Texas Roadhouse, Inc. - Quarter Report: 2013 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 26, 2013

 

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 69,874,155 on April 24, 2013.

 

 

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 26, 2013 and December 25, 2012	3
Condensed Consolidated Statements of Income and Comprehensive Income — For the 13 Weeks Ended March 26, 2013 and March 27, 2012	4
Condensed Consolidated Statement of Stockholders’ Equity  — For the 13 Weeks Ended March 26, 2013	5
Condensed Consolidated Statements of Cash Flows — For the 13 Weeks Ended March 26, 2013 and March 27, 2012	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	26
Item 4 — Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1 — Legal Proceedings	28
Item 1A —  Risk Factors	28
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3 — Defaults Upon Senior Securities	29
Item 4 — Mine Safety Disclosures	29
Item 5 — Other Information	29
Item 6 — Exhibits	29
Signatures	30

 

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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 26, 2013			December 25, 2012
Assets
Current assets:
Cash and cash equivalents		$	95,453		$	81,746
Receivables, net of allowance for doubtful accounts of $0 at March 26, 2013 and $22 at December 25, 2012		11,051			16,416
Inventories, net		10,438			10,909
Prepaid income taxes		—			3,374
Prepaid expenses		9,241			7,191
Deferred tax assets		2,896			2,836
Total current assets		129,079			122,472
Property and equipment, net of accumulated depreciation of $278,348 at March 26, 2013 and $269,052 at December 25, 2012		534,670			531,654
Goodwill		113,543			113,435
Intangible assets, net		8,689			9,264
Other assets		15,447			14,429
Total assets		$	801,428		$	791,254
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt and obligations under capital leases		$	337		$	338
Accounts payable		35,780			32,374
Deferred revenue — gift cards		32,594			53,041
Accrued wages		27,205			25,030
Income taxes payable		5,523			—
Accrued taxes and licenses		13,497			13,253
Dividends payable		8,377			13,135
Other accrued liabilities		19,030			21,491
Total current liabilities		142,343			158,662
Long-term debt and obligations under capital leases, excluding current maturities		51,183			51,264
Stock option and other deposits		4,549			4,718
Deferred rent		20,915			20,168
Deferred tax liabilities		5,410			6,102
Fair value of derivative financial instruments		3,696			4,016
Other liabilities		16,895			15,587
Total liabilities		244,991			260,517
Texas Roadhouse, Inc. and subsidiaries stockholders’ equity:
Preferred stock ($0.001 par value, 1,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock, ($0.001 par value, 100,000,000 shares authorized, 69,840,443 and 68,977,045 shares issued and outstanding at March 26, 2013 and December 25, 2012, respectively)		70			69
Additional paid in capital		207,576			199,967
Retained earnings		345,303			327,509
Accumulated other comprehensive loss		(2,265		)	(2,461		)
Total Texas Roadhouse, Inc. and subsidiaries stockholders’ equity		550,684			525,084
Noncontrolling interests		5,753			5,653
Total equity		556,437			530,737
Total liabilities and equity		$	801,428		$	791,254

 

See accompanying notes to condensed consolidated financial statements.

 

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Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(in thousands, except per share data)

(unaudited)

 

		13 Weeks Ended
		March 26, 2013			March 27, 2012
Revenue:
Restaurant sales		$	356,564		$	322,012
Franchise royalties and fees		3,112			2,857
Total revenue		359,676			324,869
Costs and expenses:
Restaurant operating costs (excluding depreciation and amortization shown separately below):
Cost of sales		124,552			109,655
Labor		101,661			93,347
Rent		7,057			6,252
Other operating		55,778			51,229
Pre-opening		2,824			3,585
Depreciation and amortization		12,212			11,347
Impairment and closure		57			19
General and administrative		17,367			20,033
Total costs and expenses		321,508			295,467
Income from operations		38,168			29,402
Interest expense, net		595			605
Equity income from investments in unconsolidated affiliates		(180		)	(41		)
Income before taxes		37,753			28,838
Provision for income taxes		10,534			9,085
Net income including noncontrolling interests		$	27,219		$	19,753
Less: Net income attributable to noncontrolling interests		1,048			884
Net income attributable to Texas Roadhouse, Inc. and subsidiaries		$	26,171		$	18,869
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives, net of tax of $(0.1) million and $0.1 million, respectively		196			(41		)
Total comprehensive income		$	26,367		$	18,828
Net income per common share attributable to Texas Roadhouse, Inc. and subsidiaries:
Basic		$	0.38		$	0.27
Diluted		$	0.37		$	0.27
Weighted-average shares outstanding:
Basic		69,359			69,405
Diluted		70,583			70,830
Cash dividends declared per share		$	0.12		$	0.09

 

See accompanying notes to condensed consolidated financial statements.

 

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Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except share data)

(unaudited)

 

		Shares		Par Value			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Texas Roadhouse, Inc. and Subsidiaries			Noncontrolling Interests			Total
Balance, December 25, 2012		68,977,045		$	69		$	199,967		$	327,509		$	(2,461	)	$	525,084		$	5,653		$	530,737
Net income		—		—			—			26,171			—			26,171			1,048			27,219
Unrealized gain on derivatives, net of tax of $0.1 million		—		—			—			—			196			196			—			196
Distributions to noncontrolling interests		—		—			—			—			—			—			(948		)	(948		)
Minority interest liquidation adjustments		—		—			5			—			—			5			—			5
Dividends declared ($0.12 per share)		—		—			—			(8,377		)	—			(8,377		)	—			(8,377		)
Shares issued under stock option plan including tax effects		490,744		—			7,104			—			—			7,104			—			7,104
Settlement of restricted stock units		546,175		1			(1		)	—			—			—			—			—
Indirect repurchase of shares for minimum tax withholdings		(173,521	)	—			(3,011		)	—			—			(3,011		)	—			(3,011		)
Share-based compensation		—		—			3,512			—			—			3,512			—			3,512
Balance, March 26, 2013		69,840,443		$	70		$	207,576		$	345,303		$	(2,265	)	$	550,684		$	5,753		$	556,437

 

See accompanying notes to condensed consolidated financial statements.

 

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Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		13 Weeks Ended
		March 26, 2013			March 27, 2012
Cash flows from operating activities:
Net income including noncontrolling interests		$	27,219		$	19,753
Depreciation and amortization		12,212			11,347
Deferred income taxes		(876		)	(2,861		)
Loss on disposition of assets		825			1,007
Equity income from investments in unconsolidated affiliates		(180		)	(41		)
Distributions of income received from investments in unconsolidated affiliates		116			103
Provision for doubtful accounts		5			11
Share-based compensation expense		3,512			3,053
Changes in operating working capital:
Receivables		5,360			2,856
Inventories		471			908
Prepaid expenses		(2,050		)	(591		)
Other assets		(949		)	(760		)
Accounts payable		3,406			14
Deferred revenue — gift cards		(20,500		)	(18,842		)
Accrued wages		2,175			3,087
Excess tax benefits from share-based compensation		(1,118		)	(295		)
Prepaid income taxes and income taxes payable		10,015			10,837
Accrued taxes and licenses		244			(160		)
Other accrued liabilities		(2,461		)	6,463
Deferred rent		683			881
Other liabilities		1,308			1,124
Net cash provided by operating activities		$	39,417		$	37,894
Cash flows from investing activities:
Capital expenditures — property and equipment		(15,601		)	(22,839		)
Proceeds from sale of property and equipment, including insurance proceeds		132			98
Net cash used in investing activities		$	(15,469	)	$	(22,741	)
Cash flows from financing activities:
Repayments of revolving credit facility		—			(10,000		)
Proceeds from minority interest contributions and other		—			512
Distributions to noncontrolling interest holders		(948		)	(763		)
Excess tax benefits from share-based compensation		1,118			295
Repayment of stock option deposits		(535		)	—
Proceeds from stock option and other deposits		366			21
Indirect repurchase of shares for minimum tax withholdings		(3,011		)	(1,488		)
Principal payments on long-term debt and capital lease obligations		(82		)	(73		)
Proceeds from exercise of stock options		5,986			4,603
Dividends paid to stockholders		(13,135		)	(5,535		)
Net cash used in financing activities		$	(10,241	)	$	(12,428	)
Net increase in cash and cash equivalents		13,707			2,725
Cash and cash equivalents — beginning of period		81,746			78,777
Cash and cash equivalents — end of period		$	95,453		$	81,502
Supplemental disclosures of cash flow information:
Interest, net of amounts capitalized		$	593		$	656
Income taxes, net of refunds		$	1,395		$	1,110

 

See accompanying notes to condensed consolidated financial statements.

 

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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.  (“TRI”) , our wholly-owned subsidiaries and subsidiaries in which we own more than 50 percent interest (collectively the “Company,” “we,” “our” and/or “us”), as of and for the 13 weeks ended March 26, 2013 and March 27, 2012.  Our wholly-owned subsidiaries include: Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse Development Corporation (“TRDC”), Texas Roadhouse Management Corporation (“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 Texas Roadhouse 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 Texas Roadhouse restaurants.  All material balances and transactions between the consolidated entities have been eliminated.

 

As of March 26, 2013 and March 27, 2012, we owned 5.0% to 10.0% equity interests in 23 and 22 franchise restaurants, respectively.  The unconsolidated restaurants are accounted for using the equity method.  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 cash flows. Our investments in these unconsolidated affiliates are included in Other assets in our unaudited condensed consolidated balance sheets and we record our percentage share of net income earned by these unconsolidated affiliates in our unaudited condensed consolidated statements of income and comprehensive income under Equity income from investments in unconsolidated affiliates.  All significant intercompany balances and transactions for these unconsolidated restaurants have been eliminated.

 

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 unaudited condensed consolidated financial statements and the reporting of revenue and expenses during the period to prepare these unaudited 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 condensed consolidated 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 26, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  The unaudited condensed consolidated 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 25, 2012.

 

Certain prior year amounts have been reclassified in our unaudited condensed consolidated financial statements to conform with current year presentation.

 

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.

 

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

 

		13 Weeks Ended
		March 26, 2013			March 27, 2012
Labor expense		$	1,330		$	1,006
General and administrative expense		2,182			2,047
Total share-based compensation expense		$	3,512		$	3,053

 

A summary of share-based compensation activity by type of grant as of March 26, 2013 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 25, 2012		2,258,921		$	13.24
Granted		—		—
Forfeited		(9,755	)	14.22
Exercised		(490,744	)	12.20
Outstanding at March 26, 2013		1,758,422		$	13.53		2.81		$	11,593
Exercisable at March 26, 2013		1,758,422		$	13.53		2.81		$	11,593

 

The total intrinsic value of options exercised during the 13 weeks ended March 26, 2013 and March 27, 2012 was $3.3 million and $3.4 million, respectively.  No stock options vested during the 13 week period ended March 26, 2013.  The total grant date fair value of stock options vested for the 13 week period ended March 27, 2012 was $0.1 million.

 

Summary Details for RSUs

 

		Shares		Weighted- Average Grant Date Fair Value			Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 25, 2012		1,803,514		$	15.73
Granted		142,647		19.00
Forfeited		(5,967	)	16.95
Vested		(546,175	)	15.67
Outstanding at March 26, 2013		1,394,019		$	16.08		8.82		$	28,048

 

As of March 26, 2013, with respect to unvested RSUs, there was $6.2 million of unrecognized compensation cost that is expected to be recognized over a weighted-average period of 1.2 years.  The vesting terms of the RSUs range from 1.0 to 5.0 years.  The total intrinsic value of RSUs vested for the 13 week periods ended March 26, 2013 and March 27, 2012 was $9.9 million and $4.8 million, respectively.

 

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

 

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

 

		March 26, 2013			December 25, 2012
Installment loans, due 2013 — 2020		$	1,418		$	1,473
Obligations under capital leases		102			129
Revolving credit facility		50,000			50,000
		51,520			51,602
Less current maturities		337			338
		$	51,183		$	51,264

 

The weighted-average interest rate for installment loans outstanding at both March 26, 2013 and December 25, 2012 was 10.56%.  The debt is secured by certain land and buildings.

 

On August 12, 2011, we entered into a $200.0 million five-year revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo, N.A.  This facility replaced our previous five-year revolving credit facility.  The revolving credit facility expires on August 12, 2016.  The terms of the revolving credit facility require us to pay interest on outstanding borrowings at London Interbank Offered Rate (“LIBOR”) plus a margin of 0.875% to 1.875%, depending on our leverage ratio, or the Alternate Base Rate, which is the higher of the issuing bank’s prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%.  We are also required to pay a commitment fee of 0.150% to 0.350% per year on any unused portion of the revolving credit facility, depending on our leverage ratio.  The weighted-average interest rate for the revolving credit facility at both March 26, 2013 and December 25, 2012 was 3.96%, including the impact of interest rate swaps as discussed in note 5.  At March 26, 2013, we had $50.0 million outstanding under the revolving credit facility and $145.3 million of availability, net of $4.7 million of outstanding letters of credit.

 

The lenders’ obligation to extend credit under the revolving credit 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 revolving 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 26, 2013.

 

(4)   Income taxes

 

A reconciliation of the statutory federal income tax rate to our effective tax rate for 13 weeks ended March 26, 2013 and March 27, 2012 is as follows:

 

		13 Weeks Ended
		March 26, 2013		March 27, 2012
Tax at statutory federal rate		35.0	%	35.0	%
State and local tax, net of federal benefit		3.7		3.8
FICA tip tax credit		(5.2	)	(5.7	)
Work opportunity tax credit		(3.5	)	(0.8	)
Incentive stock options		(0.6	)	(0.3	)
Nondeductible officer compensation		0.7		1.0
Other		(1.4	)	(0.5	)
Total		28.7	%	32.5	%

 

(5)         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 whosecredit rating is evaluated on a quarterly basis.  Our counterparty in the interest rate swaps is JPMorgan Chase Bank, N.A.  Market risk

 

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is the adverse effect on the value of a financial instrument that results from a change in interest rates.  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 borrowings.  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 borrowings.  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 or loss (“AOCI”).  Additionally, amounts related to the yield adjustment of the hedged interest payments are subsequently reclassified into interest expense in the same period which the related interest affects earnings.  We will reclassify any gain or loss from accumulated other comprehensive income or loss, net of tax, in our unaudited condensed consolidated balance sheet to interest expense in our unaudited condensed consolidated statement of income and comprehensive income when the interest rate swap expires or at the time we choose to terminate the swap.  See note 11 for fair value discussion of these interest rate swaps.

 

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

 

		Balance		Derivative Assets						Derivative Liabilities
		Sheet Location		March 26, 2013			December 25, 2012			March 26, 2013			December 25, 2012
Derivative Contracts Designated as Hedging Instruments under ASC 815		(1)
Interest rate swaps				$	—		$	—		$	3,696		$	4,016
Total Derivative Contracts				$	—		$	—		$	3,696		$	4,016

 

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

 

The following table summarizes the effect of derivative instruments in the unaudited condensed consolidated statements of income and comprehensive income for the 13 weeks ended March 26, 2013 and March 27, 2012:

 

		Amount of Gain (Loss) Recognized in AOCI (effective portion)						Location of Loss Reclassified from AOCI to		Amount of Loss Reclassified from AOCI to Income (effective portion)
		2013			2012			Income		2013			2012
Interest rate swaps		$	196		$	(41	)	Interest expense, net		$	26		$	35

 

For each of the 13 weeks ended March 26, 2013 and March 27, 2012, we did not recognize any gain or loss due to hedge ineffectiveness related to the derivative instruments in the unaudited  condensed consolidated statements of income and comprehensive income.

 

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(6)         Recent Accounting Pronouncements

 

Comprehensive Income

(Accounting Standards Update 2013-02, “ASU 2013-2”)

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, that required the presentation of significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, cross-reference to other disclosures that provide additional detail about these amounts is required.  ASU 2013-02 is effective for fiscal years beginning after December 15, 2012 (our 2013 fiscal year).  The adoption of this new guidance had no impact on our consolidated financial position, results of operations or cash flows.

 

(7)         Commitments and Contingencies

 

The estimated cost of completing capital project commitments at March 26, 2013 and December 25, 2012 was approximately $79.2 million and $73.2 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 9, the Everett, MA, Longmont, CO, and Fargo, ND restaurants are owned, in whole or part, by certain of our officers, directors or 5% shareholders.

 

During the 13 weeks ended March 26, 2013, we bought most of our beef from four suppliers. Although there are a limited number of beef suppliers, we believe 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.

 

On September 30, 2011, the U.S. Equal Employment Opportunity Commission (“EEOC”) filed a lawsuit styled Equal Employment Opportunity Commission v. Texas Roadhouse, Inc., Texas Roadhouse Holdings LLC, Texas Roadhouse Management Corp. in the United States District Court, District of Massachusetts, Civil Action Number 1:11-cv-11732. The complaint alleges that applicants over the age of 40 were denied employment in our restaurants in bartender, host, server and server assistant positions due to their age.  The EEOC is seeking injunctive relief, remedial actions, payment of damages to the applicants and costs.  We have filed an answer to the complaint, and the case is in discovery.  We deny liability; however, in view of the inherent uncertainties of litigation, the outcome of this case cannot be predicted at this time.  As a result, we cannot estimate the possible amount or range of loss, if any, associated with this matter.

 

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.

 

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(8)         Acquisitions

 

On December 25, 2012, we acquired two franchise restaurants in Illinois.  Pursuant to the terms of the acquisition agreement, we paid a purchase price of $4.3 million.  This acquisition is consistent with our long-term strategy to increase net income and earnings per share.

 

This transaction was accounted for using the purchase method as defined in ASC 805, Business Combinations (“ASC 805”). Based on a purchase price of $4.3 million, $2.8 million of goodwill was generated by the acquisition, which is not amortizable for book purposes, but is deductible for tax purposes.

 

The allocation of the purchase price has been prepared on a preliminary basis and is subject to estimates, assumptions and other uncertainties, and changes to those allocations may occur as additional information becomes available.  The purchase price has been preliminarily allocated as follows:

 

		March 26, 2013
Current assets		$	64
Property and equipment, net		304
Goodwill		2,849
Intangible asset		1,342
Current liabilities		(195		)
Other liabilities		(64		)
Purchase Price		$	4,300

 

As a result of this acquisition, we recorded an intangible asset associated with reacquired franchise rights of $1.3 million in accordance with ASC 805.  ASC 805 requires that a business combination between two parties that have a preexisting relationship be evaluated to determine if a settlement of a preexisting relationship exists.  ASC 805 also requires that certain reacquired rights (including the rights to the acquirer’s trade name under a franchise agreement) be recognized as intangible assets apart from goodwill.

 

The fair value of $1.3 million assigned to the intangible asset acquired was determined primarily using valuation methods that discount expected future cash flows to present value using estimates and assumptions determined by management.  The intangible asset has a weighted-average life of approximately 2.6 years based on the remaining term of the franchise agreements.  We recorded amortization expense relating to the intangible asset of approximately $0.1 million for the 13 weeks ended March 26, 2013.  We expect the annual expense for the next four years to average approximately $0.3 million.

 

Pro forma results of operations have not been presented because the effect of the acquisition was not material to our financial position, results of operations or cash flows.

 

(9)   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 $56,000 for each of the 13 weeks ended March 26, 2013 and March 27, 2012.

 

The Bossier City, Louisiana restaurant, of which Steven L. Ortiz beneficially owns 66.0% and we own 5.0%, leases the land and restaurant 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 year period during the term.  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 for each of the 13 weeks ended March 26, 2013 and March 27, 2012.

 

We have 15 franchise and license restaurants owned, in whole or part, by certain of our officers, directors or 5% shareholders as of March 26, 2013 and March 27, 2012. These entities paid us fees of approximately $0.6 million for both of the 13 weeks ended March 26, 2013 and March 27, 2012.   As disclosed in note 7, we are contingently liable on leases which are related to three of these restaurants.

 

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(10)    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 and RSUs 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 26, 2013		March 27, 2012
Options		278,230		299,572
Restricted stock units		9,980		12,885
Total		288,210		312,457

 

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

 

		13 Weeks Ended
		March 26, 2013			March 27, 2012
Net income attributable to Texas Roadhouse, Inc. and subsidiaries		$	26,171		$	18,869
Basic EPS:
Weighted-average common shares outstanding		69,359			69,405
Basic EPS		$	0.38		$	0.27
Diluted EPS:
Weighted-average common shares outstanding		69,359			69,405
Dilutive effect of stock options and restricted stock units		1,224			1,425
Shares — diluted		70,583			70,830
Diluted EPS		$	0.37		$	0.27

 

(11)  Fair Value Measurements

 

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 weeks ended March 26, 2013.

 

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

 

		Fair Value Measurements
		Level		March 26, 2013			December 25, 2012
Interest rate swaps		2		$	(3,696	)	$	(4,016	)
Deferred compensation plan - assets		1		10,132			9,145
Deferred compensation plan - liabilities		1		(10,123		)	(9,160		)

 

The fair value of our interest rate swaps were determined based on industry-standard valuation models.  Such models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves.  See note 5 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 unaudited 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 in the unaudited condensed consolidated statements of income and comprehensive income.

 

At March 26, 2013 and December 25, 2012, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values based on the short-term nature of these instruments. The fair value of our revolving credit facility at March 26, 2013 and December 25, 2012 approximated its carrying value since it is a variable rate credit facility (Level 2).  The fair value of our installment loans 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 installment loans are as follows:

 

		March 26, 2013						December 25, 2012
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Installment loans — Level 2		$	1,418		$	1,677		$	1,473		$	1,752

 

(12)  Stock Repurchase Program

 

On February 16, 2012, our Board of Directors approved a stock repurchase program which authorized us to repurchase up to $100.0 million of our common stock.  This stock repurchase program has no expiration date.  Any repurchases under our stock repurchase program are 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.

 

We did not repurchase any shares of our common stock during either of the 13 week periods ended March 26, 2013 or March 27, 2012.

 

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

 

CAUTIONARY STATEMENT

 

This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.  The section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 25, 2012, and in our other Securities and Exchange Commission (“SEC”) filings, discusses some of the important risk factors that may affect our business, results of operations, or financial condition.  You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.  The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock.  We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

 

OVERVIEW

 

Texas Roadhouse is a growing, moderately priced, full-service restaurant chain. Our founder, chairman and chief executive officer, W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse in Clarksville, Indiana.  Since then, we have grown to 397 restaurants in 47 states and three international locations in two countries.  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 26, 2013, our 397 restaurants included:

 

·  323 “company restaurants,” of which 308 were wholly-owned and 15 were majority-owned.  The results of operations of company restaurants are included in our unaudited condensed consolidated statements of income and comprehensive 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 unaudited condensed consolidated statements of income and comprehensive income.

 

· 74 “franchise restaurants,” of which 73 were franchise restaurants and one was a license restaurant. We have a 5.0% to 10.0% ownership interest in 23 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 unaudited condensed consolidated statements of income and comprehensive 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 13 of the 15 majority-owned company restaurants, and (ii) 66 of the domestic franchise restaurants.

 

Presentation of Financial and Operating Data

 

Throughout this report, the 13 weeks ended March 26, 2013 and March 27, 2012 are referred to as Q1 2013 and Q1 2012, respectively.  Fiscal year 2013 will be 53 weeks in length and, as such, the fourth quarter of fiscal 2013 will be 14 weeks in length.  Fiscal year 2012 was 52 weeks in length, while the quarters for the year were 13 weeks in length.

 

Long-term Strategies to Grow Earnings Per Share and Create Shareholder Value

 

Our long-term strategies with respect to increasing net income and earnings per share, along with creating shareholder value, 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

 

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and therefore we may not be able to achieve our anticipated growth.

 

Our average capital investment for Texas Roadhouse restaurants opened during 2012, including pre-opening expenses, was $3.9 million.  This average includes 10 times the annual base rent amount for restaurants where we do not own the land.  We anticipate that our 2013 development costs will the same as or slightly higher than our 2012 costs.  We continue to focus on driving sales and managing restaurant development costs in order to further increase our restaurant development in the future.

 

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 in April 2010 for the development of Texas Roadhouse restaurants in eight countries in the Middle East over the next 10 years, three of which are currently open.  Additionally, in 2010, we entered into a joint venture agreement with a casual dining restaurant operator in China for the minority ownership in three non-Texas Roadhouse restaurants, two of which are currently open.  We may also look to acquire domestic 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 323 restaurants we owned and operated at March 26, 2013, we operated 321 as Texas Roadhouse restaurants, while two operated under the name of Aspen Creek.  We plan to open approximately 28 restaurants in 2013, all of which will be company-owned Texas Roadhouse restaurants.  In addition, we anticipate our franchise partners will open as many as five Texas Roadhouse restaurants, primarily international, in 2013.

 

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 general, we continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on the long-term success of Texas Roadhouse.  This may create a challenge in terms of maintaining and/or increasing restaurant margins, as a percentage of sales, in any given year, depending on the level of inflation we experience.  However, in addition to restaurant margin, as a percentage of sales, we also focus on restaurant margin growth per store week as a measure of restaurant level profitability.  In terms of driving higher guest traffic counts, we remain focused on encouraging repeat visits by our guests through our continued commitment to operational standards relating to our quality of food and service.  In order to attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, to focus on speed of service and to increase throughput by adding seats in certain restaurants.

 

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. Our goal is for general and administrative costs to increase at a slower growth rate than our revenue.  Whether we are able to continue leveraging our infrastructure 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 evaluate opportunities to return capital to our shareholders through the payment of dividends and/or repurchases of common stock.  In 2011, our Board of Directors declared our first quarterly dividend of $0.08 per share of common stock and we have consistently grown our per share dividend each year since that time.  Most recently, on February 14, 2013, our Board of Directors authorized the payment of a quarterly cash dividend of $0.12 per share of common stock which was paid on March 28, 2013.  The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any future 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 revolving credit facility and other contractual restrictions, or other factors deemed relevant.

 

On February 16, 2012, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock.  Any repurchases will be made through open market transactions.  As of March 26, 2013, $70.6 million remains authorized for repurchase.  Since 2008, we have paid $145.5 million to repurchase 12.3 million shares of our common stock at an average price per share of $11.86 through our authorized stock repurchase programs.

 

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.

 

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Comparable Restaurant Sales Growth.   Comparable restaurant sales growth reflects the change in year-over-year sales for the company restaurants in 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 quarterly or annual restaurant sales for company-owned Texas Roadhouse 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.

 

Restaurant Margins.  Restaurant margins represent restaurant sales less cost of sales, labor, rent and other operating costs.  Depreciation and amortization expense, substantially all of which relates to restaurant-level assets, is excluded from restaurant operating costs and is shown separately as it represents a non-cash charge for the investment in our restaurants.  Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance.  Restaurant margin is not a measurement determined in accordance with generally accepted accounting principles (“GAAP”) and should not be considered in isolation, or as an alternative, to income from operations or other similarly titled measures of other companies.  Restaurant margins, as a percentage of restaurant sales, may fluctuate based on inflationary pressures, commodity costs and wage rates.  We also focus on restaurant margin dollar growth per store week as a measure of restaurant-level profitability as it provides additional insight on operating performance.

 

Other Key Definitions

 

Restaurant Sales.   Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company-owned restaurants.  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 unaudited condensed consolidated statements of income and comprehensive income.

 

Franchise Royalties and Fees.   Domestic franchisees typically pay a $40,000 initial franchise fee for each new restaurant.  In addition, at each renewal period, we receive a fee 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 agreements, 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.

 

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, gift card breakage 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, food, beverage and other initial supplies and expenses.

 

Depreciation and Amortization Expense.   Depreciation and amortization expense (“D&A”) includes the depreciation of fixed assets and amortization of intangibles with definite lives, substantially all of which relates to restaurant-level assets.

 

Impairment and closure costs.  Impairment and closure costs include any impairment of long-lived assets, including goodwill, 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 as well as lease costs.

 

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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 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 26, 2013 and March 27, 2012, we owned a 5.0% to 10.0% equity interest in 23 and 22 franchise restaurants, respectively.  Additionally, as of March 26, 2013, we owned a 40% equity interest in two non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China.  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 26, 2013 and March 27, 2012 included 15 and 12 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 10 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.

 

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 Results of Operations

 

		13 Weeks Ended
		March 26, 2013				March 27, 2012
($ in thousands)		$		%		$		%
Revenue:
Restaurant sales		356,564		99.1		322,012		99.1
Franchise royalties and fees		3,112		0.9		2,857		0.9
Total revenue		359,676		100.0		324,869		100.0
Costs and expenses:
(As a percentage of restaurant sales)
Restaurant operating costs (excluding depreciation and amortization shown separately below):
Cost of sales		124,552		34.9		109,655		34.1
Labor		101,661		28.5		93,347		29.0
Rent		7,057		2.0		6,252		1.9
Other operating		55,778		15.6		51,229		15.9
(As a percentage of total revenue)
Pre-opening		2,824		0.8		3,585		1.1
Depreciation and amortization		12,212		3.4		11,347		3.5
Impairment and closure		57		NM		19		NM
General and administrative		17,367		4.8		20,033		6.2
Total costs and expenses		321,508		89.4		295,467		90.9
Income from operations		38,168		10.6		29,402		9.1
Interest expense, net		595		0.2		605		0.2
Equity income from investments in unconsolidated affiliates		(180	)	0.1		(41	)	NM
Income before taxes		37,753		10.5		28,838		8.9
Provision for income taxes		10,534		2.9		9,085		2.8
Net income including noncontrolling interests		27,219		7.6		19,753		6.1
Net income attributable to noncontrolling interests		1,048		0.3		884		0.3
Net income attributable to Texas Roadhouse, Inc. and subsidiaries		26,171		7.3		18,869		5.8

 

NM — Not meaningful

 

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