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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 March 29, 2020

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

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

RUTH

Nasdaq

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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

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 April 30, 2020 was 28,585,268, which includes 954,650 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 March 29, 2020 and December 29, 2019

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods ended March 29, 2020 and March 31, 2019

 

4

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Thirteen Week Periods ended March 29, 2020 and March 31, 2019

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods ended March 29, 2020 and March 31, 2019

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2

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

 

19

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

 

 

 

Item 4

Controls and Procedures

 

27

 

 

 

Part II — Other Information

 

28

 

 

 

 

Item 1

Legal Proceedings

 

28

 

 

 

 

Item 1A

Risk Factors

 

28

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

29

 

 

 

 

Item 4

Mine Safety Disclosures

 

29

 

 

 

 

Item 5

Other Information

 

29

 

 

 

 

Item 6

Exhibits

 

30

 

 

 

 

Signatures

 

31

 

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)

 

 

 

March 29,

 

 

December 29,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,792

 

 

$

5,567

 

Accounts receivable, less allowance for doubtful accounts 2020 - $270; 2019 - $241

 

 

8,642

 

 

 

23,769

 

Inventory

 

 

8,450

 

 

 

9,623

 

Prepaid expenses and other

 

 

2,913

 

 

 

3,052

 

Total current assets

 

 

90,797

 

 

 

42,011

 

Property and equipment, net of accumulated depreciation 2020 - $170,188; 2019 -

   $173,845

 

 

140,967

 

 

 

142,962

 

Operating lease right of use assets

 

 

200,489

 

 

 

206,358

 

Goodwill

 

 

45,549

 

 

 

45,549

 

Franchise rights, net of accumulated amortization 2020 - $4,850; 2019 - $4,401

 

 

46,168

 

 

 

49,916

 

Other intangibles, net of accumulated amortization 2020 - $1,472; 2019 - $1,439

 

 

4,211

 

 

 

4,449

 

Deferred income taxes

 

 

6,901

 

 

 

4,929

 

Other assets

 

 

778

 

 

 

702

 

Total assets

 

$

535,860

 

 

$

496,876

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,616

 

 

 

13,598

 

Accrued payroll

 

 

10,550

 

 

 

17,303

 

Accrued expenses

 

 

5,417

 

 

 

10,574

 

Deferred revenue

 

 

47,403

 

 

 

52,856

 

Current operating lease liabilities

 

 

17,516

 

 

 

14,313

 

Other current liabilities

 

 

2,837

 

 

 

4,237

 

Total current liabilities

 

 

91,339

 

 

 

112,881

 

Long-term debt

 

 

145,000

 

 

 

64,000

 

Operating lease liabilities

 

 

222,941

 

 

 

223,292

 

Unearned franchise fees

 

 

2,430

 

 

 

2,489

 

Other liabilities

 

 

69

 

 

 

69

 

Total liabilities

 

 

461,779

 

 

 

402,731

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share; 100,000,000 shares authorized, 27,617,472

   shares issued and outstanding at March 29, 2020, 28,418,691 shares issued and

   outstanding at December 29, 2019

 

 

276

 

 

 

284

 

Additional paid-in capital

 

 

28,652

 

 

 

40,462

 

Retained earnings

 

 

45,153

 

 

 

53,399

 

Treasury stock, at cost; 71,950 shares at March 29, 2020 and December 29, 2019

 

 

 

 

 

 

Total shareholders' equity

 

 

74,081

 

 

 

94,145

 

Total liabilities and shareholders' equity

 

$

535,860

 

 

$

496,876

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations—Unaudited

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

 

 

 

13 Weeks Ended

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

Restaurant sales

 

$

103,040

 

 

$

112,986

 

Franchise income

 

 

3,626

 

 

 

4,558

 

Other operating income

 

 

1,870

 

 

 

2,197

 

Total revenues

 

 

108,536

 

 

 

119,741

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Food and beverage costs

 

 

30,626

 

 

 

31,848

 

Restaurant operating expenses

 

 

55,554

 

 

 

53,603

 

Marketing and advertising

 

 

3,438

 

 

 

3,629

 

General and administrative costs

 

 

8,031

 

 

 

8,751

 

Depreciation and amortization expenses

 

 

5,822

 

 

 

4,969

 

Pre-opening costs

 

 

477

 

 

 

98

 

Loss on impairment

 

 

8,697

 

 

 

 

Total costs and expenses

 

 

112,645

 

 

 

102,898

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(4,109

)

 

 

16,843

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(628

)

 

 

(405

)

Other

 

 

33

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(4,704

)

 

 

16,440

 

Income tax expense (benefit)

 

 

(886

)

 

 

2,529

 

Net income (loss)

 

$

(3,818

)

 

$

13,911

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

(0.13

)

 

$

0.48

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

$

(0.13

)

 

$

0.47

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

 

28,287,261

 

 

 

29,275,501

 

Diluted

 

 

28,287,261

 

 

 

29,903,511

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.15

 

 

$

0.13

 

 

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, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Treasury Stock

 

 

Shareholders'

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Value

 

 

Equity

 

Balance at December 29, 2019

 

 

28,419

 

 

$

284

 

 

$

40,462

 

 

$

53,399

 

 

 

72

 

 

$

 

 

$

94,145

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,818

)

 

 

 

 

 

 

 

 

(3,818

)

Cash dividends, $0.15 per common share

 

 

 

 

 

 

 

 

 

 

 

(4,428

)

 

 

 

 

 

 

 

 

(4,428

)

Repurchase of common stock

 

 

(902

)

 

 

(9

)

 

 

(13,217

)

 

 

 

 

 

 

 

 

 

 

 

(13,226

)

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

 

 

100

 

 

 

1

 

 

 

(659

)

 

 

 

 

 

 

 

 

 

 

 

(658

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,065

 

 

 

 

 

 

 

 

 

 

 

 

2,065

 

Balance at March 29, 2020

 

 

27,617

 

 

$

276

 

 

$

28,652

 

 

$

45,153

 

 

 

72

 

 

$

 

 

$

74,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2018

 

 

29,269

 

 

$

293

 

 

$

61,819

 

 

$

28,020

 

 

 

72

 

 

$

 

 

$

90,132

 

Net income

 

 

 

 

 

 

 

 

 

 

 

13,911

 

 

 

 

 

 

 

 

 

13,911

 

Cash dividends, $0.13 per common share

 

 

 

 

 

 

 

 

 

 

 

(3,967

)

 

 

 

 

 

 

 

 

(3,967

)

Repurchase of common stock

 

 

(26

)

 

 

 

 

 

(568

)

 

 

 

 

 

 

 

 

 

 

 

(568

)

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

 

 

133

 

 

 

1

 

 

 

(1,632

)

 

 

 

 

 

 

 

 

 

 

 

(1,631

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,033

 

 

 

 

 

 

 

 

 

 

 

 

2,033

 

Cumulative effect of a change in accounting principle (Note 3)

 

 

 

 

 

 

 

 

 

 

 

(1,261

)

 

 

 

 

 

 

 

 

(1,261

)

Balance at March 31, 2019

 

 

29,376

 

 

$

294

 

 

$

61,652

 

 

$

36,703

 

 

 

72

 

 

$

 

 

$

98,649

 

 

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)

 

 

 

13 Weeks Ended

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,818

)

 

$

13,911

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,822

 

 

 

4,969

 

Deferred income taxes

 

 

(1,973

)

 

 

95

 

Non-cash interest expense

 

 

24

 

 

 

21

 

Loss on impairment

 

 

8,697

 

 

 

 

Stock-based compensation expense

 

 

2,065

 

 

 

2,033

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

17,076

 

 

 

8,077

 

Inventories

 

 

1,174

 

 

 

820

 

Prepaid expenses and other

 

 

139

 

 

 

(540

)

Other assets

 

 

 

 

 

(42

)

Accounts payable and accrued expenses

 

 

(21,333

)

 

 

(13,511

)

Deferred revenue

 

 

(5,453

)

 

 

(5,864

)

Operating lease liabilities and assets

 

 

3,119

 

 

 

(171

)

Other liabilities

 

 

1,026

 

 

 

2,281

 

Net cash provided by operating activities

 

 

6,565

 

 

 

12,079

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(3,928

)

 

 

(5,860

)

Net cash used in investing activities

 

 

(3,928

)

 

 

(5,860

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal borrowings on long-term debt

 

 

85,000

 

 

 

7,000

 

Principal repayments on long-term debt

 

 

(4,000

)

 

 

(9,000

)

Repurchase of common stock

 

 

(13,226

)

 

 

(568

)

Cash dividend payments

 

 

(4,428

)

 

 

(3,967

)

Tax payments from the vesting of restricted stock and option exercises

 

 

(658

)

 

 

(1,630

)

Deferred financing costs

 

 

(100

)

 

 

 

Net cash provided by (used in) financing activities

 

 

62,588

 

 

 

(8,165

)

Net increase (decrease) in cash and cash equivalents

 

 

65,225

 

 

 

(1,946

)

Cash and cash equivalents at beginning of period

 

 

5,567

 

 

 

5,062

 

Cash and cash equivalents at end of period

 

$

70,792

 

 

$

3,116

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

554

 

 

$

427

 

Income taxes

 

$

75

 

 

$

31

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued acquisition of property and equipment

 

$

4,190

 

 

$

667

 

 

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 March 29, 2020 and December 29, 2019 and for the thirteen week periods ended March 29, 2020 and March 31, 2019 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 March 29, 2020, there were 159 Ruth’s Chris Steak House restaurants, including 83 Company-owned restaurants, three restaurants operating under contractual agreements and 73 franchisee-owned restaurants, including 21 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan. All Company-owned restaurants are located in the United States.  During January 2020 a Company-owned Ruth’s Chris Steak House restaurant was relocated in Washington, D.C.

On July 29, 2019, the Company completed the acquisition of substantially all of the assets of three franchisee-owned Ruth’s Chris Steak House restaurants located in Philadelphia, PA, King of Prussia, PA and Garden City, NY (the “MBR Franchise Acquisition”) for a cash purchase price of $18.6 million.  The acquisition was funded with debt through the Company’s senior credit facility.  The results of operations, financial position and cash flows of the MBR Franchise Acquisition are included in the Company’s consolidated financial statements as of the date of the acquisition.  For additional information, see Note 7.

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 March 29, 2020 and March 31, 2019 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 29, 2019.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended March 29, 2020 and March 31, 2019 each contained thirteen weeks and are referred to herein as the first quarter of fiscal year 2020 and the first quarter of fiscal year 2019, respectively. Fiscal years 2020 and 2019 are both 52-week years.

COVID-19 Impact

In March 2020 the World Health Organization declared the novel coronavirus (“COVID-19”) a pandemic and the United States declared it a National Public Health Emergency, which has resulted in a significant reduction in revenue at our restaurants due to mandatory restaurant closures, capacity limitations, social distancing guidelines or other restrictions mandated by governments across the world, including federal, state and local governments in the United States.  As a result of these developments, the Company is experiencing a significant negative impact on its revenues, results of operations and cash flows which could impact its ability to meet its obligations over the next twelve months.

In response to the business disruption caused by the COVID-19 outbreak, the Company has taken the following actions, which management expects will enable it to meet its obligations over the next twelve months.

Operating Initiatives.  Due to the government mandates regarding limiting or prohibiting in-restaurant dining due to COVID-19, the Company is leveraging its Ruth’s Anywhere program in markets where take-out and delivery sales are sufficient to cover the costs of management staffing those locations. As of the date of this report the dining rooms in all of the Company-owned restaurants are closed.  The Company is operating take-out and delivery in 56 Company-owned restaurants where it is permitted by local regulations and economically viable and 30 Company-owned and -managed restaurants are closed.  As of the date of this report, our labor and supply chain have not been disrupted.  Many of the franchisee-owned locations are experiencing similar disruptions to their business, and as a result, the Company has waived franchise royalty requirements until their dining rooms have re-opened.  The Company currently expects the majority of its dining rooms to remain closed through most of the second fiscal quarter of 2020.

Capital and Expense Reductions.  The Company has suspended all new restaurant construction and non-essential capital expenditures.  The Company has also made significant reductions in ongoing operating expenses, including curtailing operations in

7


restaurants where take-out and delivery is not viable and furloughing a significant number of team members in the field and in the Company’s Home Office.  In addition, the Company has also implemented pay reductions for all remaining Home Office and field employees.  We have taken measures to reduce payments to our landlords and vendors in April 2020 and have begun discussions with our landlords and vendors to reduce or defer our payments. We are unable to predict the outcome of these discussions and the extent to which we will be able to negotiate to reduce or defer payments. With payments being delayed, landlords or vendors may terminate our leases and contracts or could take other actions that restrict our ability to access or reopen our stores in a timely manner.

Dividends and Share Buybacks. The Company suspended the quarterly cash dividend and there are no plans for share buybacks in the foreseeable future.

Balance Sheet.  In March 2020, the Company entered into a Second Amendment to our Credit Agreement (‘Second Amendment”), which increased the Company’s borrowing capacity to $150.0 million and relaxed the leverage covenant restrictions to 4.0 times Bank Adjusted EBITDA through the first quarter of 2021.  We borrowed the remaining available amount under the Revolving Credit Facility as a precautionary measure in order to increase the Company’s cash position and preserve financial flexibility.  On May 7, 2020, the Company entered into a Third Amendment to our Credit Agreement (“Third Amendment”), which waived financial covenants until the first quarter of 2021, further relaxed the leverage covenant restrictions during the first and second quarters of 2021 and added a monthly liquidity covenant.

This is an unprecedented event in the Company’s history and it is uncertain how the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or closure requirements, when the Company’s dining rooms will re-open, and what level of customer demand the Company will experience once the dining rooms are permitted to re-open. Additionally, if the Company fails to comply with its financial covenants and is unable to remedy or obtain a waiver or amendment, an event of default would result.  We have engaged in and are continuing to engage in discussions with various parties to explore financing opportunities to further enhance our liquidity.  The Company’s operating results, financial position  and liquidity over the next twelve months will depend upon a series of factors, including the duration of restaurant shutdowns; the speed with which, and the extent to which, customers return to its restaurants once the dining rooms re-open; the Company’s success in obtaining rent and other payment concessions from landlords and vendors; and the Company’s ability to raise additional capital.  

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, lease right of use assets and obligations related to gift cards, income taxes, lease liabilities, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses.  This update requires immediate recognition of management’s estimates of current expected credit losses.  The Company adopted this new standard on December 30, 2019.  The adoption of ASU 2016-13 did not have a significant impact on the Company’s financial reporting.

In January 2017 the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Impairment Test for Goodwill.  This update eliminated the calculation of implied goodwill fair value.  The Company adopted this new standard on December 30, 2019.  The adoption of ASU 2017-04 did not have a significant impact on the Company’s financial reporting.

In August 2018 the FASB issued ASU 2018-13, Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  This update primarily amended the disclosures required surrounding Level 3 fair value measurements.  The Company adopted this new standard on December 30, 2019.  The adoption of ASU 2018-13 did not have a significant impact on the Company’s financial reporting.

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.  The Company adopted this new standard on December 30, 2019.  The adoption of ASU 2018-15 did not have a significant impact on the Company’s financial reporting.

8


In August 2018 the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses.  This update clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20.  Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842.  The Company adopted this new standard on December 30, 2019. The adoption of ASU 2018-19 did not have a significant impact on the Company’s financial reporting.

In December 2019 the FASB issued ASU 2019-12, Income Taxes (Topic 740).  This update modifies Topic 740 to simplify the accounting for income taxes.  This update is effective for the Company in the first quarter of fiscal year 2021.  The adoption of ASU 2019-12 is not expected to have a significant impact on the Company’s ongoing financial reporting.

(2) 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 March 29, 2020 and December 29, 2019 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).

During the first quarter of fiscal year 2020, primarily due to the impacts of the COVID-19 pandemic, the Company determined that a triggering event had occurred requiring an impairment evaluation of its long-lived assets, territory rights, indefinite lived intangible assets and goodwill.  After performing a Step 1 analysis the Company determined there was no impairment of goodwill and franchise rights with indefinite lives in the first quarter of fiscal year 2020.  The Company recorded a $5.6 million impairment loss related to long-lived assets at seven restaurants and a $3.1 million impairment loss related to territory rights.  The impairment was measured based on the amount by which the carrying amount of the assets exceeded fair value.  Fair value was estimated based on both the market and income approaches utilizing market participant assumptions reflecting all available information as of the balance sheet date.  The impairment losses are included in the loss on impairment caption in the accompanying condensed consolidated statement of operations.

The Company’s non-financial assets measured at fair value on a non-recurring basis as of March 29, 2020 were as follows (in thousands):

 

 

Fair Value as of March 29, 2020

 

 

Significant Other Observable Inputs (Level 3)

 

 

Total Losses on Impairment

 

Long-lived assets

 

$

4,689

 

 

$

4,689

 

 

$

5,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of March 29, 2020

 

 

Significant Other Observable Inputs (Level 3)

 

 

Total Losses on Impairment

 

Territory rights

 

$

 

 

$

 

 

$

3,101

 

9


As of December 29, 2019, 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. 

(3) Leases

The Company leases restaurant facilities and equipment.  The Company determines whether an arrangement is or contains a lease at contract inception.  The Company’s leases are all classified as operating leases, which are included as ROU assets and operating lease liabilities in the Company’s condensed consolidated balance sheet.  Operating lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date.  ROU assets are measured based on the operating lease liabilities adjusted for lease incentives, initial indirect costs and impairments of operating lease assets.  Minimum lease payments include only the fixed lease components of the agreements, as well as any variable rate payments that depend on an index, which are measured initially using the index at the lease commencement dates.  To determine the present value of future minimum lease payments, the Company estimates incremental borrowing rates based on the information available at the lease commencement dates, or the transition date at adoption.  The Company estimates its rates by starting with the interest rate on its senior revolving credit facility and makes adjustments to that rate to reflect the amount that it would pay to borrow the amount of the lease payments on a collateralized basis over similar terms.  The Company validates such rates by determining its credit rating, adjusting the rating to capture payment terms on a collateralized basis and establishing a yield curve based on such rating.  The expected lease terms include options to extend when it is reasonably certain the Company will exercise the options up to a total term of 20 years.  For financial reporting purposes, minimum rent payments are expensed on a straight-line basis over the lives of the leases.  Additionally, incentives received from landlords used to fund leasehold improvements reduce the ROU assets related to those leases and are amortized as reductions to rent expense over the lives of the leases.  Variable lease payments that do not depend on a rate or index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.

At March 29, 2020, all of the Company-owned Ruth’s Chris Steak House restaurants operated in leased premises, with the exception of the restaurant in Ft. Lauderdale, FL, which is an owned property, and the restaurants in Anaheim, CA, Lake Mary, FL, Princeton, NJ and South Barrington, IL, which operate on leased land.  The leases generally provide for minimum annual rental payments with scheduled minimum rent payment increases during the terms of the leases.  Certain leases also provide for rent deferral during the initial term, lease incentives in the form of tenant allowances to fund leasehold improvements, and/or contingent rent provisions based on the sales at the underlying restaurants.  Most of the Company’s restaurant leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more.  The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  The weighted average term and discount rate for operating leases is 13.3 years and 4.9%, respectively.

The components of lease expense are as follows (in thousands):

 

 

 

 

13 Weeks Ended

 

 

13 Weeks Ended

 

 

 

Classification

 

March 29, 2020

 

 

March 31, 2019

 

Operating lease cost

 

Restaurant operating expenses and General and administrative costs

 

$

7,152

 

 

$

6,380

 

Variable lease cost

 

Restaurant operating expenses and General and administrative costs

 

 

2,726

 

 

 

2,757

 

Total lease cost

 

 

 

$

9,878

 

 

$

9,137

 

 

As of March 29, 2020, maturities of lease liabilities are summarized as follows (in thousands):

 

Operating Leases

 

2020, excluding first thirteen weeks ended March 29, 2020

$

21,621

 

2021

 

28,290

 

2022

 

27,212

 

2023

 

24,290

 

2024

 

24,094

 

Thereafter

 

208,279

 

Total future minimum rental commitments

 

333,786

 

Imputed interest

 

(93,329

)

 

$

240,457

 

10


Supplemental cash flow information related to leases was as follows (in thousands):

 

 

13 Weeks Ended

 

 

13 Weeks Ended

 

 

 

March 29, 2020

 

 

March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

6,507

 

 

$

6,524

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

      Operating leases

 

$

3,820

 

 

$

4,055

 

 

Additionally, at March 29, 2020 we have executed seven leases for new Ruth’s Chris Steak House Restaurant locations with undiscounted fixed payments over the initial term of $35.7 million.  These leases are expected to have an economic lease term of 20 years.  These leases will commence when the landlords make the property available to us for the new restaurant construction.  We will assess the reasonably certain lease term at the lease commencement date.

 

(4) Revenue

In the following tables, the Company’s revenue is disaggregated by major component for each category on the consolidated statements of income (in thousands).

 

13 Weeks Ended March 29, 2020:

 

Domestic

 

 

International

 

 

Total Revenue

 

Restaurant sales

 

$

103,040

 

 

$

 

 

$

103,040

 

Franchise income

 

 

3,059

 

 

 

567

 

 

 

3,626

 

Other operating income

 

 

1,870

 

 

 

 

 

 

1,870

 

Total revenue

 

$

107,969

 

 

$

567

 

 

$

108,536