ruth-10q_20170924.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 24, 2017

OR

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 000-51485

 

Ruth’s Hospitality Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

72-1060618

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1030 W. Canton Avenue, Suite 100,

Winter Park, FL

32789

(Address of principal executive offices)

(Zip code)

(407) 333-7440

Registrant’s telephone number, including area code

None

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

 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares outstanding of the registrant’s common stock as of October 31, 2017 was 31,278,209, which includes 1,184,629 shares of unvested restricted stock.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

Part I — Financial Information

 

3

 

 

 

 

Item 1

Financial Statements:

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 24, 2017 and December 25, 2016

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Thirteen and Thirty-nine Week Periods ended September 24, 2017 and September 25, 2016

 

4

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Thirty-nine Week Periods ended September 24, 2017 and September 25, 2016

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Thirty-nine Week Periods ended September 24, 2017 and September 25, 2016

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

 

21

 

 

 

 

Item 4

Controls and Procedures

 

22

 

 

 

Part II — Other Information

 

22

 

 

 

 

Item 1

Legal Proceedings

 

22

 

 

 

 

Item 1A

Risk Factors

 

22

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

23

 

 

 

 

Item 4

Mine Safety Disclosures

 

23

 

 

 

 

Item 5

Other Information

 

23

 

 

 

 

Item 6

Exhibits

 

23

 

 

 

 

Signatures

 

25

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

(Amounts in thousands, except share and per share data)

 

 

 

September 24,

 

 

December 25,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,862

 

 

$

3,788

 

Accounts receivable, less allowance for doubtful accounts 2017 - $236; 2016 - $729

 

 

9,789

 

 

 

20,790

 

Inventory

 

 

7,247

 

 

 

7,396

 

Prepaid expenses and other

 

 

2,232

 

 

 

2,446

 

Total current assets

 

 

24,130

 

 

 

34,420

 

Property and equipment, net of accumulated depreciation 2017 - $143,034; 2016 -

   $132,817

 

 

103,518

 

 

 

103,041

 

Goodwill

 

 

24,293

 

 

 

24,293

 

Franchise rights, net of accumulated amortization 2017 - $218; 2016 - $218

 

 

32,200

 

 

 

32,200

 

Other intangibles, net of accumulated amortization 2017 - $1,238; 2016 - $1,179

 

 

2,836

 

 

 

2,895

 

Deferred income taxes

 

 

5,452

 

 

 

9,924

 

Other assets

 

 

643

 

 

 

699

 

Total assets

 

$

193,072

 

 

$

207,472

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,642

 

 

$

7,064

 

Accrued payroll

 

 

11,709

 

 

 

14,902

 

Accrued expenses

 

 

6,545

 

 

 

11,672

 

Deferred revenue

 

 

27,483

 

 

 

38,155

 

Other current liabilities

 

 

4,962

 

 

 

7,622

 

Total current liabilities

 

 

58,341

 

 

 

79,415

 

Long-term debt

 

 

30,000

 

 

 

25,000

 

Deferred rent

 

 

22,230

 

 

 

21,737

 

Other liabilities

 

 

2,132

 

 

 

2,311

 

Total liabilities

 

 

112,703

 

 

 

128,463

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share; 100,000,000 shares authorized, 30,093,180

   shares issued and outstanding at September 24, 2017, 30,549,283 shares issued and

   outstanding at December 25, 2016

 

 

301

 

 

 

305

 

Additional paid-in capital

 

 

84,643

 

 

 

95,266

 

Accumulated deficit

 

 

(4,575

)

 

 

(16,562

)

Treasury stock, at cost; 71,950 shares at September 24, 2017 and December 25, 2016

 

 

 

 

 

 

Total shareholders' equity

 

 

80,369

 

 

 

79,009

 

Total liabilities and shareholders' equity

 

$

193,072

 

 

$

207,472

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income—Unaudited

(Amounts in thousands, except share and per share data)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

September 24,

 

 

September 25,

 

 

September 24,

 

 

September 25,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

79,442

 

 

$

78,760

 

 

$

273,042

 

 

$

261,941

 

Franchise income

 

 

4,218

 

 

 

3,928

 

 

 

12,865

 

 

 

12,463

 

Other operating income

 

 

1,507

 

 

 

1,086

 

 

 

4,813

 

 

 

3,914

 

Total revenues

 

 

85,167

 

 

 

83,774

 

 

 

290,720

 

 

 

278,318

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and beverage costs

 

 

25,319

 

 

 

23,723

 

 

 

82,012

 

 

 

78,022

 

Restaurant operating expenses

 

 

42,595

 

 

 

40,549

 

 

 

133,046

 

 

 

127,026

 

Marketing and advertising

 

 

3,197

 

 

 

2,546

 

 

 

9,056

 

 

 

7,134

 

General and administrative costs

 

 

7,096

 

 

 

7,346

 

 

 

23,267

 

 

 

22,068

 

Depreciation and amortization expenses

 

 

3,852

 

 

 

3,435

 

 

 

11,089

 

 

 

9,907

 

Pre-opening costs

 

 

121

 

 

 

574

 

 

 

1,473

 

 

 

1,665

 

Total costs and expenses

 

 

82,180

 

 

 

78,173

 

 

 

259,943

 

 

 

245,822

 

Operating income

 

 

2,987

 

 

 

5,601

 

 

 

30,777

 

 

 

32,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(197

)

 

 

(333

)

 

 

(521

)

 

 

(799

)

Other

 

 

(6

)

 

 

(92

)

 

 

33

 

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax expense

 

 

2,784

 

 

 

5,176

 

 

 

30,289

 

 

 

31,757

 

Income tax expense

 

 

1,017

 

 

 

1,668

 

 

 

9,632

 

 

 

10,410

 

Income from continuing operations

 

 

1,767

 

 

 

3,508

 

 

 

20,657

 

 

 

21,347

 

Income (loss) from discontinued operations, net of income taxes

 

 

(71

)

 

 

75

 

 

 

(101

)

 

 

(94

)

Net income

 

$

1,696

 

 

$

3,583

 

 

$

20,556

 

 

$

21,253

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.06

 

 

$

0.11

 

 

$

0.68

 

 

$

0.67

 

Discontinued operations

 

 

 

 

 

 

 

 

(0.01

)

 

 

 

Basic earnings per share

 

$

0.06

 

 

$

0.11

 

 

$

0.67

 

 

$

0.67

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.06

 

 

$

0.11

 

 

$

0.67

 

 

$

0.66

 

Discontinued operations

 

 

(0.01

)

 

 

 

 

 

(0.01

)

 

 

 

Diluted earnings per share

 

$

0.05

 

 

$

0.11

 

 

$

0.66

 

 

$

0.66

 

Shares used in computing net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,348,180

 

 

 

31,305,952

 

 

 

30,490,554

 

 

 

32,023,814

 

Diluted

 

 

30,877,192

 

 

 

31,737,036

 

 

 

31,040,640

 

 

 

32,437,142

 

Cash dividends declared per common share

 

$

0.09

 

 

$

0.07

 

 

$

0.27

 

 

$

0.21

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited  

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Treasury Stock

 

 

Shareholders'

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Value

 

 

Equity

 

Balance at December 25, 2016

 

 

30,549

 

 

$

305

 

 

$

95,266

 

 

$

(16,562

)

 

 

72

 

 

$

 

 

$

79,009

 

Net income

 

 

 

 

 

 

 

 

 

 

 

20,556

 

 

 

 

 

 

 

 

 

20,556

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(8,568

)

 

 

 

 

 

 

 

 

(8,568

)

Repurchase of common stock

 

 

(719

)

 

 

(7

)

 

 

(14,536

)

 

 

 

 

 

 

 

 

 

 

 

(14,543

)

Shares issued under stock compensation plan net

   of shares withheld for tax effects

 

 

263

 

 

 

3

 

 

 

(1,167

)

 

 

 

 

 

 

 

 

 

 

 

(1,164

)

Stock-based compensation

 

 

 

 

 

 

 

 

5,080

 

 

 

 

 

 

 

 

 

 

 

 

5,080

 

Balance at September 24, 2017

 

 

30,093

 

 

$

301

 

 

$

84,643

 

 

$

(4,575

)

 

 

72

 

 

$

 

 

$

80,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 27, 2015

 

 

33,146

 

 

$

331

 

 

$

135,403

 

 

$

(37,832

)

 

 

72

 

 

$

 

 

$

97,902

 

Net income

 

 

 

 

 

 

 

 

 

 

 

21,253

 

 

 

 

 

 

 

 

 

21,253

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(6,969

)

 

 

 

 

 

 

 

 

(6,969

)

Repurchase of common stock

 

 

(2,477

)

 

 

(25

)

 

 

(39,948

)

 

 

 

 

 

 

 

 

 

 

 

(39,973

)

Shares issued under stock compensation plan net

   of shares withheld for tax effects

 

 

213

 

 

 

3

 

 

 

(1,430

)

 

 

 

 

 

 

 

 

 

 

 

(1,427

)

Excess tax benefit from stock based

   compensation

 

 

 

 

 

 

 

 

395

 

 

 

 

 

 

 

 

 

 

 

 

395

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,259

 

 

 

 

 

 

 

 

 

 

 

 

4,259

 

Balance at September 25, 2016

 

 

30,882

 

 

$

309

 

 

$

98,679

 

 

$

(23,548

)

 

 

72

 

 

$

 

 

$

75,440

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Amounts in thousands)

 

 

 

39 Weeks Ended

 

 

 

September 24,

 

 

September 25,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

20,556

 

 

$

21,253

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,089

 

 

 

9,907

 

Deferred income taxes

 

 

4,472

 

 

 

6,065

 

Non-cash interest expense

 

 

97

 

 

 

315

 

Debt issuance costs written-off

 

 

16

 

 

 

 

Gain on the disposal of property and equipment, net

 

 

 

 

 

(128

)

Stock-based compensation expense

 

 

5,080

 

 

 

4,259

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11,002

 

 

 

9,793

 

Inventories

 

 

149

 

 

 

341

 

Prepaid expenses and other

 

 

217

 

 

 

(2,012

)

Other assets

 

 

356

 

 

 

198

 

Accounts payable and accrued expenses

 

 

(6,064

)

 

 

(10,731

)

Deferred revenue

 

 

(10,671

)

 

 

(11,736

)

Deferred rent

 

 

493

 

 

 

978

 

Other liabilities

 

 

(1,702

)

 

 

623

 

Net cash provided by operating activities

 

 

35,090

 

 

 

29,125

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(14,326

)

 

 

(19,094

)

Proceeds from sale of property and equipment

 

 

 

 

 

802

 

Net cash used in investing activities

 

 

(14,326

)

 

 

(18,292

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal borrowings on long-term debt

 

 

26,000

 

 

 

47,000

 

Principal repayments on long-term debt

 

 

(21,000

)

 

 

(9,000

)

Repurchase of common stock

 

 

(14,543

)

 

 

(39,973

)

Cash dividend payments

 

 

(8,568

)

 

 

(6,969

)

Tax payments from the vesting of restricted stock and option exercises

 

 

(2,079

)

 

 

(1,503

)

Excess tax benefits from stock compensation

 

 

 

 

 

395

 

Proceeds from the exercise of stock options

 

 

913

 

 

 

76

 

Deferred financing costs

 

 

(413

)

 

 

 

Net cash used in financing activities

 

 

(19,690

)

 

 

(9,974

)

Net increase in cash and cash equivalents

 

 

1,074

 

 

 

859

 

Cash and cash equivalents at beginning of period

 

 

3,788

 

 

 

3,095

 

Cash and cash equivalents at end of period

 

$

4,862

 

 

$

3,954

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

405

 

 

$

461

 

Income taxes

 

$

6,539

 

 

$

2,223

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued acquisition of property and equipment

 

$

1,023

 

 

$

389

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

(1) The Company and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of September 24, 2017 and December 25, 2016 and for the thirteen and thirty-nine week periods ended September 24, 2017 and September 25, 2016 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of September 24, 2017, there were 153 Ruth’s Chris Steak House restaurants, including 70 Company-owned restaurants, two restaurants operating under contractual agreements and 81 franchisee-owned restaurants, including 21 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Panama, Singapore, Taiwan and the United Arab Emirates. All Company-owned restaurants are located in the United States.  New Company-owned Ruth’s Chris Steak House restaurants opened in Waltham, MA in January 2017 and Cleveland, OH in March 2017 and a new frachisee-owned Ruth’s Chris Steak House restaurant opened in Chengdu, China in September 2017.  A new restaurant operated by the Company under a contractual agreement also opened in Tulsa, OK in January 2017.  A franchisee-owned Ruth’s Chris Steak House restaurant was closed permanently in San Juan, Puerto Rico in September 2017 as a result of severe damage from Hurricane Maria.

The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended September 24, 2017 and September 25, 2016 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2016.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended September 24, 2017 and September 25, 2016 each contained thirteen weeks and are referred to herein as the third quarter of fiscal year 2017 and the third quarter of fiscal year 2016, respectively. Fiscal year 2017 is a 53-week year.  Fiscal year 2016 is a 52-week year.

Estimates

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 periods 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 amounts of property and equipment, goodwill, franchise rights, and obligations related to gift cards, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

Recent Accounting Pronouncements for Future Application

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for interim and annual periods in fiscal years beginning after December 15, 2017, which will require the Company to adopt these provisions in the first quarter of fiscal year 2018.  The standard permits the use of either the retrospective or cumulative effect transition method and is expected to impact the Company’s recognition of revenue related to franchise development and site specific fees.  The Company currently recognizes franchise development and site specific fees when new franchisee-owned restaurants open.  Under ASU 2014-09, development and site specific fees will be recognized over the life of the applicable franchise agreements. The Company expects that the new standard will have a material effect on the consolidated financial statements.  The Company now expects that the most significant change relates to an increase of approximately $3 million to $4 million to the deferred revenue liability on the consolidated balance sheet for previously recognized franchise development and site specific fees that will be recognized over the life of the applicable franchise agreements under the new standard. In addition, ASU 2014-09 is expected to impact the classification of advertising contributions from franchisees.  The

7


Company currently records advertising contributions from franchisees as a liability against which specified advertising and marketing costs are charged. Under the new standard, advertising contributions from franchisees will be classified as franchise income on the consolidated statements of income.  The Company recognized advertising contributions from franchisees totaling $1.3 million and $1.4 million during fiscal years 2016 and 2015, respectively, as a reduction to marketing and advertising expense on the consolidated statements of income.  The Company is evaluating other potential effects that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset.  The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases.  This update is effective for annual and interim periods beginning after December 15, 2018, which will require the Company to adopt these provisions in the first quarter of fiscal year 2019 using a modified retrospective approach.  The Company’s restaurants operate under facility lease agreements that provide for material future lease payments.  The restaurant facility leases comprise the majority of the Company’s material lease agreements.  The Company is currently evaluating the effect of the standard on its ongoing financial reporting, but expects that the adoption of ASU 2016-02 will have a material effect on its consolidated financial statements.  The Company expects that the most significant changes relate to 1) the recognition of new right–of–use assets and lease liabilities on the consolidated balance sheet for restaurant facility operating leases; and 2) the derecognition of existing lease liabilities on the consolidated balance sheet related to scheduled rent increases.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230).  This update was issued to standardize how certain transactions are classified on the statement of cash flows.  This update is effective for fiscal years beginning after December 15, 2017.  Early adoption is permitted.  The adoption of ASU 2016-15 is not expected to have a significant impact of the Company’s ongoing financial reporting.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740). This update addresses the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal year 2018 using a modified retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350).  This update eliminates the current two-step approach used to test goodwill for impairment and requires an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.  ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 (upon the first goodwill impairment test performed during that fiscal year).  Early adoption is permitted for interim or annual goodwill impairment tests after January 1, 2017.  The Company does not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.

(2) Mitchell’s Restaurants

As of December 28, 2014, the Company operated eighteen Mitchell’s Fish Markets and three Mitchell’s/Cameron’s Steakhouse restaurants (collectively, the Mitchell’s Restaurants).

In November 2014, the Company and Landry’s, Inc. and Mitchell’s Entertainment, Inc., an affiliate of Landry’s Inc. (together with Landry’s Inc., Landry’s), entered into an asset purchase agreement (the Agreement). Pursuant to the Agreement, the Company agreed to sell the Mitchell’s Restaurants and related assets to Landry’s for $10 million. The sale of the Mitchell’s Restaurants closed on January 21, 2015. The assets sold consisted primarily of leasehold interests, leasehold improvements, restaurant equipment and furnishings, inventory, and related intangible assets, including brand names and trademarks associated with the 21 Mitchell’s Restaurants.  The results of operations have been classified as discontinued operations in the consolidated statements of income for all periods presented. No amounts for shared general and administrative costs or interest expense were allocated to discontinued operations. Substantially all direct cash flows related to operating these restaurants were eliminated at the closing date of the sale.  The Company’s continuing involvement was limited to transition services up to four months with minimal impact on cash flows.

Under the terms of the Agreement, Landry’s assumed the Mitchell’s Restaurants’ facility lease obligations and the Company reimbursed Landry’s for gift cards that were sold prior to the closing date and used at the Mitchell’s Restaurants during the eighteen months following the closing date.  In the Agreement, the Company and Landry’s made customary representations and warranties and

8


agreed to customary covenants relating to the sale of the Mitchell’s Restaurants. The Company and Landry’s have agreed to indemnify each other for losses arising from certain breaches of the Agreement and for certain other liabilities.

The Company guaranteed Landry’s lease obligations aggregating $33.8 million under nine of the Mitchell’s Restaurants’ leases.  The Company did not record a financial accounting liability for the lease guarantees, because the likelihood of Landry’s defaulting on the lease agreements was deemed to be remote.  Landry’s also indemnified the Company in the event of a default under any of the leases.

(3) Discontinued Operations

The Company accounts for its closed restaurants in accordance with the provisions of FASB ASC Topic 360-10, “Property, Plant and Equipment.” As of December 29, 2014, the Company adopted ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changed the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. ASU 2014-08 requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its operations and financial results. Therefore, individual restaurants which are closed after December 28, 2014 will not be classified as discontinued operations. Prior to the Company’s adoption of ASU 2014-08, when a restaurant was closed or the restaurant was either held for sale or abandoned, the restaurant’s operations were eliminated from the ongoing operations. Accordingly, the operations of such restaurants, net of applicable income taxes, are presented as discontinued operations and prior period operations of such restaurants, net of applicable income taxes, were reclassified. For the thirteen and thirty-nine week periods ended September 24, 2017 and September 25, 2016, all restaurant sales, direct costs and expenses and income taxes attributable to restaurants classified as discontinued operations have been aggregated to a single caption entitled results from discontinued operations, net of income taxes in the condensed consolidated statements of income for all periods presented. Results from discontinued operations, net of income taxes is comprised of the following (in thousands):

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

September 24,

 

 

September 25,

 

 

September 24,

 

 

September 25,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mitchell's Restaurants

 

$

 

 

$

 

 

$

 

 

$

 

Other Restaurants

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mitchell's Restaurants

 

 

131

 

 

 

(448

)

 

 

220

 

 

 

(408

)

Other Restaurants

 

 

(17

)

 

 

325

 

 

 

(57

)

 

 

562

 

Total costs and expenses

 

 

114

 

 

 

(123

)

 

 

163

 

 

 

154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(114

)

 

 

123

 

 

 

(163

)

 

 

(154

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

 

(43

)

 

 

48

 

 

 

(62

)

 

 

(60

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations, net of income taxes

 

$

(71

)

 

$

75

 

 

$

(101

)

 

$

(94

)

 

Cash flows from discontinued operations are combined with the cash flows from continuing operations within each of the categories on our condensed consolidated statements of cash flows. We do not anticipate that the sale of the Mitchell’s Restaurants or any of our closed restaurants reported as discontinued operations will have a material impact on the Company’s cash flow during fiscal year 2017.

(4) Long-term Debt

Long-term debt consists of the following (in thousands):

 

 

 

September 24,

 

 

December 25,

 

 

 

2017

 

 

2016

 

Senior Credit Facility:

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

30,000

 

 

$

25,000

 

Less current maturities

 

 

 

 

 

 

 

 

$

30,000

 

 

$

25,000

 

9


 

As of September 24, 2017, the Company had $30.0 million of outstanding indebtedness under its senior credit facility with approximately $55.4 million of borrowings available, net of outstanding letters of credit of approximately $4.6 million. As of September 24, 2017, the weighted average interest rate on the Company’s outstanding debt was 2.7% and the weighted average interest rate on our outstanding letters of credit was 1.6%.  In addition, the fee on the Company’s senior credit facility was 0.2%. As of September 24, 2017, the Company was in compliance with all the covenants under its senior credit facility.

On February 2, 2017, the Company entered into a credit agreement with Wells Fargo Bank, National Association as administrative agent, and certain other lenders (the Credit Agreement). The Credit Agreement provides for a revolving credit facility of $90.0 million with a $5.0 million subfacility for letters of credit and a $5.0 million subfacility for swingline loans.  Subject to the satisfaction of certain conditions and lender consent, the revolving credit facility may be increased up to a maximum of $150.0 million.  The Credit Agreement has a maturity date of February 2, 2022.  At the Company’s option, revolving loans may bear interest at (i) LIBOR, plus an applicable margin or (ii) the highest of (a) the rate publicly announced by Wells Fargo as its prime rate, (b) the average published federal funds rate in effect on such day plus 0.50% and (c) one month LIBOR plus 1.00%, plus an applicable margin.  The applicable margin is based on the Company’s actual leverage ratio, ranging (a) from 1.50% to 2.25% above the applicable LIBOR rate or (b) at the Company’s option, from 0.50% to 1.25% above the applicable base rate.

The Credit Agreement contains customary representations and affirmative and negative covenants (including limitations on indebtedness and liens) as well as financial covenants requiring a minimum fixed coverage charge ratio and limiting the Company’s consolidated leverage ratio.  The Credit Agreement also contains events of default customary for credit facilities of this type (with customary grace periods, as applicable), including nonpayment of principal or interest when due; material incorrectness of representations and warranties when made; breach of covenants; bankruptcy and insolvency; unsatisfied ERISA obligations; unstayed material judgment beyond specified periods; default under other material indebtedness; and certain changes of control of the Company. If any event of default occurs and is not cured within the applicable grace period, or waived, the outstanding loans may be accelerated by lenders holding a majority of the commitments under the Credit Agreement and the lenders’ commitments may be terminated. The obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries (the Guarantors), and are secured by a lien on substantially all of the Company’s personal property assets other than any equity interest in current and future subsidiaries of the Company.

(5) Shareholders’ Equity

Subsequent to the end of the third quarter of fiscal year 2017 the Company’s Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $60 million of outstanding common stock from time to time.  The new share repurchase program replaces the previous share repurchase program announced in April 2016, which has been terminated.  The Company spent $48.0 million to repurchase 2.8 million shares of its common stock, at an average price of $17.05 per share, under its previous share repurchase program.  During the first thirty-nine weeks of fiscal year 2017, 719,442 shares were repurchased at an aggregate cost of $14.5 million, or an average cost of $20.21 per share.  Share repurchases were accounted for under the cost method and all repurchased shares were retired and cancelled.  The excess of the purchase price over the par value of the shares was recorded as a reduction in additional paid-in-capital.

The Company’s Board of Directors declared the following dividends during the periods presented (amounts in thousands, except per share amounts):

 

Declaration Date

 

Dividend per Share

 

 

Record Date

 

Total Amount

 

 

Payment Date

Fiscal Year 2017

 

 

 

 

 

 

 

 

 

 

 

 

February 17, 2017

 

$

0.09

 

 

February 23, 2017

 

$

2,862

 

 

March 9, 2017

May 5, 2017

 

$

0.09

 

 

May 18, 2017

 

$

2,862

 

 

June 1, 2017

July 28, 2017

 

$

0.09

 

 

August 10, 2017

 

$

2,844

 

 

August 24, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2016

 

 

 

 

 

 

 

 

 

 

 

 

February 12, 2016

 

$

0.07

 

 

February 25, 2016

 

$

2,350

 

 

March 10, 2016

April 28, 2016

 

$

0.07

 

 

May 12, 2016

 

$

2,338

 

 

May 26, 2016

July 29, 2016

 

$

0.07

 

 

August 11, 2016

 

$

2,282

 

 

August 25, 2016

 

Subsequent to the end of the third quarter of fiscal year 2017, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.09 per common and restricted share, or approximately $2.8 million in the aggregate based on the number of shares currently outstanding, payable on November 22, 2017 to stockholders of record as of the close of business on November 9, 2017.

10


Outstanding unvested restricted stock is not included in common stock outstanding amounts. Restricted stock outstanding as of September 24, 2017 aggregated 1,184,629 shares.

(6) Fair Value Measurements

The carrying amounts of cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to their short duration. Borrowings classified as long-term debt as of September 24, 2017 and December 25, 2016 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying amount of this debt is a reasonable estimate of its fair value (Level 2).

As of September 24, 2017 and December 25, 2016, the Company had no assets or liabilities measured on a recurring or nonrecurring basis subject to the disclosure requirements of “Fair Value Measurements and Disclosures,” FASB ASC Topic 820.

(7) Segment Information

The Company has two reportable segments – the Company-owned steakhouse segment and the franchise operations segment. The Company does not rely on any major customers as a source of revenue. The Company-owned Ruth’s Chris Steak House restaurants, all of which are located in North America, operate within the full-service dining industry, providing similar products to similar customers. Revenues are derived principally from food and beverage sales. As of September 24, 2017, (i) the Company-owned steakhouse restaurant segment included 70 Ruth’s Chris Steak House restaurants and two Ruth’s Chris Steak House restaurants operating under contractual agreements and (ii) the franchise operations segment included 81 franchisee-owned Ruth’s Chris Steak House restaurants. Segment profits for the Company-owned steakhouse restaurant segments equal segment revenues less segment expenses. Segment revenues for the Company-owned steakhouse restaurants include restaurant sales, management agreement income and other restaurant income. Gift card breakage revenue is not allocated to operating segments. Not all operating expenses are allocated to operating segments. Segment expenses for the Company-owned steakhouse segment include food and beverage costs and restaurant operating expenses.  No other operating costs are allocated to the Company-owned steakhouse segment for the purpose of determining segment profits because such costs are not directly related to the operation of individual restaurants. The accounting policies applicable to each segment are consistent with the policies used to prepare the consolidated financial statements. The profit of the franchise operations segment equals franchise income, which consists of franchise royalty fees and franchise opening fees. No costs are allocated to the franchise operations segment.

11


Segment information related to the Company’s two reportable business segments follows (in thousands):

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended