ruth-10q_20180930.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 30, 2018

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, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

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 26, 2018 was 30,809,350, which includes 1,078,571 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 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Thirteen and Thirty-nine Week Periods ended September 30, 2018 and September 24, 2017

 

4

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Thirty-nine Week Periods ended September 30, 2018 and September 24, 2017

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Thirty-nine Week Periods ended September 30, 2018 and September 24, 2017

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2

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

 

18

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

 

25

 

 

 

 

Item 4

Controls and Procedures

 

26

 

 

 

Part II — Other Information

 

27

 

 

 

 

Item 1

Legal Proceedings

 

27

 

 

 

 

Item 1A

Risk Factors

 

27

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

27

 

 

 

 

Item 4

Mine Safety Disclosures

 

27

 

 

 

 

Item 5

Other Information

 

27

 

 

 

 

Item 6

Exhibits

 

27

 

 

 

 

Signatures

 

29

 

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 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,877

 

 

$

4,051

 

Accounts receivable, less allowance for doubtful accounts 2018 - $371; 2017 - $361

 

 

11,332

 

 

 

21,626

 

Inventory

 

 

7,989

 

 

 

8,688

 

Prepaid expenses and other

 

 

2,393

 

 

 

2,680

 

Total current assets

 

 

26,591

 

 

 

37,045

 

Property and equipment, net of accumulated depreciation 2018 - $155,895; 2017 -

   $144,373

 

 

120,813

 

 

 

112,212

 

Goodwill

 

 

36,522

 

 

 

36,522

 

Franchise rights, net of accumulated amortization 2018 - $1,819; 2017 - $396

 

 

45,399

 

 

 

46,822

 

Other intangibles, net of accumulated amortization 2018 - $1,341; 2017 - $1,181

 

 

4,915

 

 

 

3,904

 

Deferred income taxes

 

 

4,949

 

 

 

4,947

 

Other assets

 

 

582

 

 

 

644

 

Total assets

 

$

239,771

 

 

$

242,096

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,537

 

 

$

10,510

 

Accrued payroll

 

 

14,130

 

 

 

15,903

 

Accrued expenses

 

 

7,779

 

 

 

11,203

 

Deferred revenue

 

 

36,794

 

 

 

42,596

 

Other current liabilities

 

 

3,541

 

 

 

8,313

 

Total current liabilities

 

 

68,781

 

 

 

88,525

 

Long-term debt

 

 

54,000

 

 

 

50,000

 

Deferred rent

 

 

23,004

 

 

 

21,993

 

Unearned franchise fees

 

 

2,803

 

 

 

 

Other liabilities

 

 

1,897

 

 

 

2,074

 

Total liabilities

 

 

150,485

 

 

 

162,592

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share; 100,000,000 shares authorized, 29,730,779

   shares issued and outstanding at September 30, 2018, 29,645,790 shares issued and

   outstanding at December 31, 2017

 

 

297

 

 

 

296

 

Additional paid-in capital

 

 

72,479

 

 

 

77,017

 

Retained earnings

 

 

16,510

 

 

 

2,191

 

Treasury stock, at cost; 71,950 shares at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Total shareholders' equity

 

 

89,286

 

 

 

79,504

 

Total liabilities and shareholders' equity

 

$

239,771

 

 

$

242,096

 

 

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 30,

 

 

September 24,

 

 

September 30,

 

 

September 24,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

93,488

 

 

$

79,442

 

 

$

307,390

 

 

$

273,042

 

Franchise income

 

 

4,030

 

 

 

4,218

 

 

 

12,905

 

 

 

12,865

 

Other operating income

 

 

1,497

 

 

 

1,507

 

 

 

4,880

 

 

 

4,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

99,015

 

 

 

85,167

 

 

 

325,175

 

 

 

290,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and beverage costs

 

 

26,440

 

 

 

25,319

 

 

 

86,894

 

 

 

82,012

 

Restaurant operating expenses

 

 

49,626

 

 

 

42,595

 

 

 

151,328

 

 

 

133,046

 

Marketing and advertising

 

 

3,813

 

 

 

3,197

 

 

 

11,930

 

 

 

9,056

 

General and administrative costs

 

 

8,809

 

 

 

7,096

 

 

 

27,056

 

 

 

23,267

 

Depreciation and amortization expenses

 

 

4,628

 

 

 

3,852

 

 

 

13,762

 

 

 

11,089

 

Pre-opening costs

 

 

845

 

 

 

121

 

 

 

1,258

 

 

 

1,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

94,161

 

 

 

82,180

 

 

 

292,228

 

 

 

259,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

4,854

 

 

 

2,987

 

 

 

32,947

 

 

 

30,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(470

)

 

 

(197

)

 

 

(1,253

)

 

 

(521

)

Other

 

 

(65

)

 

 

(6

)

 

 

(31

)

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax expense

 

 

4,319

 

 

 

2,784

 

 

 

31,663

 

 

 

30,289

 

Income tax expense

 

 

727

 

 

 

1,017

 

 

 

4,873

 

 

 

9,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

3,592

 

 

 

1,767

 

 

 

26,790

 

 

 

20,657

 

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

 

 

9

 

 

 

(71

)

 

 

30

 

 

 

(101

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,601

 

 

$

1,696

 

 

$

26,820

 

 

$

20,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.12

 

 

$

0.06

 

 

$

0.90

 

 

$

0.68

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(0.01

)

Basic earnings per share

 

$

0.12

 

 

$

0.06

 

 

$

0.90

 

 

$

0.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.12

 

 

$

0.06

 

 

$

0.88

 

 

$

0.67

 

Discontinued operations

 

 

 

 

 

(0.01

)

 

 

 

 

 

(0.01

)

Diluted earnings per share

 

$

0.12

 

 

$

0.05

 

 

$

0.88

 

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,720,472

 

 

 

30,348,180

 

 

 

29,708,055

 

 

 

30,490,554

 

Diluted

 

 

30,358,284

 

 

 

30,877,192

 

 

 

30,370,193

 

 

 

31,040,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.11

 

 

$

0.09

 

 

$

0.33

 

 

$

0.27

 

 

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

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Accumulated

 

 

Treasury Stock

 

 

Shareholders'

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit)

 

 

Shares

 

 

Value

 

 

Equity

 

Balance at December 31, 2017

 

 

29,646

 

 

$

296

 

 

$

77,017

 

 

$

2,191

 

 

 

72

 

 

$

 

 

$

79,504

 

Net income

 

 

 

 

 

 

 

 

 

 

 

26,820

 

 

 

 

 

 

 

 

 

26,820

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(10,176

)

 

 

 

 

 

 

 

 

(10,176

)

Repurchase of common stock

 

 

(225

)

 

 

(2

)

 

 

(5,941

)

 

 

 

 

 

 

 

 

 

 

 

(5,943

)

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

309

 

 

 

3

 

 

 

(4,317

)

 

 

 

 

 

 

 

 

 

 

 

(4,314

)

Stock-based compensation

 

 

 

 

 

 

 

 

5,720

 

 

 

 

 

 

 

 

 

 

 

 

5,720

 

Cumulative effect of a change in accounting principle (Note 2)

 

 

 

 

 

 

 

 

 

 

 

(2,324

)

 

 

 

 

 

 

 

 

(2,324

)

Balance at September 30, 2018

 

 

29,730

 

 

$

297

 

 

$

72,479

 

 

$

16,510

 

 

 

72

 

 

$

 

 

$

89,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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 30,

 

 

September 24,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

26,820

 

 

$

20,556

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,762

 

 

 

11,089

 

Deferred income taxes

 

 

744

 

 

 

4,472

 

Non-cash interest expense

 

 

62

 

 

 

97

 

Loss on the disposal of property and equipment, net

 

 

21

 

 

 

 

Debt issuance costs written-off

 

 

 

 

 

16

 

Amortization of below market lease

 

 

59

 

 

 

 

Stock-based compensation expense

 

 

5,720

 

 

 

5,080

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,295

 

 

 

11,002

 

Inventories

 

 

700

 

 

 

149

 

Prepaid expenses and other

 

 

287

 

 

 

217

 

Other assets

 

 

 

 

 

356

 

Accounts payable and accrued expenses

 

 

(9,797

)

 

 

(6,064

)

Deferred revenue

 

 

(6,070

)

 

 

(10,671

)

Deferred rent

 

 

834

 

 

 

493

 

Other liabilities

 

 

(2,895

)

 

 

(1,702

)

Net cash provided by operating activities

 

 

40,542

 

 

 

35,090

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(22,113

)

 

 

(14,326

)

Acquisition of intangible assets

 

 

(1,171

)

 

 

 

Net cash used in investing activities

 

 

(23,284

)

 

 

(14,326

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal borrowings on long-term debt

 

 

23,000

 

 

 

26,000

 

Principal repayments on long-term debt

 

 

(19,000

)

 

 

(21,000

)

Repurchase of common stock

 

 

(5,943

)

 

 

(14,543

)

Cash dividend payments

 

 

(10,176

)

 

 

(8,568

)

Tax payments from the vesting of restricted stock and option exercises

 

 

(4,342

)

 

 

(2,079

)

Proceeds from the exercise of stock options

 

 

29

 

 

 

913

 

Deferred financing costs

 

 

 

 

 

(413

)

Net cash used in financing activities

 

 

(16,432

)

 

 

(19,690

)

Net increase in cash and cash equivalents

 

 

826

 

 

 

1,074

 

Cash and cash equivalents at beginning of period

 

 

4,051

 

 

 

3,788

 

Cash and cash equivalents at end of period

 

$

4,877

 

 

$

4,862

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

1,204

 

 

$

405

 

Income taxes

 

$

6,730

 

 

$

6,539

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued acquisition of property and equipment

 

$

1,253

 

 

$

1,023

 

 

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 30, 2018 and December 31, 2017 and for the thirteen and thirty-nine week periods ended September 30, 2018 and September 24, 2017 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 30, 2018, there were 155 Ruth’s Chris Steak House restaurants, including 78 Company-owned restaurants, two restaurants operating under contractual agreements and 75 franchisee-owned restaurants, including 20 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Panama, Singapore and Taiwan. All Company-owned restaurants are located in the United States.  A new Company-owned Ruth’s Chris Steak House restaurant was opened in Jersey City, NJ in August 2018.  Subsequent to the end of the quarter a franchisee-owned Ruth’s Chris Steak House restaurant was closed in Panama City, Panama.

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 30, 2018 and September 24, 2017 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 31, 2017.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended September 30, 2018 and September 24, 2017 each contained thirteen weeks and are referred to herein as the third quarter of fiscal year 2018 and the third quarter of fiscal year 2017, respectively. Fiscal year 2018 is a 52-week year.  Fiscal year 2017 was a 53-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 GAAP. 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 Adopted Accounting Standard

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 replaces most existing revenue recognition guidance in GAAP.  The Company adopted this new revenue recognition standard on January 1, 2018.  See Note 2 for further information about our transition to this new revenue recognition standard.

Recent Accounting Pronouncements for Future Application

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.  In July 2018, the FASB issued ASU 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified

7


retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating which transition method it will use. 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.  The Company is implementing a new lease software program as a part of its adoption of ASU 2016-02.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).  This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  This update is effective for the Company in the first quarter of fiscal year 2021.  We do not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

(2) Revenue

The Company adopted FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) with an initial date of application of January 1, 2018.  As a result, the Company has changed its accounting policy for revenue recognition.  The Company applied Topic 606 using the cumulative effect method to contracts that were not completed at January 1, 2018, which resulted in the recognition of the cumulative effect of initially adopting Topic 606 as an adjustment to the opening balance of shareholders’ equity at January 1, 2018.  Therefore, the comparative information has not been adjusted and continues to be reported under the Company’s revenue recognition policy in effect prior to the adoption of Topic 606.  The Company adopted Topic 606 using the practical expedient in paragraph 606-10-65-1(f)(4), under which the Company aggregated all contract modifications that occurred before January 1, 2018 to identify the satisfied and unsatisfied performance obligations, to determine the transaction price, and to allocate the transaction price to the satisfied and unsatisfied performance obligations.  The details of the significant changes as a result of adopting Topic 606 are provided below.

Franchise Income.  Prior to the adoption of Topic 606, the Company recognized franchise development and opening fees when a franchisee-owned restaurant opened.  Under Topic 606, the Company now recognizes franchise development and opening specific fees over the life of the applicable franchise agreements.  The Company increased its deferred revenue liability by $3.1 million, increased its deferred tax assets by $746 thousand and decreased the opening balance of shareholders’ equity by $2.3 million for previously recognized franchise development and opening fees that will now be recognized over the life of the applicable franchise agreements.  The adoption of Topic 606 also impacts the classification of advertising contributions from franchisees.  Prior to the adoption of Topic 606, the Company recorded advertising contributions from franchisees as a liability against which specific marketing and advertising costs were charged, which reduced the Company’s marketing expense on the consolidated statements of income.  Under Topic 606, advertising contributions from franchisees are classified as franchise income on the consolidated statements of income in fiscal year 2018.  The Company recognized $1.1 million of advertising contributions from franchisees in the thirty-nine weeks of fiscal year 2018.  Because of the offsetting adjustments, the reclassification of advertising contributions from franchisees will have no impact to the Company’s net income for fiscal year 2018.

Gift Cards.  Under Topic 606, the Company now classifies certain discounts recognized on the sale of gift cards, historically recognized as marketing expense, as a reduction to restaurant sales on the consolidated statements of income.  The reclassification of discounts recognized on the sale of gift cards from marketing expense to restaurant sales on the consolidated statements of income totaled $696 thousand in the first thirty-nine weeks of fiscal year 2018.  Because of the offsetting adjustments, the reclassification of discounts recognized on the sale of gift cards will have no impact to the Company’s net income for fiscal year 2018.

Impacts on Financial Statements

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the first thirty-nine weeks of fiscal year 2018.

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September 30, 2018              As Reported

 

 

Adjustments

 

 

 

Balances without adoption of Topic 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,877

 

 

$

 

 

 

$

4,877

 

Accounts receivable, less allowance for doubtful accounts 2018 - $371; 2017 - $361

 

 

11,332

 

 

 

 

 

 

 

11,332

 

Inventory

 

 

7,989

 

 

 

 

 

 

 

7,989

 

Prepaid expenses and other

 

 

2,393

 

 

 

 

 

 

 

2,393

 

Total current assets

 

 

26,591

 

 

 

 

 

 

 

26,591

 

Property and equipment, net of accumulated depreciation 2018 - $155,895; 2017 -

   $144,373

 

 

120,813

 

 

 

 

 

 

 

120,813

 

Goodwill

 

 

36,522

 

 

 

 

 

 

 

36,522

 

Franchise rights, net of accumulated amortization 2018 - $1,819; 2017 - $396

 

 

45,399

 

 

 

 

 

 

 

45,399

 

Other intangibles, net of accumulated amortization 2018 - $1,341; 2017 - $1,181

 

 

4,915

 

 

 

 

 

 

 

4,915

 

Deferred income taxes

 

 

4,949

 

 

 

(718

)

 

 

 

4,231

 

Other assets

 

 

582

 

 

 

 

 

 

 

582

 

Total assets

 

$

239,771

 

 

$

(718

)

 

 

$

239,053

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,537

 

 

$

 

 

 

$

6,537

 

Accrued payroll

 

 

14,130

 

 

 

 

 

 

 

14,130

 

Accrued expenses

 

 

7,779

 

 

 

 

 

 

 

7,779

 

Deferred revenue

 

 

36,794

 

 

 

(126

)

 

 

 

36,668

 

Other current liabilities

 

 

3,541

 

 

 

 

 

 

 

3,541

 

Total current liabilities

 

 

68,781

 

 

 

(126

)

 

 

 

68,655

 

Long-term debt

 

 

54,000