Ruths Hospitality Group, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 25, 2016

OR

For the transition period from                       to                      

Commission File Number 000-51485

Ruth’s Hospitality Group, Inc.

(Exact name of registrant as specified in its charter)

(407) 333-7440

Registrant’s telephone number, including area code

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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

The number of shares outstanding of the registrant’s common stock as of October 26, 2016 was 31,888,363, which includes 1,249,169 shares of unvested restricted stock.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

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

See accompanying notes to condensed consolidated financial statements.

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income—Unaudited

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

See accompanying notes to condensed consolidated financial statements.

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited

for the Thirty-nine Weeks ended September 25, 2016 and September 27, 2015

(Amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Amounts in thousands)

See accompanying notes to condensed consolidated financial statements. 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “targeting,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals, including with respect to new restaurant openings, capital expenditures and the impact of healthcare inflation and minimum wage legislation, also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: reductions in the availability of, or increases in the cost of, USDA Prime grade beef, fish and other food items; changes in economic conditions and general trends; the loss of key management personnel; the effect of market volatility on the Company’s stock price; health concerns about beef or other food products; the effect of competition in the restaurant industry; changes in consumer preferences or discretionary spending; labor shortages or increases in labor costs; the impact of federal, state or local government regulations relating to Company employees, the sale or preparation of food, the sale of alcoholic beverages and the opening of new restaurants; harmful actions taken by the Company’s franchisees; a material failure, interruption or security breach of the Company’s information technology network; repeal or reduction of the federal FICA tip credit; unexpected expenses incurred as a result of the sale of the Mitchell’s Restaurants; the Company’s ability to protect its name and logo and other proprietary information; an impairment in the financial statement carrying value of our goodwill, other intangible assets or property; the impact of litigation; the restrictions imposed by the Company’s Amended and Restated Credit Agreement; and changes in, or the discontinuation of, the Company’s quarterly cash dividend payments or share repurchase program. For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2015, which is available on the SEC’s website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof. You should not assume that material events subsequent to the date of this Quarterly Report on Form 10-Q have not occurred.

Unless the context otherwise indicates, all references in this report to the “Company,” “Ruth’s,” “we,” “us”, “our” or similar words are to Ruth’s Hospitality Group, Inc. and its subsidiaries. Ruth’s Hospitality Group, Inc. is a Delaware corporation formerly known as Ruth’s Chris Steak House, Inc., and was founded in 1965.

Overview

Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of September 25, 2016, there were 149 Ruth’s Chris Steak House restaurants, including 68 Company-owned restaurants, one restaurant operating under a management agreement and 80 franchisee-owned restaurants.

We previously operated eighteen Mitchell’s Fish Markets and three Mitchell’s/Cameron’s Steakhouse restaurants (collectively, the Mitchell’s Restaurants), located primarily in the Midwest and Florida. On January 21, 2015, we sold the Mitchell’s Restaurants to a third party for $10 million. The assets sold consisted primarily of leasehold interests, leasehold improvements, restaurant equipment and furnishings, inventory, and related intangible assets, including brand names and trademarks associated with the 21 Mitchell’s Restaurants. For financial reporting purposes, the Mitchell’s Restaurants are classified as a discontinued operation for all periods presented.

The Ruth’s Chris menu features a broad selection of USDA Prime- and high quality steaks and other premium offerings served in Ruth’s Chris’ signature fashion—“sizzling” and topped with butter—complemented by other traditional menu items inspired by our New Orleans heritage. The Ruth’s Chris restaurants reflect the 50 year commitment to the core values instilled by our founder, Ruth Fertel, of caring for our guests by delivering the highest quality food, beverages and service in a warm and inviting atmosphere.

All Company-owned Ruth’s Chris Steak House restaurants are located in the United States. The franchisee-owned Ruth’s Chris Steak House restaurants include 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Panama, Singapore, Taiwan and the United Arab Emirates. New Company-owned Ruth’s Chris Steak House restaurants opened in El Paso, TX in August 2016 and in Albuquerque, NM in May 2016 and a new franchisee-owned Ruth’s Chris Steak House restaurant opened in Jakarta, Indonesia in February 2016. Subsequent to September 25, 2016, new franchisee-owned Ruth’s Chris Steak House restaurants opened in Odenton, MD and Greenville, SC. A Company-owned Ruth’s Chris Steak House in Columbus, OH closed in February 2016.

Our business is subject to seasonal fluctuations. Historically, our first and fourth quarters have tended to be the strongest revenue quarters due largely to the year-end holiday season and the popularity of dining out during the fall and winter months. Consequently, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular period may decrease.

Our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 provides additional information about our business, operations and financial condition.

Results of Operations

The table below sets forth certain operating data expressed as a percentage of total revenues for the periods indicated, except as otherwise noted. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

Third Quarter Ended September 25, 2016 (13 Weeks) Compared to Third Quarter Ended September 27, 2015 (13 Weeks)

Overview. Operating income increased by $1.4 million, or 34.8%, to $5.6 million for the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015. Operating income for the third quarter of fiscal year 2016 was favorably impacted by a $3.5 million increase in restaurant sales offset by a $1.2 million increase in restaurant operating expenses and a $462 thousand increase in pre-opening costs. Income from continuing operations increased from the third quarter of fiscal year 2015 by $870 thousand to $3.5 million. Net income for the third quarter of fiscal year 2016 increased from the third quarter of fiscal year 2015 by $1.0 million to $3.6 million.

Segment Profits. Segment profitability information is presented in Note 7 to the condensed consolidated financial statements. Not all operating expenses are allocated to operating segments. The Ruth’s Chris Steak House Company-owned restaurants, which are all located in the United States, are managed as an operating segment. The Ruth’s Chris concept operates within the full-service dining industry, providing similar products to similar customers. The franchise operations are reported as a separate operating segment. No costs are allocated to the franchise operations segment. Segment profits for the third quarter of fiscal year 2016 for the Company-owned steakhouse restaurant segment increased by $2.3 million to $15.1 million from the third quarter of fiscal year 2015. The increase was driven primarily by a $3.5 million increase in restaurant sales offset by a $1.2 million increase in restaurant operating expenses. Franchise income was flat in the third quarter of fiscal year 2016 compared to the third quarter of fiscal year 2015.

Restaurant Sales. Restaurant sales increased by $3.5 million, or 4.7%, to $78.8 million in the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015. The increase was attributable to a $1.5 million increase in Company-owned comparable sales and a $2.5 million increase in restaurant sales at new restaurants, partially offset by a $544 thousand decrease in sales from a closed restaurant. Excluding discontinued operations, total operating weeks during the third quarter of fiscal year 2016 increased to 877 from 858 in the third quarter of fiscal year 2015. Company-owned comparable restaurant sales increased 2.1%, driven by an average check increase of 3.6% partially offset by a traffic decrease of 1.5%.

Franchise Income. Franchise income was flat in the third quarter of fiscal year 2016 compared to the third quarter of fiscal year 2015.

Other Operating Income. Other operating income was flat in the third quarter of fiscal year 2016 compared to the third quarter of fiscal year 2015. Other operating income includes our share of income from a managed restaurant, gift card breakage revenue and miscellaneous restaurant income.

Food and Beverage Costs. Food and beverage costs were flat in the third quarter of fiscal year 2016 compared to the third quarter of fiscal year 2015. As a percentage of restaurant sales, food and beverage costs decreased to 30.1% in the third quarter of fiscal year 2016 from 31.5% in the third quarter of fiscal year 2015. The decrease in food and beverage costs as a percentage of restaurant sales was primarily due to a 6.3% decrease in beef costs and an increase in average check of 3.5%.

Restaurant Operating Expenses. Restaurant operating expenses increased $1.2 million, or 3.1%, to $40.5 million in the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015. Restaurant operating expenses, as a percentage of restaurant sales, decreased to 51.5% in the third quarter of fiscal year 2016 from 52.3% in the third quarter of fiscal year 2015. The decrease in restaurant operating expenses as a percentage of restaurant sales was primarily due to a $335 thousand benefit related to the settlement of disputed rent costs.

Marketing and Advertising. Marketing and advertising expenses increased $234 thousand to $2.5 million in the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015. The increase in marketing and advertising expenses in the third quarter of fiscal year 2016 was primarily attributable to a planned increase in advertising spending.

General and Administrative Costs. General and administrative costs decreased $96 thousand to $7.3 million in the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015. The decrease in general and administrative costs was primarily attributable to a decrease in performance-based compensation.

Depreciation and Amortization Expenses. Depreciation and amortization expense increased $194 thousand to $3.4 million in the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015 primarily due to depreciation on new restaurant assets placed in service within the last twelve months.

Pre-opening Costs. Pre-opening costs were $574 thousand in the third quarter of fiscal year 2016 primarily due to the opening of a Ruth’s Chris Steak House Restaurant in El Paso, TX, which opened in the third quarter of fiscal year 2016. Pre-opening costs were $112 thousand in the third quarter of fiscal year 2015 primarily due to a new Ruth’s Chris Steak House restaurant in Dallas, TX that opened in the fourth quarter of fiscal year 2015.

Interest Expense. Interest expense increased $145 thousand to $333 thousand in the third quarter of fiscal year 2016 from the third quarter of fiscal year 2015 due to a higher average debt balance during the third quarter of fiscal year 2016.

Other Income and Expense. During the third quarter of fiscal year 2016, we recognized other expense of $92 thousand primarily due to state sales tax assessments. During the third quarter of fiscal year 2015 we recognized other income of $9 thousand.

Income Tax Expense. During the third quarter of fiscal year 2016, we recognized income tax expense of $1.7 million. During the third quarter of fiscal year 2015, we recognized income tax expense of $1.3 million. The effective tax rate, including the impact of discrete items, decreased to 32.2% for the third quarter of fiscal year 2016 compared to 33.7% for the third quarter of fiscal year 2015. The effective tax rate decreased in the third quarter of fiscal year 2016 primarily due to the favorable tax impact of discrete items recognized in the quarter. Fiscal year 2016 discrete items and other unexpected changes impacting annual tax expense may cause the effective tax rate for fiscal year 2016 to differ from the effective tax rate for the third quarter 2016.

Income from Continuing Operations. Income from continuing operations of $3.5 million in the third quarter of fiscal year 2016 increased by $870 thousand compared to the third quarter of fiscal year 2015 due to the factors noted above.

Income or Loss from Discontinued Operations, net of income taxes. Income from discontinued operations, net of income taxes, for the third quarter of fiscal year 2016 was $75 thousand compared to a loss of $73 thousand during the third quarter of fiscal year 2015. The income in the third quarter of fiscal year 2016 was primarily attributable to a $466 thousand benefit from the extinguishment of a liability related to Mitchell’s Restaurant gift cards, partially offset by occupancy costs of $335 thousand from a closed Ruth’s Chris Steak House restaurant. The loss in the third quarter of fiscal year 2015 was primarily attributable to Mitchell’s Restaurants.

Net Income. Net income was $3.6 million in the third quarter of fiscal year 2016 and increased by $1.0 million compared to $2.6 million in the third quarter of fiscal year 2015. The increase was largely attributable to the factors noted above.

Thirty-nine Weeks Ended September 25, 2016 Compared to Thirty-nine Weeks Ended September 27, 2015

Overview. Operating income increased $728 thousand, or 2.3%, to $32.5 million for the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. Operating income for the first thirty-nine weeks of fiscal year 2016 was impacted by a $8.9 million increase in restaurant sales, offset by a $5.7 million increase in restaurant operating expenses, a $1.0 million increase in pre-opening costs, a $782 thousand increase in marketing and advertising costs, a $734 thousand increase in general and administrative costs and a $560 thousand increase in depreciation and amortization. Income from continuing operations increased from the first thirty-nine weeks of fiscal year 2015 by $272 thousand to $21.3 million. Net income for the first thirty-nine weeks of fiscal year 2016 increased from the first thirty-nine weeks of fiscal year 2015 by $760 thousand to $21.3 million.

Segment Profits. Segment profits for the first thirty-nine weeks of fiscal year 2016 for the Company-owned steakhouse restaurant segment increased by $3.3 million to $58.9 million from the first thirty-nine weeks of fiscal year 2015. The increase was driven by a $9.1 million increase in revenues, which exceeded the increase in segment operating expenses. Franchise income increased $360 thousand in the first thirty-nine weeks of fiscal year 2016.

Restaurant Sales. Restaurant sales increased by $8.9 million, or 3.5%, to $261.9 million in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. The increase was attributable to a $5.8 million increase in Company-owned comparable restaurant sales, a $4.3 million increase in restaurant sales at new restaurants, partially offset by a $1.3 million decrease in sales from a closed restaurant. Excluding discontinued operations, total operating weeks during the first thirty-nine weeks of fiscal year 2016 increased to 2,605 from 2,568 in the first thirty-nine weeks of fiscal year 2015. Company-owned comparable restaurant sales increased 2.3%, driven by an average check increase of 3.1%, partially offset by a traffic decrease of 0.8%.

Franchise Income. Franchise income in the first thirty-nine weeks of fiscal year 2016 increased $360 thousand compared to the first thirty-nine weeks of fiscal year 2015 primarily due to higher royalties from an increase in franchise restaurant count.

Other Operating Income. Other operating income in the first thirty-nine weeks of fiscal year 2016 increased $417 thousand compared to the first thirty-nine weeks of fiscal year 2015. Approximately $185 thousand of the increase was due to gift card breakage revenue and $135 thousand of the increase was from our share of income from a restaurant operated under a management agreement.

Food and Beverage Costs. Food and beverage costs were relatively unchanged in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. As a percentage of restaurant sales, food and beverage costs decreased to 29.8% in the first thirty-nine weeks of fiscal year 2016 from 30.8% in the first thirty-nine weeks of fiscal year 2015. The decrease in food and beverage costs as a percentage of restaurant sales was primarily due to a 5.2% decrease in beef costs and a 3.1% increase in average check.

Restaurant Operating Expenses. Restaurant operating expenses increased $5.7 million, or 4.7%, to $127.0 million in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. Restaurant operating expenses, as a percentage of restaurant sales, increased to 48.5% in the first thirty-nine weeks of fiscal year 2016 from 47.9% in the first thirty-nine weeks of fiscal year 2015. The increase in restaurant operating expenses as a percentage of restaurant sales was attributable to a $3.4 million increase in restaurant labor costs and a $1.3 million increase in occupancy costs.

Marketing and Advertising. Marketing and advertising expenses increased $782 thousand to $7.1 million in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. The increase in marketing and advertising expenses in the first thirty-nine weeks of fiscal 2016 was primarily attributable to a planned increase in advertising spending.

General and Administrative Costs. General and administrative costs increased $734 thousand to $22.1 million in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. The increase in general and administrative costs was primarily attributable to a $962 thousand increase in professional fees partially offset by a $328 decrease in compensation expense.

Depreciation and Amortization Expenses. Depreciation and amortization expense increased $560 thousand to $9.9 million in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015 primarily due to depreciation on new restaurant assets placed in service within the last twelve months.

Pre-opening Costs. Pre-opening costs were $1.7 million in the first thirty-nine weeks of fiscal year 2016 due to expenses incurred related to the anticipated opening of four new Company-owned restaurants, including the new locations in Albuquerque, NM and El Paso, TX, which opened in May and August 2016, respectively. Pre-opening costs were $627 thousand in the first thirty-nine weeks of fiscal year 2015 primarily due to the openings of new Ruth’s Chris Steak House restaurants in St. Petersburg, FL and Dallas, TX in February 2015 and November 2015, respectively.

Interest Expense. Interest expense increased $211 thousand to $799 thousand in the first thirty-nine weeks of fiscal year 2016 from the first thirty-nine weeks of fiscal year 2015. The increase was primarily due to a higher average debt balance during the first thirty-nine weeks of fiscal year 2016.

Other Income. Other income remained relatively unchanged for the first thirty-nine weeks of fiscal year 2016 compared to the first thirty-nine weeks of fiscal year 2015.

Income Tax Expense. During the first thirty-nine weeks of fiscal year 2016, we recognized income tax expense of $10.4 million. During the first thirty-nine weeks of fiscal year 2015, we recognized income tax expense of $10.1 million. The effective tax rate, including the impact of discrete items, increased to 32.8% for the first thirty-nine weeks of fiscal year 2016 compared to 32.5% for the first thirty-nine weeks of fiscal year 2015. The effective tax rate increased primarily due to the unfavorable tax impact of equity compensation. Fiscal year 2016 discrete items and other unexpected changes impacting annual tax expense may cause the effective tax rate for fiscal year 2016 to differ from the effective tax rate for the first thirty-nine weeks of fiscal year 2016.

Income from Continuing Operations. Income from continuing operations of $21.3 million in the first thirty-nine weeks of fiscal year 2016 increased by $272 thousand compared to the first thirty-nine weeks of fiscal year 2015 due to the factors noted above.

Loss from Discontinued Operations, net of income taxes. Loss from discontinued operation, net of income taxes, for the first thirty-nine weeks of fiscal year 2016 was $94 thousand compared to $582 thousand during the first thirty-nine weeks of fiscal year 2015. The loss for the first thirty-nine weeks of fiscal year 2016 was primarily attributable to occupancy costs of $581 thousand from a closed Ruth’s Chris Steak House restaurant, partially offset by a benefit of $466 thousand from the extinguishment of a liability related to Mitchell’s Restaurant gift cards. The loss for the first thirty-nine weeks of fiscal year 2015 was primarily attributable to Mitchell’s Restaurants.

Net Income. Net income was $21.3 million in the first thirty-nine weeks of fiscal year 2016 and increased by $760 thousand compared to $20.5 million in the first thirty-nine weeks of fiscal year 2015. The increase was largely attributable to the factors noted above.

Liquidity and Capital Resources

Overview

Our principal sources of cash during the first thirty-nine weeks of fiscal year 2016 were net cash provided by operating activities and borrowings under our $100 million senior credit facility. Our principal uses of cash during the first thirty-nine weeks of fiscal year 2016 were for capital expenditures, principal repayments under our $100 million senior credit facility, common stock repurchases and dividend payments.

Cash flows from discontinued operations are combined with the cash flows from continuing operations within each of the categories on our condensed consolidated statements of cash flows. We do not anticipate that any of our closed restaurants reported in discontinued operations will have a material impact on the Company’s cash flow during fiscal year 2016. The receipt of $10 million cash for the sale of the Mitchell’s Restaurants and related assets during the first quarter of fiscal year 2015 was the only material impact on the Company’s cash flow during fiscal year 2015 related to the sale of the Mitchell’s Restaurants or any of our closed restaurants reported in discontinued operations.

In April 2016, we announced that our Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $60 million of outstanding common stock from time to time. The new share repurchase program replaces the previous share repurchase program announced in November 2014, which has been terminated. During the first thirty-nine weeks of fiscal year 2016, we repurchased 2,476,865 shares at an aggregate cost of $40.0 million or an average cost of $16.14 per share. All repurchased shares were retired and cancelled. As of September 25, 2016, $31.7 million remained available for future purchases under the new program. Our ability to make future stock purchases under the new program is currently limited by our Amended and Restated Credit Agreement. The agreement was amended in September 2016 to reset the limit applicable to junior stock payments, which include both cash dividend payments and repurchases of common stock. Junior stock payments made subsequent to December 30, 2012 through the end of the agreement are limited to $140 million. As of September 25, 2016, $105.9 million of such payments had been made, and, as a result, as of September 25, 2016, we had $34.1 million of capacity under this limitation for both quarterly cash dividends and stock repurchases. As of September 25, 2016, we were in compliance with all the covenants under our senior credit facility.

During the second quarter of fiscal year 2013, we commenced paying quarterly cash dividends to holders of common and restricted stock. We paid a quarterly cash dividend of $0.07 per share, or $2.3 million in the aggregate, during the first, second and third quarters of fiscal year 2016. On October 28, 2016, we announced that our Board of Directors declared a quarterly cash dividend of $0.07 per share, or approximately $2.2 million in the aggregate, to be paid on November 23, 2016 to common and restricted stockholders of record as of the close of business on November 10, 2016. Future dividends will be subject to the approval of our Board of Directors. 

We have increased borrowing under our senior credit facility by $38.0 million since the end of fiscal year 2015. As of September 25, 2016, we had $38.0 million of outstanding indebtedness under our senior credit facility with approximately $57.9 million of borrowings available, net of outstanding letters of credit of approximately $4.1 million. As of September 25, 2016, the weighted average interest rate on our outstanding indebtedness was 2.66%. In addition, the fees on our unused senior credit facility and outstanding letters of credit were 0.2% and 2.1%, respectively.

The senior credit facility has a maturity date of February 14, 2017. We are currently negotiating with lenders to refinance the senior credit facility prior to its maturity.

We believe that our cash flow from operations coupled with our borrowing capacity under our senior credit facility should provide us with adequate liquidity for the next 12 months. We anticipate capital expenditures for fiscal year 2016 will total approximately $28.0 million to $30.0 million.

Sources and Uses of Cash

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):

Operating Activities. Operating cash inflows pertain primarily to restaurant sales and franchise income. Operating cash outflows pertain primarily to expenditures for food and beverages, restaurant operating expenses, marketing and advertising, general and administrative costs and income taxes. Operating activities provided cash flow during the first thirty-nine weeks of both fiscal years 2016 and 2015 primarily because operating revenues exceeded cash-based expenses.

Investing Activities. Cash used in investing activities aggregated $18.3 million in the first thirty-nine weeks of fiscal year 2016 compared with $4.6 million cash used in the first thirty-nine weeks of fiscal year 2015 primarily due to receipt of $10 million from the sale of the Mitchell’s Restaurants and related assets in fiscal year 2015. Investing cash outflows during the first thirty-nine weeks of both fiscal years 2016 and 2015 pertained primarily to capital expenditure projects. Cash used in investing projects during the first thirty-nine weeks of fiscal year 2016 pertained to $8.6 million for restaurant remodel and capital replacement projects and $9.5 million for new restaurants. Cash used in investing activities during the first thirty-nine weeks of fiscal year 2015 pertained to $8.6 million for restaurant remodel projects and $5.7 million for new restaurants.

Financing Activities. Financing activities used cash during the first thirty-nine weeks of both fiscal years 2016 and 2015. During the first thirty-nine weeks of fiscal year 2016, we: used $40.0 million to repurchase common stock; increased the debt outstanding under our senior credit facility by $38.0 million; paid $1.5 million in employee taxes in connection with the vesting of restricted stock and the exercise of stock options; and paid dividends of $7.0 million. We paid $1.5 million in taxes in connection with the vesting of restricted stock and the exercise of stock options because some recipients elected to satisfy their individual minimum tax withholding obligations by having us withhold a number of vested shares of restricted stock and/or a number of shares otherwise issuable pursuant to stock options. During the first thirty-nine weeks of fiscal year 2015, we: reduced the debt outstanding under our senior credit facility by $8.0 million; used $11.7 million to repurchase common stock; paid $1.4 million in taxes related to stock based compensation; and paid dividends of $6.3 million.

Off-Balance Sheet Arrangements

As of September 25, 2016, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 includes a summary of the critical accounting policies and estimates that we believe are the most important to aid in the understanding our financial results. There have been no material changes to these critical accounting policies and estimates that impacted our reported amounts of assets, liabilities, revenues or expenses during the first thirty-nine weeks of fiscal year 2016.

Interest Rate Risk

The Company is exposed to market risk from fluctuations in interest rates. For fixed rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely, for variable rate debt, including borrowings under the Company’s senior credit facility, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. At September 25, 2016, the Company had $38.0 million in variable rate debt outstanding. The Company currently does not use financial instruments to hedge its risk to market fluctuations in interest rates. Ceteris paribus, a hypothetical immediate one percentage point change in interest rates would be expected to have an impact on pre-tax earnings and cash flows for fiscal year 2016 of approximately $380 thousand.

Foreign Currency Risk

The Company believes that fluctuations in foreign exchange rates do not present a material risk to its operations due to the relatively small amount of franchise income it receives from outside the U.S. During the first thirty-nine weeks of fiscal years 2016 and 2015, franchise income attributable to international locations was approximately $2.1 million and $2.3 million, respectively.

Commodity Price Risk

The Company is exposed to market price fluctuations in beef and other food product prices, which in the past have been volatile and have impacted the Company’s food and beverage costs. As the Company typically sets its menu prices in advance of its beef and other food product purchases, the Company cannot quickly react to changing costs of beef and other food items. To the extent that the Company is unable to pass the increased costs on to its guests through price increases, the Company’s results of operations would be adversely affected. As of September 25, 2016, the Company has entered into negotiated set pricing for approximately 50% of its beef requirements for the remainder of fiscal year 2016. The market for USDA Prime grade beef is particularly volatile. If prices increase, or the supply of beef is reduced, operating margin could be materially adversely affected. Ceteris paribus, a hypothetical 10% fluctuation in beef prices would have an approximate impact on pre-tax earnings ranging from $0.5 million to $1.0 million for the remainder of fiscal year 2016.

From time to time, the Company enters into purchase price agreements for other lower-volume food products, including seafood. In the past, certain types of seafood have experienced fluctuations in availability. Seafood is also subject to fluctuations in price based on availability, which is often seasonal. If certain types of seafood are unavailable, or if the Company’s costs increase, the Company’s results of operations could be adversely affected.

Effects of Healthcare Inflation

The Company is exposed to market price fluctuations related to the cost of providing healthcare to its employees. Claim trends are predicted to outpace inflation throughout the upcoming year. Pharmacy costs are also rising in excess of general and medical cost inflation. If prices increase, or the Company experiences significantly more claims, operating margin could be materially adversely affected. Ceteris paribus, a hypothetical 10% fluctuation in healthcare costs would have an approximate impact on pre-tax earnings of approximately $250 thousand for the remainder of 2016.

Effects of Inflation

The Company believes that general inflation, excluding increases in food, employee wages and employee health plan costs, has not had a material impact on its results of operations in recent years. Additionally, increases in statutory minimum wage rates may increase our operating costs. During 2016 and 2015, governmental entities acted to increase minimum wage rates in several states where Company-owned restaurants are located. The increased minimum wage rates are expected to increase employee compensation and related taxes by approximately $1.4 million in fiscal year 2016 compared to fiscal year 2015. Also, the U.S. government may consider legislation to increase the federal minimum wage rate, which, if enacted, would further increase employee compensation and related taxes.

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 25, 2016. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 25, 2016 to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

Changes in internal control over financial reporting

During the fiscal quarter ended September 25, 2016, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that in the Company’s judgment has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. While litigation is subject to uncertainties and the outcome of litigated matters is not predictable with assurance, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition or results of operations.

The Company sells a considerable number of gift cards, which are issued and administered by a third party gift card issuer and service provider, consistent with common retail industry practice. The third party gift card issuer is paid a net fee for its services by the Company. The third party gift card issuer and service provider, as well as a number of other restaurant companies, retailers and gift card issuers, were named as defendants in an action filed under seal in June 2013 by William French on behalf of the State of Delaware in the Superior Court of Delaware in and for New Castle County. The complaint alleges that the Company and other defendants intentionally failed to report and remit money with respect to unused gift cards to the State of Delaware under the Delaware Escheats Law, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit such money to Delaware in violation of the Delaware False Claims and Reporting Act (DFCRA). The complaint further alleges that the amount of money that the Company should have escheated to Delaware is approximately $30 million. The complaint seeks monetary damages (including treble damages under the DFCRA), penalties, and attorneys’ fees and costs. The case was unsealed in March 2014, at which time the court also granted the State of Delaware’s motion to intervene. All parties to the case are now in the process of seeking discovery. Mediation between all defendants and the State of Delaware was held in mid-October 2016. The Company filed a motion to dismiss in August 2016, and a hearing on the motion to dismiss was held in late October 2016. The motion to dismiss is currently pending. The Company believes it is in compliance with the Delaware Escheats Law and has not violated the DFCRA. The Company has been vigorously defending the action, and intends to continue to do so.

There have been no material changes in the risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2015. The impact of circumstances and events described in such risk factors could result in significant adverse effects on our financial position, results of operations and cash flows.