Texas Roadhouse, Inc. - Quarter Report: 2011 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 29, 2011

 

OR

 

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

 

For the transition period from                            to

 

Commission File Number 000-50972

 

Texas Roadhouse, Inc.

(Exact name of registrant specified in its charter)

 

 

6040 Dutchmans Lane, Suite 200

Louisville, Kentucky 40205

(Address of principal executive offices) (Zip Code)

 

(502) 426-9984

(Registrant’s telephone number, including area code)

 

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

 

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

 

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 the definitions of “large accelerated filer”, “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 o  No x.

 

The number of shares of common stock outstanding were 71,192,408 on April 29, 2011.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
Item 1 — Financial Statements — Texas Roadhouse, Inc. and Subsidiaries	3
Condensed Consolidated Balance Sheets — March 29, 2011 and December 28, 2010	3
Condensed Consolidated Statements of Income — For the 13 Weeks Ended March 29, 2011 and March 30, 2010	4
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income — For the 13 Weeks Ended March 29, 2011	5
Condensed Consolidated Statements of Cash Flows — For the 13 Weeks Ended March 29, 2011 and March 30, 2010	6
Notes to Condensed Consolidated Financial Statements	7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	24
Item 4 — Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1 — Legal Proceedings	25
Item 1A — Risk Factors	25
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3 — Defaults Upon Senior Securities	26
Item 4 — (Removed and Reserved)	26
Item 5 — Other Information	26
Item 6 — Exhibits	27
Signatures	28

 

2

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 — FINANCIAL STATEMENTS

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		(unaudited)
		March 29, 2011			December 28, 2010
Assets
Current assets:
Cash and cash equivalents		$	77,420		$	82,215
Receivables, net of allowance for doubtful accounts of $253 at March 29, 2011 and $222 at December 28, 2010		12,152			12,563
Inventories, net		8,559			9,197
Prepaid income taxes		—			375
Prepaid expenses		6,897			7,204
Deferred tax assets		2,295			2,368
Total current assets		107,323			113,922
Property and equipment, net		460,522			458,983
Goodwill		111,785			111,785
Intangible asset, net		9,849			10,118
Other assets		9,325			7,993
Total assets		$	698,804		$	702,801
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt and obligations under capital leases		$	281		$	274
Accounts payable		28,457			26,864
Deferred revenue — gift cards/certificates		22,329			39,165
Accrued wages		23,111			21,050
Income tax payable		8,907			—
Accrued taxes and licenses		12,148			12,318
Dividends payable		5,692			—
Other accrued liabilities		13,327			12,387
Total current liabilities		114,252			112,058
Long-term debt and obligations under capital leases, excluding current maturities		51,832			51,906
Stock option and other deposits		4,367			4,052
Deferred rent		15,050			14,457
Deferred tax liabilities		8,126			8,444
Fair value of derivative financial instruments		2,003			2,178
Other liabilities		10,712			10,324
Total liabilities		206,342			203,419
Texas Roadhouse, Inc. and subsidiaries stockholders’ equity:
Common stock, ($0.001 par value, 100,000,000 shares authorized, 71,166,208 and 72,222,991 shares issued and outstanding at March 29, 2011 and December  28, 2010, respectively)		71			72
Additional paid in capital		254,942			250,874
Retained earnings		261,109			247,008
Accumulated other comprehensive loss		(1,230		)	(1,338		)
Treasury stock (1,500,000 common shares in 2011 at cost)		(25,267		)	—
Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity		489,625			496,616
Noncontrolling interests		2,837			2,766
Total equity		492,462			499,382
Total liabilities and equity		$	698,804		$	702,801

 

See accompanying notes to condensed consolidated financial statements.

 

3

Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

		13 Weeks Ended
		March 29, 2011			March 30, 2010
Revenue:
Restaurant sales		$	281,320		$	257,342
Franchise royalties and fees		2,465			2,282
Total revenue		283,785			259,624
Costs and expenses:
Restaurant operating costs:
Cost of sales		93,541			82,799
Labor		82,720			74,909
Rent		5,657			5,270
Other operating		45,281			42,598
Pre-opening		1,890			1,105
Depreciation and amortization		10,600			10,337
Impairment and closures		26			158
General and administrative		13,861			12,342
Total costs and expenses		253,576			229,518
Income from operations		30,209			30,106
Interest expense, net		565			730
Equity income from investments in unconsolidated affiliates		(103		)	(108		)
Income before taxes		29,747			29,484
Provision for income taxes		9,272			9,606
Net income including noncontrolling interests		$	20,475		$	19,878
Less: Net income attributable to noncontrolling interests		682			637
Net income attributable to Texas Roadhouse, Inc. and subsidiaries		$	19,793		$	19,241
Net income per common share attributable to Texas Roadhouse, Inc. and subsidiaries:
Basic		$	0.27		$	0.27
Diluted		$	0.27		$	0.27
Weighted-average shares outstanding:
Basic		72,052			70,690
Diluted		73,727			72,226
Cash dividends declared per share		$	0.08		$	—

 

See accompanying notes to condensed consolidated financial statements.

 

4

Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(in thousands, except share data)

(unaudited)

 

		Shares		Par Value			Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Texas Roadhouse, Inc. and Subsidiaries			Noncontrolling Interests			Total
Balance, December 28, 2010		72,222,991		$	72		$	250,874		$	247,008		$	(1,338	)	$	—		$	496,616		$	2,766		$	499,382
Comprehensive income:
Unrealized gain on derivatives, net of tax of $0.1 million		—		—			—			—			108			—			108			—			108
Net income		—		—			—			19,793			—			—			19,793			682			20,475
Total comprehensive income																			19,901			682			20,583
Distributions to noncontrolling interests		—		—			—			—			—			—			—			(611		)	(611		)
Dividends declared ($0.08 per share)		—		—			—			(5,692		)	—			—			(5,692		)	—			(5,692		)
Shares issued under stock option plan including tax effects		223,756		1			2,647			—			—			—			2,648			—			2,648
Repurchase of shares of common stock		(1,500,000	)	(2		)	—			—			—			(25,267		)	(25,269		)	—			(25,269		)
Settlement of restricted stock units, net of tax		219,461		—			(1,539		)	—			—			—			(1,539		)	—			(1,539		)
Share-based compensation		—		—			2,960			—			—			—			2,960			—			2,960
Balance, March 29, 2011		71,166,208		$	71		$	254,942		$	261,109		$	(1,230	)	$	(25,267	)	$	489,625		$	2,837		$	492,462

 

See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		13 Weeks Ended
		March 29, 2011			March 30, 2010
Cash flows from operating activities:
Net income including noncontrolling interests		$	20,475		$	19,878
Depreciation and amortization		10,600			10,337
Deferred income taxes		(313		)	1,567
Loss on disposition of assets		539			141
Impairment and closures		—			121
Equity income from investments in unconsolidated affiliates		(103		)	(108		)
Distributions received from investments in unconsolidated affiliates		80			94
Provision for doubtful accounts		(31		)	—
Share-based compensation expense		2,960			1,830
Changes in operating working capital:
Receivables		442			(231		)
Inventories		638			693
Prepaid expenses and other current assets		307			(2,229		)
Other assets		(1,309		)	295
Accounts payable		1,593			(554		)
Deferred revenue — gift cards/certificates		(16,836		)	(14,434		)
Accrued wages		2,061			2,354
Excess tax benefits from share-based compensation		(236		)	(1,499		)
Prepaid income taxes and income taxes payable		9,518			1,479
Accrued taxes and licenses		(170		)	2,100
Other accrued liabilities		940			(317		)
Deferred rent		593			523
Other liabilities		388			644
Net cash provided by operating activities		$	32,136		$	22,684
Cash flows from investing activities:
Capital expenditures — property and equipment		(12,458		)	(7,822		)
Proceeds from sale of property and equipment, including insurance proceeds		49			21
Net cash used in investing activities		$	(12,409	)	$	(7,801	)
Cash flows from financing activities:
Repayments of revolving credit facility, net		—			(12,000		)
Distributions to noncontrolling interest holders		(611		)	(561		)
Excess tax benefits from share-based compensation		236			1,499
Repayments of stock option and other deposits		(283		)	(400		)
Proceeds from stock option and other deposits		598			224
Repurchase shares of common stock		(25,269		)	—
Settlement of restricted stock units, net of tax		(1,539		)	(1,148		)
Principal payments on long-term debt and capital lease obligations		(67		)	(60		)
Proceeds from exercise of stock options		2,413			4,448
Net cash used in financing activities		$	(24,522	)	$	(7,998	)
Net (decrease)/increase in cash and cash equivalents		(4,795		)	6,885
Cash and cash equivalents — beginning of period		82,215			46,858
Cash and cash equivalents — end of period		$	77,420		$	53,743
Supplemental disclosures of cash flow information:
Interest, net of amounts capitalized		$	426		$	692
Income taxes, net of refunds		$	66		$	6,558

 

See accompanying notes to condensed consolidated financial statements.

 

6

Table of Contents

 

Texas Roadhouse, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except per share data)

(unaudited)

 

1)             Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Texas Roadhouse, Inc. (the “Company”, “we” and/or “our”), our wholly-owned subsidiaries and subsidiaries in which we own more than 50 percent interest, as of and for the 13 weeks ended March 29, 2011 and  March 30, 2010.  Our wholly-owned subsidiaries include: Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse Development Corporation (“TRDC”), Texas Roadhouse Management Corp. (“Management Corp.”) and Aspen Creek, LLC (“Aspen Creek”).  We and our subsidiaries operate restaurants under the names Texas Roadhouse and Aspen Creek. Holdings also provides supervisory and administrative services for certain other franchise and license restaurants. TRDC sells franchise rights and collects the franchise royalties and fees.  Management Corp. provides management services to the Company, Holdings, Aspen Creek and certain other license and franchise restaurants.  All material balances and transactions between the consolidated entities have been eliminated.

 

As of March 29, 2011 and March 30, 2010, we owned 5.0% to 10.0% equity interest in 21 franchise restaurants.  While we exercise significant control over these franchise restaurants, we do not consolidate their financial position, results of operations or cash flows as it is immaterial to our consolidated financial position, results of operations and/or cash flows. Our investment in these unconsolidated affiliates is included in Other assets in our condensed consolidated balance sheets and we record our percentage share of net income earned by these unconsolidated affiliates on our condensed consolidated statements of income under Equity income from investments in unconsolidated affiliates.

 

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the period to prepare these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill, obligations related to insurance reserves, income taxes and share-based compensation expense. Actual results could differ from those estimates.

 

In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the periods presented.  The financial statements have been prepared in accordance with GAAP, except that certain information and footnotes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  Operating results for the 13 weeks ended March 29, 2011 are not necessarily indicative of the results that may be expected for the year ending December 27, 2011.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2010.

 

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

 

(2)   Share-based Compensation

 

We may grant incentive and non-qualified stock options to purchase shares of common stock, stock bonus awards (restricted stock unit awards (“RSUs”)) and restricted stock awards under the Texas Roadhouse, Inc. 2004 Equity Incentive Plan (the “Plan”).  Beginning in 2008, we changed the method by which we provide share-based compensation to our employees by eliminating stock option grants and, instead, granting RSUs as a form of share-based compensation.  An RSU is the conditional right to receive one share of common stock upon satisfaction of the vesting requirement.

 

The following table summarizes the share-based compensation recorded in the accompanying condensed consolidated statements of income:

 

		13 Weeks Ended
		March 29, 2011			March 30, 2010
Labor expense		$	938		$	761
General and administrative expense		2,022			1,069
Total share-based compensation expense		$	2,960		$	1,830

 

7

Table of Contents

 

A summary of share-based compensation activity by type of grant as of March 29, 2011 and changes during the period then ended is presented below.

 

Summary Details for Plan Share Options

 

		Shares		Weighted- Average Exercise Price			Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 28, 2010		3,996,512		$	11.87
Granted		—		—
Forfeited		(7,722	)	16.54
Exercised		(223,756	)	10.79
Outstanding at March 29, 2011		3,765,034		$	11.92		4.39		$	17,741
Exercisable at March 29, 2011		3,630,087		$	11.86		4.33		$	20,200

 

No stock options were granted during the 13 weeks ended March 29, 2011.

 

The total intrinsic value of options exercised during the 13 weeks ended March 29, 2011and March 30, 2010 was $1.5 million and $4.6 million, respectively.  As of March 29, 2011, with respect to unvested stock options, there was an immaterial amount of unrecognized compensation cost that is expected to be recognized over a weighted-average period of less than a year.  The total grant date fair value of stock options vested for both 13 week periods ended March 29, 2011 and March 30, 2010 was $0.2 million and $0.7 million, respectively.

 

Summary Details for RSUs

 

		Shares		Weighted- Average Grant Date Fair Value
Outstanding at December 28, 2010		1,205,410		$	11.71
Granted		431,908		17.25
Forfeited		(33,923	)	16.11
Vested		(312,327	)	11.26
Outstanding at March 29, 2011		1,291,068		$	13.31

 

As of March 29, 2011, with respect to unvested RSUs, there was $11.0 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 1.8 years.  The vesting terms of the RSUs range from approximately 1.0 to 5.0 years.  The total grant date fair value of RSUs vested for the 13 week periods ended March 29, 2011 and March 30, 2010 was $3.5 million and $3.0 million, respectively.

 

(3)         Long-term Debt and Obligations Under Capital Leases

 

Long-term debt and obligations under capital leases consisted of the following:

 

		March 29, 2011			December 28, 2010
Installment loans, due 2011 — 2020		$	1,819		$	1,865
Obligations under capital leases		294			315
Revolver		50,000			50,000
		52,113			52,180
Less current maturities		281			274
		$	51,832		$	51,906

 

8

Table of Contents

 

The weighted-average interest rate for installment loans outstanding at March 29, 2011 and December 28, 2010 was 10.58%.  The debt is secured by certain land and buildings.

 

We have a $250.0 million five-year revolving credit facility with a syndicate of commercial lenders led by Bank of America, N.A., Banc of America Securities LLC and PNC Bank.  The facility expires on May 31, 2012.  The terms of the facility require us to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to 0.875%, depending on our leverage ratio, or the Base Rate, which is the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.50%.  We are also required to pay a commitment fee of 0.10% to 0.175% per year on any unused portion of the facility, depending on our leverage ratio.  The weighted-average interest rate for the revolver at March 29, 2011 and December 28, 2010 was 3.59%, including interest rate swaps.  At March 29, 2011, we had $50.0 million outstanding under the credit facility and $196.2 million of availability, net of $3.8 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit under the facility depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The credit facility permits us to incur additional secured or unsecured indebtedness outside the facility, except for the incurrence of secured indebtedness that in the aggregate exceeds 20% of our consolidated tangible net worth or circumstances where the incurrence of secured or unsecured indebtedness would prevent us from complying with our financial covenants.  We were in compliance with all covenants as of March 29, 2011.

 

(4)         Derivative and Hedging Activities

 

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”).  We use interest rate-related derivative instruments to manage our exposure to fluctuations of interest rates.  By using these instruments, we expose ourselves, from time to time, to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.  We minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.  Our counterparty in the interest rate swaps is J.P. Morgan Chase, N.A.  Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices or the market price of our common stock.  We minimize market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be taken.

 

Interest Rate Swaps

 

On October 22, 2008, we entered into an interest rate swap, starting on November 7, 2008, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate credit facility.  We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixed rate of 3.83% on the $25.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on November 7, 2015, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.

 

On January 7, 2009, we entered into an interest rate swap, starting on February 7, 2009, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate credit facility.  We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixed rate of 2.34% on the $25.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on January 7, 2016, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.

 

We entered into the above interest rate swaps with the objective of eliminating the variability of our interest cost that arises because of changes in the variable interest rate for the designated interest payments.  Changes in the fair value of the interest rate swap will be reported as a component of accumulated other comprehensive income.  We will reclassify any gain or loss from accumulated other comprehensive income, net of tax, on our consolidated balance sheet to interest expense on our consolidated statement of income when the interest rate swap expires or at the time we choose to terminate the swap.  See note 9 for fair value discussion of these interest rate swaps.

 

9

Table of Contents

 

The following table summarizes the fair value and presentation in the condensed consolidated balance sheets for derivatives designated as hedging instruments under FASB ASC 815:

 

		Balance		Derivative Assets						Derivative Liabilities
		Sheet Location		March 29, 2011			December 28, 2010			March 29, 2011			December 28, 2010
Derivative Contracts Designated as Hedging Instruments under ASC 815		(1)
Interest rate swaps				$	—		$	—		$	2,003		$	2,178
Total Derivative Contracts				$	—		$	—		$	2,003		$	2,178

 

(1)                             Derivative assets and liabilities are included in fair value of derivative financial instruments on the condensed consolidated balance sheets.

 

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of income for the 13 weeks ended March 29, 2011 and March 30, 2010:

 

		Amount of (Loss) Gain Recognized in AOCI (effective portion)						Location of Gain (Loss) Reclassified from AOCI		Amount of Gain (Loss) Reclassified from AOCI to Income (effective portion)						Location of Gain (Loss) Recognized in Income (ineffective		Amount of Gain (Loss) Recognized in Income (ineffective portion)
		2011			2010			Income		2011			2010			portion)		2011			2010
Interest rate swaps		$	108		$	(457	)	—		$	—		$	—		—		$	—		$	—

 

(5)         Recent Accounting Pronouncements

 

Fair Value Measures and Disclosures

(Accounting Standards Update (“ASU”) 2010-06)

 

In January 2010, the FASB issued ASU 2010-06 which amends Accounting Standards Codification (“ASC”) topic 820, Fair Value Measures and Disclosures.  ASU No. 2010-06 amends the ASC to require disclosure of transfer into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements.  The changes as a result of this update are effective for annual and interim reporting periods beginning after December 15, 2009 (our 2010 fiscal year), except for requirements related to Level 3 disclosures, which are effective for annual and interim reporting periods beginning after December 15, 2010 (our 2011 fiscal year).  This guidance requires new disclosures only, and had no impact on our consolidated financial position, results of operations or cash flows.

 

(6)         Commitments and Contingencies

 

The estimated cost of completing capital project commitments at March 29, 2011 and December 28, 2010 was approximately $58.9 million and $52.8 million, respectively.

 

We entered into real estate lease agreements for franchise restaurants located in Everett, MA, Longmont, CO, Montgomeryville, PA, Fargo, ND and Logan, UT before granting franchise rights for those restaurants. We have subsequently assigned the leases to the franchisees, but remain contingently liable if a franchisee defaults under the terms of a lease.  The Longmont lease was assigned in October 2003 and expires in May 2014, the Everett lease was assigned in September 2002 and expires in February 2018, the Montgomeryville lease was assigned in October 2004 and expires in June 2021, the Fargo lease was assigned in February 2006 and expires in July 2016 and the Logan lease was assigned in January 2009 and expires in August 2019.  As the fair value of the guarantees is not considered significant, no liability has been recorded.  As discussed in note 7, the Everett, MA, Longmont, CO, and Fargo, ND restaurants are owned, in whole or part, by certain of our officers, directors or 5% shareholders.

 

We currently buy most of our beef from three suppliers. Although there are a limited number of beef suppliers, management believes that other suppliers could provide a similar product on comparable terms. A change in suppliers, however, could cause supply shortages and a possible loss of sales, which would affect operating results adversely. We have no material minimum purchase commitments with our vendors that extend beyond a year.

 

10

Table of Contents

 

On October 8, 2010, the U.S. Equal Employment Opportunity Commission (“EEOC”) for the Boston Area Office issued a determination letter in Charge No. 523-2009-00643 alleging that we engaged in a pattern and practice of age discrimination in hiring for certain restaurant positions in violation of the Age Discrimination in Employment Act.  The determination alleges that applicants over the age of 40 were denied employment in our restaurants in bartender, host, server and server assistant positions solely due to their age.  The EEOC is seeking remedial actions and the payment of damages to the applicants.  We have denied the allegation and intend to vigorously defend against the charge.  We are currently engaged in the conciliation process with the EEOC.  Based on the preliminary status of this matter, we cannot estimate the possible amount or range of loss, if any, associated with this matter.

 

On January 19, 2011, a civil case styled as a class action complaint titled Jenna Crenshaw, Andrew Brickley, et al, and all others similarly situated v. Texas Roadhouse, Inc., Texas Roadhouse Holdings, LLC, Texas Roadhouse of Everett, LLC and Texas Roadhouse Management Corp., d/b/a Texas Roadhouse (“Crenshaw”), Superior Court Civil Action Number 11-0157, was filed against us in Middlesex County, Massachusetts. The complaint was subsequently amended to add additional plaintiffs, all of whom have alleged a failure to comply with Massachusetts labor laws, specifically that we improperly shared pooled tips with ineligible employees.  The complaint alleges violations in all of our restaurants in Massachusetts. Currently, we operate nine restaurants in the state.  We have filed notice to remove the case to federal court, filed an answer denying all material allegations and are in the early phases of discovery.

 

We believe that we have meritorious defenses to the claims made in the Crenshaw case, and we intend to vigorously defend against them, including plaintiffs’ efforts to certify a class action. Based on the preliminary status of this matter, we cannot estimate the possible amount or range of loss, if any, associated with this matter. However, if the court imposes statutory penalties, including restitution of the difference between the tip credit wage and minimum wage, restitution of tips, treble damages and attorneys’ fees, then the case could have a material adverse effect on our consolidated financial position, results of operation or cash flows.

 

We are involved in various other claims and legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.

 

(7)         Related Party Transactions

 

The Longview, Texas restaurant, which was acquired by us in connection with the completion of our initial public offering, leases the land and restaurant building from an entity controlled by Steven L. Ortiz, our Chief Operating Officer. The lease term is 15 years and will terminate in November 2014. The lease can be renewed for two additional terms of five years each. Rent is approximately $19,000 per month. The lease can be terminated if the tenant fails to pay the rent on a timely basis, fails to maintain the insurance specified in the lease, fails to maintain the building or property or becomes insolvent. Total rent payments were approximately $55,000 for the 13 week periods ending March 29, 2011 and March 30, 2010.

 

The Bossier City, Louisiana restaurant, of which Steven L. Ortiz beneficially owns 66.0% and we own 5.0%, leases the land and building from an entity owned by Mr. Ortiz.  The lease term is 15 years and will terminate on March 31, 2020.  Rent is approximately $16,600 per month and escalates 10% each five years.  The next rent escalation is in the second quarter of 2015.  The lease can be terminated if the tenant fails to pay rent on a timely basis, fails to maintain insurance, abandons the property or becomes insolvent.  Total rent payments were approximately $50,000 and $45,000 for the 13 week periods ended March 29, 2011 and March 30, 2010, respectively.

 

We have 14 franchise and license restaurants owned, in whole or part, by certain of our officers, directors or 5% shareholders at March 29, 2011 and March 30, 2010. These entities paid us fees of approximately $0.5 million during both of the 13 week periods ended March 29, 2011 and March 30, 2010.  As disclosed in note 6, we are contingently liable on leases which are related to three of these restaurants.

 

11

Table of Contents

 

(8)         Earnings Per Share

 

The share and net income per share data for all periods presented are based on the historical weighted-average shares outstanding.  The diluted earnings per share calculations show the effect of the weighted-average stock options, RSUs and restricted stock awards outstanding from our equity incentive plan as discussed in note 2.

 

The following table summarizes the options and nonvested stock that were outstanding but not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect:

 

		13 Weeks Ended
		March 29, 2011		March 30, 2010
Options		310,504		2,207,141
Nonvested stock		210		18,281
Total		310,714		2,225,422

 

The following table sets forth the calculation of weighted-average shares outstanding (in thousands) as presented in the accompanying condensed consolidated statements of income:

 

		13 Weeks Ended
		March 29, 2011			March 30, 2010
Net income attributable to Texas Roadhouse, Inc. and subsidiaries		$	19,793		$	19,241
Basic EPS:
Weighted-average common shares outstanding		72,052			70,690
Basic EPS		$	0.27		$	0.27
Diluted EPS:
Weighted-average common shares outstanding		72,052			70,690
Dilutive effect of stock options and restricted stock		1,675			1,536
Shares — diluted		73,727			72,226
Diluted EPS		$	0.27		$	0.27

 

(9)         Fair Value Measurement

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820 establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

 

Level 1           Inputs based on quoted prices in active markets for identical assets.

Level 2                                  Inputs other than quoted prices included within Level 1 that are observable for the assets, either directly or indirectly.

Level 3           Inputs that are unobservable for the asset.

 

There were no transfers among levels within the fair value hierarchy during the 13 week period ended March 29, 2011.

 

12

Table of Contents

 

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

 

		Fair Value Measurements
		Level		March 29, 2011			December 28, 2010
Interest rate swaps		2		$	(2,003	)	$	(2,178	)
Deferred compensation plan — assets		1		6,088			5,475
Deferred compensation plan - liabilities		1		(6,060		)	(5,469		)
Total				$	(1,975	)	$	(2,172	)

 

The fair value of our interest rate swaps were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk, and using discount rates appropriate for the duration. See note 4 for discussion of our interest rate swaps.

 

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

 

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

 

		Fair Value Measurements
		Level		March 29, 2011			December 28, 2010
Long-lived assets held for sale		2		$	1,598		$	1,598
Long-lived assets held for use		2		1,087			1,117
Goodwill		3		1,830			1,830
Total				$	4,515		$	4,545

 

Long-lived assets held for sale include land and building and are valued using Level 2 inputs, primarily an independent third party appraisal.  These assets are included in Property and equipment in our condensed consolidated balance sheets as we do not expect to sell these assets in the next 12 months.  Costs to market and/or sell the assets are factored into the estimates of fair value.

 

Long-lived assets held for use include building, equipment and furniture and fixtures and are valued using Level 2 inputs, primarily independent third party appraisal.  These assets are included in Property and equipment in our condensed consolidated balance sheets.

 

Goodwill in the table above relates to three underperforming restaurants in which the carrying value of the associated goodwill was reduced to fair value, based on their historical results and anticipated future trends of operations.

 

At March 29, 2011 and December 28, 2010, the fair value of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying value based on the short-term nature of these instruments. The fair value of our long-term debt is estimated based on the current rates offered to us for instruments of similar terms and maturities. The carrying amounts and related estimated fair values for our debt are as follows:

 

		March 29, 2011						December 28, 2010
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Installment loans		$	1,819		$	2,255		$	1,865		$	2,324
Revolver		50,000			50,000			50,000			50,000

 

13

Table of Contents

 

(10) Stock Repurchase Program

 

On February 17, 2011, our Board of Directors approved a stock repurchase program under which it authorized us to repurchase up to $50.0 million of our common stock.  Any repurchases will be made through open market transactions.  The timing and the amount of any repurchases will be determined by management under parameters established by our Board of Directors, based on its evaluation of our stock price, market conditions and other corporate considerations.

 

For the 13 weeks ended March 29, 2011, we paid approximately $25.3 million to repurchase 1,500,000 shares of our common stock.  These shares are recorded in Treasury stock on the condensed consolidated balance sheets.  These shares were retired in second quarter of 2011.

 

14

Table of Contents

 

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

 

OVERVIEW

 

Texas Roadhouse is a growing, moderately priced, full-service restaurant chain. Our founder and chairman, W. Kent Taylor, started the business in 1993. Our mission statement is “Legendary Food, Legendary Service®.” Our operating strategy is designed to position each of our restaurants as the local hometown destination for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of March 29, 2011, there were 347 restaurants operating in 46 states, including:

 

·  276 “company restaurants,” of which 265 were wholly-owned and 11 were majority-owned.  The results of operations of company restaurants are included in our condensed consolidated statements of income. The portion of income attributable to minority interests in company restaurants that are not wholly-owned is reflected in the line item entitled “Net income attributable to noncontrolling interests” in our condensed consolidated statements of income.

 

· 71 “franchise restaurants,” of which 68 were franchise restaurants and three were license restaurants. We have a 5.0% to 10.0% ownership interest in 21 franchise restaurants.  The income derived from our minority interests in these franchise restaurants is reported in the line item entitled “Equity income from investments in unconsolidated affiliates” in our condensed consolidated statements of income. Additionally, we provide various management services to these franchise restaurants, as well as seven additional franchise restaurants in which we have no ownership interest.

 

We have contractual arrangements which grant us the right to acquire at pre-determined valuation formulas (i) the remaining equity interests in nine of the 11 majority-owned company restaurants, and (ii) 65 of the franchise restaurants.

 

Presentation of Financial and Operating Data

 

Throughout this report, the 13 weeks ended March 29, 2011 and March 30, 2010 are referred to as Q1 2011 and Q1 2010.

 

Long-term Strategies to Grow Earnings Per Share

 

Our long-term strategies with respect to increasing net income and earnings per share include the following:

 

Expanding Our Restaurant Base.  We will continue to evaluate opportunities to develop Texas Roadhouse restaurants in existing and new domestic and international markets. Domestically, we will remain focused primarily on mid-sized markets where we believe a significant demand for our restaurants exists because of population size, income levels, the presence of shopping and entertainment centers and a significant employment base.  Our ability to expand our restaurant base is influenced by many factors beyond our control and therefore we may not be able to achieve our anticipated growth.

 

We may, at our discretion, add franchise restaurants, domestically and/or internationally, primarily with franchisees who have demonstrated prior success with the Texas Roadhouse or other restaurant concepts and in markets in which the franchisee demonstrates superior knowledge of the demographics and restaurant operating conditions.  In conjunction with this strategy, we signed our first international franchise agreement on April 26, 2010 for the development of Texas Roadhouse restaurants in eight countries in the Middle East over the next ten years, the first of which is expected to open in mid-2011.  Additionally, in 2010, we entered into a joint venture agreement with a casual dining restaurant operator in China for minority ownership in three non-Texas Roadhouse restaurants yet to be opened.  We may also look to acquire franchise restaurants under terms favorable to us and our stockholders.  Additionally, from time to time, we may evaluate potential mergers, acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts.  Of the 276 restaurants we owned and operated at March 29, 2011, 273 operated as Texas Roadhouse restaurants, while three operated under the name of Aspen Creek.  All of our planned restaurant growth in 2011 will be Texas Roadhouse restaurants.

 

Maintaining and/or Improving Restaurant Level Profitability.  We plan to maintain, or possibly increase, restaurant level profitability through a combination of increased comparable restaurant sales and operating cost management. In Q1 2011, our average unit volumes and comparable restaurant sales increased 4.8% and 4.6%, respectively.  The growth in these measures was primarily due to higher guest traffic counts, which we believe is due to our continued focus on encouraging repeat visits by our guests by not sacrificing any operational standards relating to our quality of food and service, along with an improvement in the overall economy.  We also continue to drive various localized marketing programs in order to attract new guests and increase the frequency of visits of our existing guests.  Additionally, we have been conservative with menu price increases. While this may create a challenge in terms of maintaining and/or increasing restaurant margins in any given year, depending on the level of inflation we experience, we believe that it is important to remain conservative with menu price increases for the long term success of the business.

 

15

Table of Contents

 

Leveraging Our Scalable Infrastructure.  To support our growth, we continue to make investments in our infrastructure.  Over the past several years, we have made significant investments in our infrastructure, including information systems, real estate, human resources, legal, marketing and operations. Historically, general and administrative costs have increased at a slower growth rate than our revenue.  Whether we are able to leverage our infrastructure in the future will depend, in part, on our new restaurant openings and our comparable restaurant sales growth rate going forward.

 

Returning Capital to Shareholders.  We continue to look at opportunities to return capital to our shareholders, including through repurchases of common stock and payment of dividends.  On February 17, 2011, our Board of Directors approved a stock repurchase program under which it authorized us to repurchase up to $50.0 million of our common stock.  Any repurchases will be made through open market transactions.  As of March 29, 2011, $24.8 million remained authorized for repurchase.

 

On February 17, 2011, our Board of Directors authorized the payment of a cash dividend of $0.08 per share of common stock.  This payment was distributed on April 1, 2011, to shareholders of record at the close of business on March 16, 2011.  The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on a number of factors, including, but not limited to, earnings, financial condition, applicable covenants under our credit facility and other contractual restrictions, or other factors deemed relevant.

 

Key Measures We Use to Evaluate Our Company

 

Key measures we use to evaluate and assess our business include the following:

 

Number of Restaurant Openings.  Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings we incur pre-opening costs, which are defined below, before the restaurant opens. Typically new restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease to a steady level approximately three to six months after opening. However, although sales volumes are generally higher, so are initial costs, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately three to six months after opening.

 

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

 

Average Unit Volume.  Average unit volume represents the average annual restaurant sales for all company restaurants open for a full six months before the beginning of the period measured. Average unit volume excludes sales on restaurants closed during the period.  Growth in average unit volumes in excess of comparable restaurant sales growth is generally an indication that newer restaurants are operating with sales levels in excess of the company average. Conversely, growth in average unit volumes less than growth in comparable restaurant sales growth is generally an indication that newer restaurants are operating with sales levels lower than the company average.

 

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

 

Other Key Definitions

 

Restaurant Sales.  Restaurant sales include gross food and beverage sales, net of promotions and discounts.  Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the condensed consolidated statements of income.

 

Franchise Royalties and Fees.  Domestic franchisees typically pay a $40,000 initial franchise fee for each new restaurant and a one-time fee payable for each renewal period equal to the greater of 30% of the then-current initial franchise fee or $10,000 to $15,000. Franchise royalties consist of royalties in an amount up to 4.0% of gross sales, as defined in our franchise agreement, paid to us by our domestic franchisees.

 

Restaurant Cost of Sales.  Restaurant cost of sales consists of food and beverage costs.

 

Restaurant Labor Expenses.  Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit sharing incentive compensation expenses earned by our restaurant managers. These profit sharing expenses are reflected in restaurant other operating expenses.  Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.

 

16

Table of Contents

 

Restaurant Rent Expense.  Restaurant rent expense includes all rent associated with the leasing of real estate and includes base, percentage and straight-line rent expense.

 

Restaurant Other Operating Expenses.  Restaurant other operating expenses consist of all other restaurant-level operating costs, the major components of which are utilities, supplies, advertising, repair and maintenance, property taxes, credit card fees and general liability insurance.  Profit sharing allocations to managing partners and market partners are also included in restaurant other operating expenses.

 

Pre-opening Expenses.  Pre-opening expenses, which are charged to operations as incurred, consist of expenses incurred before the opening of a new restaurant and are comprised principally of opening team and training salaries, travel expenses, rent, and food, beverage and other initial supplies and expenses.

 

Depreciation and Amortization Expenses.  Depreciation and amortization expenses (“D&A”) includes the depreciation of fixed assets and amortization of intangibles with definite lives.

 

Impairment and closure costs.  Impairment and closure costs include any impairment of long-lived assets associated with restaurants where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset and expenses associated with the closure of a restaurant.  Closure costs also include any gains or losses associated with the sale of a closed restaurant and/or assets held for sale.

 

General and Administrative Expenses.  General and administrative expenses (“G&A”) are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth.  Supervision and accounting fees received from certain franchise restaurants and license restaurants are offset against G&A.  G&A also includes share-based compensation expense related to executive officers, support center employees and area managers, including market partners.

 

Interest Expense, Net.  Interest expense includes the cost of our debt obligations including the amortization of loan fees, reduced by interest income and capitalized interest.  Interest income includes earnings on cash and cash equivalents.

 

Equity Income from Unconsolidated Affiliates.  As of March 29, 2011 and March 30, 2010, we owned a 5.0% to 10.0% equity interest in 21 franchise restaurants. Equity income from unconsolidated affiliates represents our percentage share of net income earned by these unconsolidated affiliates.

 

Net Income Attributable to Noncontrolling Interests.  Net income attributable to noncontrolling interests represents the portion of income attributable to the other owners of the majority-owned or controlled restaurants.  Our consolidated subsidiaries at March 29, 2011 and March 30, 2010 included 11 and 10 majority-owned restaurants, respectively, all of which were open.

 

Managing Partners and Market Partners.  Managing partners are single unit operators who have primary responsibility for the day-to-day operations of the entire restaurant and are responsible for maintaining the standards of quality and performance we establish.  Market partners, generally, have supervisory responsibilities for up to 12 to 15 restaurants.  In addition to supervising the operations of our restaurants, they are also responsible for the hiring and development of each restaurant’s management team and assist in the new restaurant site selection process.

 

17

Table of Contents

 

Results of Operations

 

		13 Weeks Ended
		March 29, 2011				March 30, 2010
($ in thousands)		$		%		$		%
Revenue:
Restaurant sales		281,320		99.1		257,342		99.1
Franchise royalties and fees		2,465		0.9		2,282		0.9
Total revenue		283,785		100.0		259,624		100.0
Costs and expenses:
(As a percentage of restaurant sales)
Restaurant operating costs:
Cost of sales		93,541		33.3		82,799		32.2
Labor		82,720		29.4		74,909		29.1
Rent		5,657		2.0		5,270		2.0
Other operating		45,281		16.1		42,598		16.6
(As a percentage of total revenue)
Pre-opening		1,890		0.7		1,105		0.4
Depreciation and amortization		10,600		3.7		10,337		4.0
Impairment and closure		26		NM		158		0.1
General and administrative		13,861		4.9		12,342		4.8
Total costs and expenses		253,576		89.4		229,518		88.4
Income from operations		30,209		10.6		30,106		11.6
Interest expense, net		565		0.2		730		0.3
Equity income from investments in unconsolidated affiliates		(103	)	NM		(108	)	NM
Income before taxes		29,747		10.5		29,484		11.4
Provision for income taxes		9,272		3.3		9,606		3.7
Net income including noncontrolling interests		20,475		7.2		19,878		7.7
Net income attributable to noncontrolling interests		682		0.2		637		0.3
Net income attributable to Texas Roadhouse, Inc. and subsidiaries		19,793		7.0		19,241		7.4

 

NM — Not meaningful

 

Restaurant Unit Activity

 

		Company		Franchise		Total
Balance at December 28, 2010		274		71		345
Openings		2		—		2
Acquisitions (Dispositions)		—		—		—
Closures		—		—		—
Balance at March 29, 2011		276		71		347

 

18