0001415301-18-000142.txt : 20181109 0001415301-18-000142.hdr.sgml : 20181109 20181109161336 ACCESSION NUMBER: 0001415301-18-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180925 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Del Frisco's Restaurant Group, Inc. CENTRAL INDEX KEY: 0001415301 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 208453116 STATE OF INCORPORATION: DE FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35611 FILM NUMBER: 181173232 BUSINESS ADDRESS: STREET 1: 2900 RANCH TRAIL CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 469-913-1845 MAIL ADDRESS: STREET 1: 2900 RANCH TRAIL CITY: IRVING STATE: TX ZIP: 75063 FORMER COMPANY: FORMER CONFORMED NAME: Del Frisco's Restaurant Group, LLC DATE OF NAME CHANGE: 20071016 10-Q 1 dfrgform10q.htm 10-Q Document

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 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 001-35611 
dfrglogo.jpg
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.)
 
2900 Ranch Trail,
Irving, TX
 
75063
(Address of principal executive offices)
 
(Zip code)
(469) 913-1845
(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   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically 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 such files).    Yes   x     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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
 
  
Accelerated filer
 
x
Non-accelerated filer
¨
 
  
Smaller reporting company
 
¨

 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.    Yes   ¨    No  x
As of November 6, 2018, the latest practicable date, 33,321,795 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.



DEL FRISCO’S RESTAURANT GROUP, INC.
FORM 10-Q

INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Quarterly Report") and the documents incorporated herein by reference contain 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. Forward looking statements include all statements that are not historical facts. 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,” "should," "could" 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. Additional important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and include, but are not limited to, the following:
economic conditions (including customer spending patterns);
our ability to compete;
our ability to implement our growth strategy, including opening new restaurants, operating them profitably and accelerating development of our brands;
customer experiences or negative publicity surrounding our restaurants;
pricing and deliveries of food and other supplies;
changes in consumer tastes and spending patterns;
laws and regulations affecting labor and employee benefit costs, including increases in state and federally mandated minimum wages;
labor shortages;
general financial and credit market conditions;
fixed rental payments and the terms of our indebtedness;
cyber security customer information;
the Barteca Acquisition (as described herein)
valuation allowance (as described herein); and
other factors described in "Item 1A. Risk Factors" set forth in our Annual Report on Form 10-K for the year ended December 26, 2017 (the "2017 10-K"), and in our Quarterly Report on Form 10-Qs for the quarters ended March 27, 2018 and June 26, 2018.
All forward-looking statements in this Quarterly Report, or that are made on our behalf by our directors, officers or employees related to the information contained herein, apply only as of the date of this Quarterly Report or as of the date they were made. We undertake no obligation, except as required by applicable law, to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

1


PART I
FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)

2


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets—Unaudited
 
As of
(Amounts in thousands, except share data)
September 25, 2018
 
December 26, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,344

 
$
4,553

Inventory
20,668

 
15,539

Income taxes receivable
3,346

 
3,369

Lease incentives receivable
7,801

 
1,739

Prepaid expenses
6,272

 
5,383

Other current assets
6,871

 
3,392

Current assets held for sale

 
3,028

Total current assets
49,302

 
37,003

Property and equipment:
 
 
 
Buildings and improvements
13,569

 

Leasehold improvements
262,590

 
167,383

Furniture, fixtures, and equipment
77,717

 
61,500

Construction in progress
1,079

 

Property and equipment, gross
354,955

 
228,883

Less accumulated depreciation
(86,793
)
 
(75,566
)
Property and equipment, net
268,162

 
153,317

Goodwill
159,278

 
43,928

Intangible assets, net
206,383

 
20,284

Deferred income taxes

 
1,683

Other assets
19,547

 
15,187

Noncurrent assets held for sale

 
57,068

Total assets
$
702,672

 
$
328,470

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,802

 
$
13,941

Deferred revenue
12,640

 
17,646

Sales tax payable
2,512

 
3,314

Accrued payroll
10,264

 
7,103

Current portion of deferred rent obligations
5,024

 
4,177

Other current liabilities
5,064

 
5,076

Current portion of capital and financing lease obligations
1,706

 

Current portion of long-term debt
3,100

 

Current liabilities held for sale

 
575

Total current liabilities
76,112

 
51,832

Noncurrent liabilities:
 
 
 
Long-term debt, net
297,205

 
24,477

Obligations under capital and financing lease, net
10,463

 

Deferred rent obligations
54,441

 
41,166

Deferred income taxes, net
30,214

 

Other liabilities
12,607

 
13,261

Noncurrent liabilities held for sale

 
8,647

Total liabilities
481,042

 
139,383

Commitments and contingencies (Note 13)

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at September 25, 2018 or December 26, 2017

 

Common stock, $0.001 par value, 190,000,000 shares authorized, 37,442,934 shares issued and 33,320,764 shares outstanding at September 25, 2018 and 24,420,490 shares issued and 20,309,341 shares outstanding at December 26, 2017
37

 
24

Treasury stock at cost: 4,122,170 and 4,111,149 shares at September 25, 2018 and December 26, 2017, respectively
(67,823
)
 
(67,823
)
Additional paid in capital
247,656

 
147,503

Retained earnings
41,446

 
109,383

Accumulated other comprehensive income, net of tax
314

 

Total stockholders' equity
221,630

 
189,087

Total liabilities and stockholders' equity
$
702,672

 
$
328,470

See accompanying notes to condensed consolidated financial statements.

3


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations — Unaudited
໿

13 Weeks Ended(1)
 
12 Weeks Ended(1)
 
39 Weeks Ended(1)
 
36 Weeks Ended(1)
(Amounts in thousands, except per share data)
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Revenues
$
105,304

 
$
60,616

 
$
254,367

 
$
193,404

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
28,749

 
17,731

 
71,503

 
54,920

Restaurant operating expenses (excluding depreciation and amortization shown separately below)
56,063

 
32,259

 
128,618

 
96,099

Marketing and advertising costs
1,904

 
1,165

 
5,100

 
3,331

Pre-opening costs
3,559

 
25

 
6,108

 
2,032

General and administrative costs
11,833

 
6,301

 
27,613

 
18,097

Donations
32

 
834

 
90

 
836

Consulting project costs
963

 
153

 
1,897

 
2,786

Acquisition costs
6,026

 

 
10,892

 

Reorganization severance
697

 
353

 
810

 
1,072

Lease termination and closing costs
948

 

 
1,539

 
(2
)
Impairment charges
2,115

 

 
2,115

 

Depreciation and amortization
6,362

 
4,195

 
14,734

 
11,842

Total costs and expenses
119,251

 
63,016

 
271,019

 
191,013

Insurance settlements
72

 

 
72

 

Operating income (loss)
(13,875
)
 
(2,400
)
 
(16,580
)
 
2,391

Other income (expense), net:
 
 
 
 
 
 
 
Interest, net of capitalized interest
(24,410
)
 
(342
)
 
(25,223
)
 
(360
)
Other  
(484
)
 
(43
)
 
(533
)
 
(53
)
Income (loss) before income taxes
(38,769
)
 
(2,785
)
 
(42,336
)
 
1,978

Income tax expense (benefit)
2,436

 
(1,730
)
 
255

 
595

(Loss) income from continuing operations
(41,205
)
 
(1,055
)
 
(42,591
)
 
1,383

(Loss) income from discontinued operations, net of tax
(25,869
)
 
(721
)
 
(25,645
)
 
2,241

Net income (loss)
$
(67,074
)
 
$
(1,776
)
 
$
(68,236
)
 
$
3,624

Net income (loss) per average common share outstanding—basic
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(1.49
)
 
$
(0.05
)
 
$
(1.87
)
 
$
0.06

Income (loss) from discontinued operations
(0.94
)
 
(0.03
)
 
(1.13
)
 
0.10

Net income (loss)
$
(2.43
)
 
$
(0.08
)
 
$
(3.00
)
 
$
0.17

Net income (loss) per average common share outstanding—diluted
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(1.49
)
 
$
(0.05
)
 
$
(1.87
)
 
$
0.06

Income (loss) from discontinued operations
(0.94
)
 
(0.03
)
 
(1.13
)
 
0.10

Net income (loss)
$
(2.43
)
 
$
(0.08
)
 
$
(3.00
)
 
$
0.16

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
27,634

 
21,103

 
22,776

 
21,962

Diluted
27,634

 
21,103

 
22,776

 
22,180

(1)
Beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain 14 weeks. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The third quarter ended September 25, 2018 contained 13 weeks, the quarter ended September 5, 2017 contained 12 weeks, the first three quarters ended September 25, 2018 contained 39 weeks and the first three quarters ended September 5, 2017 contained 36 weeks. See Note 1, Business and Basis of Presentation in the notes to our consolidated financial statements included in our quarterly report on Form 10-Q for the quarter ended September 25, 2018.
See accompanying notes to condensed consolidated financial statements.

4


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) — Unaudited

13 Weeks Ended(2)
 
12 Weeks Ended(2)
 
39 Weeks Ended(2)
 
36 Weeks Ended(2)
(Amounts in thousands)
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Net income (loss)
$
(67,074
)
 
$
(1,776
)
 
$
(68,236
)
 
$
3,624

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gain (loss) on cash flow hedge(1)
314

 

 
314

 

Other comprehensive income (loss), net of tax
314

 

 
314

 

Comprehensive income (loss)
$
(66,760
)
 
$
(1,776
)
 
$
(67,922
)
 
$
3,624

(1)
Change in unrealized gain (loss) on cash flow hedges is presented net of tax expense of $0.1 million for the 13 and 39 weeks ended September 25, 2018. There was no cash flow hedging activity for the 12 and 36 weeks ended September 5, 2017.
(2)
Beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain 14 weeks. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The third quarter ended September 25, 2018 contained 13 weeks, the quarter ended September 5, 2017 contained 12 weeks, the first three quarters ended September 25, 2018 contained 39 weeks and the first three quarters ended September 5, 2017 contained 36 weeks. See Note 1, Business and Basis of Presentation in the notes to our consolidated financial statements included in our quarterly report on Form 10-Q for the quarter ended September 25, 2018.
See accompanying notes to condensed consolidated financial statements.

5


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity — Unaudited

Common Stock
 
 
 
 
 
 
 
 
 
 
(In thousands, except share data)
Shares
 
Par Value
 
Additional Paid
In Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated other Comprehensive Income
 
Total 
Balance at December 26, 2017
20,309,341

 
$
24

 
$
147,503

 
$
(67,823
)
 
$
109,383

 
$

 
$
189,087

Cumulative effect adjustment (Note 1)

 

 

 

 
299

 

 
299

Balance at December 27, 2017
20,309,341

 
24

 
147,503

 
(67,823
)
 
109,682

 

 
189,386

Net loss

 

 

 

 
(68,236
)
 

 
(68,236
)
Other comprehensive income, net of tax

 

 

 

 

 
314

 
314

Share-based compensation costs

 

 
3,079

 

 

 

 
3,079

Issuance of common stock through public offering, net of fees and issuance costs
12,937,500

 
13

 
97,198

 

 

 

 
97,211

Stock option exercises
4,000

 

 
52

 

 

 

 
52

Shares issued under stock compensation plan, net of shares withheld for tax effects
69,923

 

 
(176
)
 

 

 

 
(176
)
Balance at September 25, 2018
33,320,764

 
$
37

 
$
247,656

 
$
(67,823
)
 
$
41,446

 
$
314

 
$
221,630

See accompanying notes to condensed consolidated financial statements.

6


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows—Unaudited
໿

39 Weeks Ended(1)
 
36 Weeks Ended(1)
(Amounts in thousands)
September 25, 2018
 
September 5, 2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(68,236
)
 
$
3,624

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,770

 
14,987

Loss on disposal of restaurant property
444

 
29

Loss on Sullivan's sale
23,620

 

Loss on extinguishment of debt
18,266

 

Amortization of debt issuance costs
238

 
3

Share based compensation
3,079

 
1,974

Impairment charges
2,199

 

Deferred income taxes
2,445

 
(1,016
)
Amortization of deferred lease incentives
(872
)
 
(573
)
Changes in operating assets and liabilities:
 
 
 
Inventory
(2,812
)
 
(245
)
Lease incentives receivable
4,009

 

Prepaid expenses and other assets
859

 
5,485

Insurance settlement
72

 
828

Accounts payable
10,628

 
(5,210
)
Income taxes
23

 
1,048

Deferred rent obligations
6,798

 
295

Deferred revenue
(5,680
)
 
(6,465
)
Other liabilities
(4,684
)
 
(5,072
)
Net cash (used) provided by operating activities
8,166

 
9,692

Cash flows from investing activities:
 
 
 
Insurance settlement for property and equipment

 
644

Purchases of property and equipment
(63,679
)
 
(26,503
)
Purchase of Barteca, net of cash acquired
(325,194
)
 

Proceeds from Sullivan's sale, net
29,894

 

Other investing activities
(1,561
)
 
41

Net cash used in investing activities
(360,540
)
 
(25,818
)
Cash flows from financing activities:
 
 
 
Payments on borrowings
(168,965
)
 
(13,000
)
Proceeds from borrowings
445,014

 
49,750

Payment of debt issuance costs
(21,460
)
 

Principal payments of capital and financing lease obligations
(182
)
 

Proceeds from loan against deferred compensation investments
1,526

 
3,545

Payments on loan against deferred compensation investments
(896
)
 
(132
)
Proceeds from sale of common stock, net of issuance costs
97,211

 

Purchases of treasury stock

 
(38,687
)
Cash tax payment for share-based awards
(176
)
 
(183
)
Proceeds from exercise of stock options
52

 
652

Net cash provided by financing activities
352,124

 
1,945

Less; Net change in cash and cash equivalents from discontinued operations
(41
)
 

Net change in cash and cash equivalents
(209
)
 
(14,181
)
Cash and cash equivalents at beginning of period
4,594

 
14,622

Cash and cash equivalents at end of period
$
4,344

 
$
441

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,559

 
$
70

Income taxes
$
1,091

 
$
406

Non cash investing and financing activities:
 
 
 
Capital expenditures included in accounts payable at end of period
$
6,085

 
$
1,610

Tenant improvement allowance receivables
$
7,954

 
$

Capital lease
$
887

 
$

Cumulative effect adjustment
$
299

 
$

(1)
Beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain 14 weeks. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The third quarter ended September 25, 2018 contained 13 weeks, the quarter ended September 5, 2017 contained 12 weeks, the first three quarters ended September 25, 2018 contained 39 weeks and the first three quarters ended September 5, 2017 contained 36 weeks. See Note 1, Business and Basis of Presentation in the notes to our consolidated financial statements included in our quarterly report on Form 10-Q for the quarter ended September 25, 2018.
See accompanying notes to condensed consolidated financial statements.

7


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements—Unaudited
໿
1. Business and Basis of Presentation
As of September 25, 2018, Del Frisco’s Restaurant Group, Inc. ("we," "us," "our," “Del Frisco’s” or the “Company”) owned and operated 70 restaurants under the concept names of Del Frisco’s Double Eagle Steakhouse (“Double Eagle”), Barcelona Wine Bar (“Barcelona”), bartaco, and Del Frisco’s Grille (“Grille”). Of the 70 restaurants we operated at the end of the period covered by this report, there were 15 Double Eagle restaurants, 15 Barcelona restaurants, 18 bartaco restaurants, and 22 Grille restaurants in operation in 17 states and the District of Columbia.
Recent Developments
On June 27, 2018 (“Acquisition Date”), we completed the acquisition of all outstanding interests in Barteca Holdings, LLC ("Barteca Acquisition"), a Delaware limited liability company, and its subsidiaries (“Barteca”) for total cash consideration of $331.2 million, which represents a purchase price of $325 million plus customary adjustments including payments for cash remaining in the business.
In connection with the completion of the Barteca Acquisition, we entered into a new credit agreement that provides for (i) senior secured term loans in an aggregate principal amount of $390.0 million (“Term Loan B”) and (ii) senior secured revolving credit commitments in an aggregate principal amount of $50.0 million (“Revolving Loan,” and, collectively with the term loans, the “2018 Credit Facility”). See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our credit facility.
On August 1, 2018, we entered into an underwriting agreement with certain underwriters with respect to (i) the sale by the Company of 11,250,000 shares of the Company’s common stock, par value $0.001 per share, to the underwriters and (ii) the grant by the Company to the underwriters of an option (the “Option”) to purchase up to 1,687,500 additional shares of the Company’s common stock (together, the “Shares”). The sale of the Shares, including the exercise in full of the Option, closed on August 6, 2018. The total proceeds of $97.8 million from the public offering of common stock were used to repay a portion of Term Loan B. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements.
On August 27, 2018 we amended (the “First Amendment”) Term Loan B (“Amended Term Loan B”). The First Amendment amends the 2018 Credit Facility, to, among other things, provide the Company with additional term loans (“Additional Term Loans”) in an aggregate principal amount of $18.0 million. The First Amendment also amended the 2018 Credit Facility to increase the interest rate applicable to the Additional Term Loans and the existing term loans outstanding under the 2018 Credit Facility to, at our option, a rate per annum equal to either a LIBOR or a base rate, plus an applicable margin, which is equal to 6.00% for LIBOR rate loans and 5.00% for base rate loans. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our amended credit facility.
On September 21, 2018, we sold all of the outstanding equity interests in our Sullivan’s Steakhouse business (“Sullivan’s") to Sullivan’s Holding LLC, a Delaware limited liability company and affiliate of Romano’s Macaroni Grill, for the total gross proceeds of approximately $32 million, subject to customary adjustments for inventory and cash. See Note 3, Dispositions in the notes to our condensed consolidated financial statements for information regarding discontinued operations.
Basis of Presentation
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 13 and 39 weeks ended September 25, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 25, 2018. 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 our Annual Report on Form 10-K for the fiscal year ended December 26, 2017 filed with the SEC on March 27, 2018 (the “2017 10-K”).
The results of Sullivan's operations have been presented as discontinued operations for all periods presented and the related assets and liabilities as of December 26, 2017 were reclassified as held for sale. See Note 3 Dispositions in the notes to our condensed consolidated financial statements for information regarding discontinued operations.
We operate on a 52- or 53-week fiscal year ending the last Tuesday in December. Beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain

8


14 weeks. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The fiscal quarter ended September 25, 2018 contained 13 weeks and the quarter ended September 5, 2017 contained 12 weeks and are referred to herein as the third quarter of 2018 and the third quarter of 2017, respectively. The first three quarters ended September 25, 2018 contained 39 weeks and the first three quarters ended September 5, 2017 contained 36 weeks and are referred to herein as the first three quarters of 2018 and the first three quarters of 2017, respectively. Fiscal 2018 will be a 52-week fiscal year as was fiscal 2017. We believe that a reporting basis comprised of four equal 13-week quarters is a more typical reporting format comparable to most companies in the restaurant industry and is easier to understand for our investors.
As a result of the change in our calendar, our third quarter 2018, which began on June 27, 2018, had 91 days of activity, 7 more days than our third quarter 2017, which began on June 14, 2017 and had 84 days of activity. While our 2017 and 2018 full fiscal years will have the same number of days, our 2018 first quarter had 7 additional days, our 2018 second quarter had 7 additional days, and our 2018 fourth quarter will have 21 fewer days than the corresponding periods in 2017. As a result, our first three quarters of 2018 had 21 more days than our first three quarters of 2017.

We have not restated and do not plan to restate previously filed 2017 quarterly financial statements prepared in accordance with GAAP because no information other than revenues, including certain recurring expense items, such as costs of sales, restaurant operating expenses, marketing and advertising cost, pre-opening costs, general and administrative costs and depreciation and amortization, and cash flow, necessary to restate operations are available on a daily or weekly basis. Because we rely on this information in the preparation of our financial statements, the unavailability thereof made restating our financial statements in accordance with GAAP impracticable. Accordingly, the corresponding first, second and third quarter 2017 historical operating results are not comparable to our first and third quarter 2018 results.
If we used our revised quarterly reporting period in the prior year, excluding amounts for Barcelona and bartaco, which were purchased during the third quarter in 2018 and Sullivan's business, which was sold during the third quarter of 2018, revenues would have been $65.9 million and $210.3 million, during the 13 weeks period ended September 26, 2017 and the 39 weeks period ended September 26, 2017, respectively.
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. We base our 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.
Except for our accounting policies impacted by our adoption of Topic 606, and business combination as a result of the Barteca Acquisition, there have been no material changes to the significant accounting policies from what was previously reported in the 2017 10-K.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU 2014-09”) – Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance to provide additional clarification on specific topics (“Topic 606”). Topic 606 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company adopted Topic 606 as of December 27, 2017 by applying the cumulative effect transition method. Based on our evaluation of our revenue streams, the Company has determined that there was not a material impact as of the date of adoption between the new revenue standard and how we previously recognized revenue, and therefore the adoption did not have a material effect on our consolidated financial statements. The primary item affected by the adoption of Topic 606 was the deferred revenue from our loyalty program. While we do not anticipate changes to this revenue stream to be material, as stated above, we do expect to recognize income from this revenue stream earlier than it was previously recognized under the prior guidance, by bifurcating the performance obligations associated with our loyalty program. As a result of adopting Topic 606, the cumulative effect to our retained earnings was approximately $0.3 million, net of tax effect. For other revenue streams, there was no material change in the timing of revenue recognition as our accounting policies under the prior guidance was materially consistent with Topic 606.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) ("ASU 2016-15") – Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this update were effective for financial statements issued for annual periods that begun

9


after December 15, 2017, including interim periods within those annual periods, and early application was permitted. An entity should apply ASU 2016-15 using a retrospective transition method to each period presented. We adopted ASU 2016-15 beginning in fiscal 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18") – Restricted Cash, which outlines that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 was effective for public business entities for annual periods, including interim periods within those annual periods, that began after December 15, 2017, and early application was permitted. An entity should apply ASU 2016-18 using a retrospective transition method to each period presented. We adopted ASU 2016-18 beginning in fiscal 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) ("ASU 2017-09") – Scope of Modification Accounting, which provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award, and when an entity should apply modification accounting. The amendments in this update are effective for financial statements issued for annual periods that began after December 15, 2017, including interim periods within those annual periods, and early adoption was permitted for interim or annual periods. The amendments in ASU 2017-09 should be applied prospectively to awards modified on or after the adoption date. We adopted ASU 2017-09 beginning in fiscal 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”) – Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. We early adopted ASU 2017-12 on June 27, 2018 (Adoption Date). ASU 2017-12 requires that certain provisions be applied on a modified retrospective basis upon adoption, which results in a cumulative catch-up adjustment to the opening balance of accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year of adoption, which is January 1, 2018 (Application Date). Given that no outstanding hedge existed at the Application Date, no provisions elected by us will result in a cumulative effect adjustment to retained earnings. Consequently, the adoption did not have a material impact on our Consolidated Financial Statements and related disclosures. See Note 6 Derivative Instruments for disclosures on our derivative instrument and hedging activities.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. The main amendments in ASU 2016-02 require recognition on the balance sheet of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. We anticipate implementing the standard by taking advantage of the practical expedient option, which permits companies to not apply ASU 2016-02 in the comparative periods in our consolidated financial statements in the fiscal year of adoption. At the time of adoption, the discounted minimum remaining rental payments of operating leases will be the starting point for determining the right-of-use asset and lease liability. We had operating leases with remaining rental payments of approximately $476.6 million at the end of third quarter in 2018. We expect that adoption of ASU 2016-02 will have a material impact on our consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to our current operating leases. In preparation for the adoption of the new guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, however we anticipate the evaluation of the impact will be completed in fiscal 2018.
2. Acquisitions
On the Acquisition Date, we completed the acquisition of all outstanding interests in Barteca for total cash consideration of $331.2 million, which represents a purchase price of $325 million plus customary adjustments including payments for cash remaining in the business. Barteca, now referred to as Del Frisco’s Emerging Brands (“Emerging Brands”) within our organizational structure, owns and operates two restaurant concepts: Barcelona and bartaco. Emerging Brands’ two restaurant concepts are innovative, with a unique vibe, food, drinks and design. Barcelona serves as a neighborhood Spanish tapas bar with an ever-changing selection of tapas, using both local and seasonal ingredients as well as specialties from Spain and the Mediterranean. Barcelona has a superior Spanish wine program and an award winning selection of wines, with 15 locations in 7 states and the District of Columbia. bartaco combines fresh, upscale street food with a coastal vibe in a relaxed environment and is inspired by a healthy, outdoor lifestyle. bartaco has 18 locations across 10 states.

10


The following table summarizes the preliminary fair value of identified assets acquired and liabilities assumed at the Acquisition Date:
 
 
As of
(Amounts in thousands)
 
June 27, 2018
Purchase price
 
$
331,199

 
 
 
Allocation of purchase price
 
 
Cash and cash equivalents
 
6,006

Accounts receivable
 
3,311

Inventory
 
2,068

Prepaid expenses and other assets
 
3,740

Leasehold improvements
 
34,919

Buildings and improvements
 
13,441

Furniture, fixtures, and equipment
 
13,207

Construction in progress
 
4,340

Other assets
 
1,421

Intangible assets
 
185,080

(Unfavorable) leases
 
(785
)
Accounts payable and other liabilities
 
(15,055
)
Financing lease obligations
 
(11,313
)
Deferred taxes
 
(24,531
)
Total fair value of net assets acquired:
 
215,849

Goodwill
 
$
115,350

Intangible assets acquired primarily include liquor licenses and bartaco and Barcelona trade names. The fair value of the acquired liquor licenses and trade names are $1.1 million and $183.0 million, respectively. Other intangible assets were valued at approximately $0.2 million. Liquor licenses acquired will be amortized over an estimated useful life of each individual license, which is currently estimated to be one year. Trade names represent intangible assets with indefinite life.
As a result of the acquisition, we have recognized approximately $115.4 million of goodwill, of which $46.1 million is deductible for income tax purposes. Goodwill, of which $43.6 million and $71.8 million is attributable to the Barcelona and bartaco reportable segments, respectively, represents the excess of the purchase price over the aggregate fair value of net assets acquired and is related to the benefits expected as a result of the acquisition, including sales, development and growth opportunities. We believe that Emerging Brands’ innovative concepts are highly complementary and will provide Del Frisco’s portfolio with significant growth and development opportunities, enabling us to capture market share in the experiential dining segment, while mitigating the effects of seasonality and the risk of economic downturns to our restaurant portfolio.
The purchase accounting is incomplete and our estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date). The primary area of the purchase price allocation that is not yet finalized relates to deferred taxes.
Pro Forma Results of Operations (unaudited)
The following pro forma results of operations for the 13 weeks ended September 25, 2018 and the 12 weeks ended September 5, 2017 as well as the 39 weeks ended September 25, 2018 and the 36 weeks ended September 5, 2017, have been prepared as though the business acquisition occurred as of the beginning of the earliest period presented. This pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future:

11


 
 
13 Weeks Ended
 
12 Weeks Ended
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands)
 
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Revenues
 
$
105,304

 
$
96,392

 
$
322,585

 
$
290,859

Net loss
 
(36,018
)
 
(3,872
)
 
(56,433
)
 
(20,069
)
Net loss per average common share
 
 
 
 
 
 
 
 
       Basic
 
$
(1.30
)
 
$
(0.18
)
 
$
(2.48
)
 
$
(0.91
)
       Diluted
 
$
(1.30
)
 
$
(0.18
)
 
$
(2.48
)
 
$
(0.91
)
The above pro forma information includes Emerging Brands’ actual revenues and net income of $39.9 million and $3.8 million, respectively, contributed post acquisition for the 13 and 39 weeks ended September 25, 2018. The Company incurred acquisition costs and wrote off deferred financing costs related to the transaction and debt amendment of $5.9 million and $18.3 million, respectively, for the 13 weeks ended September 25, 2018. The combined companies incurred acquisition costs and wrote off deferred financing charges related to the transaction of $10.2 million and $18.3 million, respectively, for the 39 weeks ended September 25, 2018. These charges are reflected in pro forma net income for the 36 weeks ended September 5, 2017. Pro forma revenues exclude Sullivan’s for each period presented as these amounts are reflected as discontinued operations in the Condensed Consolidated Statements of Operations. See Note 3, Dispositions in the notes to our condensed consolidated financial statements for information regarding discontinued operations.
3. Dispositions
On September 21, 2018, we sold all of the outstanding equity interests in our Sullivan’s Steakhouse business to Sullivan’s Holding LLC, a Delaware limited liability company and affiliate of Romano’s Macaroni Grill for the total gross proceeds of approximately $32 million, subject to customary adjustments for inventory and cash.
The results of Sullivan’s operations have been reflected as discontinued operations for all periods presented, and the related assets and liabilities as of December 26, 2017 were reclassified as held for sale. Sullivan’s Steakhouse had been previously disclosed as a separate reportable segment. Disposition costs related to the sale of Sullivan’s were approximately $2.0 million. These costs are reported in discontinued operations as they represent a cost directly related to the disposal and were included within the loss from sale of discontinued operations before income tax presented below.
 
13 Weeks Ended
 
12 Weeks Ended
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands)
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Revenues
$
11,000

 
$
12,728

 
$
41,280

 
$
46,130

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
3,533

 
3,910

 
12,889

 
13,935

Restaurant operating expenses
6,270

 
7,181

 
21,336

 
24,149

Marketing and advertising costs
272

 
393

 
1,092

 
1,145

General and administrative costs
268

 
275

 
1,323

 
1,026

Disposition costs
119

 

 
188

 

Lease termination and closing costs
90

 
2

 
888

 
542

Impairment charges

 

 
84

 

Depreciation and amortization
866

 
979

 
2,969

 
3,145

Total costs and expenses
11,418

 
12,740

 
40,769

 
43,942

Insurance recovery

 
234

 

 
582

Operating income (loss)
(418
)
 
222

 
511

 
2,770

Other income (expense)

 
(3
)
 

 
(3
)
Income (Loss) from discontinued operation before income taxes
(418
)
 
219

 
511

 
2,767

Loss from sale of discontinued operations before income tax
(23,620
)
 

 
(23,620
)
 

Income tax expense
1,831

 
941

 
2,536

 
526

Loss (income) from discontinued operations
$
(25,869
)
 
$
(722
)
 
$
(25,645
)
 
$
2,241

The carrying amounts of major classes of assets and liabilities that were classified as held for sale in the December 26, 2017 Condensed Consolidated Balance Sheet were as follows:

12


 
 
As of
(Amounts in thousands)
 
December 26, 2017
Cash and cash equivalents
 
$
41

Inventory
 
2,490

Prepaid expenses and other assets
 
497

Current assets held for sale
 
$
3,028

Property and equipment, net
 
22,038

Goodwill
 
18,313

Intangible assets, net
 
16,716

Other assets
 
1

Noncurrent assets held for sale
 
$
57,068

 
 
 
Accrued payroll
 
312

Current portion of deferred rent obligations
 
263

Current liabilities held for sale
 
$
575

Deferred rent obligations
 
3,664

Deferred income taxes, net
 
4,983

Noncurrent liabilities held for sale
 
$
8,647

Cash flows from Sullivan’s discontinued operations are included in the accompanying Condensed Consolidated Statements of Cash Flows. The significant cash flow items from the Sullivan’s divestiture for the 39 weeks ended September 25, 2018 and for the 36 weeks ended September 5, 2017 were as follows:
 
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands)
 
September 25, 2018
 
September 5, 2017
Depreciation and amortization
 
$
2,969

 
$
3,145

Capital expenditures
 
579

 
6,829


4. Earnings (loss) Per Share
Basic earnings (loss) 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. We incurred a net loss for the 13 weeks ended September 25, 2018 and for the 12 weeks ended September 5, 2017 and therefore, diluted shares outstanding equaled basic shares outstanding. We incurred a net loss for the 39 weeks ended September 25, 2018, and therefore, diluted shares outstanding equaled basic shares outstanding. The computation of diluted earnings per share excluded 683,000 antidilutive stock options, restricted stock units and performance stock units for the 36 weeks ended September 5, 2017.
The following table details our basic and diluted earnings per common share calculation:໿

13 Weeks Ended
 
12 Weeks Ended
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands, except per share data)
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Net income (loss)
$
(67,074
)
 
$
(1,776
)
 
$
(68,236
)
 
$
3,624

Shares:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
27,634

 
21,103

 
22,776

 
21,962

Effect of dilutive shares

 

 

 
218

Weighted-average common shares outstanding—diluted
27,634

 
21,103

 
22,776

 
22,180


 
 
 
 
 
 
 
Earnings (loss) per share—basic
$
(2.43
)
 
$
(0.08
)
 
$
(3.00
)
 
$
0.17

Earnings (loss) per share—diluted
$
(2.43
)
 
$
(0.08
)
 
$
(3.00
)
 
$
0.16



13


5. Stock-Based Employee Compensation
2012 Long-Term Equity Incentive Plan
On July 16, 2012, we adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (the “2012 Plan”), which allows us 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 us. 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 537,800 shares of common stock issuable upon exercise of outstanding options and 806,975 restricted shares, restricted stock units and performance stock units outstanding at September 25, 2018 with 585,569 shares of common stock available for future grants.
The following table details our total share-based compensation cost, as well as where the costs were expensed:

13 Weeks Ended
 
12 Weeks Ended
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands)
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Restaurant operating expenses
$
5

 
$
47

 
$
69

 
$
181

General and administrative costs
976

 
601

 
3,010

 
1,793

Total stock compensation cost
$
981

 
$
648

 
$
3,079

 
$
1,974

Restricted Stock, Restricted Stock Units, and Performance Stock Units
The following table summarizes restricted stock, restricted stock unit, and performance stock unit activity:

39 Weeks Ended September 25, 2018
 
Shares (000's)
 
Weighted average grant date fair value
 
Aggregate intrinsic value ($000's)
Outstanding at beginning of period
498

 
$
13.90

 
 
Granted
448

 
14.42

 
 
Vested
(81
)
 
17.59

 
 
Forfeited
(58
)
 
16.17

 
 
Outstanding at end of period
807

 
$
13.66

 
$
6,900

As of September 25, 2018, there was $6.6 million of total unrecognized compensation cost related to non-vested restricted stock, restricted stock units, and performance stock units. This cost is expected to be recognized over a period of approximately 2.0 years
Stock Options
The following table summarizes stock option activity:

39 Weeks Ended September 25, 2018
 
Shares (000's)
 
Weighted average exercise price
 
Weighted average remaining contractual term
 
Aggregate intrinsic value ($000's)
Outstanding at beginning of period
589

 
$
18.53

 
 
 
 
Exercised
(4
)
 
13.00

 
 
 
 
Forfeited
(47
)
 
19.15

 
 
 
 
Outstanding at end of period
538

 
$
18.51

 
4.6 years
 
$

Options exercisable at end of period
538

 
$
18.51

 
4.6 years
 
$

A summary of changes in and the status of non-vested stock options is presented below:

14



39 Weeks Ended

September 25, 2018
 
Shares (000's)
 
Weighted average grant-date fair value
Non-vested stock options at beginning of period
7

 
$
8.93

Vested

 

Forfeited
(7
)
 
8.93

Non-vested stock options at end of period

 
$

As of September 25, 2018, all stock options were vested, accordingly all compensation costs related to vested stock options were recognized.
6. Derivative Financial Instruments
As of September 25, 2018, we have entered into one derivative instrument designated as a cash flow hedge for risk management purposes. The derivative instrument is used to mitigate our exposure to interest rate fluctuations.
Interest Rate Cap
During fiscal 2018, we entered into an interest rate cap with a notional value of $200.0 million and 3.00% per annum strike rate to hedge the variability of the monthly 1-month LIBOR interest payments on a portion of our Term Loan B. The hedged monthly interest payments began on July 31, 2018 and end on the expiration of the interest rate cap on June 30, 2022. Any variability in the 1-month LIBOR interest payment on the Term Loan Facility beyond 3.00% per annum are offset by the net proceeds received upon exercising the interest rate cap. The interest rate cap was designated as a cash flow hedge at inception.
The hedge effectiveness for the designated interest rate cap is based on the changes in the interest rate cap’s intrinsic value. Accordingly, we will exclude all the change in the time value of the interest rate cap from the assessment. The excluded component will be amortized over the life of the derivative instrument and recognized in Interest, net of capitalized interest in the Consolidated Statements of Operations. The amount of gains that are reported in accumulated other comprehensive income at the reporting date that are expected to be reclassified into earnings within the next 12 months is $0.5 million.
Credit Risk
We are exposed to credit risk of the counterparty with which we entered into the derivative. This is the risk of the counterparty’s non-performance pursuant to the derivative contract. The risk will continue to exist as long as the derivative is in an asset position, creating a liability for the counterparty. However, the risk is deemed to be minimal as the counterparty has investment grade credit ratings. We will monitor the counterparty’s credit ratings and our market position with the counterparty on an ongoing basis. The interest rate cap does not contain any credit-risk related contingent features.
Quantitative Disclosures on Derivative Instruments
The following tables present the required quantitative disclosures for our derivative instrument, including its estimated fair values (all estimated using Level 2 inputs) and their financial statement presentation for the fiscal quarters ended September 25, 2018 and September 5, 2017, respectively.
Derivative instruments recorded at fair value in our unaudited condensed consolidated balance sheets as of September 25, 2018 and December 26, 2017, respectively, consisted of the following:
 
Derivative Assets
(Amounts in thousands)
September 25, 2018
 
December 26, 2017
Derivatives designated as hedging instruments
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate cap
Other current assets
 
$
2,262

 
Other current assets
 
$

Total derivatives designated as hedging instruments
 
 
$
2,262

 
 
 
$

The effect of cash flow hedges on accumulated other comprehensive income for the 13 weeks ended September 25, 2018 and the 12 weeks ended September 5, 2017 was as follows (Amounts in thousands):

15


Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain or (Loss) Recognized In Accumulated Other Comprehensive Income on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified From Accumulated Other Comprehensive Income into Income
 
13 Weeks Ended
 
12 Weeks Ended
 
 
13 Weeks Ended
 
12 Weeks Ended
 
September 25, 2018*
 
September 5, 2017
 
 
September 25, 2018
 
September 5, 2017
Interest rate cap
 
$
314

 
$

 
Interest, net of capitalized interest
 
$
122

 
$

*The portion of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income related to the component excluded from the assessment of effectiveness is $0.3 million.
The effect of cash flow hedges on accumulated other comprehensive income for the 39 weeks ended September 25, 2018 and the 36 weeks ended September 5, 2017, was as follows (Amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain or (Loss) Recognized In Accumulated Other Comprehensive Income on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified From Accumulated Other Comprehensive Income into Income
 
39 Weeks Ended
 
36 Weeks Ended
 
 
39 Weeks Ended
 
36 Weeks Ended
 
September 25, 2018*
 
September 5, 2017
 
 
September 25, 2018
 
September 5, 2017
Interest rate cap
 
$
314

 
$

 
Interest, net of capitalized interest
 
$
122

 
$

*The portion of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income related to the component excluded from the assessment of effectiveness is $0.3 million.
The effect of cash flow hedges on Consolidated Statements of Operations for the 13 weeks ended September 25, 2018 and the 12 weeks ended September 5, 2017, was as follows:
 
 
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
 
 
13 Weeks Ended
 
12 Weeks Ended
(Amounts in thousands)
 
September 25, 2018
 
September 5, 2017
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of cash flow hedges are recorded
 
Interest, net of capitalized interest
Gain or (loss) on cash flow hedging relationships
 
 
 
 
Interest Rate Cap:
 
 
 
 
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
 
$

 
$

Amount excluded from effectiveness testing using an amortization approach(1)
 
(122
)
 

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring
 

 

(1)
The portion of the amount of gain reclassified from accumulated other comprehensive income to income includes $0.1 million related to the amortization of the excluded component.
The effect of cash flow hedges on Consolidated Statements of Operations for the 39 weeks ended September 25, 2018 and the 36 weeks ended September 5, 2017, was as follows:

16


 
 
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
 
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands)
 
September 25, 2018
 
September 5, 2017
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of cash flow hedges are recorded
 
Interest, net of capitalized interest
Gain or (loss) on cash flow hedging relationships
 
 
 
 
Interest Rate Cap:
 
 
 
 
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
 
$

 
$

Amount excluded from effectiveness testing using an amortization approach(1)
 
(122
)
 

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring
 

 

(1)
The portion of the amount of loss reclassified from accumulated other comprehensive income to income includes $0.1 million related to the amortization of the excluded component.
7. Long-Term Indebtedness
Credit Facilities
On October 15, 2012, we entered into a credit facility that, as of the last amendment on October 20, 2017, provided for an unsecured credit facility with a maximum credit commitment of $50.0 million, (the "2012 Credit Facility"). Borrowings under the 2012 Credit Facility bore interest, at our option, based on (i) LIBOR plus 1.50% or (ii) the prime rate as defined in the credit facility. We are required to pay a commitment fee equal to 0.25% per annum on the available but unused credit facility. The 2012 Credit Facility was guaranteed by certain of our subsidiaries. The 2012 Credit Facility contained various financial covenants, including a maximum ratio of total indebtedness to EBITDA and minimum fixed charge coverage, both as defined in the credit agreement governing the credit facility. The 2012 Credit Facility also contained 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.
On June 27, 2018, in connection with the completion of the Barteca Acquisition, we entered into a new credit agreement that provides for (i) a seven year senior secured term loan Term Loan B in aggregate principal amount of $390.0 million bearing interest per annum equal to either a LIBOR or ABR rate, plus an applicable margin, which is equal to 4.75% per annum for LIBOR loans and 3.75% for ABR loans, with the option to maintain or convert base rate loans to LIBOR loans and (ii) five year senior secured revolving credit commitments ("Revolving Loan") in an aggregate principal amount of $50.0 million with the ability to increase the facility by up to an additional $25.0 million with unpaid amounts bearing interest at 3.50% per annum for LIBOR loans and 2.50% per annum for ABR loans. Similar to the term loan, base rate loans may be maintained or converted to LIBOR loans. Rates may be subject to adjustment by reference to the consolidated total leverage ratio, (collectively with the term loans, the "2018 Credit Facility"). Part of the proceeds from the term loans were used to retire the 2012 Credit Facility.
On August 6, 2018, we received $97.8 million of proceeds from a public offering of common stock that were used to repay a portion of the $390.0 million of the Term Loan B pursuant to an existing prepayment option.
On August 27, 2018 we amended ("The First Amendment") Term Loan B ("Amended Term Loan B"). The First Amendment amends the 2018 Credit Facility, to, among other things, completely re-syndicate the Amended Term Loan B and provide the Company with additional term loans ("Additional Term Loans") in an aggregate principal amount of $18.0 million. We incurred a loss of $18.3 million for the write-off of deferred financing costs related to the original Term Loan B, which is included in interest expense in our Consolidated Statements of Operations. The First Amendment also amended the 2018 Credit Facility to increase the interest rate applicable to the Additional Term Loans and the existing term loans outstanding under the 2018 Credit Facility to, at our option, a rate per annum equal to either a LIBOR or ABR rate, plus an applicable margin, which is equal to 6.00% for LIBOR loans and 5.00% for ABR loans.
As of September 25, 2018no amounts under the Revolving Loan were outstanding (excluding amounts reserved for letters of credit in the amount of $1.6 million). As of December 26, 2017$21.5 million under the 2012 Credit Facility Revolving Loan, was outstanding (excluding amounts reserved for letters of credit in the amount of $1.5 million). The Revolving Loan unpaid amounts bear interest at 3.50% per annum for LIBOR loans and 2.50% per annum for ABR loans. As of September 25, 2018, the

17


Revolving Loan unused commitment fee was 0.50%. The principal amount of the Revolving Loan is due and payable on June 27, 2023.
As of September 25, 2018$310.2 million was outstanding under the Amended Term Loan B. Interest on the Term Loan B accrues at a rate per annum equal to either a LIBOR rate or a base rate, plus an applicable margin, which is equal to 6.00% for LIBOR loans and 5.00% for base rate loans. The Interest Rate Cap Agreement, which has a notional value of $200.0 million and 3.00% per annum strike rate to hedge the variability of the monthly 1-month LIBOR interest payments on a portion of our Term Loan B, mitigates the risk of an increase in the LIBOR rate in effect on the Amended Term Loan B. See Note 6Derivative Financial Instruments for further discussion. As of September 25, 2018, the applicable interest rate on the Amended Term Loan B was 8.24%. The Amended Term Loan B is payable in equal quarterly installments of $0.8 million. The outstanding principal of the Amended Term Loan B is due and payable on June 27, 2025.
Amounts outstanding under the 2018 Credit Facility are guaranteed by Del Frisco's and certain of the subsidiaries of Del Frisco’s (collectively, the "Loan Parties"). The 2018 Credit Facility is secured by a first priority security interest in substantially all of the assets of the Loan Parties. The 2018 Credit Facility agreement contains certain representations, warranties and affirmative covenants and financial covenants, including a maximum ratio of total indebtedness to EBITDAR, as defined in the credit agreement governing the credit facility. The total indebtedness to EBITDAR calculation is applicable only when we are over 25% drawn on the Revolver at the end of the reporting period and doesn’t take effect until two full quarters after the Transaction Date.  As of September 25, 2018no amounts under the Revolving Loan were outstanding. In addition, the 2018 Credit Facility agreement 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.
Loan Against the Investments in Deferred Compensation Plan
On July 12, 2017, we executed an agreement to borrow against the investments in our deferred compensation plan to pay out funds due to plan participants instead of using operating cash flows. The loan does not have an expiration date or defined payment terms, and accrues interest at a rate of 1%, net of the 3% that is earned by the investments being loaned against. As of September 25, 2018 and December 26, 2017 there was $3.6 million and $3.0 million of outstanding borrowings on this loan, respectively.
Long-Term Indebtedness Summary
As of September 25, 2018 and December 26, 2017, long-term debt consisted of the following: 
 
 
As of
(Amounts in thousands)
 
September 25, 2018
 
December 26, 2017
Amended Term Loan B
 
$
310,193

 
$

Revolving Loan (2012 Credit Facility)
 

 
21,500

Loan Against the Investments in Deferred Compensation Plan
 
3,607

 
2,977

Net discount
 
(12,470
)
 

Deferred financing costs
 
(1,025
)
 

Long-term debt
 
300,305

 
24,477

Less current portion
 
(3,100
)
 

Total long-term debt, net
 
$
297,205

 
$
24,477

8. Financing Lease Obligations
The Company evaluates arrangements for which it is involved in the construction of leased restaurant space to determine whether build-to-suit accounting criteria have been met. When arrangements meet such criteria, the Company is the deemed owner of the construction project, which is generally limited to the leased restaurant space and build-out thereof. The Company capitalizes the related construction costs and recognizes a financing lease obligation for the construction costs incurred by the landlord when it is the deemed owner of the project. When a construction project for which the Company is the deemed owner is complete, the Company is required under applicable accounting guidance to determine whether it can remove the capitalized construction costs incurred by the landlord and the corresponding financing lease obligation from its consolidated balance sheet by applying sale-leaseback accounting criteria.
If the sale-leaseback criteria is met, the Company would derecognize the capitalized construction costs incurred by the landlord as well as the corresponding financing lease obligation, and would apply operating lease accounting unless the lease qualified for capital lease classification. When the sale-leaseback criteria is not met due to a form of prohibited continuing involvement such

18


as the Company not being reimbursed by the landlord for certain construction costs, the Company accounts for the transaction as a financing lease and as if it were the legal owner of the completed construction project, which is included in the Consolidated Balance Sheets as buildings and improvements within property and equipment. For such transactions, the Company depreciates the capitalized asset and accretes the related financing lease obligation using the effective interest method. Depreciation on these assets and interest on the related financing lease obligations are recognized in depreciation and amortization and interest expense, respectively, in the Company's Consolidated Statements of Operations. The Company recognizes the lease payments in such transactions as a reduction of the accreted balance of the respective financing lease. The Company determined that certain arrangements did not meet the accounting criteria for sale-leaseback accounting due to the Company's continuing involvement post-construction.
Future minimum payments due under financing lease and capital lease obligations for existing restaurants and commitments for restaurants whose development had not yet commenced as of September 25, 2018 were as follows:
 
As of
(Amounts in thousands)
September 25, 2018
2018
$
360

2019
1,818

2020
1,919

2021
1,967

2022
1,998

Thereafter
8,657

Total minimum lease payments
$
16,719

Less imputed interest
(4,550
)
Present value of future lease commitments
12,169

Less current maturities
(1,706
)
Obligations under capital and financing leases, net of current maturities
$
10,463

9. Accumulated Other Comprehensive Income

Changes in the composition of Accumulated Other Comprehensive Income (“AOCI”) during the first three quarters ended September 25, 2018 were as follows:
(Amounts in thousands)
 
Net Unrealized Gains (Losses) Related to Derivatives
 
Accumulated Other Comprehensive Income
Balance at December 26, 2017
 
$

 
$

Net change in fair value of derivatives, net of tax
 
227

 
227

Amounts reclassified to earnings of cash flow hedges, net of tax
 
87

 
87

Balance at September 25, 2018
 
$
314

 
$
314

10. Income Taxes
The Tax Cuts and Jobs Act (the "TCJA") was enacted in December 2017. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21%, among other provisions. GAAP requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. The provisional impact of the TCJA for the year ended December 26, 2017 was $4.6 million. The TCJA may be subject to technical amendments, as well as interpretations and implementing of regulations by the Department of Treasury and Internal Revenue Service, any of which could increase or decrease one or more impacts of the legislation. As such, we may record additional provisional amounts or adjustments to provisional amounts during the measurement period ending no later than December 2018. As of September 25, 2018, we have not changed the provisional estimates recognized in 2017.
The effective income tax rate for continued operations for the13 weeks ended September 25, 2018 was a negative 6.3%, compared to 62.1% for the 12 weeks ended September 5, 2017. The effective income tax rate for the 39 weeks ended September 25, 2018

19


was negative 0.6%, compared to 30.1% for the 36 weeks ended September 5, 2017. For the 13 and 39 weeks ended September 25, 2018, the factors that cause the effective tax rates to vary from the federal statutory rate of 21% were primarily the valuation allowance established during the third quarter of 2018 and the effect of certain permanent differences. transaction costs incurred for the Barteca Acquisition, and the impact of FICA tip and other credits. For the 12 and 36 weeks ended September 5, 2017, the factors causing the effective tax rates to vary from the federal statutory rate of 35% include the impact of the FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.
The Company assesses the available positive and negative evidence at each balance sheet date to determine whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. The purpose of this analysis is to assess whether it is more likely than not that some or all of our deferred tax assets will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets and in making this determination, we consider all available positive and negative evidence and make certain assumptions. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. To the extent we generate sufficient taxable income in the future to fully utilize the tax benefits of the net deferred tax assets on which a valuation allowance was recorded; our effective tax rate may decrease as the valuation allowance is reversed. During the 13 weeks ended September 25, 2018, the Company entered a three year cumulative loss position and established a valuation allowance of $20.8 million against deferred tax assets. Approximately $1.8 million of this valuation allowance was recorded against deferred tax assets established with the acquisition of Barteca, resulting in a corresponding increase to recorded goodwill. See Note 2 Acquisitions for information regarding deferred tax assets established with the acquisition of Barteca. Approximately $14.3 million and $4.7 million of this valuation allowance was recorded in continuing operations and discontinued operations, respectively.
11. Fair Value Measurement
Under GAAP, we are 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 our 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.
Fair Value of Debt and Other Financial Instruments
Debt is recorded at carrying value. The fair value of long-term debt is based on market prices that generally are observable for similar liabilities at commonly quoted intervals and is considered a Level 2 fair value measurement. The estimated fair value of debt (including current portion) is $298.8 million and $24.5 million and the carrying amount is $300.3 million and $24.5 million as of September 25, 2018 and December 26, 2017, respectively.
At September 25, 2018, the carrying values of other financial instruments such as cash and cash equivalents, receivables and accounts payable approximate fair value due to their short-term nature.
Recurring Fair Value Measurements

20


The following table presents our financial assets and liabilities measured at fair value on a recurring basis at September 25, 2018 and December 26, 2017, respectively:

Fair Value Measurements
(Amounts in thousands)
Level
 
September 25, 2018
 
December 26, 2017
Financial assets (liabilities):
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Deferred compensation plan investments (included in Other assets)
2
 
$
15,006

 
$
15,006

 
$
14,643

 
$
14,643

Deferred compensation plan liabilities (included in Other liabilities)
2
 
(10,405
)
 
(10,405
)
 
(11,326
)
 
(11,326
)
Interest rate cap agreement assets (included in Other current assets)
2
 
2,262

 
2,262

 

 

There were no transfers among levels within the fair-value hierarchy during the first three quarters of fiscal 2018 and fiscal 2017.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
The measurement of the fair value of derivative assets and liabilities is based on market prices that generally are observable for similar assets and liabilities at commonly quoted intervals and is considered a Level 2 fair value measurement. Derivative assets and liabilities that have maturity dates equal to or less than twelve months from the balance sheet date are included in prepaid and other current assets and other accrued liabilities, respectively. Derivative assets and liabilities that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets and other long-term liabilities, respectively. See Note 2 for additional information on our derivative instruments and related Company policies.
Non-recurring Fair Value Measurements
During the third quarter of 2018, we determined that the carrying value of the Chicago Double Eagle location exceeded its estimated future cash flows (level 3), due in part by our determination to close this location during the first quarter of 2019, and recognized a $2.1 million impairment charge.
12. Segment Reporting
We operate the Double Eagle, Barcelona, bartaco, 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 we do 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, Double Eagle restaurants typically have higher revenues, driven by their larger physical presence and higher average check. The Double Eagle, Barcelona, bartaco, 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:

13 Weeks Ended September 25, 2018
(Amounts in thousands)
Double Eagle
 
Barcelona
 
bartaco
 
Grille
 
Corporate
 
Consolidated
Revenues
$
38,112

 
$
17,210

 
$
22,663

 
$
27,319

 
$

 
$
105,304

Restaurant-level EBITDA
5,906

 
3,924

 
6,296

 
2,462

 

 
18,588

Capital expenditures
13,563

 
2,468

 
5,315

 
6,534

 
(243
)
 
27,637

Property and equipment, gross
148,122

 
31,906

 
41,785

 
129,390

 
3,752

 
354,955


21



12 Weeks Ended September 5, 2017
(Amounts in thousands)
Double Eagle
 
Barcelona
 
bartaco
 
Grille
 
Corporate
 
Consolidated
Revenues
$
34,738

 
$

 
$

 
$
25,878

 
$

 
$
60,616

Restaurant-level EBITDA
7,066

 

 

 
2,395

 

 
9,461

Capital expenditures
3,012

 

 

 
2,326

 
262

 
5,600

Property and equipment, gross
125,937

 

 

 
127,090

 
2,828

 
255,855


39 Weeks Ended September 25, 2018
(Amounts in thousands)
Double Eagle
 
Barcelona
 
bartaco
 
Grille
 
Corporate
 
Consolidated
Revenues
$
125,536

 
$
17,210

 
$
22,663

 
$
88,958

 
$

 
$
254,367

Restaurant-level EBITDA
28,083

 
3,924

 
6,296

 
10,843

 

 
49,146

Capital expenditures
41,769

 
2,468

 
5,315

 
14,688

 
(492
)
 
63,748

Property and equipment, gross
148,122

 
31,906

 
41,785

 
129,390

 
3,752

 
354,955


36 Weeks Ended September 5, 2017
(Amounts in thousands)
Double Eagle
 
Barcelona
 
bartaco
 
Grille
 
Corporate
 
Consolidated
Revenues
$
114,692

 
$

 
$

 
$
78,712

 
$

 
$
193,404

Restaurant-level EBITDA
28,861

 

 

 
10,193

 

 
39,054

Capital expenditures
10,075

 

 

 
10,678

 
402

 
21,155

Property and equipment, gross
125,937

 

 

 
127,090

 
2,828

 
255,855

In addition to using consolidated results in evaluating our performance and allocating our resources, our chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP at both the segment and consolidated level. At the consolidated level, this non-GAAP operating measure is useful to both management and investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not, however, indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA on a consolidated basis should not be considered a substitute for, or superior to, operating income loss, which is calculated in accordance with GAAP, and the reconciliations to operating income set forth below should be carefully evaluated.
We define restaurant-level EBITDA as operating income before pre-opening costs, general and administrative costs, donations, consulting project costs, acquisition costs, reorganization severance costs, lease termination and closing costs, depreciation and amortization, impairment charges, and insurance settlements. 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 our consolidated financial results as they are generally not specifically identifiable to individual operating segments as these costs relate to supporting all of our restaurant operations and the extension of our concepts into new markets. Donations, consulting project costs, acquisition and disposition costs and reorganization severance costs are excluded because they are not related to the health of ongoing operations. Lease termination and closing costs, depreciation and amortization, impairment charges, and insurance settlements 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 our chief operating decision maker in allocating resources.

22


The following table reconciles operating income (loss) to restaurant-level EBITDA:

13 Weeks Ended
 
12 Weeks Ended
 
39 Weeks Ended
 
36 Weeks Ended
(Amounts in thousands)
September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Operating income (loss)
$
(13,875
)
 
$
(2,400
)
 
$
(16,580
)
 
$
2,391

Pre-opening costs
3,559

 
25

 
6,108

 
2,032

General and administrative costs
11,833

 
6,301

 
27,613

 
18,097

Donations
32

 
834

 
90

 
836

Consulting project costs
963

 
153

 
1,897

 
2,786

Acquisition costs
6,026

 

 
10,892

 

Reorganization severance
697

 
353

 
810

 
1,072

Lease termination and closing costs
948

 

 
1,539

 
(2
)
Depreciation and amortization
6,362

 
4,195

 
14,734

 
11,842

Impairment charges
2,115

 

 
2,115

 

Insurance settlements
(72
)
 

 
(72
)
 

Restaurant-level EBITDA
$
18,588

 
$
9,461

 
$
49,146

 
$
39,054

13. Commitments and Contingencies
We are 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 our consolidated financial position, results of operations or cash flows.
At September 25, 2018 and December 26, 2017, we had outstanding letters of credit of $1.6 million and $1.5 million, respectively, which were drawn on our 2018 Credit Facility and 2012 Credit Facility, respectively (see Note 7, Long-Term Indebtedness). The letters of credit typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions.
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis presents information that we believe is relevant to an assessment and understanding of our consolidated financial position and results of operations. This information should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial data included elsewhere in this Quarterly Report. The following information should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2017 Annual Report. Unless the context otherwise indicates, all references to “we,” “our,” “us,” “Del Frisco’s”or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.
Overview
Del Frisco’s develops, owns and operates four contemporary and complementary restaurants: Del Frisco’s Double Eagle Steakhouse (“Double Eagle”), Barcelona Wine Bar (“Barcelona”), bartaco, and Del Frisco’s Grille (“Grille”). As of the end of the period covered by this report, we operated 70 restaurants in 17 states and the District of Columbia. Of the 70 restaurants we operated at the end of the period covered by this report, there were 15 Double Eagle restaurants, 15 Barcelona restaurants, 18 bartaco restaurants, and 22 Grille restaurants.
Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:

23


Disciplined Growth. Our long term target is to grow annual revenues through a combination of annual restaurant growth and comparable restaurant sales growth. We believe that there are significant opportunities to grow our concepts in both existing and new markets, where we believe we can generate attractive unit-level economics, which we view as the most significant driver of future growth. Our real estate process includes partnering with a third party master broker to source potential sites against a set of clear criteria for each brand, working with a third-party spatial analytics company, who have developed a model to determine the most attractive locations for each of our brands and a predictive sales model for specific sites, and a Real Estate Committee, consisting of members of the Board of Directors (the “Board”) and senior management, which visits, assesses and approves each site. While we do not believe it is possible to guarantee every site will meet its expected returns, we expect these processes to increase the probability of a site meeting its financial return on investment hurdles. We believe our concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible unit models and robust site assessment and approval processes, will allow us to expand each of our concepts into a greater number of locations. We will also continue to pursue opportunities to increase the sales at our existing restaurants through menu innovation, relevant and impactful marketing initiatives and loyalty programs, growing private dining and continued focus on enhancing the guest experience.
Operating and G&A Leverage. Our long term target is to grow Adjusted EBITDA . We will continue to protect our strong restaurant level margins through operational efficiencies and economies of scale, including purchasing synergies across our concepts. As we open new restaurants our organizational structure will enable us to keep our Brand teams focused on individual Brand priorities while leveraging our support functions across a larger business, resulting in G&A reducing as a percentage of revenue over time. The Barteca Acquisition greatly enhances our ability to leverage the benefits of scale.
Financing Strategies. Our long term target is to reduce our leverage through a combination of disciplined capital expenditures to support our restaurant count growth target and remodel needs, free cash flow generation from revenue growth and operating and G&A leverage, and other financing strategies to reduce our debt.
Our long term target is to grow the Double Eagle, Barcelona and bartaco Brands by opening new restaurants. We expect to open no Grilles in 2019 or 2020 as we evaluate the performance of 2018 openings which incorporate learnings from our 2017 consulting project. In the first three quarters of 2018, we closed Austin, Texas and Chicago, Illinois Sullivan's and River Oaks, Texas, Little Rock, Arkansas and Stamford, Connecticut Grille restaurants. We also determined to close Asheville, North Carolina and Homewood, Alabama bartaco locations in the forth quarter of 2018, and Chicago, Illinois Double Eagle location during the first quarter of 2019. It generally takes 9 to 12 months after the signing of a lease or the closing of a purchase to complete construction and open a new restaurant. Additional time is sometimes required to obtain certain government approvals, permits and licenses, such as liquor licenses.
Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:
Comparable Restaurant Sales Growth. We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 58 and 29 restaurants at September 25, 2018 and September 5, 2017, 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 Unit Volume. Average unit volume, or AUV, consists of the average sales of our restaurants over a certain period of time. This measure is calculated by dividing total restaurant sales within a period by the number of restaurants operating during the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our concepts.
Customer Counts. Customer counts for Double Eagle and Grille are measured by the number of entrées ordered at our restaurants over a given time period. Barcelona and bartaco customer counts are measured by the number of customers counted in the dining room or on the patio over a given time period.

24


Restaurant-Level EBITDA and Restaurant-Level EBITDA Margin. Restaurant-level EBITDA represents Adjusted EBITDA before general and administrative costs. Adjusted EBITDA represents operating income (loss) before depreciation and amortization, plus the sum of certain non-operating expenses, including pre-opening costs, donations, lease termination costs, acquisition costs, consulting project costs, reorganization severance, impairment charges and insurance settlements. Restaurant-level EBITDA margin is the ratio of Restaurant-level EBITDA to revenues. These non-GAAP operating measures are useful to both management and investors because they represent one means of gauging the overall profitability of our recurring and controllable core restaurant operations for each segment, and all segments at a consolidated level. These measures are not, however, indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. See Note 12, Segment Reporting, in the notes to our consolidated financial statements for a reconciliation of restaurant-level EBITDA to operating income at a consolidated level.
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. 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.
Recent Events
On June 27, 2018 (“Acquisition Date”), we completed the acquisition of all outstanding interests in Barteca Holdings, LLC ("Barteca Acquisition"), a Delaware limited liability company, and its subsidiaries (“Barteca”) for total cash consideration of $331.2 million, which represents a purchase price of $325 million plus customary adjustments including payments for cash remaining in the business.
In connection with the completion of the Barteca Acquisition, we entered into a new credit agreement that provides for (i) senior secured term loans in an aggregate principal amount of $390.0 million (“Term Loan B”) and (ii) senior secured revolving credit commitments in an aggregate principal amount of $50.0 million (“Revolving Loan,” and, collectively with the term loans, the “2018 Credit Facility”). See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our credit facility.
On August 1, 2018, we entered into an underwriting agreement with certain underwriters with respect to (i) the sale by the Company of 11,250,000 shares of the Company’s common stock, par value $0.001 per share, to the underwriters and (ii) the grant by the Company to the underwriters of an option (the “Option”) to purchase up to 1,687,500 additional shares of the Company’s common stock (together, the “Shares”). The sale of the Shares, including the exercise in full of the Option, closed on August 6, 2018. The total proceeds of $97.8 million from the public offering of common stock were used to repay a portion of Term Loan B. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements.
On August 27, 2018 we amended (“First Amendment”) Term Loan B (“Amended Term Loan B”). The First Amendment amends the 2018 Credit Facility, to, among other things, provide the Company with additional term loans (“Additional Term Loans”) in an aggregate principal amount of $18.0 million. The First Amendment also amended the 2018 Credit Facility to increase the interest rate applicable to the Additional Term Loans and the existing term loans outstanding under the 2018 Credit Facility to, at our option, a rate per annum equal to either a LIBOR or a base rate, plus an applicable margin, which is equal to 6.00% for LIBOR rate loans and 5.00% for base rate loans. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our amended credit facility.
On September 21, 2018, we sold all of the outstanding equity interests in our Sullivan’s Steakhouse business (“Sullivan’s) to Sullivan’s Holding LLC, a Delaware limited liability company and affiliate of Romano’s Macaroni Grill, for the total gross proceeds of approximately $32 million, subject to customary adjustments for inventory and cash.
Change in Reporting Periods
We operate on a 52- or 53-week fiscal year ending on the last Tuesday of each December and, beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain 14 weeks. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The fiscal quarter ended September 25, 2018 contained 13 weeks and quarter ended September 5, 2017 contained 12 weeks and are referred to herein as the third quarter of 2018 and the third quarter of 2017, respectively. The first three quarters ended September 25, 2018 contained 39 weeks and the first three quarters ended September 5, 2017 contained 36 weeks and are referred to herein as the first three quarters of 2018 and the first three quarters of 2017, respectively. As a result of the change in our calendar, our first three quarters of 2018 had 273 days of activity, 21 more days

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than our first two quarters of 2017, which had 252 days of activity. We have not restated and do not plan to restate historical results. See Note 1, Business and Basis of Presentation in the notes to our condensed consolidated financial statements.
We estimate the additional operating days in the third quarter of 2018 resulted in $5.8 million of additional consolidated revenues, or $3.7 million and $2.1 million of Double Eagle and Grille revenues, and in the first three quarters of 2018 resulted in $16.5 million of additional consolidated revenues, or $10.3 million and $6.2 million of Double Eagle and Grille revenues, respectively. We discuss the estimated impacts of the additional operating days in more detail below to the extent significant.
Due to the difference in the reporting period between the third quarter of 2018 and the third quarter of 2017, and between the first three quarters of 2018 and the first three quarters of 2017, the Barteca Acquisition, and the Sullivan's sale during the third quarter of fiscal 2018, discussed above, our results of operations for the third quarter of 2018 and the first three quarters of 2018 as presented in accordance with GAAP and set forth below are not comparable to the third quarter of 2017 and the first three quarters of 2017.
Key Financial Definitions
Detailed discussion regarding key financial definitions as they relate to our results of operations can be found in the 2017 10-K.

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Results of Operations
The following table shows our operating results (in thousands), as well as our operating results as a percentage of revenues. With the change in our fiscal quarters, as described above, the third quarter of 2018 represents 13 weeks of activity and the third quarter of 2017 represents 12 weeks of activity. Further, the first three quarters of 2018 represent 39 weeks of activity and the first three quarters of 2017 represent 36 weeks of activity.

13 Weeks Ended
 
12 Weeks Ended
 
39 Weeks Ended
 
36 Weeks Ended

September 25, 2018
 
September 5, 2017
 
September 25, 2018
 
September 5, 2017
Revenues
$
105,304

 
100.0
 %
 
$
60,616

 
100.0
 %
 
$
254,367

 
100.0
 %
 
$
193,404

 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
28,749

 
27.3

 
17,731

 
29.3

 
71,503

 
28.1

 
54,920

 
28.4

Restaurant operating expenses (excluding depreciation and amortization shown separately below)
56,063

 
53.2

 
32,259

 
53.2

 
128,618

 
50.6

 
96,099

 
49.7

Marketing and advertising costs
1,904

 
1.8

 
1,165

 
1.9

 
5,100

 
2.0

 
3,331

 
1.7

Pre-opening costs
3,559

 
3.4

 
25

 

 
6,108

 
2.4

 
2,032

 
1.1

General and administrative costs
11,833

 
11.2

 
6,301

 
10.4

 
27,613

 
10.9

 
18,097

 
9.4

Donations
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