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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended April 21, 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: 001-34851

 

RED ROBIN GOURMET BURGERS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(303) 846-6000

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes 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.

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

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TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	23

 

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PART I — FINANCIAL INFORMATION

 

Item 1.                        Financial Statements

 

RED ROBIN GOURMET BURGERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

		April 21, 2013			December 30, 2012
Assets:
Current Assets:
Cash and cash equivalents		$	17,375		$	22,440
Accounts receivable, net		9,198			16,386
Inventories		18,325			18,371
Prepaid expenses and other current assets		8,952			13,439
Deferred tax asset and other		3,238			3,868
Total current assets		57,088			74,504
Property and equipment, net		410,573			413,258
Goodwill		62,525			62,525
Intangible assets, net		36,892			37,203
Other assets, net		9,633			9,642
Total assets		$	576,711		$	597,132
Liabilities and Stockholders’ Equity:
Current Liabilities:
Trade accounts payable		$	13,974		$	14,241
Construction related payables		4,682			4,694
Accrued payroll and payroll related liabilities		33,371			31,476
Unearned revenue, net		20,552			28,187
Accrued liabilities and other		29,738			23,685
Total current liabilities		102,317			102,283
Deferred rent		46,327			44,801
Long-term portion of credit facility		90,500			125,000
Long-term portion of capital lease obligations		8,960			9,211
Other non-current liabilities		8,656			8,918
Total liabilities		256,760			290,213
Stockholders’ Equity:
Common stock, $0.001 par value: 30,000 shares authorized; 17,656 and 17,499 shares issued; 14,156 and 13,999 shares outstanding		18			17
Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding		—			—
Treasury stock, 3,500 and 3,500 shares, at cost		(107,589		)	(107,589		)
Paid-in capital		189,561			185,974
Accumulated other comprehensive gain (loss), net of tax		(31		)	5
Retained earnings		237,992			228,512
Total stockholders’ equity		319,951			306,919
Total liabilities and stockholders’ equity		$	576,711		$	597,132

 

See notes to condensed consolidated financial statements.

 

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RED ROBIN GOURMET BURGERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Sixteen Weeks Ended
		April 21, 2013			April 15, 2012
Revenues:
Restaurant revenue		$	301,313		$	294,642
Franchise royalties, fees and other revenues		5,036			4,817
Total revenues		306,349			299,459
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales		74,982			75,075
Labor (includes $69 and $143 of stock-based compensation, respectively)		101,882			98,606
Operating		37,090			37,405
Occupancy		22,573			21,114
Depreciation and amortization		17,834			16,652
Selling, general and administrative (includes $1,123 and $1,059 of stock-based compensation, respectively)		37,608			33,877
Pre-opening costs		834			983
Total costs and expenses		292,803			283,712
Income from operations		13,546			15,747
Other expense:
Interest expense, net and other		1,089			1,833
Income before income taxes		12,457			13,914
Provision for income taxes		2,977			3,356
Net income		$	9,480		$	10,558
Earnings per share:
Basic		$	0.67		$	0.72
Diluted		$	0.66		$	0.71
Weighted average shares outstanding:
Basic		14,062			14,611
Diluted		14,341			14,894

 

See notes to condensed consolidated financial statements.

 

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RED ROBIN GOURMET BURGERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Sixteen Weeks Ended
		April 21, 2013			April 15, 2012
Net income		$	9,480		$	10,558
Cash Flow Hedges:
Decrease in fair value of interest rate swap		(60		)	(491		)
Net loss reclassified into interest expense		—			132
Total change in unrealized loss related to cash flow hedges		(60		)	(359		)
Income tax benefit related to items of other comprehensive income		24			140
Other comprehensive loss, net of tax		(36		)	(219		)
Total comprehensive income		$	9,444		$	10,339

 

See notes to condensed consolidated financial statements.

 

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RED ROBIN GOURMET BURGERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Sixteen Weeks Ended
		April 21, 2013			April 15, 2012
Cash Flows From Operating Activities:
Net income		$	9,480		$	10,558
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		17,834			16,652
Stock-based compensation expense		1,192			1,202
Other, net		(285		)	170
Changes in operating assets and liabilities		12,146			970
Cash provided by operating activities		40,367			29,552
Cash Flows From Investing Activities:
Purchases of property and equipment		(13,640		)	(10,447		)
Changes in marketing fund restricted cash and other		—			862
Cash used in investing activities		(13,640		)	(9,585		)
Cash Flows From Financing Activities:
Net payments on long-term debt		(34,500		)	(18,750		)
Proceeds from exercise of stock options and employee stock purchase plan		2,957			1,958
Payments of other debt and capital lease obligations		(249		)	(234		)
Cash used in financing activities		(31,792		)	(17,026		)
Net change in cash and cash equivalents		(5,065		)	2,941
Cash and cash equivalents, beginning of period		22,440			35,036
Cash and cash equivalents, end of period		$	17,375		$	37,977
Supplemental of Cash Flow Information:
Income taxes paid		$	1,521		$	199
Interest paid, net of amounts capitalized		948			1,901

 

See notes to condensed consolidated financial statements.

 

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RED ROBIN GOURMET BURGERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                        Basis of Presentation and Recent Accounting Pronouncements

 

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin” or the “Company”), develops and operates casual-dining restaurants. As of April 21, 2013, the Company owned and operated 342 restaurants located in 33 states. The Company also sells franchises, and there were 133 franchised restaurants, in 21 states and two Canadian provinces as of April 21, 2013. The Company operates its business as one operating and one reportable segment.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Red Robin and its wholly owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.  The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Some of the more significant estimates included in the preparation of these financial statements pertain to recoverability of long-lived assets, recoverability of goodwill, estimated useful lives of other intangible assets, variable compensation accruals, lease accounting, estimated fair value, self-insurance liabilities, stock-based compensation expense, estimated breakage on unredeemed gift cards and deferred revenue related to our customer loyalty program, legal contingencies, and income taxes.  Actual results could differ from those estimates.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

The accompanying condensed consolidated financial statements of Red Robin have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements on Form 10-K have been condensed or omitted.  The condensed consolidated balance sheet as of December 30, 2012, has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required by generally accepted accounting principles.  For further information, please refer to and read these interim condensed consolidated financial statements in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2012, filed with the SEC on February 28, 2013.

 

The Company’s quarter which ended April 21, 2013, is referred to as first quarter 2013, or the sixteen weeks ended April 21, 2013; the first quarter ended April 15, 2012, is referred to as first quarter 2012, or the sixteen weeks ended April 15, 2012.

 

Recently Issued Accounting Standards

 

In January 2013, the Financial Accounting Standards Board (“FASB”) issued Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of transactions that are subject to the disclosures about offsetting and will require disclosure of information about the effect or potential effect of financial instrument netting arrangements on financial position. Entities will be required to present both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. This guidance is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance in fiscal 2014 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an organization to present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income (“AOCI”), but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

 

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2.                       Goodwill and Intangible Assets

 

The following table presents goodwill as of April 21, 2013, and December 30, 2012 (in thousands):

 

Balance at December 25, 2011		$	61,769
Acquisition		756
Balance at December 30, 2012 and April 21, 2013		62,525

 

The Company has no historical goodwill impairment losses in periods prior to those presented in the above table.  Refer to Note 5, Acquisition of Red Robin Franchised Restaurant for details of the acquisition.

 

The following table presents intangible assets subject to amortization as of April 21, 2013, and December 30, 2012 (in thousands):

 

		April 21, 2013									December 30, 2012
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Intangible assets subject to amortization:
Franchise rights		$	43,603		$	(16,097	)	$	27,506		$	43,519		$	(15,342	)	$	28,177
Leasehold interests		12,744			(4,546		)	8,198			12,744			(4,313		)	8,431
Liquor licenses		10,049			(8,861		)	1,188			9,095			(8,500		)	595
		$	66,396		$	(29,504	)	$	36,892		$	65,358		$	(28,155	)	$	37,203

 

There were no impairments to intangible assets during the sixteen weeks ended April 21, 2013, and April 15, 2012. The amortization expense reflected in the consolidated statements of operations totaled $1.3 million and $1.4 million for the sixteen weeks ended April 21, 2013, and April 15, 2012, respectively.

 

The aggregate future amortization expense as of April 21, 2013 is as follows (in thousands):

 

Remainder of 2013		$	2,200
2014		3,398
2015		3,395
2016		3,229
2017		3,116
Thereafter		21,554
		$	36,892

 

3.                        Stock-Based Compensation

 

Under the Company’s Second Amended and Restated 2007 Performance Incentive Plan (the “2007 Stock Plan”), various stock options and stock awards may be granted to employees of the Company and any of the Company’s subsidiaries, directors of the Company, certain consultants and advisors to the Company or any of its subsidiaries.

 

Stock options are granted with an exercise price equal to the fair market value of shares of the Company’s common stock at the grant date. We account for stock-based compensation in accordance with fair value recognition provisions, calculated using the Black-Scholes option pricing model (the “pricing model”). The weighted-average fair value of non-qualified stock options and the related assumptions used in the pricing model were as follows:

 

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		Sixteen Weeks Ended
		2013			2012
Risk-free interest rate		0.7		%	0.7		%
Expected years until exercise		4.1			4.1
Expected stock volatility		44.3		%	52.8		%
Dividend yield		—		%	—		%
Weighted average Black-Scholes fair value per share at date of grant		$	14.84		$	14.60

 

The following table presents a summary of the Company’s stock-based compensation activity for the 16 weeks ended April 21, 2013:

 

(in thousands)		Stock Options		Restricted Stock Units		Restricted Stock		Performace Stock Units
Outstanding, December 30, 2012		705		180		4		35
Granted		124		30		—		6
Exercised		(114	)	(24	)	(4	)	(21	)
Cancelled		(12	)	(3	)	—
Outstanding, April 21, 2013		703		183		—		20

 

4.                        Earnings Per Share

 

Basic earnings per share amounts are calculated by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share amounts are calculated based upon the weighted-average number of common shares and potentially dilutive shares of common stock outstanding during the period.  Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect.  Diluted earnings per share reflect the potential dilution that could occur if holders of options exercised their options into common stock.  During the sixteen weeks ended April 21, 2013, and April 15, 2012, weighted average stock options outstanding of 114,000 and 280,000, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.  The Company uses the treasury stock method to calculate the effect of outstanding stock options.  The computations for basic and diluted earnings per share are as follows (in thousands, except per share data):

 

		Sixteen Weeks Ended
		April 21, 2013			April 15, 2012
Net income		$	9,480		$	10,558
Basic weighted average shares outstanding		14,062			14,611
Dilutive effect of stock options and awards		279			283
Diluted weighted average shares outstanding		14,341			14,894
Earnings per share:
Basic		$	0.67		$	0.72
Diluted		$	0.66		$	0.71

 

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5.                        Acquisition of Red Robin Franchised Restaurant

 

On June 19, 2012, the Company acquired the assets of one restaurant of one of its franchisees.  The purchase price was approximately $3.2 million. The consolidated statements of operations include the results of operations for this restaurant from the date of acquisition. The pro forma impact of the acquisition on prior periods is not presented as the impact was not material to reported results.

 

The Company allocated the purchase price to the tangible and intangible assets acquired in the acquisition at their estimated fair values with the remainder allocated to goodwill as follows: $1.9 million to intangibles, which represent the fair value of franchise rights and liquor licenses, $756,000 to goodwill, $540,000 to fixed assets and $47,000 to inventory. The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date was based on significant inputs not observed in the market and thus represents a Level 3 measurement.

 

6.                        Advertising Costs

 

Costs incurred in connection with the advertising and marketing of the Company are included in selling, general, and administrative expenses.  These costs include salaries, variable compensation, advertising, media, and marketing materials. Advertising production costs are expensed in the period when the advertising first takes place. Other advertising and marketing costs are expensed as incurred.  Advertising and marketing costs amounted to $11.1 million and $9.9 million for the sixteen weeks ended April 21, 2013, and April 15, 2012, respectively.

 

Under the Company’s franchise agreements, both the Company and the franchisees must contribute a minimum percentage of revenues to two marketing and national media advertising funds (the “Marketing Funds”). These Marketing Funds are used to develop and distribute Red Robin® branded marketing materials, for media purchases and for administrative costs. The Company’s portion of costs incurred by the Marketing Funds is recorded as selling, general and administrative expenses in the Company’s consolidated statements of income.

 

7.                        Derivative and Other Comprehensive Income

 

The Company enters into derivative instruments for risk management purposes only, including derivatives designated as a cash flow hedge under guidance for derivative instruments and hedging activities. The Company uses interest rate-related derivative instruments to manage its exposure to fluctuations in interest rates. By using these instruments, the Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of either party to the contract to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company minimizes the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis. Market risk, as it relates to the Company’s interest-rate derivative, is the adverse effect on the value of a financial instrument that results from changes in interest rates. The Company minimizes market risk by establishing and monitoring parameters that limit the types and degree of market risk that the Company takes.

 

The Company had one interest rate swap at April 21, 2013, and its counterparty is Rabobank International, Utrecht (“Rabobank”). The Company entered into a variable-to-fixed interest rate swap agreement with Rabobank in August 2011 to hedge the floating interest rate on a portion of the term loan under the Company’s credit facility. The interest rate swap was effective August 5, 2011, with an initial notional amount of $74.1 million. In accordance with its original terms $4.7 million and $0.9 million of the initial $74.1 million expired in 2012 and 2011 respectively. The remaining notional amount of $65.5 million as of April 21, 2013, is set to expire on June 30, 2015, with a notional hedge amount of $50.6 million. Under the swap, the Company is required to make quarterly payments based on a fixed interest rate of 1.135%, calculated based on the remaining notional amount. In exchange, the Company receives interest on the notional amount at a variable rate that is based on the 3-month spot LIBOR rate quarterly. The Company entered into this interest rate swap to offset the variability of its interest expense arising out of changes in the variable interest rate for the designated interest payments and designated the swap as a cash flow hedge. Concurrent with the December 14, 2012, refinancing of its then-existing credit facility, the Company de-designated the original hedging relationship for this swap and consequently re-designated the swap on the amended credit facility’s $225 million revolver. Accordingly, changes in fair value of the interest rate swap contract are recorded, net of taxes, as a component of AOCI, in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain or loss from AOCI, net of tax, on the Company’s consolidated balance sheet to interest expense on the Company’s consolidated statements of income as the interest expense is recognized on the related debt.

 

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The following table summarizes the fair value and presentation in the condensed consolidated balance sheets of the interest rate swap as hedging instruments as of April 21, 2013, and December 30, 2012 (in thousands):

 

		Derivative Liability
Balance Sheet Location		Fair Value at April 21, 2013			Fair Value at December 30, 2012
Accrued liabilities		$	532		$	539
Other non-current liabilities		497			677
Total derivative liability		$	1,029		$	1,216

 

During the first quarter 2013, the interest rate swap was highly effective. The Company expects the swap to continue to be highly effective during the next twelve months. Additionally, the Company had no obligations at April 21, 2013, to post collateral under the terms of the interest rate swap agreement.

 

The components of AOCI at the end of each period was as follows (in thousands):

 

		April 21, 2013			December 30, 2012
Unrealized gain (loss) related to cash flow hedges, pretax		$	(50	)	$	9
Tax effect		19			(4		)
Accumulated other comprehensive income (loss), net		$	(31	)	$	5

 

8.                       Fair Value Measurement

 

Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value:

 

Level 1: Observable inputs that reflect unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Assets and Liabilities Measured at Fair Value

 

The derivative liability associated with the interest rate swap is considered to be a Level 2 instrument. The interest rate swap was a standard cash flow hedge with a fair value estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves.  See Note 7, Derivative and Other Comprehensive Income, for the discussion of the derivative liability.

 

The Company’s deferred compensation plan is a nonqualified deferred compensation plan which allows highly compensated employees to defer a portion of their base salary, variable compensation, and commissions each plan year. The carrying value of both the liability for the deferred compensation plan and associated life insurance policy are equal to their fair value. These agreements are required to be measured at fair value on a recurring basis and are valued using Level 2 inputs. At April 21, 2013, and December 30, 2012, a liability for participant contributions and investment income thereon of $2.3 million and $3.0 million, respectively, is included in other non-current liabilities. To offset its obligation, the Company’s plan administrator purchases Company-owned whole-life insurance contracts on certain team members. The cash surrender value of

 

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these policies at April 21, 2013, and December 30, 2012, were $3.0 and $2.9 million, respectively, and is included in other assets, net.

 

As of April 21, 2013, the Company had no financial assets or liabilities that were measured using Level 1 or Level 3 inputs.  The Company also had no non-financial assets or liabilities that were required to be measured at fair value on a recurring basis.

 

The following table presents our assets and liabilities that are fair valued on a recurring basis for the quarter ended April 21, 2013, and for the fiscal year ended December 30, 2012 (in thousands):

 

		April 21, 2013			Level 1			Level 2			Level 3
Assets:
Life insurance policy		$	2,951		$	—		$	2,951		$	—
Total assets measured at fair value		$	2,951		$	—		$	2,951		$	—
Liabilities:
Derivative - interest rate swap		$	1,029		$	—		$	1,029		$	—
Deferred compensation plan		2,301			—			2,301			—
Total liabilities measured at fair value		$	3,330		$	—		$	3,330		$	—

 

		December 30, 2012			Level 1			Level 2			Level 3
Assets:
Life insurance policy		$	2,920		$	—		$	2,920		$	—
Total assets measured at fair value		$	2,920		$	—		$	2,920		$	—
Liabilities:
Derivative— interest rate swap		$	1,216		$	—		$	1,216		$	—
Deferred compensation plan		2,974			—			2,974			—
Total liabilities measured at fair value		$	4,190		$	—		$	4,190		$	—

 

Disclosures of Fair Value of Other Assets and Liabilities

 

The Company’s liabilities under its credit facility and capital leases are carried at historical cost in the accompanying consolidated balance sheet. For disclosure purposes, the Company estimated the fair value of the credit facility and capital lease obligations using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt. Both the credit facility and the Company’s capital lease obligations are considered to be Level 2 instruments. The carrying value of the Company’s credit facility as of April 21, 2013, and December 30, 2012, was $90.5 million and $125.0 million, respectively. The fair value of the Company’s credit facility as of April 21, 2013, and December 30, 2012, was approximately $90.4 million and $124.4 million, respectively. There are $9.7 million of outstanding borrowings recorded for the Company’s capital leases as of April 21, 2013, which have an estimated fair value of $11.5 million. At December 30, 2012, the carrying amount of the Company’s capital lease obligations was $10.0 million, and the fair value was $11.8 million.

 

9.                      Related Party Transactions

 

The former president and majority owner of one of the Company’s former franchisees has served on the Company’s board of directors since 2009. He has announced his retirement from the board effective as of the date of the Company’s 2013 annual meeting of stockholders. The Company purchased 13 Red Robin® restaurants in Washington from this franchisee in 2006. The board member is a principal of and holds, directly or indirectly, interests of between 45% and 100% in each of three privately-held entities that hold the leases for three of the acquired Washington restaurants. These leases were assumed by the Company in connection with the acquisition. Under these leases, the Company recognized rent and other related payments in the amounts of $0.3 million and $0.4 million for the sixteen weeks ended April 21, 2013, and April 15, 2012, respectively. Future minimum lease commitments under these leases are $3.9 million as of April 21, 2013.

 

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10.                Commitments and Contingencies

 

In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. These include employment related claims and claims alleging illness, injury or other food quality, health or operational issues. To date, no claims of these types of litigation, certain of which are covered by insurance policies, have had a material effect on us. While it is not possible to predict the outcome of these suits, legal proceedings and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the financial statements and that the ultimate resolution of these matters will not have a material effect on the Company’s financial position and results of operations.

 

11.                Subsequent Events

 

The Company has evaluated subsequent events and found there to be no events requiring recognition or disclosure through the date of issuance of this report.

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying condensed consolidated financial statements.  All comparisons under this heading between 2013 and 2012 refer to the sixteen week periods ending April 21, 2013, and April 15, 2012, respectively, unless otherwise indicated.

 

Overview

 

Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin” or the “Company”), primarily develops, operates and franchises casual-dining restaurants with 475 locations as of April 21, 2013.  The Company operated 342 Company-owned restaurants located in 33 states comprised of 337 casual dining locations and five Red Robin’s Burger Works®, a smaller non-traditional prototype with a limited menu and limited service. The Company also franchises restaurants, of which there were 133 restaurants in 21 states and two Canadian provinces as of April 21, 2013.  The Company operates its business as one operating and one reportable segment.

 

The following summarizes the operational and financial highlights during the first sixteen weeks of fiscal 2013 and our outlook for the remainder of 2013:

 

·                  Comparable Restaurant Revenue.  Comparable restaurants include those Company-owned restaurants that have achieved five full quarters of operations during the periods presented, and such restaurants are only included in our comparable metrics if they are comparable for the entirety of both periods presented. For the sixteen weeks ended April 21, 2013, the 320 restaurants in our comparable base experienced a 2.2% increase in net sales compared to the same period last year.  This increase was driven by a 2.8% increase in average guest check, partially offset by a 0.6% decrease in guest count.  Our comparable sales are measured using the most closely aligned calendar weeks.

 

·                  Marketing.  Our Red Robin Royalty™ loyalty program operates in all of our Company-owned restaurants and in 69 of our franchised locations. Engaging our guests through this program is a key part of our marketing strategy and uses offers designed to increase the frequency of guest visits. We are also using the program to generate awareness of new menu items and to engage our guests with smart rewards. Our “Take Back the Bar” initiative continued to increase our alcoholic beverage mix, differentiate our brand, and help target adult diners.

 

·                  Brand Transformation Initiative.  As of April 21, 2013, we have completed brand transformation projects at 21 of our restaurants. Additionally, we plan to expand our Brand Transformation initiatives into an additional 20 restaurants during the remainder of 2013 through remodeling efforts.

 

·                  Food Costs.  As a percentage of restaurant revenue, we have experienced a 60 basis point decrease in cost of goods during the sixteen weeks ended April 21, 2013, compared to the same period in the prior year.  This decrease was primarily driven by lower hamburger and cheese cost, as well as favorable mix.

 

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·                  Labor.  Labor costs as a percentage of restaurant revenue increased 30 basis points for the sixteen weeks ended April 21, 2013, from the same period in 2012.  This increase was primarily driven by higher restaurant management wages, partially offset by a decrease in worker’s compensation costs.

 

·                  New Restaurant Openings.  We opened three Company-owned restaurants during the sixteen weeks ended April 21, 2013.  We plan to open 20 additional Company-owned restaurants in 2013 and several Burger Works®, which we expect to fund from our operating cash flows.

 

·                  Selling, General and Administrative. As a percentage of total revenue, selling, general and administrative costs increased 100 basis points for the sixteen weeks ended April 21, 2013, from the same period in 2012. This increase was primarily driven by an increase in staffing levels resulting in higher salaries and benefits.

 

Restaurant Data

 

The following table details restaurant unit data for our Company-owned and franchise locations for the periods indicated.

 

		Sixteen Weeks Ended
		April 21, 2013		April 15, 2012
Company-owned:
Beginning of period		339		327
Opened during period (1)		3		4
Closed during period		—		(1	)
End of period		342		330
Franchised:
Beginning of period		133		137
Sold or closed during period		—		(1	)
End of period		133		136
Total number of Red Robin restaurants		475		466

 

(1)         Includes one Red Robin’s Burger Works® in 2012.

 

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Results of Operations

 

Operating results for each period presented below are expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.

 

This information has been prepared on a basis consistent with our audited 2012 annual financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented.  Our operating results may fluctuate significantly as a result of a variety of factors, and operating results for any period presented are not necessarily indicative of results for a full fiscal year.

 

		Sixteen Weeks Ended
		April 21, 2013		April 15, 2012
Revenues:
Restaurant		98.4	%	98.4	%
Franchise royalties, fees and other revenues		1.6		1.6
Total revenues		100.0		100.0
Costs and Expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales		24.9		25.5
Labor		33.8		33.5
Other operating		12.3		12.7
Occupancy		7.5		7.2
Total restaurant operating costs		78.5		78.9
Depreciation and amortization		5.8		5.6
Selling, general and administrative		12.3		11.3
Pre-opening costs		0.3		0.3
Income from operations		4.4		5.3
Interest expense, net and other		0.4		0.6
Income before income taxes		4.1		4.6
Provision for income taxes		1.0		1.1
Net income		3.1	%	3.5	%

 

Certain percentage amounts in the table above do not total due to rounding as well as the fact that restaurant operating costs are expressed as a percentage of restaurant revenues and not total revenues.

 

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Total Revenues

 

		Sixteen Weeks Ended
(Revenues in thousands)		April 21, 2013			April 15, 2012			Percent Change
Restaurant revenue		$	301,313		$	294,642		2.3	%
Franchise royalties and fees and other revenue		5,036			4,817			4.5	%
Total revenues		$	306,349		$	299,459		2.3	%
Average weekly net sales volumes in comparable restaurants (1) (2)		$	55,982		$	54,794		2.2	%
Average weekly net sales volumes in Company-owned restaurants (1) (2)		$	55,978		$	56,303		(0.6	)%
Total operating weeks		5,444			5,244			3.8	%
Net sales per square foot in Company-owned restaurants		$	139		$	145		(4.1	)%

 

(1)  Includes Company-owned casual dining restaurants only.

 

Restaurant revenue during the sixteen weeks ended April 21, 2013, which is comprised almost entirely of food and beverage sales, increased by $6.7 million compared to first quarter 2012.  Net sales in our comparable restaurant base increased approximately $6.1 million or 2.2% during the first quarter 2013, compared to first quarter 2012.  The comparable sales increase was primarily the result of a 2.8% increase in average guest check, partially offset by 0.6% decrease in guest counts.

 

Average weekly net sales volumes represent the total restaurant revenue for all Company-owned casual dining restaurants for each time period presented, divided by the number of operating weeks in the period. Comparable restaurant average weekly sales volumes include those restaurants that are in the comparable base at the end of each period presented. New restaurants are primarily restaurants that are open but by definition not included in the comparable category because they have not yet operated for five full quarters. Fluctuations in average weekly net sales volumes for comparable restaurants reflect the effect of same store sales changes as well as the performance of new restaurants entering the comparable base during the period and the average square feet of our restaurants. First quarter 2013 total average weekly net sales in Company-owned restaurants decreased 0.6% from 2012 due mainly to the change in fiscal year which resulted in seasonal holiday sales shifting out of the first quarter.

 

Franchise royalties and fees, which consist primarily of royalty income and initial franchise fees, remained relatively flat for the sixteen weeks ended April 21, 2013.  Our franchisees reported that comparable restaurant net sales decreased 1.0% for U.S. restaurants and increased 3.2% for Canadian restaurants for the first quarter of 2013 compared to the first quarter of 2012.

 

Cost of Sales

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Cost of sales		$	74,982		$	75,075		(0.1	)%
As a percent of restaurant revenue		24.9		%	25.5		%	(0.6	)%

 

Cost of sales, comprised of food and beverage costs, is variable and generally fluctuates with sales volume.  For the sixteen weeks ended April 21, 2013, cost of sales as a percentage of restaurant revenue decreased 60 basis points, compared to the same period in the prior year.  This decrease was driven by lower hamburger and cheese costs, as well as favorable mix.

 

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Labor

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Labor		$	101,882		$	98,606		3.3	%
As a percent of restaurant revenue		33.8		%	33.5		%	0.3	%

 

Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits.  For the sixteen weeks ended April 21, 2013, labor costs as a percentage of restaurant revenue increased 30 basis points. This increase primarily resulted from an approximate 50 basis point increase due to higher management wages and group insurance, partially offset by an approximate 20 basis point decrease related to lower worker’s compensation costs.

 

Other Operating

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Operating		$	37,090		$	37,405		(0.8	)%
As a percent of restaurant revenue		12.3		%	12.7		%	(0.4	)%

 

Other operating costs include costs such as restaurant supplies, utilities, and other costs such as service repairs and maintenance costs.  For the sixteen weeks ended April 21, 2013, operating costs as a percentage of restaurant revenue decreased 40 basis points over prior year.  The decrease as a percentage of restaurant revenue resulted from a 60 basis point decrease related to lower promotional activities, partially offset by a 20 basis point increase in utilities and credit card fees.

 

Occupancy

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Occupancy		$	22,573		$	21,114		6.9	%
As a percent of restaurant revenue		7.5		%	7.2		%	0.3	%

 

Occupancy costs include fixed rents, contingent rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs. Occupancy costs incurred prior to opening our new restaurants are included in pre-opening costs. The increase in occupancy costs for the sixteen weeks ended April 21, 2013 was primarily due to an increase in fixed rents related to the additional restaurants opened since first quarter 2012. Our fixed rents for the sixteen weeks ended April 21,2013 and April 15, 2012 were $14.4 million and $13.5 million, respectively.

 

Depreciation and Amortization

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Depreciation and amortization		$	17,834		$	16,652		7.1	%
As a percent of total revenues		5.8		%	5.6		%	0.2	%

 

Depreciation and amortization includes depreciation of capital investments for restaurants and corporate assets as well as amortization of acquired intangible assets and liquor licenses.  Depreciation and amortization expense as a percentage of revenue increased 20 basis points for the sixteen weeks ended April 21, 2013 as compared to the prior period, largely due to an increase in leasehold improvement amortization due primarily to the opening of new restaurants, as well as an increase in depreciation related to placing into service certain elements of our information technology systems.

 

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Selling, General and Administrative

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Selling, general and administrative		$	37,608		$	33,877		11.0	%
As a percent of total revenues		12.3		%	11.3		%	1.0	%

 

Selling, general and administrative costs include all corporate and administrative functions. Components of this category include corporate, regional and franchise support salaries and benefits, travel, information systems, training, office rent, professional and consulting fees, board of directors’ expenses, legal expenses and marketing costs.  For the sixteen weeks ended April 21, 2013, selling, general and administrative costs increased 11.0%, or $3.7 million over the sixteen weeks ended April 15, 2012, driven primarily by an increase in salaries and benefits due to investments in talent to support value-enhancing initiatives and higher incentive based compensation.

 

Pre-opening Costs

 

		Sixteen Weeks Ended
(In thousands, except percentages)		April 21, 2013			April 15, 2012			Percent Change
Pre-opening costs		$	834		$	983		(15.2	)%
As a percent of total revenues		0.3		%	0.3		%	0.0	%

 

Pre-opening costs, which are expensed as incurred, consist of the costs of labor, hiring, and training the initial work force for our new restaurants, travel expenses for our training teams, the cost of food and beverages used in training, marketing costs, occupancy costs incurred prior to opening, and other direct costs related to the opening of new restaurants. Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened and the location of the restaurants. Pre-opening expenses for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opened towards the end of the prior quarter and restaurants opening in subsequent quarters.

 

Interest Expense, net and other

 

Interest expense, net and other was $1.1 million and $1.8 million for the sixteen weeks ended April 21, 2013, and April 15, 2012, respectively.  The decrease for the sixteen weeks ended April 21, 2013, was primarily due to the Company’s lower interest expense, due to the refinancing of the Company’s debt in December 2012.  Our weighted average interest rate was 2.7% and 3.6% for the sixteen weeks ended April 21, 2013, and April 15, 2012, respectively.

 

Provision for Income Taxes

 

The effective income tax rate for the first quarter 2013 was 23.9% compared to 24.1% for the first quarter 2012. We anticipate that our full year fiscal 2013 effective tax rate will be approximately 24%.

 

Liquidity and Capital Resources

 

General.  Cash and cash equivalents decreased $5.1 million to $17.4 million at April 21, 2013, from $22.4 million at the beginning of the fiscal year. We expect to continue to reinvest available cash flows from operations to develop new restaurants or invest in existing restaurants and infrastructure, pay down debt, and maintain the flexibility to use excess cash to opportunistically repurchase our common stock and execute our long term strategic initiatives.

 

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Cash Flows

 

The table below summarizes our cash flows from operating, investing and financing activities for each of periods presented (in thousands):

 

		Sixteen Weeks Ended
		April 21, 2013			April 15, 2012
Net cash provided by operating activities		$	40,367		$	29,552
Net cash used in investing activities		(13,640		)	(9,585		)
Net cash used in financing activities		(31,792		)	(17,026		)
Net increase (decrease) in cash and cash equivalents		$	(5,065	)	$	2,941

 

Operating Cash Flows

 

Net cash flows provided by operating activities were $40.4 million for the first quarter 2013 compared to $29.6 million for the same period in 2012. The $10.8 million increase over the prior year is primarily due the to acceleration of payments to vendors at the end of fiscal year 2012 in order to aid in the conversion to our new information technology system, as well as an increase in accrued payroll and marketing related liabilities, partially offset by a decrease in tax liabilities due to cash payments for income taxes.

 

Investing Cash Flows

 

Net cash flows used in investing activities increased $4.0 million from $9.6 million in the first quarter 2012 to $13.6 million in the first quarter 2013. The increase over prior year is due primarily to investments in new restaurant openings, kitchen equipment and technology infrastructure. The following table lists the components of our investing activities for fiscal 2012 (in millions): double underline table

 

		Sixteen Weeks Ended
		April 21, 2013
New restaurants		$	6,860
Restaurant facility improvements		4,466
Investments in technology infrastructure and other		2,314
Net cash used in investing activities		$	13,640

 

Financing Cash Flows

 

Cash used in our financing activities increased $14.8 million from $17.0 million in the first quarter 2012 to $31.8 million in the first quarter 2013 primarily due to an increase in debt payments driven by strong cash flow during the quarter.

 

Credit Facility.  On December 14, 2012, we entered into a new credit facility (“New Credit Facility”) with a consortium of banks, thereby terminating our previous credit facility, which had been amended and restated on May 6, 2011 (“Previous Facility”).  The New Credit Facility provides for a $225 million revolving line of credit with a sublimit for the issuance of up to $25 million in letters of credits and swingline loans up to $15 million, and maintains the option to increase this credit facility in the future, subject to lenders’ participation, by up to an additional $100 million in the aggregate. Borrowings under the New Credit Facility are subject to rates based on LIBOR plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1%). This $225 million revolving line of credit matures on December 14, 2017. Borrowings under the New Credit Facility are secured by first priority liens and security interests in substantially all of our assets, which include the capital stock of our certain subsidiaries, and are available for financing activities including

 

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restaurant construction costs, working capital and general corporate purposes, including, among other uses, to refinance certain indebtedness, permitted acquisitions and redemption of capital stock.  We do not believe that any of our lenders will not be able to fulfill their lending commitments under our New Credit Facility.  Loan origination costs associated with the New Credit Facility are included as deferred costs in other assets, net in the accompanying consolidated balance sheet.  As of April 21, 2013, we had outstanding borrowings under the New Credit Facility of $90.5 million.

 

In August 2011, we entered into a variable-to-fixed interest rate swap agreement with Rabobank International, Utrecht (“Rabobank”) to hedge the floating interest rate on a portion of the term loan under our Previous Facility. The interest rate swap had an effective date of August 5, 2011, and an initial notional amount of $74.1 million. In accordance with its original terms $4.7 million and $0.9 million of the initial $74.1 million expired in 2012 and 2011 respectively. The remaining notional amount is $65.5 million and is set to expire on June 30, 2015, with a notional hedge amount of $50.6 million. Under the swap, we are required to make quarterly payments based on a fixed interest rate of 1.135%, calculated based on the remaining notional amount. In exchange, we receive interest on the notional amount at a variable rate that is based on the 3-month spot LIBOR rate quarterly. Concurrent with the December 14, 2012 refinancing of the Previous Facility, the Company undesignated the original hedging relationship for this swap and consequently re-designated the swap on the New Credit Facility’s $225 million revolver.

 

Covenants.  We are subject to a number of customary covenants under our New Credit Facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments. As of April 21, 2013, we were in compliance with all debt covenants.

 

Debt Outstanding.  Total debt outstanding decreased $34.8 million to $100.2 million at April 21, 2013, from $135.0 million at December 30, 2012, primarily due to debt payments of $34.5 million on our credit facility. Our New Credit Facility matures in 2017.

 

We typically maintain current liabilities in excess of our current assets which results in a working capital deficit. We are able to operate with a working capital deficit because restaurant sales are primarily conducted on a cash or credit card basis. Rapid turnover of inventory results in limited investment in inventories, and cash from sales is usually received before related payables for food, supplies and payroll become due. In addition, receipts from the sale of gift cards are received well in advance of related redemptions. Rather than maintain higher cash balances that would result from this pattern of operating cash flows, we typically utilize operating cash flows in excess of those required for currently-maturing liabilities to pay for capital expenditures, debt repayment or to repurchase stock. When necessary, we utilize our revolving credit facility to satisfy short-term liquidity requirements. However, we believe that our future cash flows will be sufficient to satisfy any working capital deficits.

 

Inflation

 

The primary inflationary factors affecting our operations are food, labor costs, energy costs, and materials used in the construction of new restaurants. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage have directly affected our labor costs in recent years. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. We believe inflation had a negative impact on our financial condition and results of operations during the first quarter of 2013, due primarily to higher costs for certain supplies, and commodity prices for certain foods we purchased at market rates.  Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed wage increases and construction materials make it difficult to predict what impact, if any, inflation may have on our business during 2013, but it is anticipated that inflation will continue to have a negative impact in fiscal year 2013.

 

Seasonality

 

Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality. Accordingly, results for any one quarter or year are not necessarily indicative of results to be expected for any other quarter or for any year, and comparable restaurant sales for any particular future period may decrease.

 

Off Balance Sheet Arrangements

 

Except for operating leases (primarily restaurant leases) entered into the normal course of business, we do not have any material off balance sheet arrangements.

 

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Critical Accounting Policies and Estimates

 

Critical accounting policies and estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters.  We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances.  Actual results may differ from these estimates, including our estimates of future restaurant level cash flows, which are subject to the current economic environment, and we might obtain different results if we used different assumptions or conditions.  We had no significant changes in our critical accounting policies and estimates since our last annual report.  Our critical accounting estimates are contained in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.

 

Recently Issued Accounting Standards

 

In January 2013, the Financial Accounting Standards Board (“FASB”) issued Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies the scope of transactions that are subject to the disclosures about offsetting and will require disclosure of information about the effect or potential effect of financial instrument netting arrangements on financial position. Entities will be required to present both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. This guidance is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance in fiscal 2014 is not expected to have a material impact on our consolidated financial statements.

 

In February 2013, the FASB issued Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an organization to present the effects on the line items of net income of significant amounts reclassified out of AOCI, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012. The adoption of this guidance did not have a significant impact on our consolidated financial statements.

 

Forward-Looking Statements

 

Certain information and statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) codified at Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “may,” “will,” “would” and similar expressions. Certain forward-looking statements are included in this Quarterly Report on Form 10-Q, principally in the sections captioned “Financial Statements” and “Management’s Discussion and Analysis”.  Forward-looking statements in this report include, among other things: expectations about our interest-rate swaps; anticipated number of new restaurants; anticipated funding for new restaurant openings; anticipated effective tax rate for 2013; beliefs about inflation and the effect of the adoption of new accounting standards on our financial and accounting systems and analysis programs.

 

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those we express in these forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the effectiveness of our business improvement initiatives; effectiveness of our marketing campaign; uncertainty regarding general economic conditions and economic recovery; concentration of restaurants in certain markets and lack of market awareness in new markets; changes in consumer disposable income consumer spending trends and habits; ineffectiveness of our information technology efforts; regional mall and lifestyle center traffic trends; increased competition and discounting in the casual dining restaurant market; costs and availability of food and beverage inventory; changes in commodity prices, particularly ground beef; changes in labor and energy costs; limitations on the Company’s ability to execute stock repurchases due to lack of available shares or acceptable stock price levels or other market or Company-specific conditions; our ability to attract qualified managers and team members; changes in the availability of capital or credit facility borrowings; costs and other effects of legal claims by team members, franchisees, customers, vendors, stockholders and others, including settlement of those claims; effectiveness of management strategies and decisions; weather conditions and related events in regions where our restaurants are operated; and changes in accounting standards policies and practices or related interpretations by auditors or regulatory entities; and other risk factors described from time to time in our SEC reports, including the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 30, 2012, filed with the SEC on February 28, 2013.

 

Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

 

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Item 3.                      Quantitative and Qualitative Disclosures About Market Risk

 

Under our New Credit Facility, we are exposed to market risk from changes in interest rates on borrowings, which bear interest at one of the following rates we select: an Alternate Base Rate (“ABR”), based on the Prime Rate plus 0.50% to 1.25%, or the London Interbank Offered Rate (“LIBOR”), based on the relevant one, three or six-month LIBOR, at our discretion, plus 1.50% to 2.25%. The spread, or margin, for ABR and LIBOR loans under the New Credit Facility is subject to quarterly adjustment based on our then current leverage ratio, as defined by the credit agreement. As of April 21, 2013, we had $25.0 million of borrowings subject to variable interest rates. A 1.0% change in the effective interest rate applied to these loans would have resulted in pre-tax interest expense fluctuation of $0.25 million on an annualized basis.

 

Our objective in managing exposure to interest rate changes is to limit the effect of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve this objective, we have used an interest rate swap and may use other means such as caps to manage our net exposure to interest rate changes related to our borrowings. As appropriate, on the date derivative contracts are entered into, we designate derivatives as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

 

In August 2011, we entered into a variable-to-fixed interest rate swap agreement with Rabobank to hedge the floating interest rate on a portion of the term loan under our Previous Facility. The interest rate swap had an effective date of August 5, 2011 and an initial notional amount of $74.1 million. In accordance with its original terms $4.7 million and $0.9 million of the initial $74.1 million expired in 2012 and 2011 respectively. The remaining notional amount of $68.4 million as of April 21, 2013, decreases quarterly and is set to expire on June 30, 2015, with a notional hedge amount of $50.6 million. Under the swap, we are required to make quarterly payments based on a fixed interest rate of 1.135%, calculated based on the remaining notional amount. In exchange, we receive interest on the notional amount at a variable rate that is based on the 3-month spot LIBOR rate quarterly. Concurrent with the December 14, 2012 refinancing of the loan agreement that was designated as being hedged by this swap, the Company de-designated the original hedging relationship for this swap and consequently re-designated the swap on the New Credit Facility’s $225 million revolver. Refer to Note 7, Derivative and Other Comprehensive Income, of Notes to Consolidated Financial Statements of this report.

 

Primarily all of our transactions are conducted, and our accounts are denominated, in United States dollars.  Accordingly, we are not exposed to significant foreign currency risk.

 

Many of the food products we purchase are affected by changes in weather, production, availability, seasonality, and other factors outside our control. In an effort to mitigate some of this risk, we have entered into fixed price agreements on some of our food and beverage products, including certain proteins, produce and cooking oil. As of the end of fiscal year 2012, approximately 40% of our estimated annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times during fiscal year 2013. These contracts may exclude related expenses such as fuel surcharges and other fees. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to reduce or mitigate these risks.

 

Item 4.                      Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of the Company, (“Management”), including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required

 

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