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Texas Roadhouse 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 28, 2005

 

OR

 

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

 

For the transition period from                            to

 

Commission File Number 000-50972

 

Texas Roadhouse, Inc.

(Exact name of registrant specified in its charter)

 

Delaware

 

20-1083890

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification Number)

 

6040 Dutchmans Lane, Suite 400
Louisville, Kentucky 40205

(Address of principal executive offices) (Zip Code)

 

(502) 426-9984

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes   o  No  ý.

 

The number of shares of Class A and Class B common stock outstanding were 32,070,402 and 2,632,688, respectively, on August 5, 2005.

 

 



 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1 – Financial Statements – Texas Roadhouse, Inc. and Subsidiaries

 

 

Condensed Consolidated Balance Sheets – June 28, 2005 and December 28, 2004

 

 

Condensed Consolidated Statements of Income – For the Thirteen and Twenty-six Weeks Ended June 28, 2005 and June 29, 2004

 

 

Condensed Consolidated Statements of Cash Flows – For the Twenty-six Weeks Ended June 28, 2005 and June 29, 2004

 

 

Notes to Condensed Consolidated Financial Statements

 

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

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

Item 4 – Controls and Procedures

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1 – Legal Proceedings

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3 – Defaults Upon Senior Securities

 

Item 4 – Submissions of Matters to a Vote of Security Holders

 

Item 5 – Other Information

 

Item 6 – Exhibits

 

 

 

Signatures

 

 

2



 

PART I – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

Texas Roadhouse, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

June 28, 2005

 

December 28, 2004

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,481

 

$

46,235

 

Receivables, net of allowance for doubtful accounts of $24

 

6,835

 

6,139

 

Inventories

 

5,687

 

5,169

 

Prepaid expenses

 

1,413

 

2,652

 

Deferred tax asset

 

600

 

499

 

Other current assets

 

1,268

 

144

 

Total current assets

 

25,284

 

60,838

 

Property and equipment, net

 

181,238

 

162,991

 

Goodwill

 

50,753

 

50,753

 

Other assets

 

1,292

 

1,272

 

Total assets

 

$

258,567

 

$

275,854

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Distributions payable

 

$

 

$

31,176

 

Current maturities of long-term debt

 

476

 

525

 

Current maturities of obligations under capital leases

 

198

 

198

 

Accounts payable

 

11,519

 

12,093

 

Deferred revenue – gift certificates

 

7,049

 

14,676

 

Accrued wages

 

7,938

 

7,285

 

Income taxes payable

 

5,287

 

544

 

Accrued taxes and licenses

 

1,564

 

4,275

 

Other accrued liabilities

 

4,487

 

3,647

 

Total current liabilities

 

38,518

 

74,419

 

Long-term debt, excluding current maturities

 

10,511

 

12,760

 

Obligations under capital leases, excluding current maturities

 

699

 

771

 

Stock option deposits

 

2,885

 

2,617

 

Deferred rent

 

4,115

 

3,781

 

Deferred tax liability

 

5,150

 

5,100

 

Other liabilities

 

2,812

 

2,496

 

Total liabilities

 

64,690

 

101,944

 

Minority interest in consolidated subsidiaries

 

678

 

699

 

Stockholders’ equity

 

 

 

 

 

Preferred stock ($0.001 par value, 1,000,000 shares authorized; no shares outstanding or issued)

 

 

 

Common stock, Class A, ($0.001 par value, 100,000,000 shares authorized, 31,679,481 and 30,928,340 shares issued and outstanding at June 28, 2005 and December 28, 2004, respectively)

 

32

 

31

 

Common stock, Class B, ($0.001 par value, 8,000,000 shares authorized, 2,632,688 shares issued and outstanding)

 

3

 

3

 

Additional paid in capital

 

176,800

 

173,654

 

Retained earnings (loss)

 

16,364

 

(584

)

Accumulated other comprehensive gain

 

 

107

 

Total stockholders’ equity

 

193,199

 

173,211

 

Total liabilities and stockholders’ equity

 

$

258,567

 

$

275,854

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

Texas Roadhouse, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share data)

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 28,
2005

 

June 29,
2004

 

June 28,
2005

 

June 29,
2004

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

113,108

 

$

87,782

 

$

221,715

 

$

169,675

 

Franchise royalties and fees

 

2,649

 

2,137

 

5,109

 

4,142

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

115,757

 

89,919

 

226,824

 

173,817

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Restaurant operating costs:

 

 

 

 

 

 

 

 

 

Cost of sales

 

39,906

 

30,806

 

77,940

 

58,979

 

Labor

 

30,473

 

24,303

 

59,716

 

46,578

 

Rent

 

2,089

 

1,730

 

4,126

 

3,353

 

Other operating

 

18,109

 

14,121

 

35,492

 

27,455

 

Pre-opening

 

1,135

 

1,250

 

2,170

 

2,146

 

Depreciation and amortization

 

3,475

 

2,567

 

6,723

 

4,916

 

General and administrative

 

7,886

 

5,853

 

14,196

 

10,422

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

103,073

 

80,630

 

200,363

 

153,849

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

12,684

 

9,289

 

26,461

 

19,968

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

112

 

1,012

 

69

 

2,039

 

Minority interest

 

194

 

1,898

 

221

 

3,857

 

Equity (loss) income from investments in unconsolidated affiliates

 

(30

)

26

 

22

 

70

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

12,348

 

6,405

 

26,193

 

14,142

 

Provision for income taxes

 

4,358

 

 

9,245

 

 

Net income

 

$

7,990

 

$

6,405

 

$

16,948

 

$

14,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

 

 

Pro forma

 

Historical net income

 

 

 

$

6,405

 

 

 

$

14,142

 

Pro forma provision for income taxes

 

 

 

2,258

 

 

 

4,989

 

 

 

 

 

 

 

 

 

 

 

Net income adjusted for pro forma provision for income taxes

 

 

 

$

4,147

 

 

 

$

9,153

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.17

 

$

0.50

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.22

 

$

0.16

 

$

0.47

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

33,855

 

23,788

 

33,760

 

23,757

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

36,314

 

25,796

 

36,198

 

25,765

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



 

Texas Roadhouse, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)

 

 

 

26 Weeks Ended

 

 

 

June 28, 2005

 

June 29, 2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

16,948

 

$

14,142

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,723

 

4,916

 

Loss on disposal of assets

 

107

 

72

 

Noncash compensation expense

 

 

632

 

Minority interest

 

221

 

3,857

 

Equity income from investments in unconsolidated affiliates

 

(22

)

(70

)

Distributions received from investments in unconsolidated affiliates

 

139

 

71

 

Provision for doubtful accounts

 

 

5

 

Changes in operating working capital:

 

 

 

 

 

Receivables

 

(696

)

5,423

 

Inventories

 

(518

)

(669

)

Prepaid expenses and other current assets

 

1,239

 

147

 

Other assets

 

(137

)

(18

)

Accounts payable

 

(574

)

1,885

 

Deferred revenue—gift certificates

 

(7,627

)

(4,219

)

Accrued wages

 

653

 

(1,682

)

Income taxes payable

 

4,692

 

 

Accrued taxes and licenses

 

(2,711

)

501

 

Accrued other liabilities

 

840

 

(172

)

Deferred rent

 

334

 

143

 

Other liabilities

 

316

 

550

 

 

 

 

 

 

 

Net cash provided by operating activities

 

19,927

 

25,514

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures—property and equipment

 

(25,077

)

(21,792

)

Proceeds from sale of property and equipment

 

 

2

 

 

 

 

 

 

 

Net cash used in investing activities

 

(25,077

)

(21,790

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from short term bank revolver

 

 

8,000

 

Proceeds from issuance of long-term debt

 

 

7,075

 

Proceeds from minority interest contributions and other

 

70

 

 

Repayment of stock option deposits

 

(35

)

(185

)

Proceeds from stock option deposits

 

552

 

375

 

Principal payments on long-term debt

 

(2,298

)

(5,374

)

Principal payments on capital lease obligations

 

(72

)

(83

)

Proceeds from exercise of stock options

 

1,671

 

694

 

Payment of initial public offering expenses

 

(41

)

 

Distributions to minority interest holders

 

(275

)

(3,447

)

Distributions to members

 

(31,176

)

(8,682

)

 

 

 

 

 

 

Net cash used in financing activities

 

(31,604

)

(1,627

)

 

 

 

 

 

 

Net (decrease) increase in cash

 

(36,754

)

2,097

 

Cash and cash equivalents—beginning of period

 

46,235

 

5,728

 

Cash and cash equivalents—end of period

 

$

9,481

 

$

7,825

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Interest, net of amounts capitalized

 

$

421

 

$

2,042

 

Income taxes

 

$

4,568

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



 

Texas Roadhouse, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Tabular amounts in thousands, except per share data)

 

(1)   Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Texas Roadhouse, Inc. (the “Company”), its wholly-owned subsidiaries, Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse Development Corporation (“TRDC”), and Texas Roadhouse Management Corp., for the 13 and 26 weeks ended June 28, 2005 and June 29, 2004.  The Company and its wholly-owned subsidiaries operate Texas Roadhouse restaurants. Holdings also provides supervisory and administrative services for certain other license and franchise restaurants. TRDC sells franchise rights and collects the franchise royalties and fees.  Texas Roadhouse Management Corp. provides management services to Holdings, TRDC and certain franchise and license restaurants.

 

Prior to October 8, 2004, the condensed consolidated financial statements included the accounts of Holdings and its wholly-owned and majority-owned subsidiaries, TRDC, WKT Restaurant Corp. (“WKT”), and Texas Roadhouse Management Corp. and six license and three franchise restaurants, all of which were under common control by one controlling shareholder.  The controlling shareholder had the unilateral ability to implement major operating and financial policies for the entities.  On October 8, 2004, Holdings and its wholly-owned and majority-owned subsidiaries completed a reorganization and initial public offering.  In connection with the reorganization and public offering, Holdings became a subsidiary of the Company.

 

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the period to prepare these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill, and obligations related to workers’ compensation, general liability and property insurance. Actual results could differ from those estimates.

 

In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, the results of operations and cash flows of the Company for such periods.  The financial statements have been prepared in accordance with U.S. generally accepted accounting principles, except that certain information and footnotes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  Operating results for the 13 and 26 week periods ended June 28, 2005 are not necessarily indicative of the results that may be expected for the year ending December 27, 2005.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s report on Form 10-K for the year ended December 28, 2004.

 

Certain prior year amounts have been reclassified to conform with the current year presentation.  These reclassifications had no effect on previously reported net income.

 

(2)   Stock-Based Employee Compensation

 

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”) and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

 

6



 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 28, 2005

 

June 29, 2004

 

June 28, 2005

 

June 29, 2004

 

Net income, 2004 as adjusted for pro forma provision for income taxes

 

$

7,990

 

$

4,147

 

$

16,948

 

$

9,153

 

Deduct total stock-based-employee compensation expense determined under fair-value-based method for all awards, net of taxes

 

(1,029

)

(80

)

(1,687

)

(202

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

6,961

 

$

4,067

 

$

15,261

 

$

8,951

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic – as reported

 

$

0.24

 

$

0.17

 

$

0.50

 

$

0.39

 

Basic – pro forma

 

$

0.21

 

$

0.17

 

$

0.45

 

$

0.38

 

Diluted – as reported

 

$

0.22

 

$

0.16

 

$

0.47

 

$

0.36

 

Diluted – pro forma

 

$

0.19

 

$

0.16

 

$

0.42

 

$

0.35

 

 

(3)   Long-term Debt

 

Long-term debt consisted of the following:

 

 

 

June 28, 2005

 

December 28, 2004

 

Installment loans, due 2005-2026

 

$

6,987

 

$

7,285

 

Revolver, due October 2009

 

4,000

 

6,000

 

 

 

10,987

 

13,285

 

Less current maturities

 

476

 

525

 

 

 

$

10,511

 

$

12,760

 

 

In October 2004, the Company completed a $150.0 million, five-year revolving credit facility which replaced a credit facility dated July 2003.  The terms of this credit facility require the Company to pay interest on outstanding borrowings at LIBOR plus a margin of 0.75% to 1.50%, plus a commitment fee of 0.15% to 0.25% per year on any unused portion of the facility, in both cases, depending on the Company’s leverage ratio.  The facility prohibits the Company from incurring additional debt outside the facility with certain exceptions, including equipment financing up to $3.0 million, unsecured debt up to $500,000 and up to $20.0 million of debt incurred by majority-owned companies formed to open new restaurants. The facility also prohibits the declaration or payment of cash dividends on the Company’s stock and requires W. Kent Taylor to maintain beneficial ownership of at least 20% of the voting power of the Company’s stock. Additionally, the lenders’ obligation to extend credit under the facility depends upon maintaining certain financial covenants, including a minimum fixed charge coverage ratio of 1.50 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  The credit facility is secured by a pledge of our ownership interests in all subsidiaries. The weighted average interest rate for the revolver at June 28, 2005 was 3.06%.  At June 28, 2005, the Company had $4.0 million of borrowings outstanding under its credit facility and $144.2 million of availability net of $1.8 million of outstanding letters of credit.  In addition, the Company had various other notes payable totaling $7.0 million with interest rates ranging from 5.65% to 10.80%.  The majority of these notes related to the financing of specific restaurants.  The Company’s total weighted average effective interest rate at June 28, 2005 was 6.93%.

 

(4)   Recently Issued Financial Accounting Standards

 

In October 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination, (“EITF No. 04-1”). EITF No. 04-1 requires that a business combination between two parties that have a preexisting relationship be evaluated to determine if a settlement of a preexisting relationship exists. EITF No. 04-1 also requires that certain reacquired rights (including the rights to the acquirer’s trade name under a franchise agreement) be recognized as intangible assets apart from goodwill. However, if a contract giving rise to the reacquired rights includes terms that are favorable or unfavorable when compared to pricing for current market transactions for the same or similar items, EITF No. 04-1 requires that a settlement gain or loss should be measured as the lesser of a) the amount by which the contract is favorable or unfavorable under market terms from the perspective of the acquirer or b) the stated settlement provisions of the contract available to the counterparty to which the contract is unfavorable.

 

EITF No. 04-1 was effective prospectively for business combinations consummated in reporting periods beginning after October 13, 2004 (fiscal year beginning December 29, 2004 for the Company). EITF No. 04-1 will apply to acquisitions of restaurants the Company may make from our franchisees or licensees. The Company currently attempts to have its franchisees or licensees enter into standard franchise or license agreements when renewing or entering into a new agreement. However, in certain instances franchisees or licensees have existing agreements that possess terms that differ from the Company’s current standard agreements. If in the future the Company were to acquire a franchisee or licensee with such an existing agreement, the Company would be required to record a

 

7



 

settlement gain or loss at the date of acquisition. The amount and timing of any such gains or losses the Company might record is dependent upon which franchisees or licensees the Company might acquire and when they are acquired. Accordingly, any impact cannot be currently determined.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, supercedes APB No. 25 and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. The provisions of SFAS No. 123R are similar to those of SFAS No. 123, however, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option-pricing models (e.g. Black Scholes or binomial models) and assumptions that appropriately reflect the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of the awards that actually vest.

 

The Company will be required to choose between the modified-prospective and modified-retrospective transition alternatives in adopting SFAS No. 123R. Under the modified-prospective transition method, compensation cost will be recognized in financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. The Company will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS No. 123. Under the modified-retrospective transition method, compensation cost will be recognized in a manner consistent with the modified-prospective method, however, prior period financial statements will also be restated by recognizing compensation cost as previously reported in the proforma disclosures under SFAS No. 123. The restatement provisions can be applied to either a) all periods presented or b) beginning of the fiscal year in which SFAS No. 123R is adopted.

 

On April 15, 2005, the SEC announced the deferral of the effective date of SFAS No. 123R for calendar year companies until the beginning of the first fiscal year beginning after June 15, 2005 (the year beginning December 28, 2005 for the Company).  The Company is in the process of evaluating the use of certain option-pricing models as well as the assumptions to be used in such models. When such evaluation is complete, we will determine the transition method to use, the timing of adoption and the impact any change in valuation models might have.

 

(5)   Commitments and Contingencies

 

The estimated cost of completing capital project commitments at June 28, 2005 and June 29, 2004 was approximately $31.5 million and $36.6 million, respectively.

 

The Company entered into real estate lease agreements for franchise restaurants located in Everett, MA and Longmont, CO before granting franchise rights for those restaurants. The Company has subsequently assigned the leases to the franchisees, but remains contingently liable if a franchisee defaults under the terms of a lease.  The Longmont lease was assigned in October 2003 and expires in May 2014, while the Everett lease was assigned in September 2002 and expires in February 2018. As the fair value of the guarantees was not considered significant, no liability was recorded.

 

The Company is involved in various claims and legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated results of operations, financial position or liquidity.

 

(6)   Noncash Compensation Expense

 

Prior to October 8, 2004, some of the Company’s executive officers earned compensation at rates significantly below market levels, and the Company paid no salary or bonus compensation to W. Kent Taylor, the Company’s founder and chairman. General and administrative expense for the 13 weeks and 26 weeks ended June 29, 2004 includes an adjustment of $0.3 million and $0.6 million to record the difference between the actual salary and bonus compensation paid to these officers and the Company’s estimate of the fair market value, based on industry analysis and competitive benchmarking, of the services rendered by these officers.

 

(7)   Stock Split

 

On September 20, 2004, the Company declared a 1.1875-for-one stock split of the Company’s Class A and Class B common stock to stockholders of record immediately prior to the Company’s initial public offering. All share and per share information included in the accompanying condensed consolidated financial statements for all periods presented have been adjusted to retroactively reflect the stock split.

 

(8)   Related Party Transactions

 

Prior to October 8, 2004, W. Kent Taylor owned a substantial interest in Buffalo Construction, Inc., a restaurant construction business which provides services to the Company and other restaurant companies. The Company paid Buffalo Construction, Inc. amounts

 

8



 

totaling $4.5 million and $9.8 million for the 13 and 26 weeks ended June 29, 2004, respectively.  In October 2004, W. Kent Taylor sold his interest in Buffalo Construction, Inc.  Mr. Taylor received a promissory note in the amount of $1.5 million from the purchaser of Buffalo Construction, Inc. in partial consideration of the purchase.

 

The Longview, Texas restaurant, which was acquired by the Company in connection with the completion of the initial public offering, leases the land and restaurant building from an entity controlled by Steven L. Ortiz, the Company’s Chief Operating Officer. The lease is for 15 years and will terminate in November 2014. The lease can be renewed for two additional periods of five years each. Rent is approximately $16,000 per month and will increase by 5% on each of the 6th and 11th anniversary dates of the lease. The lease can be terminated if the tenant fails to pay the rent on a timely basis, fails to maintain the insurance specified in the lease, fails to maintain the building or property or becomes insolvent. Total rent payments were approximately $49,000 and $47,000 for the 13 weeks ended June 28, 2005 and June 29, 2004, respectively.  For the 26 weeks ended June 28, 2005 and June 29, 2004, rent payments were approximately $0.1 million.

 

The Elizabethtown, Kentucky restaurant is currently leased from an entity owned by W. Kent Taylor and three other stockholders. The lease is for 10 years and will terminate on March 31, 2007. The lease can be renewed for three additional periods of five years each. Rent throughout the term is approximately $12,000 per month. The lease can be terminated if the tenant fails to pay rent on a timely basis, fails to maintain insurance, abandons the property or becomes insolvent. Rent expense for this restaurant was approximately $37,000 for the 13 weeks ended June 28, 2005 and June 29, 2004.  For the 26 weeks ended June 28, 2005 and June 29, 2004, rent expense was approximately $73,000 and $72,000, respectively.

 

The Company had 13 and 11 license and franchise restaurants owned in whole or part by certain officers, directors and 5% stockholders of the Company at June 28, 2005 and June 29, 2004, respectively. These entities paid the Company fees of approximately $0.5 million and $0.4 million during the 13 weeks ended June 28, 2005 and June 29, 2004, respectively.  For the 26 weeks ended June 28, 2005 and June 29, 2004, these entities paid the Company fees of approximately $0.8 million and $0.7 million, respectively.  These entities are not consolidated in the Company’s results.

 

The Company employs Juli Miller Hart, the wife of G.J. Hart, the Company’s Chief Executive Officer, as Director of Public Relations. Ms. Hart reports to W. Kent Taylor who conducts her performance reviews and determines her compensation.

 

WKT, which was owned by W. Kent Taylor, received royalties of approximately $0.5 million and $1.3 million for the 13 and 26 weeks ended June 29, 2004, respectively, that it was entitled to receive as consideration for its contribution of the Texas Roadhouse operating system and concept to Holdings.  In May 2004, WKT merged into and with the Company.  After the completion of the initial public offering, the Company no longer receives such royalties.

 

John D. Rhodes, a stockholder, is a director and substantial stockholder of Confluent Inc., which provided certain business intelligence services to the Company through February 2004 for which it was paid an aggregate of $91,000. Services included generating marketing analysis using their proprietary software program and data provided by the Company.  After completion of the corporate reorganization and initial public offering on October 8, 2004, Dr. Rhodes is no longer a 5% stockholder of the Company.

 

(9)   Pro forma Adjustments

 

In connection with the reorganization as a “C” corporation, a pro forma income tax provision has been calculated as if the Company were taxable at an estimated combined effective income tax rate of 35.3% for the 13 and 26 weeks ended June 28, 2004 and included in the accompanying pro forma provision for income tax.

 

9



 

(10)   Earnings Per Share

 

The share and net income per share data for all periods presented are based on the historical weighted average shares outstanding.  The diluted earnings per share calculations show the effect of the weighted average stock options outstanding from the Company’s stock option plan. The 2004 net income per share data reflects a pro forma income tax provision.

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 28, 2005

 

June 29, 2004

 

June 28, 2005

 

June 29, 2004

 

Net income, 2004 as adjusted for pro forma income taxes

 

$

7,990

 

$

4,147

 

$

16,948

 

$

9,153

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

33,855

 

23,788

 

33,760

 

23,757

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

0.24

 

$

0.17

 

$

0.50

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

33,855

 

23,788

 

33,760

 

23,757

 

Dilutive effect of stock options

 

2,459

 

2,008

 

2,438

 

2,008

 

Shares – diluted

 

36,314

 

25,796

 

36,198

 

25,765

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

0.22

 

$

0.16

 

$

0.47

 

$

0.36

 

 

For the 13 and 26 weeks ended June 28, 2005 and June 29, 2004, all unexercised stock options were included in the computation of diluted EPS because their exercise prices were less than the average market price of our common stock during the quarter.  The Company issued 184,431 stock options at $29.07 per share and 378,300 stock options at a weighted average grant price of $28.78 during the thirteen and twenty-six weeks ended June 28, 2005, respectively.  Additionally, 556,987 and 751,461 shares were exercised in the thirteen and twenty-six weeks ended June 28, 2005, respectively.  The proceeds for the exercise price related to stock option exercises of 386,920 shares of Class A common stock that were sold in the follow-on offering discussed below were not received until July 2005 and as such are reflected in other current assets in the accompanying condensed consolidated balance sheet.

 

(11)   Subsequent Events

 

On July 5, 2005, the Company sold 350,000 shares as part of a follow-on Class A common stock offering and received net offering proceeds of $11.6 million, net of $0.6 million of offering expenses.  In conjunction with the offering, the Company paid off $4.0 million of borrowings under its credit facility, with the remaining proceeds intended to be used to fund development of new restaurants and for general corporate purposes.

 

10



 

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

 

OVERVIEW

 

Texas Roadhouse is a growing, moderately priced, full-service restaurant chain. Our founder and chairman, W. Kent Taylor, started the business in 1993. Our mission statement is “Legendary Food, Legendary Service.” Our operating strategy is designed to position each of our restaurants as the local hometown destination for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of June 28, 2005, 204 Texas Roadhouse restaurants were operating in 37 states, including:

 

  113 “company restaurants,” of which 110 were wholly-owned and three were majority-owned.  The results of operations of company restaurants are included in our consolidated operating results. The portion of income attributable to minority interests in company restaurants that are not wholly-owned is reflected in the line item entitled “Minority interest” in our condensed consolidated statements of income.

 

  91 “franchise restaurants,” of which 87 were franchise restaurants and four were license restaurants. We have a 10.0% ownership interest in three franchise restaurants, a 5.0% ownership interest in 13 franchise restaurants, and a 1.0% ownership in one franchise restaurant. The income derived from our minority interests in these franchise restaurants is reported in the line item entitled “Equity (loss) income from investments in unconsolidated affiliates” in our condensed consolidated statements of income. Additionally, we provide various management services to 17 franchise restaurants.

 

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

 

Presentation of Financial and Operating Data

 

Through the closing of our reorganization and initial public offering on October 8, 2004, we conducted the Texas Roadhouse restaurant business through:

 

                                          Texas Roadhouse Holdings LLC and its wholly-owned restaurants and 22 majority-owned restaurants;

                                          Texas Roadhouse Development Corporation, holding the rights to franchise Texas Roadhouse restaurants;

                                          Texas Roadhouse Management Corp., providing management services to Texas Roadhouse Holdings LLC, Texas Roadhouse Development Corporation and certain license and franchise restaurants; and

                                          nine controlled franchise restaurants;

 

all of which were entities under the common control of W. Kent Taylor, our founder and chairman. Our consolidated historical financial statements and financial and operating data reflect the consolidated operations and financial position of Texas Roadhouse Holdings LLC and the above affiliated entities.

 

Since the closing of our reorganization and initial public offering on October 8, 2004, we conduct the Texas Roadhouse restaurant business through Texas Roadhouse, Inc.

 

Throughout this report, the 13 weeks ended June 28, 2005 and June 29, 2004 are referred to as Q2 2005 and Q2 2004, respectively, and the 26 weeks ended June 28, 2005 and June 29, 2004 are referred as 2005 YTD and 2004 YTD, respectively.

 

Corporate Reorganization and Initial Public Offering

 

In connection with our reorganization and initial public offering on October 8, 2004 we:

 

                  Became a “C” corporation through the combination of our operations into a new holding company, Texas Roadhouse, Inc.;

                  Issued an aggregate of 21,257,779 shares of Class A common stock and 2,632,688 shares of Class B common stock in the combination of our operations under Texas Roadhouse, Inc.;

                  Issued an aggregate of 3,089,080 shares of Class A common stock to acquire the remaining equity interests in Texas Roadhouse Development Corporation and all 31 of our majority-owned or controlled company restaurants (including the remaining equity interests in the 9 controlled franchise restaurants), and all of the equity interests in one franchise restaurant;

                  Issued and sold 6,581,481 new shares at $17.50 per share, raising approximately $105.1 million after underwriting discounts and transactions costs;

                  Repaid $68.9 million of indebtedness on our then existing credit facility with the proceeds raised in the public offering;

                  Recorded distributions payable of $31.2 million to the equity holders of Texas Roadhouse Holdings LLC in redemption of its preferred shares relating to its income for the periods prior to October 8, 2004.

 

11



 

The reorganization has impacted our financial position and results of operations as follows:

 

                  First, unlike Texas Roadhouse Holdings LLC, Texas Roadhouse, Inc., as a “C” corporation, is subject to state and federal income tax;

                  Second, upon becoming a “C” corporation, we recorded a cumulative net deferred tax liability and a corresponding charge to our provision for income taxes of approximately $5.0 million; and,

                  Third, as a result of acquiring all of the remaining interests in our majority-owned or controlled restaurants and Texas Roadhouse Development Corporation, all but three of our company restaurants are wholly-owned by us. The provision for the minority interest related to the acquired entities has been eliminated from our financial statements.

 

Long-Term Strategies to Grow Earnings Per Share

 

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

 

Expanding Our Restaurant Base.   We will continue to evaluate opportunities to develop Texas Roadhouse restaurants in existing and new markets. We will remain focused primarily on mid-sized markets where we believe there exists a significant demand for our restaurants because of population size, income levels and the presence of shopping and entertainment centers and a significant employment base.

 

We may, at our discretion, add franchise restaurants primarily with franchisees who have demonstrated prior success with the Texas Roadhouse or other restaurant concepts and in markets in which the franchisee demonstrates superior knowledge of the demographics and restaurant operating conditions.

 

Improving Restaurant Level Profitability.   We plan to increase restaurant level profitability through a combination of increased comparable restaurant sales and operating cost management.

 

Leveraging Our Scalable Infrastructure.   Over the past several years, we have made significant investments in our infrastructure, including information systems, real estate, human resources, legal, marketing and operations. As a result, we believe that our general and administrative costs will increase at a slower growth rate than our revenue.

 

Key Measures We Use To Evaluate Our Company

 

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

 

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

 

Comparable Restaurant Sales Growth.   Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the later fiscal period. Comparable restaurant sales growth can be generated by an increase in guest traffic counts or by increases in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.

 

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

 

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

 

Other Key Definitions

 

Restaurant Sales.   Restaurant sales include gross food and beverage sales, net of promotions and discounts.

 

Franchise Royalties and Fees.   Franchisees typically pay a $40,000 initial franchise fee for each new restaurant. Franchise royalties consist of royalties in the amount of 2.0% to 4.0% of gross sales paid to us by our franchisees.

 

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

 

12



 

Restaurant Labor Expenses.   Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit sharing incentive compensation expenses earned by our managing and market partners. These profit sharing expenses are reflected in restaurant other operating expenses.

 

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

 

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

 

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

 

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

 

General and Administrative Expenses.   General and administrative expenses (“G&A”) is comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth. Supervision and accounting fees received from certain franchise restaurants and license restaurants are offset against general and administrative expenses.

 

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

 

Minority Interest.   Our consolidated subsidiaries at June 28, 2005 included three majority-owned or controlled restaurants.  Our consolidated subsidiaries at June 29, 2004 included 31 majority-owned or controlled restaurants and Texas Roadhouse Development Corporation. Minority interest represents the portion of income attributable to the other owners of the majority-owned or controlled restaurants and Texas Roadhouse Development Corporation.

 

Equity (Loss) Income from Investments in Unconsolidated Affiliates.   We own a 10.0% equity interest in three franchise restaurants, a 5.0% interest in 13 franchise restaurants, and a 1.0% equity interest in one franchise restaurant, all of which were open and operating at June 28, 2005. Equity (loss) income from investments in unconsolidated affiliates represents our percentage share of net income (loss) earned by these unconsolidated affiliates.

 

13



 

Results of Operations

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 28, 2005

 

June 29, 2004

 

June 28, 2005

 

June 29, 2004

 

($ in thousands)

 

$

 

%

 

$

 

%

 

$

 

%

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

113,108

 

97.7

 

87,782

 

97.6

 

221,715

 

97.7

 

169,675

 

97.6

 

Franchise royalties and fees

 

2,649

 

2.3

 

2,137

 

2.4

 

5,109

 

2.3

 

4,142

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

115,757

 

100.0

 

89,919

 

100.0

 

226,824

 

100.0

 

173,817

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As a percentage of restaurant sales)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

39,906

 

35.3

 

30,806

 

35.1

 

77,940

 

35.2

 

58,979

 

34.8

 

Labor

 

30,473

 

26.9

 

24,303

 

27.7

 

59,716

 

26.9

 

46,578

 

27.5

 

Rent

 

2,089

 

1.8

 

1,730

 

2.0

 

4,126

 

1.9

 

3,353

 

2.0

 

Other operating

 

18,109

 

16.0

 

14,121

 

16.1

 

35,492

 

16.0

 

27,455

 

16.2

 

(As a percentage of total revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening

 

1,135

 

1.0

 

1,250

 

1.4

 

2,170

 

1.0

 

2,146

 

1.2

 

Depreciation and amortization

 

3,475

 

3.0

 

2,567

 

2.9

 

6,723

 

3.0

 

4,916

 

2.8

 

General and administrative

 

7,886

 

6.8

 

5,853

 

6.5

 

14,196

 

6.3

 

10,422

 

6.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

103,073

 

89.0

 

80,630

 

89.7

 

200,363

 

88.3

 

153,849

 

88.5

 

Income from operations

 

12,684

 

11.0

 

9,289

 

10.3

 

26,461

 

11.7

 

19,968

 

11.5

 

Interest expense, net

 

112

 

0.1

 

1,012

 

1.1

 

69

 

NM

 

2,039

 

1.2

 

Minority interest

 

194

 

0.2

 

1,898

 

2.1

 

221

 

0.1

 

3,857

 

2.2

 

Equity (loss) income from investments in unconsolidated affiliates

 

(30

)

NM

 

26

 

NM

 

22

 

NM

 

70

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

12,348

 

10.7

 

6,405

 

7.1

 

26,193

 

11.5

 

14,142

 

8.1

 

Provision for income taxes

 

4,358

 

3.8

 

 

 

9,245

 

4.1

 

 

 

Net income

 

7,990

 

6.9

 

6,405

 

7.1

 

16,948

 

7.5

 

14,142

 

8.1

 

 

NM - Not meaningful

 

Restaurant Unit Activity

 

 

 

Company

 

Franchise

 

Total

 

Balance at December 28, 2004

 

107

 

86

 

193

 

Openings

 

4

 

1

 

5

 

Acquisitions (Dispositions)

 

 

 

 

Closures

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 29, 2005

 

111

 

87

 

198

 

Openings

 

2

 

4

 

6

 

Acquisitions (Dispositions)

 

 

 

 

Closures

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 28, 2005

 

113

 

91

 

204

 

 

Q2 2005 (13 weeks) Compared to Q2 2004 (13 weeks) and 2005 YTD (26 weeks) Compared to 2004 YTD (26 weeks)

 

Restaurant Sales.   Restaurant sales increased by 28.9% in Q2 2005 as compared to Q2 2004 and by 30.7% in 2005 YTD as compared to 2004 YTD. This increase was primarily attributable to the opening of new restaurants and comparable restaurant sales growth. The following table summarizes additional factors that influenced the changes in restaurant sales at company restaurants.

 

 

 

Q2 2005

 

Q2 2004

 

2005 YTD

 

2004 YTD

 

Company Restaurants

 

 

 

 

 

 

 

 

 

Store weeks

 

1,460

 

1,198

 

2,868

 

2,330

 

Comparable restaurant sales growth

 

6.8

%

7.8

%

6.8

%

8.8

%

Average unit volume (in thousands)

 

$

1,008

 

$

938

 

$

2,000

 

$

1,864

 

 

14



 

Franchise Royalties and Fees.   Franchise royalties and fees increased by $0.5 million, or by 24.0%, from Q2 2004 to Q2 2005 and by $1.0 million, or by 23.3%, in 2005 YTD as compared to 2004 YTD. These increases were primarily attributable to the opening of new franchise restaurants and comparable restaurant sales growth.

 

Restaurant Cost of Sales.   Restaurant cost of sales as a percentage of restaurant sales increased to 35.3% in Q2 2005 from 35.1% in Q2 2004 and to 35.2% in 2005 YTD from 34.8% in 2004 YTD.  This increase was primarily due to the higher cost of pork ribs and was partially offset by menu price increases of approximately 2% and the lower cost of dairy products.  We expect restaurant cost of sales, as a percentage of restaurant sales, to be approximately 25 to 50 basis points higher in 2005 versus 2004.  This increase is expected to be principally driven by the higher cost of pork ribs.

 

Restaurant Labor Expenses.   Restaurant labor expenses, as a percentage of restaurant sales, decreased to 26.9% in Q2 2005 from 27.7% in Q2 2004 and to 26.9% in 2005 YTD from 27.5% in 2004 YTD. The percentage of sales benefit generated from comparable restaurant sales growth more than offset modest wage rate inflation.

 

Restaurant Rent Expense.   Restaurant rent expense, as a percentage of restaurant sales, decreased to 1.8% in Q2 2005 and 2005 YTD from 2.0% in Q2 2004 and 2004 YTD.  The increase in deferred rent due to the impact of our fourth quarter correction of our lease accounting practices was offset by the percentage of sales benefit generated from comparable restaurant sales growth.

 

Restaurant Other Operating Expenses.   Restaurant operating expenses, as a percentage of restaurant sales, decreased to 16.0% in Q2 2005 from 16.1% in Q2 2004 and to 16.0% in 2005 YTD from 16.2% in 2004 YTD. In Q2 2005, we recorded a $0.3 million decrease in general liability insurance expense due to changes in our claim development history based on our second quarter actuarial analysis. In addition, the Q2 2005 and 2005 YTD percentage of restaurant sales changes were primarily due to the percentage of sales benefit generated from comparable restaurant sales growth, along with decreases in gift card fees, equipment rent and other expenses and was partially offset by higher restaurant-level management bonuses, outside services, credit card charges and utility costs.

 

Restaurant Pre-opening Expenses.   Pre-opening expenses decreased slightly in Q2 2005 to $1.1 million from $1.3 million in Q2 2004 and increased slightly to $2.2 million in 2005 YTD from $2.1 million in 2004 YTD.

 

Depreciation and Amortization Expense.   D&A, as a percentage of revenue, increased slightly to 3.0% in Q2 2005 from 2.9% in Q2 2004 and increased slightly to 3.0% for 2005 YTD as compared to 2.8% for 2004 YTD. Increases related to capital spending on new restaurants were partially offset by the percentage of sales benefit generated from comparable restaurant sales growth.

 

General and Administrative Expenses.   G&A increased in Q2 2005 to $7.9 million (6.8% of revenue) from $5.9 million (6.5% of revenue) in Q2 2004 and in 2005 YTD to $14.2 million (6.3% of revenue) from $10.4 million (6.0% of revenue) in 2004 YTD.  These increases were primarily due to general business growth, public company costs which did not exist in Q2 2004 or 2004 YTD and increases in annual conference expenses.

 

Interest Expense, Net.   Interest expense decreased to $0.1 million in Q2 2005 from $1.0 million in Q2 2004 and to $0.1 million in 2005 YTD from $2.0 million in 2004 YTD.   Interest expense in Q2 2005 and 2005 YTD included interest income of $0.1 million and $0.4 million, respectively.  Excluding this income, interest expense decreased by approximately $0.8 million from Q2 2004 to Q2 2005 and $1.6 million from 2004 YTD to 2005 YTD due to a significant reduction in long term debt.

 

Minority Interest.   The minority interest deducted from income in Q2 2005 decreased to $0.2 million from $1.9 million in Q2 2004 and to $0.2 million in 2005 YTD from $3.9 million in 2004 YTD.  These decreases were due to the acquisition of the remaining minority interest in 31 majority-owned restaurants in connection with the closing of our corporate reorganization and initial public offering on October 8, 2004.  Subsequent to October 8, 2004, minority interest includes three majority-owned restaurants.

 

Equity (Loss) Income from Investments in Unconsolidated Affiliates.   Equity (loss) income from investments in unconsolidated affiliates decreased to $(30,000) in Q2 2005 from $26,000 in Q2 2004 and to $22,000 in 2005 YTD from $70,000 in 2004 YTD due to our share of losses generated by four franchise restaurants which were opened in 2005.  Primarily due to pre-opening expenses, new restaurants take three to six months to become profitable.

 

Income Tax Expense.    Until October 8, 2004, we operated as a limited liability company and, as such, were taxed as a partnership.  Accordingly, we paid no significant income taxes on our own behalf and there is no provision for taxes prior to October 8, 2004 in our condensed consolidated financial statements,

 

In connection with the closing of our corporate reorganization and initial public offering, we became a “C” corporation subject to federal and state income taxes.  Our effective tax rate for 2005 YTD is 35.3%.

 

15



 

Liquidity and Capital Resources

 

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

 

 

 

26 Weeks Ended

 

 

 

2005 YTD

 

2004 YTD

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

19,927

 

$

25,514

 

Net cash used in investing activities

 

(25,077

)

(21,790

)

Net cash used in financing activities

 

(31,604

)

(1,627

)

 

 

 

 

 

 

Net (decrease) increase in cash

 

$

(36,754

)

$

2,097

 

 

Net cash provided by operating activities was $19.9 million in 2005 YTD compared to $25.5 million in 2004 YTD.  The decrease was driven primarily by higher gift card sales in Q4 2004 followed by higher redemptions in 2005 YTD and changes in working capital offset by an increase in net income.

 

Net cash used in investing activities was $25.1 million in 2005 YTD compared to $21.8 million in 2004 YTD.  The increase was primarily due to an increase in capital spending associated with new restaurant construction.

 

Net cash used in financing activities was $31.6 million in 2005 YTD as compared to $1.6 million in 2004 YTD.  The increase was due primarily to the payment of distributions of $31.2 million to members of our predecessor company, Texas Roadhouse Holdings LLC, in redemption of its preferred shares related to its income for periods prior to and through October 8, 2004.  Additionally, 2004 YTD included net proceeds from short-term and long-term debt of $15.1 million.

 

Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital. Sales are primarily for cash, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.

 

We require capital principally for the development of new company restaurants and the refurbishment of existing restaurants.   Capital expenditures totaled approximately $25.1 million and $21.8 million in 2005 YTD and 2004 YTD, respectively.  We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land where it is cost effective. As of June 28, 2005, there were 57 restaurants developed on land which we owned.

 

We have also required cash to pay distributions to our equity holders relating to periods before our initial public offering. Our predecessor companies paid aggregate distributions to their equity holders for the 26 weeks ended June 29, 2004 of $12.1 million.

 

We intend to retain our future earnings, if any, to finance the future development and operation of our business. Accordingly, we do not anticipate paying any dividends on our common stock in the foreseeable future.

 

On July 5, 2005, the Company sold 350,000 shares as part of a follow-on Class A common stock offering and received net offering proceeds of $11.6 million, net of $0.6 million of offering expenses.  In conjunction with the offering, the Company paid off $4.0 million of borrowings under its credit facility, with the remaining proceeds intended to be used to fund development of new restaurants and for general corporate purposes.

 

In 2005 YTD and 2004 YTD, we used cash on hand, borrowings under our credit facility and net cash provided by operating activities to fund capital expenditures and distributions.

 

On October 8, 2004, we entered into a new $150.0 million, five-year revolving credit facility with a syndicate of commercial lenders led by Bank of America, N. A., Banc of America Securities LLC and National City Bank of Kentucky. The new facility replaced Texas Roadhouse Holdings LLC's previous credit facility. The terms of the new facility require us to pay interest on outstanding borrowings at LIBOR plus a margin of 0.75% to 1.50% and to pay a commitment fee of 0.15% to 0.25% per year on any unused portion of the facility, in both cases depending on our leverage ratio. The facility prohibits us from incurring additional debt outside the facility with certain exceptions, including equipment financing up to $3.0 million, unsecured debt up to $500,000 and up to $20.0 million of debt incurred by majority-owned companies formed to open new restaurants.  The facility also prohibits the declaration or payment of cash dividends on our stock and requires W. Kent Taylor to maintain beneficial ownership of at least 20% of the voting power of our stock.  Additionally, the lenders’ obligation to extend credit under the facility depends upon maintaining certain financial covenants, including a minimum fixed charge coverage ratio of 1.50 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00.  At June 28, 2005, we had $4.0 million of borrowings outstanding under our credit facility and $144.2 million of availability net of $1.8 million of outstanding letters of credit.  In addition, we had various other notes payable totaling $7.0 million with interest rates ranging from 5.50% to 10.80%.  Each of these notes related to the financing of specific restaurants.  Our total weighted average effective interest rate at June 28, 2005 was 6.93%.  We repaid the $4.0 million borrowed under our credit facility in July 2005.

 

16



 

In 2003, we entered into a fixed rate swap agreement for $31.2 million of the outstanding debt under our credit facility to limit the variability of a portion of our interest payments. This swap changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of this interest rate swap, we received variable interest rate payments and made fixed interest rate payments, thereby creating the equivalent of fixed-rate debt.  As of June 29, 2004, approximately $1.0 million of unrealized loss on the swap was recorded in accumulated other comprehensive income.  This swap was terminated in Q2 2005.

 

Our future capital requirements will primarily depend on the number of new restaurants we open and the timing of those openings within a given fiscal year. These requirements will include costs directly related to opening new restaurants and may also include costs necessary to ensure that our infrastructure is able to support a larger restaurant base. In 2005, we expect our capital expenditures to be approximately $50.0 million to $60.0 million, substantially all of which will relate to planned restaurant openings. We intend to satisfy our capital requirements over the next 18 months with cash on hand, net cash provided by operating activities and funds available under our credit facility.

 

Off-Balance Sheet Arrangements

 

Except for operating leases (primarily restaurant leases), we do not have any off-balance sheet arrangements.

 

Guarantees

 

We entered into real estate lease agreements for franchise restaurants located in Everett, MA and Longmont, CO prior to our granting franchise rights for those restaurants. We have subsequently assigned the leases to the franchisees, but we remain contingently liable if a franchisee defaults under the terms of a lease. The Longmont lease expires in May 2014 and the Everett lease expires in February 2018.  As the fair value of the guarantees was not considered significant, no liability has been recorded.

 

Recently Adopted Accounting Pronouncements

 

See Note 4 in the accompanying condensed consolidated financial statements.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains statements about future events and expectations that constitute forward-looking statements. Forward-looking statements are based on our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account the information currently available to us. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. Factors that could, individually or in the aggregate, contribute to these differences include, but are not limited to, those set forth in the section ”Risk Factors” in our Registration Statement (SEC File No. 333-115259) relating to our initial public offering and the following:

 

                                          our ability to raise capital in the future;

 

                                          our ability to successfully execute our growth strategy;

 

                                          our ability to successfully open new restaurants or acquire franchise restaurants;

 

                                          the continued service of key management personnel;

 

                                          health concerns about our food products;

 

                                          our ability to attract, motivate and retain qualified employees;

 

                                          the impact of federal, state or local government regulations relating to our employees or the sale of food and alcoholic beverages;

 

                                          the impact of litigation;

 

                                          the cost of our principal food products;

 

                                          labor shortages or increased labor costs;

 

                                          inflationary increases in the costs of construction and real estate;

 

                                          changes in consumer preferences and demographic trends;

 

17



 

                                          increasing competition in the casual dining segment of the restaurant industry;

 

                                          our ability to successfully expand into new markets;

 

                                          the rate of growth of general and administrative expenses associated with building a strengthened corporate infrastructure to support our growth initiatives;

 

                                          negative publicity regarding food safety and health concerns;

 

                                          our franchisees’ adherence to our practices, policies and procedures;

 

                                          potential fluctuation in our quarterly operating results due to seasonality and other factors;

 

                                          supply and delivery shortages or interruptions;

 

                                          inadequate protection of our intellectual property;

 

                                          volatility of actuarially determined insurance losses and loss estimates;

 

                                          adoption of new, or changes in existing, accounting policies and practices;

 

                                          adverse weather conditions which impact guest traffic at our restaurants; and

 

                                          adverse economic conditions.

 

The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors.

 

We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates on debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding bank debt. At June 28, 2005, outstanding borrowings under our revolving line of credit bear interest at approximately 75 to 150 basis points (depending on our leverage ratios) over the London Interbank Offered Rate. The weighted average effective interest rate on the $4.0 million outstanding balance under this line at June 28, 2005 was 3.06%.  The outstanding borrowings on our revolving line of credit were paid off in July 2005 with proceeds from our follow-on offering.  Our various other notes payable totaling $7.0 million at June 28, 2005 had fixed interest rates ranging from 5.65% to 10.80%.  Should interest rates based on these borrowings increase by one percentage point, it would not have a material impact on our net income.

 

The Company invests portions of its excess cash, if any, in highly liquid investments.  At June 28, 2005, the Company had $4.7 million in a broad range of money market instruments, including government, bank and commerical obligations and repurchase agreements secured by such obligations.  The market risk on such investments is minimal due to their short-term nature.

 

Many of the ingredients used in the products sold in our restaurants are commodities that are subject to unpredictable price volatility. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for certain commodities such as produce and cheese and we are subject to prevailing market conditions when purchasing those types of commodities. For commodities that are purchased under fixed price contracts, the prices are based on prevailing market prices at the time the contract is entered into and do not fluctuate during the contract period. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid. Extreme and/or long term increases in commodity prices could adversely affect our future results, especially if we are unable, primarily due to competitive reasons, to increase menu prices. Additionally, if there is a time lag between the increasing commodity prices and our ability to increase menu prices or, if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected.

 

We are subject to business risk as our beef supply is highly dependent upon four vendors. We currently purchase most of our beef from one of the largest beef suppliers in the country. If this vendor was unable to fulfill its obligations under its contracts, we may encounter supply shortages and incur higher costs to secure adequate supplies, any of which would harm our business.

 

18



 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by the report.

 

Changes in Internal Control

 

There were no significant changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended June 28, 2005.

 

19



 

PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including “slip and fall” accidents, employment related claims and claims from guests or employees alleging illness, injury or food quality, health or operational concerns.  None of these types of litigation, most of which are covered by insurance, has had a material effect on us and, as of the date of this report, we are not party to any litigation that we believe would have a material adverse effect on our business.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

We registered 10,474,669 shares of our Class A common stock in connection with our initial public offering under the Securities Act of 1933, including 1,366,261 shares that were subject to an over-allotment option. The Securities and Exchange Commission declared our Registration Statement on Form S-1, as amended (Reg. No. 333-115259), for such initial public offering effective on October 4, 2004.

 

All 10,474,669 shares of our Class A common stock registered in the offering were sold at the initial public offering price per share of $17.50. The aggregate purchase price of the offering was $183.3 million. 6,581,481 shares of Class A common stock were sold for an aggregate purchase price of $115.2 million for the benefit of the Company and 3,893,188 shares of Class A common stock were sold for the accounts of selling stockholders.

 

The net offering proceeds to us after deducting total expenses were approximately $105.1 million. We incurred total expenses in connection with the offering of $10.1 million, which consisted of:

 

              $1.6 million in legal, accounting and printing fees;

              $8.1 million in underwriters’ discounts fees and commissions for those shares sold by us; and

              $0.4 million in miscellaneous expenses.

 

No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

 

We completed our initial public offering on October 8, 2004. From October 8, 2004 through June 28, 2005, we applied the net proceeds as follows:

 

              $68.9 million was used to repay outstanding borrowings under our credit facility, including accrued interest thereon; and,

 

              $3.4 million was used to fund payments to equity holders of our predecessor company, Texas Roadhouse Holdings LLC, based on its undistributed net income for periods from June 30, 2004 to October 8, 2004.

 

              $31.2 million was used to fund payments to equity holders of our predecessor company, Texas Roadhouse Holdings LLC, in redemption of its preferred shares related to its income for periods prior to October 8, 2004, and to fund working capital.

 

Of the $3.4 million of payments we made in 2004 and $31.2 million payment made in April 2005, our executive officers, directors and 10% stockholders, including affiliates, received the amounts set forth below (in thousands):

 

Name

 

2004
Payment

 

2005
Payment

 

 

 

 

 

 

 

W. Kent Taylor (Chairman of the Company, Director)

 

$

1,765

 

$

17,378

 

G.J. Hart (President, Chief Executive Officer, Director)

 

22

 

213

 

Steven L. Ortiz (Chief Operating Officer)

 

12

 

29

 

Sheila C. Brown (General Counsel, Corporate Secretary)

 

1

 

2

 

Martin T. Hart (Director)

 

8

 

81

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

20



 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

On May 26, 2005, at the Annual Meeting of Stockholders, the stockholders took the following actions:

 

1.               Elected all directors designated in the proxy statement dated April 25, 2005, as follows:

 

 

 

Number of Votes

 

 

 

For

 

Withheld

 

 

 

 

 

 

 

James R. Ramsey

 

51,268,053

 

965,806

 

James R. Zarley

 

51,825,269

 

408,590

 

 

Directors whose terms continued after the Annual Meeting of Stockholders are as follows:  W. Kent Taylor, G.J. Hart, Martin T. Hart, Gregory N. Moore and James F. Parker.

 

2.     Ratified the audit committee’s selection of KPMG LLP as the Company’s independent auditors for the fiscal year ending December 27, 2005:  52,186,471 votes cast for, 42,530 votes cast against and 4,858 abstained.

 

ITEM 5.  OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

SIGNATURES

 

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.

 

 

TEXAS ROADHOUSE, INC.

 

 

 

Date: August 10, 2005

By:

/s/ G.J. Hart

 

 

 

G.J. Hart

 

 

President & Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: August 10, 2005

By:

/s/ Scott M. Colosi

 

 

 

Scott M. Colosi

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

21


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