weighted average grant-date fair value

Non-vested stock options at beginning of period

506,500 

 

$

7.25 

Vested

(11,250)

 

 

7.99 

Forfeited

(24,750)

 

 

7.64 

Non-vested stock options at end of period

470,500 

 

$

7.22 



As of June 14, 2016, there was $1.5 million of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a period of approximately 1.1 years.





 











10


 











 

4.

LONG-TERM DEBT



On October 15, 2012,  the Company entered into a credit facility that, as last amended on June 30, 2015, provides for an unsecured credit facility with a credit commitment of $25.0 million,  subject to increases in increments of $5.0 million, with a maximum amount of $30.0 million. The credit facility expires on October 15, 2017.  Borrowings under the credit facility bear interest, at the option of the Company, based on (i) LIBOR plus 1.50% or (ii) the prime rate as defined in the credit facility. The Company is required to pay a commitment fee equal to 0.25% per annum on the available but unused credit facility. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility contains various financial covenants, including a maximum ratio of total indebtedness to EBITDA and minimum fixed charge coverage, both as defined in the credit agreement. The credit facility also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the payment of dividends, the incurrence of indebtedness and providing financing or other transactions with affiliates. 

As of June 14, 2016, there were no outstanding borrowings on the Company’s credit facility and the Company had approximately $28.8 million of borrowings available, with $1.2 million in outstanding letters of credit commitments. As of December 29, 2015, there was $4.5 million in outstanding borrowings on the Company’s credit facility. The Company was in compliance with all of the financial debt covenants as of June 14, 2016 and December 29, 2015.



 



5.

INCOME TAXES

The effective income tax rate for the 12 and 24 weeks ended June 14, 2016 was 29.4% and 30.3%, respectively,  compared to 31.2% and 30.4% for the 12 and 24 weeks ended June 16, 2015. The factors that cause the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.

 





 



 

6.

FAIR VALUE MEASUREMENT



Under GAAP, the Company is required to measure certain assets and liabilities at fair value, or to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including the Company’s own credit risk. Each fair value measurement is reported in one of the following three levels:

Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.



The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at June 14, 2016 and December 29, 2015, respectively (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Fair Value Measurements



Level

 

June 14, 2016

 

December 29, 2015

Deferred compensation plan investments (included in Other assets)

 

2

 

$

14,287 

 

$

13,955 

Deferred compensation plan liabilities (included in Other liabilities)

 

2

 

$

(13,527)

 

$

(14,083)



There were no transfers among levels within the fair-value hierarchy during the first two quarters of fiscal 2016 and fiscal 2015.  The carrying value of the Company’s cash and cash equivalents, receivables and accounts payable approximate fair value due to their short term nature.





11


 



 

7.

SEGMENT REPORTING



The Company operates the Del Frisco’s, Sullivan’s, and Grille brands as operating segments. The restaurant concepts operate solely in the U.S. within the full-service dining industry, providing similar products to similar customers. Sales from external customers are derived principally from food and beverage sales, and the Company does not rely on any major customers as a source of sales. The restaurant concepts also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. However, as Del Frisco’s restaurants typically have higher revenues, driven by their larger physical presence and higher average check, the Del Frisco’s, Sullivan’s, and Grille operating segments have varying operating income and restaurant-level EBITDA margins due to the leveraging of higher revenues on certain fixed operating costs such as management labor, rent, utilities, and building maintenance.

The following tables present information about reportable segments (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended June 14, 2016



Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

37,945 

 

$

17,575 

 

$

24,396 

 

$

 

$

79,916 

Restaurant-level EBITDA

 

10,692 

 

 

2,642 

 

 

3,795 

 

 

 

 

17,129 

Capital expenditures

 

3,898 

 

 

388 

 

 

4,356 

 

 

40 

 

 

8,682 

Property and equipment

 

109,652 

 

 

48,156 

 

 

104,997 

 

 

2,498 

 

 

265,303 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended June 16, 2015



Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

37,175 

 

$

17,477 

 

$

19,124 

 

$

 

$

73,776 

Restaurant-level EBITDA

 

11,129 

 

 

2,385 

 

 

2,980 

 

 

 

 

16,494 

Capital expenditures

 

4,192 

 

 

985 

 

 

9,174 

 

 

29 

 

 

14,380 

Property and equipment

 

98,907 

 

 

45,846 

 

 

84,542 

 

 

2,376 

 

 

231,671 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



24 Weeks Ended June 14, 2016



Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

76,288 

 

$

36,476 

 

$

48,346 

 

$

 

$

161,110 

Restaurant-level EBITDA

 

21,405 

 

 

6,190 

 

 

7,563 

 

 

 

 

35,158 

Capital expenditures

 

5,182 

 

 

596 

 

 

5,626 

 

 

47 

 

 

11,451 

Property and equipment

 

109,652 

 

 

48,156 

 

 

104,997 

 

 

2,498 

 

 

265,303 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



24 Weeks Ended June 16, 2015



Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

73,196 

 

$

37,315 

 

$

38,367 

 

$

 

$

148,878 

Restaurant-level EBITDA

 

21,451 

 

 

6,262 

 

 

5,903 

 

 

 

 

33,616 

Capital expenditures

 

5,647 

 

 

1,378 

 

 

12,477 

 

 

118 

 

 

19,620 

Property and equipment

 

98,907 

 

 

45,846 

 

 

84,542 

 

 

2,376 

 

 

231,671 

In addition to using consolidated results in evaluating the Company’s performance and allocating its resources, the Company’s chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP. The Company defines restaurant-level EBITDA as net income before income taxes, other income (expenses), net, pre-opening costs, general and administrative costs, lease termination and closure costs and depreciation and amortization. Pre-opening costs are excluded because they vary in timing and magnitude and are not related to the health of ongoing operations. General and administrative costs are only included in the Company’s consolidated financial results as they are generally not specifically identifiable to individual operating segments as these costs relate to supporting all of the restaurant operations of the Company and the extension of the Company’s concepts into new markets. Lease termination and closure costs and depreciation and amortization are excluded because they are not ongoing controllable cash expenses, and they are not related to the health of ongoing operations. Property and equipment is the only balance sheet measure used by the Company’s chief operating decision maker in allocating resources.

12


 

The following table reconciles restaurant-level EBITDA to net income (in thousands).





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended

 

24 Weeks Ended



June 14, 2016

 

June 16, 2015

 

June 14, 2016

 

June 16, 2015

Restaurant-level EBITDA

$

17,129 

 

$

16,494 

 

$

35,158 

 

$

33,616 

Less:

 

 

 

 

 

 

 

 

 

 

 

Pre-opening costs

 

591 

 

 

1,479 

 

 

685 

 

 

1,746 

General and administrative costs

 

6,030 

 

 

5,908 

 

 

11,780 

 

 

11,386 

Lease termination and closing costs

 

20 

 

 

 

 

41 

 

 

Depreciation and amortization

 

4,163 

 

 

3,613 

 

 

8,448 

 

 

7,190 

Operating income

 

6,325 

 

 

5,494 

 

 

14,204 

 

 

13,294 

Less:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

24 

 

 

 

 

55 

 

 

32 

Other  

 

 

 

88 

 

 

 

 

177 

Net income before income taxes

 

6,296 

 

 

5,399 

 

 

14,144 

 

 

13,085 

Less income tax expense

 

1,852 

 

 

1,686 

 

 

4,289 

 

 

3,978 

Net income

$

4,444 

 

$

3,713 

 

$

9,855 

 

$

9,107 























8.

COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims, possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Prior to the acquisition of Lone Star Steakhouse & Saloon, Inc. by Lone Star Fund, the Company’s predecessor guaranteed certain lease payments of certain non-Company restaurants in connection with the leasing of real estate for restaurant locations. As of June 14, 2016, the Company was responsible as guarantor for one remaining lease of its former affiliate. The lease expires at the end of 2016. This guarantee will require payment by the Company only in an event of default by the former affiliate where it is unable or unwilling to make the required lease payments. Management believes that the likelihood is remote that material payments will be required under the guarantee. At June 14, 2016 and December 29, 2015 the maximum potential amount of future lease payments the Company could be required to make as a result of the guarantees was approximately $0.1 million  and $0.2 million, respectively.

At June 14, 2016 and December 29, 2015, the Company had outstanding letters of credit of $1.2 million and $1.3 million, respectively, which were drawn on the Company’s credit facility (see Note 4,  Long-Term Debt). The letters of credit typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions.









13


 





 



 

Item 2.

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



Cautionary Statement

Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting 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. Although we believe the expectations reflected in any forward looking statements are reasonable, 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. These differences can arise as a result of the risks described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2015, filed March 3, 2016, or the 2015 10-K, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward looking statements contained in this report will, in fact, transpire.

Overview

Del Frisco’s Restaurant Group develops, owns and operates three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille. We currently operate 50 restaurants in 23 states and the District of Columbia. Of the 50 restaurants we operated as of the end of the period covered by this report, there were 12 Del Frisco’s restaurants, 18 Sullivan’s restaurants and 20 Grille restaurants.

Unless the context otherwise indicates, all references to “we,” “our,” “us,” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.

Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:

 

 

 

Pursue Disciplined Restaurant Growth. We believe that there are significant opportunities to grow our concepts on a nationwide basis in both existing and new markets where we believe we can generate attractive unit-level economics. We are presented with many development opportunities, and we carefully evaluate each opportunity to determine that sites selected for development have a high probability of meeting our return on investment targets. Our disciplined growth strategy includes accepting only those sites that we believe present attractive rent and tenant allowance structures as well as reasonable construction costs given the sales potential of the site. We believe our concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible unit models, will allow us to expand each of our three concepts into a greater number of locations.



 

 

 

Grow Existing Revenue. We will continue to pursue opportunities to increase the sales at our existing restaurants, pursue targeted local marketing efforts and evaluate operational initiatives, including growth in private dining, designed to increase restaurant unit volumes.



 

 

 

Maintain Margins Throughout Our Growth. We will continue to aggressively protect our margins using economies of scale, including marketing and purchasing synergies between our concepts and leveraging our corporate infrastructure as we continue to open new restaurants.



In general, we believe there are opportunities to open four to six restaurants annually, generally composed of one Del Frisco’s and three to five Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of new unit growth in the near term. During 2016, we expect to open three Grille restaurants and relocate one Del Frisco’s restaurant.

 

14


 



Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:

 

 

 

Comparable Restaurant Sales.  Effective beginning with the first quarter of fiscal 2016, we consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth month of operations. Previously, we considered a restaurant to be comparable during the first full fiscal period following the eighteenth month of operations.  This change in methodology did not result in any material changes in comparable restaurant metrics. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable restaurant sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 40 and 34 restaurants at June 14, 2016 and June 16, 2015, respectively.



 

 

 

Average Check. Average check is calculated by dividing total restaurant sales by customer counts for a given time period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in customers’ preferences, the effectiveness of menu changes and price increases and per customer expenditures.



 

 

 

Average Weekly Volume. Average weekly volume, or AWV, consists of the average weekly sales of our restaurants over a certain period of time. This measure is calculated by dividing total revenues within a period by the number of restaurants operating weeks during the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our concepts.



 

 

 

Customer Counts. Customer counts are measured by the number of entrées ordered at our restaurants over a given time period.



 

 

 

Restaurant-Level EBITDA Margin. Restaurant-level EBITDA margin, a non-GAAP financial measure, represents net income before income taxes, other income (expenses), net, pre-opening costs, general and administrative costs, lease termination and closing costs and depreciation and amortization as a percentage of revenues. By monitoring and controlling our restaurant-level EBITDA margins, we can gauge the overall profitability of our core restaurant operations. See Note 7,  Segment Reporting in the notes to our condensed consolidated financial statements for additional information on restaurant-level EBITDA.



Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth fiscal quarters has been higher due, in part, to increased gift card redemptions and increased private dining during the year-end holiday season, respectively. In addition, our first, second and third quarters each contain 12 operating weeks with the fourth quarter containing 16 or 17 operating weeks. As many of our operating expenses have a fixed component, our operating income and operating income margin have historically varied significantly from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

 

Results of Operations

The following table shows our operating results (in thousands), as well as our operating results as a percentage of revenues, for the 12 and 24 weeks ended June 14, 2016 and June 16, 2015.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended

 

24 Weeks Ended



June 14,

 

June 16,

 

June 14,

 

June 16,



2016

 

2015

 

2016

 

2015

Revenues

$

79,916 

 

100.0% 

 

$

73,776 

 

100.0% 

 

$

161,110 

 

100.0% 

 

$

148,878 

 

100.0% 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales

 

22,637 

 

28.3% 

 

 

21,276 

 

28.8% 

 

 

45,855 

 

28.5% 

 

 

42,938 

 

28.8% 

Restaurant operating expenses

 

38,017 

 

47.6% 

 

 

34,260 

 

46.4% 

 

 

76,643 

 

47.6% 

 

 

69,207 

 

46.5% 

Marketing and advertising costs

 

2,133 

 

2.7% 

 

 

1,746 

 

2.4% 

 

 

3,454 

 

2.1% 

 

 

3,117 

 

2.1% 

Pre-opening costs

 

591 

 

0.7% 

 

 

1,479 

 

2.0% 

 

 

685 

 

0.4% 

 

 

1,746 

 

1.2% 

General and administrative costs

 

6,030 

 

7.5% 

 

 

5,908 

 

8.0% 

 

 

11,780 

 

7.3% 

 

 

11,386 

 

7.6% 

Lease termination and closing costs

 

20 

 

0.0% 

 

 

 —

 

0.0% 

 

 

41 

 

0.0% 

 

 

 —

 

0.0% 

Depreciation and amortization

 

4,163 

 

5.2% 

 

 

3,613 

 

4.9% 

 

 

8,448 

 

5.2% 

 

 

7,190 

 

4.8% 

Operating income

 

6,325 

 

7.9% 

 

 

5,494 

 

7.4% 

 

 

14,204 

 

8.8% 

 

 

13,294 

 

8.9% 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

(24)

 

0.0% 

 

 

(7)

 

0.0% 

 

 

(55)

 

0.0% 

 

 

(32)

 

0.0% 

Other  

 

(5)

 

0.0% 

 

 

(88)

 

-0.1%

 

 

(5)

 

0.0% 

 

 

(177)

 

-0.1%

Income before income taxes

 

6,296 

 

7.9% 

 

 

5,399 

 

7.3% 

 

 

14,144 

 

8.8% 

 

 

13,085 

 

8.8% 

Income tax expense

 

1,852 

 

2.3% 

 

 

1,686 

 

2.3% 

 

 

4,289 

 

2.7% 

 

 

3,978 

 

2.7% 

Net income

$

4,444 

 

5.6% 

 

$

3,713 

 

5.0% 

 

$

9,855 

 

6.1% 

 

$

9,107 

 

6.1% 

























15


 



Fiscal Quarter Ended June 14, 2016 (12 weeks) Compared to the Fiscal Quarter Ended June 16, 2015 (12 weeks)

The following tables show our operating results (in thousands) by segment, as well as our operating results as a percentage of revenues, for the 12 weeks ended June 14, 2016 and June 16, 2015.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





12 Weeks Ended June 14, 2016



Del Frisco's

 

Sullivan's

 

Grille

 

Consolidated

Revenues

$

37,945 

 

100.0% 

 

$

17,575 

 

100.0% 

 

$

24,396 

 

100.0% 

 

$

79,916 

 

100.0% 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

11,236 

 

29.6% 

 

 

5,215 

 

29.7% 

 

 

6,186 

 

25.4% 

 

 

22,637 

 

28.3% 

Restaurant operating expenses: