Buffalo Wild Wings 10-Q 2013
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
Commission File No. 000-24743
BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
5500 Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically 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 ¨
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):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares outstanding of the registrant’s common stock as of May 3, 2013: 18,757,439 shares.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
See accompanying notes to consolidated financial statements.
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
See accompanying notes to consolidated financial statements.
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND MARCH 25, 2012
(Dollar amounts in thousands except share and per share data)
(1) Basis of Financial Statement Presentation
The consolidated financial statements as of March 31, 2013 and December 30, 2012, and for the three-month periods ended March 31, 2013 and March 25, 2012 have been prepared by Buffalo Wild Wings, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The financial information as of March 31, 2013 and for the three-month periods ended March 31, 2013 and March 25, 2012 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.
References in the remainder of this document to “company,” “we,” “us” and “our” refer to the business of Buffalo Wild Wings, Inc. and our subsidiaries.
The financial information as of December 30, 2012 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2012, which is included in Item 8 in the Fiscal 2012 Annual Report on Form 10-K and should be read in conjunction with such financial statements.
The results of operations for the three-month period ended March 31, 2013 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 29, 2013.
(2) Summary of Significant Accounting Policies
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Cash flows related to inventory sales are classified in net cash provided by operating activities in the Consolidated Statements of Cash Flows.
We purchase products from a number of suppliers and believe there are alternative suppliers. We have minimum purchase commitments from some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. The primary food product used by our restaurants and our franchised restaurants is chicken wings. Current month chicken wing prices are determined based on the average of the previous month’s spot rates. For the three-month periods ended March 31, 2013 and March 25, 2012, chicken wings were 28.8% and 25.7%, of restaurant cost of sales, respectively.
We reviewed all significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.
(3) Fair Value Measurements
The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of March 31, 2013:
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of December 30, 2012:
We classified a portion of our marketable securities as available-for-sale and trading securities which were reported at fair market value, using the “market approach” valuation technique. The “market approach” valuation method uses prices and other relevant information observable in market transactions involving identical or comparable assets. Our cash equivalents include money market funds which are valued using a Level 1 approach. Our trading securities are valued using a Level 1 approach. Our available-for-sale marketable securities are valued using a Level 2 approach using observable direct and indirect inputs for municipal bonds.
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three-month periods ended March 31, 2013 or March 25, 2012.
Marketable securities consisted of the following:
All held-to-maturity debt securities mature within one year and had an aggregate fair value of $2,770 as of December 30, 2012. Trading securities represent investments held for future needs of a non-qualified deferred compensation plan.
Property and equipment consisted of the following:
(6) Investments in Affiliates
In March 2013, we acquired a minority equity investment in PizzaRev, a California-based restaurant concept that currently has three fast casual pizza restaurants in California. If financial thresholds are met, we have the obligation to make additional investments in PizzaRev. We also have the right to open company-owned locations in certain states. Investment in affiliates is included in other assets in our Consolidated Balance Sheets.
(7) Revolving Credit Facility
In February 2013, we entered into a three-year $100,000 unsecured revolving credit facility. A loan under the facility shall bear interest at a rate per annum equal to, at our election, either (i) LIBOR for an interest period of one month, reset daily, plus 0.875%, if our consolidated total leverage ratio is less than or equal to 0.50, or plus 1.125% if our total leverage ratio is greater than or equal to .51, or (ii) LIBOR for an interest period of one, two, three, six or twelve months, reset at the end of the selected interest period, plus 0.875%, if our consolidated total leverage ratio is less than or equal to 0.50, or plus 1.125% if our consolidated total leverage ratio is greater than or equal to .51. As of March 31, 2013, our outstanding balance on the facility was $5,000. Subsequent to quarter-end, the outstanding balance was paid in full.
There is a commitment fee on the average unused portion of the facility at a rate per annum equal to 0.15%, if our consolidated total leverage ratio is less than or equal to 0.50, or 0.20% if our consolidated total leverage ratio is greater than or equal to 0.51.
The Credit Agreement requires us to maintain (a) consolidated coverage ratio as of the end of each fiscal quarter at no less than 2.50 to 1.00, (b) consolidated total leverage ratio as of the end of each fiscal quarter at no more than 2.00 to 1.00 and (c) minimum EBITDA during any consecutive four-quarter period at no less than $100,000. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict the right of the Company and its subsidiaries to merge, to lease, sell or otherwise dispose of assets, to make investments and to grant liens on their assets.
(8) Stockholders’ Equity
(a) Stock Options
We have 5.4 million shares of common stock reserved for issuance under our Equity Incentive Plan (Plan) for our employees, officers, and directors. The exercise price for stock options issued under this plan is to be not less than the fair market value on the date of grant with respect to incentive and nonqualified stock options. Incentive stock options become exercisable in four equal installments from the date of the grant and have a contractual life of seven to ten years. Nonqualified stock options issued pursuant to the Plan have varying vesting periods from immediately to four years and have a contractual life of seven to ten years. Incentive stock options may be granted under this Plan until March 12, 2022. We issue new shares of common stock upon exercise of stock options. Option activity is summarized for the three months ended March 31, 2013 as follows:
The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of $87.54 as of the last business day of the quarter ended March 31, 2013, which would have been received by the optionees had all options been exercised on that date. As of March 31, 2013, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $1,026, which is expected to be recognized over a weighted average period of approximately 2.2 years. During the three-month periods ended March 31, 2013 and March 25, 2012, the total intrinsic value of stock options exercised was $602 and $754, respectively. No shares were granted or vested during the three-month periods ended March 31, 2013 or March 25, 2012.
The Plan has 1,594,742 shares available for grant as of March 31, 2013.
(b) Restricted Stock Units
Restricted stock units are granted annually under the Plan at the discretion of the Compensation Committee of our Board of Directors.
We grant restricted stock units subject to three-year cliff vesting and a cumulative three-year earnings target. The number of units which vest at the end of the three-year period is based on performance against the target. These restricted stock units are subject to forfeiture if they have not vested at the end of the three-year period. Stock-based compensation is recognized for the number of units expected to vest at the end of the period and is expensed beginning on the grant date through the end of the performance period.
For each grant, restricted stock units meeting the performance criteria will vest as of the end of the third fiscal year in the performance period, subject to a Plan specified maximum number of shares that may be issued to any individual in any year in settlement of restricted stock units. The distribution of vested restricted stock units as common stock typically occurs in March of the following year. The common stock is issued to participants net of the number of shares needed for the required minimum employee withholding taxes. We issue new shares of common stock upon the disbursement of restricted stock units. Restricted stock units are contingently issuable shares, and the activity for the first quarter of 2013 is as follows:
As of March 31, 2013, the total stock-based compensation expense related to nonvested awards not yet recognized was $5,714, which is expected to be recognized over a weighted average period of 1.5 years. No shares were granted or vested during the three-month periods ended March 31, 2013 and March 25, 2012. During the three-month periods ended March 31, 2013 and March 25, 2012, we recognized $599 and $976, respectively, of stock-based compensation expense related to restricted stock units.
(c) Employee Stock Purchase Plan
We have reserved 600,000 shares of common stock for issuance under our Employee Stock Purchase Plan (ESPP). The ESPP is available to substantially all employees subject to employment eligibility requirements. Participants may purchase our common stock at 85% of the beginning or ending closing price, whichever is lower, for each six-month period ending in May and November. During the first quarters of 2013 and 2012, we issued no shares of common stock under the plan. As of March 31, 2013, we had 247,877 shares available for future issuance under the ESPP.
(9) Earnings Per Share>
The following is a reconciliation of basic and fully diluted earnings per common share for the three-month periods ended March 31, 2013 and March 25, 2012:
The following is a summary of those securities outstanding at the end of the respective periods, which have been excluded from the fully diluted calculations because the effect on net earnings per common share would have been antidilutive or were performance-granted shares for which the performance criteria had not yet been met:
We are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2013, cash requirements, and our expected store openings and preopening costs. Such statements are forward-looking and speak only as of the date on which they are made. Actual results are subject to various risks and uncertainties including, but not limited to, those discussed in this Form 10-Q under Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2012 Form 10-K. Information included in this discussion and analysis includes commentary on company-owned and franchised restaurant units, restaurant sales, same-store sales, and average weekly sales volumes. Management believes such sales information is an important measure of our performance, and is useful in assessing consumer acceptance of the Buffalo Wild Wings® Grill & Bar concept and the overall health of the concept. Franchise information also provides an understanding of our revenues because franchise royalties and fees are based on the opening of franchised units and their sales. However, franchise sales and same-store sales information does not represent sales in accordance with U. S. generally accepted accounting principles (GAAP), should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP and may not be comparable to financial information as defined or used by other companies.
Critical Accounting Estimates
Our most critical accounting estimates, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, goodwill, vendor allowances, revenue recognition from franchise operations, self-insurance liabilities, and stock-based compensation. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012. There have been no changes to those policies during this period.
As of March 31, 2013, we owned and operated 397 company-owned and franchised an additional 514 Buffalo Wild Wings® Grill & Bar restaurants in North America. We believe that we will grow the Buffalo Wild Wings brand to about 1,700 locations in North America, continuing the strategy of developing both company-owned and franchised restaurants.
We believe we will open 60 company-owned and 45 franchised restaurants in 2013. With continued same-store sales momentum and moderating wing costs, and our disciplined management of labor, we are confident we will achieve 17% net earnings growth for 2013, equating to 25% on a 52-week basis. Our growth and success depend on several factors and trends. First, we will continue our focus on trends in company-owned and franchised same-store sales as an indicator of the continued acceptance of our concept by consumers. We also review the overall trend in average weekly sales as an indicator of our ability to increase the sales volume and, therefore, cash flow per location. We remain committed to high quality operations and guest experience.
Our revenue is generated by:
A second factor is our success in developing restaurants in new markets. There are inherent risks in opening new restaurants, especially in new markets, including the lack of experience, logistical support, and brand awareness. These factors may result in lower than anticipated sales and cash flow for restaurants in new markets along with higher preopening costs. We believe our focus on new restaurant opening procedures, along with our expanding North American presence, will help to mitigate the overall risk associated with opening restaurants in new markets.
Third, we continue to monitor and react to changes in our cost of goods sold. The cost of goods sold is difficult to predict, as it has ranged from 31.1% to 32.7% of restaurant sales per quarter in our 2012 fiscal year and year-to-date in 2013, mostly due to the price and yield fluctuations in chicken wings. We are focused on minimizing the impact of rising costs-per-wing, which includes both price increases and yield fluctuations. Our efforts include new purchasing strategies, menu price increases, and reduced food waste, as well as marketing promotions, menu additions, and menu changes that affect the percent that chicken wings represent in terms of total restaurant sales. We will continue to monitor the cost of chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants. Current month chicken wing prices are determined based on the average of the previous month’s spot rates.
We generate cash from the operation of company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the on-going operation of our company-owned restaurants in the consolidated statement of earnings under “Restaurant operating costs.” Our depreciation and amortization expense consists of depreciation related to assets used by our company-owned restaurants and amortization of reacquired franchise rights. Preopening costs are those costs associated with opening new company-owned restaurants and will vary quarterly based on the number of new locations opening and under construction. Loss on asset disposals and store closures expense is related to company-owned restaurants and includes the costs associated with closures of locations and normal asset retirements. General and administrative expenses are related to home office and field support provided to both company-owned restaurant and franchising operations.
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Both of the first quarters of 2013 and 2012 consisted of 13 weeks. The fiscal year ended December 30, 2012 was a 53-week year, with the fourth quarter having 14 weeks.
Quarterly Results of Operations
Our operating results for the periods indicated are expressed below as a percentage of total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales. The information for each three-month period is unaudited, and we have prepared it on the same basis as the audited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results.
Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in same-store sales, changes in commodity prices, the timing and number of new restaurant openings and related expenses, asset impairment charges, store closing charges, general economic conditions, stock-based compensation, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.
The number of company-owned and franchised restaurants open are as follows:
The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):
Increases in same-store sales are as follows (based on restaurants operating at least fifteen months):
The quarterly average prices paid per pound for chicken wings for company-owned restaurants are as follows:
Results of Operations for the Three Months Ended March 31, 2013 and March 25, 2012
Restaurant sales increased by $52.1 million, or 22.4%, to $284.4 million in 2013 from $232.3 million in 2012. The increase in restaurant sales was due to a $49.3 million increase associated with 17 company-owned restaurants that opened or were acquired in 2013 and the company-owned restaurants opened or acquired before 2013 that did not meet the criteria for same-store sales for all or part of the three-month period, and $2.8 million related to a 1.4% increase in same-store sales.
Franchise royalties and fees increased by $1.1 million, or 6.0%, to $19.9 million in 2013 from $18.8 million in 2012. The increase was primarily due to royalties related to additional sales at nine more franchised restaurants in operation at the end of the period compared to prior year. Same-store sales for franchised restaurants increased 2.2% in the first quarter of 2013.
Cost of sales increased by $20.9 million, or 29.0%, to $93.1 million in 2013 from $72.2 million in 2012 due primarily to more restaurants being operated in 2013. Cost of sales as a percentage of restaurant sales increased to 32.7% in 2013 from 31.1% in 2012, primarily due to higher chicken wing prices and a lower wing-per-pound yield. During the first quarter of 2013, the cost per traditional wing increased by 31.0% over the same period in 2012.
Labor expenses increased by $17.6 million, or 25.7%, to $85.8 million in 2013 from $68.3 million in 2012 due primarily to more restaurants being operated in 2013. Labor expenses as a percentage of restaurant sales increased to 30.2% in 2013 from 29.4% in 2012. Cost of labor as a percentage of restaurant sales increased primarily due to higher hourly labor costs related to the new guest experience business model partially offset by lower bonus expense.
Operating expenses increased by $8.3 million, or 25.3%, to $41.1 million in 2013 from $32.8 million in 2012 due primarily to more restaurants being operated in 2013. Operating expenses as a percentage of restaurant sales increased to 14.5% in 2013 from 14.1% in 2012. The increase in operating expenses as a percentage of restaurant sales is primarily due to higher repairs and maintenance and store-level marketing expense.
Occupancy expenses increased by $3.3 million, or 26.0%, to $16.1 million in 2013 from $12.8 million in 2012 due primarily to more restaurants being operated in 2013. Occupancy expenses as a percentage of restaurant sales increased to 5.7% in 2013 from 5.5% in 2012, primarily due to deleveraging rent costs with the lower same-store sales increase.
Depreciation and amortization increased by $4.6 million, or 29.7%, to $20.1 million in 2013 from $15.5 million in 2012. The increase was primarily due to the additional depreciation related to the 70 additional company-owned restaurants compared to the same period in 2012. Depreciation and amortization expense as a percentage of total revenue increased to 6.6% in 2013 from 6.2% in 2012, primarily due to additional amortization related to reacquired franchise rights and higher depreciation on company-owned buildings.
General and administrative expenses increased by $1.9 million, or 9.6%, to $21.3 million in 2013 from $19.4 million in 2012 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 7.0% in 2013 from 7.7% in 2012. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue decreased to 6.7% in 2013 from 7.2% in 2012, primarily due to lower cash incentive and travel-related expenses.
Preopening costs increased by $1.7 million, to $4.3 million in 2013 from $2.6 million in 2012. In 2013, we incurred costs of $3.1 million for 14 new company-owned restaurants opened in the first quarter of 2013 and costs of $1.1 million for restaurants that will open in the second quarter of 2013 or later. In 2012, we incurred costs of $1.8 million for 10 new company-owned restaurants opened in the first quarter of 2012 and costs of $779,000 for restaurants that opened in the second quarter of 2012 or later. Preopening costs per new restaurant averaged $285,000 in the first quarter of 2013, which is consistent with our anticipated average of $280,000 for fiscal year 2013. Preopening costs per new restaurant averaged $256,000 in the first quarter of 2012 due to the inclusion of two relocated restaurants, which have lower preopening costs.
Loss on asset disposals and store closures decreased by $166,000 to $571,000 in 2013 from $737,000 in 2012. The expense in 2013 represented the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2012 represented the closure costs for two relocated restaurants of $381,000 and the write-off of miscellaneous equipment and disposals due to remodels.
Investment income decreased by $65,000 to $345,000 in 2013 from $410,000 in 2012. The decrease was primarily due to lower balances in our municipal securities balances. Cash and marketable securities balances at the end of the first quarter totaled $14.8 million in 2013 compared to $71.5 million at the end of the first quarter of 2012.
Provision for income taxes decreased $3.1 million to $5.9 million in 2013 from $9.0 million in 2012. The effective tax rate as a percentage of income before taxes decreased to 26.5% in 2013 from 33.0% in 2012. The decrease in the effective tax rate was primarily due to the favorable impact of the American Taxpayer Relief Act of 2012 that was enacted this year. For 2013, our effective annual tax rate is estimated at 30.0% to 30.5%.
Liquidity and Capital Resources
Our primary liquidity and capital requirements have been for constructing, remodeling and maintaining our new and existing company-owned restaurants; working capital; acquisitions; and other general business needs. We fund these expenses, except for acquisitions and emerging brands, primarily with cash from operations. Depending on the size of the transaction, acquisitions or investments in emerging brands would generally be funded from cash balances or using our line of credit. The cash and marketable securities balance at March 31, 2013 was $14.8 million. We invest our cash balances in money market funds with the focus on protection of principal, adequate liquidity, and return on investment based on risk. Our marketable securities balance consists of mutual funds held for our deferred compensation plan.
For the three months ended March 31, 2013, net cash provided by operating activities was $27.8 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and an increase in income tax payable, partially offset by a decrease in accrued expenses and accounts payable. The increase in income tax payable was primarily due to timing of tax payments. The decrease in accrued expenses was primarily due to the timing of payroll and bonus payments. The decrease in accounts payable was due to timing of payments.
For the three months ended March 25, 2012, net cash provided by operating activities was $42.2 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and an increase in income tax payable and accrued expenses, partially offset by an increase in accounts receivable. The increase in income tax payable was primarily due to timing of tax payments. The increase in accrued expenses was primarily due to the timing of payroll payments. The increase in accounts receivable was due to higher credit card sales at the end of the quarter.
For the three months ended March 31, 2013 and March 25, 2012, net cash used in investing activities was $41.4 million and $27.5 million, respectively. Investing activities included purchases of property and equipment related to the additional company-owned restaurants and restaurants under construction in both periods. During the first three months of 2013, investing activities also included a minority investment in an emerging restaurant concept and the purchase of three franchised restaurants. During the first three months of 2013 and 2012, we opened 14 and 10 restaurants, respectively. In 2013, we expect capital expenditures of approximately $128.2 million for the cost of 60 new or relocated company-owned restaurants, $8.4 million for technology improvements on our restaurant and corporate systems, and $22.3 million for capital expenditures at our existing restaurants. In the first quarter of 2013, we received proceeds of $3.3 million as our marketable securities matured or were sold. In the first quarter of 2012, we purchased $19.7 million of marketable securities and received proceeds of $16.0 million as investments matured or were sold.
For the three months ended March 31, 2013 and March 25, 2012, net cash provided by (used in) financing activities was $492,000 and ($7.9 million), respectively. Net cash used in financing activities for 2013 resulted primarily from proceeds from our line of credit of $5.0 million, the exercise of stock options of $174,000, and the excess tax benefit from stock issuance of $131,000, offset by tax payments for restricted stock units of $4.8 million. Net cash used in financing activities for 2012 resulted primarily from tax payments for restricted stock units of $8.4 million, offset by proceeds from the exercise of stock options of $256,000 and the excess tax benefit from stock issuance of $259,000. No additional funding from the issuance of common stock (other than from the exercise of options and purchase of stock under the employee stock purchase plan) is anticipated for the remainder of 2013.
Our liquidity is impacted by minimum cash payment commitments resulting from operating lease obligations for our restaurants and our corporate offices. Lease terms are generally 10 to 15 years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds. We own the buildings in which 94 of our restaurants operate and therefore have a limited ability to enter into sale-leaseback transactions as a potential source of cash.
The following table presents a summary of our contractual operating lease obligations and commitments as of March 31, 2013:
We believe the cash flows from our operating activities and our balance of cash will be sufficient to fund our operations and building commitments and meet our obligations for the foreseeable future. Depending on the size of the transaction, acquisitions or investments in emerging brands would generally be funded from cash balances or using our line of credit. Our future cash outflows related to income tax uncertainties amounted to $905,000 as of March 31, 2013. These amounts are excluded from the contractual obligations table due to the high degree of uncertainty regarding the timing of these liabilities.
Off-Balance Sheet Arrangements
As of March 31, 2013, we had no off-balance sheet arrangements or transactions.
Risk Factors/Forward-Looking Statements
The foregoing discussion and other statements in this report contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Forward-looking statements are based on current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similar words or expressions. Our forward-looking statements generally relate to our growth strategy, financial results, sales efforts, franchise expectations, restaurant openings and related expense, and cash requirements. Although we believe there is reasonable basis for the forward-looking statements, our actual results could be materially different. While it is not possible to foresee all of the factors that may cause actual results to differ from our forward-looking statements, such factors include, among others, the risk factors that follow (some of which are discussed in greater detail in the risk factor section of our Annual Report on Form 10-K for the fiscal year ended December 30, 2012). Investors are cautioned that all forward-looking statements involve risks and uncertainties and speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to international market risk related to our cash and cash equivalents and marketable securities. We invest our excess cash in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. We invest with a strategy focused on principal preservation. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and marketable securities and the interest expense we pay on our line of credit, therefore, impact our cash flows and results of operations. We also have trading securities, which are held to generate returns that seek to offset changes in liabilities related to the equity market risk of our deferred compensation arrangements.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of municipal securities. We do not believe there is a significant risk of non-performance by these municipalities because of our investment policy restrictions as to acceptable investment vehicles.
The primary inflationary factors affecting our operations are food, labor, and restaurant operating costs. Substantial increases in these costs in any country that we operate in could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.
Commodity Price Risk
Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. We believe that almost all of our food and supplies are available from several sources, which helps to control food product and supply risks. We negotiate directly with independent suppliers for our supply of food and other products. Domestically, we use members of UniPro Food Services, Inc., a national cooperative of independent food distributors, to distribute these products from the suppliers to our restaurants. We have signed a new distribution contract with McLane Company, Inc. that covers food, paper, and non-food products and began transitioning locations to the new provider in December 2012 with full rollout expected to be completed by June 2013. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. The primary food product used by company-owned and franchised restaurants is chicken wings. We work to counteract the effect of the volatility of chicken wing prices and wing-per-pound yield, which can significantly change our cost of sales and cash flow, with the introduction of new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu changes and price increases. We also explore purchasing strategies to lessen the severity of cost and yield fluctuations. Current month chicken wing prices are determined based on the average of the previous month’s spot rates. Chicken wings accounted for approximately 28.8% and 25.7% of our cost of sales in the first quarters of 2013 and 2012, respectively, with a quarterly average price per pound of $2.10 and $1.92, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, franchise-related claims, dram shop claims, employment-related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. To date, none of these types of litigation, most of which are typically covered by insurance, has had a material effect on us. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could adversely affect our financial condition or results of operations.
See Exhibit Index following the signature page of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED March 31, 2013