20150616 10Q Q2 2015

Table of Contents

 

 

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 June 16, 2015

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 001-35611

 

Del Frisco’s Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

Delaware

 

20-8453116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

920 S. Kimball Ave., Suite 100,

Southlake, TX

 

76092

(Address of principal executive offices)

 

(Zip code)

 

(817) 601-3421

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

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

As of July 22, 2015, the latest practicable date, 23,449,996 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.

 

 

1


 

Table of Contents

 

 

Table of Contents:

 

 

 

 

 

 

 

 

 

 

 

Part I – Financial Information 

  

 

  

Item 1. Financial Statements (unaudited)

  

 

  

Condensed Consolidated Balance Sheets 

  

 

  

Condensed Consolidated Statements of Income and Comprehensive Income 

  

 

  

Condensed Consolidated Statement of Changes in Stockholders’ Equity 

  

 

  

Condensed Consolidated Statements of Cash Flows 

  

 

  

Notes to Condensed Consolidated Financial Statements 

  

 

  

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

  

 

14 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

  

 

24 

  

Item 4. Controls and Procedures 

  

 

24 

  

 

 

Part II – Other Information 

  

 

25 

  

Item 1. Legal Proceedings 

  

 

25 

  

Item 1A. Risk Factors 

  

 

25 

  

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

  

 

25 

  

Item 3. Defaults Upon Senior Securities 

  

 

25 

  

Item 4. Mine Safety Disclosures 

  

 

25 

  

Item 5. Other Information 

  

 

25 

  

Item 6. Exhibits 

  

 

25 

  

 

 

Signatures 

  

 

27 

  

 

 

2


 

Table of Contents

 

PART I

FINANCIAL INFORMATION

  Item 1.

Financial Statements

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 16,

 

December 30,

 

2015

 

2014

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,928 

 

$

3,520 

Restricted cash

 

215 

 

 

215 

Inventory

 

15,668 

 

 

16,592 

Income taxes receivable

 

3,563 

 

 

4,769 

Deferred income taxes

 

3,076 

 

 

3,124 

Lease incentives receivable

 

3,569 

 

 

5,406 

Prepaid expenses and other

 

4,303 

 

 

6,007 

Total current assets

 

32,322 

 

 

39,633 

Property and equipment, net of accumulated depreciation of $58,443 and $64,198 at December 30, 2014 and June 16, 2015 (unaudited), respectively

 

167,473 

 

 

154,999 

Goodwill

 

75,365 

 

 

75,365 

Intangible assets, net

 

36,465 

 

 

36,575 

Deferred compensation plan investments

 

13,862 

 

 

12,760 

Other assets

 

331 

 

 

334 

Total assets

$

325,818 

 

$

319,666 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

$

 —

 

$

 —

Accounts payable

 

9,908 

 

 

12,198 

Accrued payroll

 

5,381 

 

 

5,788 

Accrued self-insurance

 

1,010 

 

 

950 

Deferred revenue

 

11,990 

 

 

15,716 

Other current liabilities

 

6,793 

 

 

6,244 

Total current liabilities

 

35,082 

 

 

40,896 

Long-term debt

 

 —

 

 

 —

Deferred rent obligations

 

34,498 

 

 

33,186 

Deferred income taxes

 

15,849 

 

 

16,179 

Other liabilities

 

18,816 

 

 

18,422 

Total liabilities

 

104,245 

 

 

108,683 

Commitments and contingencies

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at December 30, 2014 or June 16, 2015 (unaudited)

 

 —

 

 

 —

Common stock, $0.001 par value, 190,000,000 shares authorized, 23,908,542 shares issued and 23,443,046 shares outstanding at December 30, 2014 and 23,915,492 shares issued and 23,449,996 shares outstanding at June 16, 2015 (unaudited)

 

24 

 

 

24 

Treasury stock at cost: 465,496 shares at December 30, 2014 and June 16, 2015 (unaudited)

 

(10,000)

 

 

(10,000)

Additional paid in capital

 

135,366 

 

 

133,883 

Retained earnings

 

96,183 

 

 

87,076 

Total stockholders' equity

 

221,573 

 

 

210,983 

Total liabilities and stockholders' equity

$

325,818 

 

$

319,666 

See notes to condensed consolidated financial statements.

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Table of Contents

 

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income—Unaudited

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended

 

24 Weeks Ended

 

June 16,

 

June 17,

 

June 16,

 

June 17,

 

2015

 

2014

 

2015

 

2014

Revenues

$

73,776 

 

$

67,386 

 

$

148,878 

 

$

134,008 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Costs of sales

 

21,276 

 

 

20,292 

 

 

42,938 

 

 

40,344 

Restaurant operating expenses

 

34,260 

 

 

30,037 

 

 

69,207 

 

 

60,608 

Marketing and advertising costs

 

1,746 

 

 

1,386 

 

 

3,117 

 

 

2,607 

Pre-opening costs

 

1,479 

 

 

906 

 

 

1,746 

 

 

1,290 

General and administrative costs

 

5,908 

 

 

4,844 

 

 

11,386 

 

 

9,530 

Secondary public offering costs

 

 —

 

 

 —

 

 

 —

 

 

Depreciation and amortization

 

3,613 

 

 

3,001 

 

 

7,190 

 

 

5,956 

Operating income

 

5,494 

 

 

6,920 

 

 

13,294 

 

 

13,668 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(7)

 

 

(16)

 

 

(32)

 

 

(31)

Other  

 

(88)

 

 

(22)

 

 

(177)

 

 

(39)

Income before income taxes

 

5,399 

 

 

6,882 

 

 

13,085 

 

 

13,598 

Income tax expense

 

1,686 

 

 

2,113 

 

 

3,978 

 

 

4,308 

Net income

$

3,713 

 

$

4,769 

 

$

9,107 

 

$

9,290 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.16 

 

$

0.20 

 

$

0.39 

 

$

0.39 

Diluted earnings per common share

$

0.16 

 

$

0.20 

 

$

0.39 

 

$

0.39 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

23,445,716 

 

 

23,578,703 

 

 

23,444,381 

 

 

23,603,045 

Diluted

 

23,672,028 

 

 

23,846,766 

 

 

23,599,213 

 

 

23,852,881 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

3,713 

 

$

4,769 

 

$

9,107 

 

$

9,290 

 

See notes to condensed consolidated financial statements.

 

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity—Unaudited

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional Paid

 

Treasury

 

Retained

 

 

 

 

Shares

 

Par Value

 

In Capital

 

Stock

 

Earnings

 

Total 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2014

23,443,046 

 

$

24 

 

$

133,883 

 

$

(10,000)

 

$

87,076 

 

$

210,983 

Net income

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,107 

 

 

9,107 

Share-based compensation costs

 —

 

 

 —

 

 

1,382 

 

 

 —

 

 

 —

 

 

1,382 

Stock option exercises, including tax effects

6,950 

 

 

 —

 

 

101 

 

 

 —

 

 

 —

 

 

101 

Balance at June 16, 2015

23,449,996 

 

$

24 

 

$

135,366 

 

$

(10,000)

 

$

96,183 

 

$

221,573 

 

See notes to condensed consolidated financial statements.

 

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended

 

June 16,

 

June 17,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Net income

$

9,107 

 

$

9,290 

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

 

 

 

 

 

Depreciation and amortization

 

7,190 

 

 

5,956 

Loss on disposal of restaurant property

 

25 

 

 

39 

Loan cost amortization

 

 

 

Share-based compensation

 

1,382 

 

 

1,154 

Deferred income taxes

 

(282)

 

 

(1,096)

Amortization of deferred lease incentives

 

(475)

 

 

(355)

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

924 

 

 

169 

Lease incentives receivable

 

2,687 

 

 

1,352 

Other assets

 

780 

 

 

1,186 

Accounts payable

 

(865)

 

 

1,487 

Income taxes

 

658 

 

 

330 

Deferred rent obligations

 

1,009 

 

 

881 

Other liabilities

 

(2,832)

 

 

(1,730)

Net cash provided by operating activities

 

19,316 

 

 

18,671 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

 

Purchases of property and equipment

 

(21,045)

 

 

(17,822)

Other

 

35 

 

 

(89)

Net cash used in investing activities

 

(21,009)

 

 

(17,902)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Purchases of treasury stock

 

 —

 

 

(2,701)

Proceeds from exercise of stock options

 

101 

 

 

308 

Net cash provided by (used in) financing activities

 

101 

 

 

(2,393)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(1,592)

 

 

(1,624)

Cash and cash equivalents at beginning of period

 

3,520 

 

 

13,674 

Cash and cash equivalents at end of period

$

1,928 

 

$

12,050 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

$

43 

 

$

25 

Income taxes

$

1,778 

 

$

3,997 

Capital expenditures included in accounts payable

$

1,425 

 

$

745 

 

See notes to condensed consolidated financial statements.

6


 

Table of Contents

 

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

 

 

1.

BUSINESS AND BASIS OF PRESENTATION

As of June 16, 2015, Del Frisco’s Restaurant Group, Inc. (the “Company”) owned and operated 46 restaurants under the concept names of Del Frisco’s Double Eagle Steak House (“Del Frisco’s”), Sullivan’s Steakhouse (“Sullivan’s”), and Del Frisco’s Grille (“Grille”). Of the 46 restaurants the Company operated at the end of the period covered by this report, there were 11 Del Frisco’s restaurants, 18 Sullivan’s restaurants and 17 Grille restaurants in operation in 20 states and the District of Columbia. During the second fiscal quarter of 2015, the Company opened a new Grille location in The Woodlands, Texas. The Company also closed a Sullivan’s location in Denver, Colorado.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the 12 and 24 weeks ended June 16, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2015. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2014 filed with the SEC on February 27, 2015 (the “2014 10-K”).

The Company operates on a 52- or 53-week fiscal year ending the last Tuesday in December. The fiscal quarters ended June 16, 2015 and June 17, 2014 each contained 12 weeks and are referred to herein as the second quarter of fiscal year 2015 and the second quarter of fiscal year 2014, respectively. Fiscal year 2015 will be a 52-week fiscal year as was fiscal year 2014.

Accounting Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates.

There have been no material changes to the significant accounting policies from what was previously reported in the 2014 10-K.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”), 2014-09, Revenue from Contracts with Customers.  This ASU is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB voted to defer the effective date of this ASU by one year to annual periods beginning after December 15, 2017 and the standard permits the use of either the retrospective or cumulative effect transition method. Early adoption is permitted as of the original effective date. The Company is evaluating the effect that ASU 2014-09 will have on the Company’s consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has the Company determined the effect, if any, of the standard on the Company’s ongoing financial reporting.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The amendments in this ASU are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the impact of adopting this ASU to be material to the Company’s financial statements and related disclosures.

 

 

 

 

 

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2.

EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) data is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS data is computed based on the weighted average number of shares of common stock outstanding, including all potentially issuable shares of common stock. Diluted EPS for the 12 and 24 weeks ended June 16, 2015 excludes options to purchase 760,457 and 829,332  shares of common stock, respectively, which were outstanding during the periods, but were antidilutive. Diluted EPS for the 12 and 24 weeks ended June 17, 2014, excludes options to purchase 708,047 and 700,285 shares of common stock, respectively, which were outstanding during the periods but were antidilutive.

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended

 

24 Weeks Ended

 

June 16,

 

June 17,

 

June 16,

 

June 17,

 

2015

 

2014

 

2015

 

2014

Net income

$

3,713 

 

$

4,769 

 

$

9,107 

 

$

9,290 

Shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

23,445,716 

 

 

23,578,703 

 

 

23,444,381 

 

 

23,603,045 

Dilutive shares

 

226,312 

 

 

268,063 

 

 

154,832 

 

 

249,836 

Total Diluted Shares

 

23,672,028 

 

 

23,846,766 

 

 

23,599,213 

 

 

23,852,881 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.16 

 

$

0.20 

 

$

0.39 

 

$

0.39 

Diluted earnings per common share

$

0.16 

 

$

0.20 

 

$

0.39 

 

$

0.39 

 

 

 

 

 

 

 

 

 

 

3.

STOCK-BASED EMPLOYEE COMPENSATION

2012 Long-Term Equity Incentive Plan

On July 16, 2012, the Company adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (the “2012 Plan”), which allows the Company to grant stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services for the Company. The 2012 Plan provides for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. Equity-based awards become exercisable at various periods ranging from one to four years from the date of grant. The 2012 Plan has 2,232,800 shares authorized for issuance under the plan. There were 1,410,300 shares of common stock issuable upon exercise of outstanding options and 160,271 shares of unvested restricted stock outstanding at  June 16, 2015 with 528,704 shares available for future grants.

 

The following table details the Company’s total stock-based compensation cost during the 12 and 24 weeks ended June 16, 2015 and June 17, 2014 as well as where the costs were expensed (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended

 

24 Weeks Ended

 

June 16,

 

June 17,

 

June 16,

 

June 17,

 

2015

 

2014

 

2015

 

2014

Restaurant operating expenses

$

115 

 

$

101 

 

$

223 

 

$

199 

General and administrative costs

 

687 

 

 

480 

 

 

1,159 

 

 

955 

Total stock compensation cost

$

802 

 

$

581 

 

$

1,382 

 

$

1,154 

 

 

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Restricted Stock

The following table summarizes restricted stock activity during the 24 week period ended June 16, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended June 16, 2015

 

Shares

 

Weighted average grant date fair value

 

Aggregate intrinsic value ($000's)

Outstanding at beginning of year

 

 —

 

$

 —

 

 

 

Granted

 

160,271 

 

 

20.30 

 

 

 

Vested

 

 —

 

 

 —

 

 

 

Forfeited

 

 —

 

 

 —

 

 

 

Outstanding at end of period

 

160,271 

 

$

20.30 

 

 

2,976 

 

As of June 16, 2015, there was $3.0 million of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a period of approximately 3.5 years. Of the restricted shares granted during the period, 62,569 of the 160,271 shares granted are subject to forfeiture if certain performance conditions are not achieved during fiscal 2015.

Stock Options

The following table summarizes stock option activity during the 24 week period ended June 16, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended June 16, 2015

 

Shares

 

Weighted average exercise price

 

Weighted average remaining contractual term

 

Aggregate intrinsic value ($000's)

Outstanding at beginning of year

 

1,429,000 

 

$

17.45 

 

 

 

 

 

 

Granted

 

  —

 

 

 —

 

 

 

 

 

 

Exercised

 

(6,950)

 

 

14.55 

 

 

 

 

 

 

Forfeited

 

(11,750)

 

 

21.22 

 

 

 

 

 

 

Outstanding at end of period

 

1,410,300 

 

$

17.43 

 

 

7.7 years

 

 

3,626 

Options exercisable at end of period

 

466,925 

 

$

16.32 

 

 

7.6 years

 

 

1,546 

 

 

A summary of the status of non-vested stock options as of June 16, 2015 and changes during the 24 weeks ended June 16, 2015 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended

 

June 16, 2015

 

Shares

 

Weighted average grant-date fair value

Non-vested stock options at beginning of year

974,250 

 

$

7.08 

Granted

 —

 

 

 —

Vested

(21,375)

 

 

7.46 

Forfeited

(9,500)

 

 

8.68 

Non-vested stock options at end of period

943,375 

 

$

7.05 

 

As of June 16, 2015, there was $4.4 million of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a period of approximately 1.7 years. No stock-based awards were issued under the 2012 Plan during the 24 weeks ended June 16, 2015.

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The following table details the values from and assumptions for the Black-Scholes option pricing model for stock options issued during the 24 weeks ended June 17, 2014:

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended

 

 

 

June 17, 2014

Weighted average grant date fair value

 

 

 

$9.99

Weighted average risk-free interest rate

 

 

 

1.86%

Weighted average expected life

 

 

 

5.40 years

Weighted average volatility

 

 

 

37.32%

Expected dividend

 

 

 

 —

 

The Black-Scholes option valuation model requires the input of subjective assumptions, including the expected life of the stock-based award. The assumptions above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. The expected term of options granted is based on a representative peer group with similar employee groups and expected behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury constant maturities rate in effect at the time of grant. The Company utilized a weighted rate for expected volatility based on a representative peer group with a similar expected term of options granted. Outstanding options granted under the 2012 Plan are subject to a four year vesting period and have a ten year maximum contractual term.

In addition, the Company is required to estimate the expected forfeiture rate and only recognizes expense for those stock options expected to vest. If the actual forfeiture rate is materially different from the Company’s estimate, the share-based compensation expense could be materially different.

 

 

 

 

 

4.

LONG-TERM DEBT

On October 15, 2012, the Company entered into a credit facility that provides for a three-year unsecured revolving credit facility of up to $25.0 million. Borrowings under the credit facility bear interest at a rate of LIBOR plus 1.50%. The Company is required to pay a commitment fee equal to 0.25% per annum on the available but unused revolving credit facility. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility contains various financial covenants, including a maximum ratio of total indebtedness to EBITDA and minimum fixed charge coverage, both as defined in the credit agreement. The credit facility also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the payment of dividends, the incurrence of indebtedness and providing financing or other transactions with affiliates. The Company was in compliance with all of the debt covenants as of June 16, 2015 and December 30, 2014.

As of June 16, 2015 and December 30, 2014, there were no outstanding borrowings on the Company’s revolving credit facility. Under the revolving loan commitment, the Company had approximately $25.0 million of borrowings available less  $1,369,250 in outstanding letters of credit commitments. 

Subsequent to the second fiscal quarter, on June 30, 2015 the Company entered into a Second Amendment to the credit facility (the “Amendment”.)  The Amendment, among other things, extended the termination date of the credit facility to October 15, 2017 and modified the revolving credit commitment to $15.0 million, with such amount subject to increases in increments of $5.0 million at the Company’s request, up to a maximum amount of $30.0 million.  All other major terms remained unchanged.

 

 

 

5.

INCOME TAXES

The effective income tax rate for the 12 and 24 weeks ended June 16, 2015 was 31.2% and 30.4%, respectively, compared to an effective income tax rate of 30.7% and 31.7%, respectively, for the 12 and 24 weeks ended June 17, 2014. The factors that cause the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses. 

 

 

 

6.

FAIR VALUE MEASUREMENT

Under GAAP, the Company is required to measure certain assets and liabilities at fair value, or to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including the Company’s own credit risk. Each fair value measurement is reported in one of the following three levels:

Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

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Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at June 16, 2015 and December 30, 2014, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

Level

 

June 16, 2015

 

December 30, 2014

Deferred compensation plan investments

 

2

 

$

13,862 

 

$

12,760 

Deferred compensation plan liabilities (included in Other liabilities)

 

2

 

$

(13,922)

 

$

(12,979)

 

There were no transfers among levels within the fair-value hierarchy during the first two quarters of fiscal 2015 and fiscal 2014.  The carrying value of the Company’s cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value due to their short term nature.

 

 

7.

SEGMENT REPORTING

The Company operates the Del Frisco’s, Sullivan’s, and Grille brands as operating segments. The restaurant concepts operate solely in the U.S. within the full-service dining industry, providing similar products to similar customers. Sales from external customers are derived principally from food and beverage sales, and the Company does not rely on any major customers as a source of sales. The restaurant concepts also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. However, as Del Frisco’s restaurants typically have higher revenues, driven by their larger physical presence and higher average check, the Del Frisco’s, Sullivan’s, and Grille operating segments have varying operating income and restaurant-level EBITDA margins due to the leveraging of higher revenues on certain fixed operating costs such as management labor, rent, utilities, and building maintenance.

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The following tables present information about reportable segments for the 12 and 24 weeks ended June 16, 2015 and June 17, 2014 and as of June 16, 2015 and June 17, 2014, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended June 16, 2015

 

Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

37,175 

 

$

17,477 

 

$

19,124 

 

$

 —

 

$

73,776 

Restaurant-level EBITDA

 

11,129 

 

 

2,385 

 

 

2,980 

 

 

 —

 

 

16,494 

Capital expenditures

 

4,192 

 

 

985 

 

 

9,174 

 

 

29 

 

 

14,380 

Property and equipment

 

98,907 

 

 

45,846 

 

 

84,542 

 

 

2,376 

 

 

231,671 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended June 17, 2014

 

Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

33,862 

 

$

18,435 

 

$

15,089 

 

$

 —

 

$

67,386 

Restaurant-level EBITDA

 

9,903 

 

 

2,956 

 

 

2,812 

 

 

 —

 

 

15,671 

Capital expenditures

 

5,763 

 

 

926 

 

 

5,694 

 

 

168 

 

 

12,551 

Property and equipment

 

80,253 

 

 

44,931 

 

 

59,048 

 

 

2,040 

 

 

186,272 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended June 16, 2015

 

Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

73,196 

 

$

37,315 

 

$

38,367 

 

$

 —

 

$

148,878 

Restaurant-level EBITDA

 

21,451 

 

 

6,262 

 

 

5,903 

 

 

 —

 

 

33,616 

Capital expenditures

 

5,647 

 

 

1,378 

 

 

12,477 

 

 

118 

 

 

19,620 

Property and equipment

 

98,907 

 

 

45,846 

 

 

84,542 

 

 

2,376 

 

 

231,671 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 Weeks Ended June 17, 2014

 

Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

66,430 

 

$

37,456 

 

$

30,122 

 

$

 —

 

$

134,008 

Restaurant-level EBITDA

 

19,111 

 

 

6,118 

 

 

5,220 

 

 

 —

 

 

30,449 

Capital expenditures

 

6,775 

 

 

2,381 

 

 

7,650 

 

 

271 

 

 

17,077 

Property and equipment

 

80,253 

 

 

44,931 

 

 

59,048 

 

 

2,040 

 

 

186,272 

 

In addition to using consolidated results in evaluating the Company’s performance and allocating its resources, the Company’s chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP. The Company defines restaurant-level EBITDA as operating income before pre-opening costs, general and administrative costs, secondary public offering costs and depreciation and amortization. Pre-opening costs are excluded because they vary in timing and magnitude and are not related to the health of ongoing operations. General and administrative costs are only included in the Company’s consolidated financial results as they are generally not specifically identifiable to individual operating segments as these costs relate to supporting all of the restaurant operations of the Company and the extension of the Company’s concepts into new markets. Public offering costs and depreciation and amortization are excluded because they are not ongoing controllable cash expenses and they are not related to the health of ongoing operations. Property and equipment is the only balance sheet measure used by the Company’s chief operating decision maker in allocating resources. See table below (in thousands) for a reconciliation of restaurant-level EBITDA to operating income from continuing operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended

 

24 Weeks Ended

 

June 16, 2015

 

June 17, 2014

 

June 16, 2015

 

June 17, 2014

Restaurant-level EBITDA

$

16,494 

 

$

15,671 

 

$

33,616 

 

$

30,449 

Less:

 

 

 

 

 

 

 

 

 

 

 

Pre-opening costs

 

1,479 

 

 

906 

 

 

1,746 

 

 

1,290 

General and administrative costs

 

5,908 

 

 

4,844 

 

 

11,386 

 

 

9,530 

Secondary public offering costs

 

 —

 

 

 —

 

 

 —

 

 

Depreciation and amortization

 

3,613 

 

 

3,001 

 

 

7,190 

 

 

5,956 

Operating income

$

5,494 

 

$

6,920 

 

$

13,294 

 

$

13,668 

 

 

 

 

 

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8.

COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims, possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Prior to the acquisition of Lone Star Steakhouse & Saloon, Inc. by Lone Star Fund, the Company’s predecessor guaranteed certain lease payments of certain non-Company restaurants in connection with the leasing of real estate for restaurant locations. As of June 16, 2015 and December 30, 2014, the Company was responsible as guarantor for five of these leases of its former affiliate. The leases expire at various times through 2016. These guarantees will require payment by the Company only in an event of default by the former affiliate where it is unable to make the required lease payments. Management believes that the likelihood is remote that material payments will be required under these guarantees. At June 16, 2015 and December 30, 2014 the maximum potential amount of future lease payments the Company could be required to make as a result of the guarantees was approximately $0.7 million and  $0.9 million, respectively.

During fiscal 2015, the Company received notification that its former affiliate ceased payments on two of the five aforementioned leases. The two leases, for which payment had not been made, are non-operating land leases, while the other three leases guaranteed by the Company are operating properties. As a result of this development, the Company has determined it is probable a liability exists in regards to these two non-operating land leases. The Company’s reasonable estimate of this liability is a range between $152 thousand and $304 thousand, with no amount within that range more probable than any other amount. Accordingly, $152 thousand was recorded to Other expense during the first 24 weeks of fiscal 2015.

At June 16, 2015 and December 30, 2014, the Company had outstanding letters of credit of $1,584,250 and $1,076,000, respectively, of which $1,369,250 and $861,000, respectively, were drawn on the Company’s credit facility (see Note 4,  Long-Term Debt ) and $215,000 were collateralized by restricted cash. The letters of credit typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions.

 

 

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Item 2.

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

 

Cautionary Statement

Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2014, filed February 27, 2015, or the 2014 10-K, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether as a result of new information,  future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward looking statements contained in this report will, in fact, transpire.

Overview

Del Frisco’s Restaurant Group develops, owns and operates three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille. We currently operate 46 restaurants in 20 states and the District of Columbia. Of the 46 restaurants we operated as of the end of the period covered by this report, there were 11 Del Frisco’s restaurants, 18 Sullivan’s restaurants and 17 Grille restaurants. During the second fiscal quarter of 2015, we opened one new Grille location in the Woodlands, Texas. We also closed one Sullivan’s location in Denver, Colorado.

Unless the context otherwise indicates, all references to “we,” “our,” “us,” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.

Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:

 

 

 

Pursue Disciplined Restaurant Growth. We believe that there are significant opportunities to grow our concepts on a nationwide basis in both existing and new markets where we believe we can generate attractive unit-level economics. We are presented with many development opportunities, and we carefully evaluate each opportunity to determine that sites selected for development have a high probability of meeting our return on investment targets. Our disciplined growth strategy includes accepting only those sites that we believe present attractive rent and tenant allowance structures as well as reasonable construction costs given the sales potential of the site. We believe our concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible unit models, will allow us to expand each of our three concepts into a greater number of locations.

 

 

 

 

Grow Existing Revenue. We will continue to pursue opportunities to increase the sales at our existing restaurants, pursue targeted local marketing efforts and evaluate operational initiatives, including growth in private dining, designed to increase restaurant unit volumes.

 

 

 

 

Maintain Margins Throughout Our Growth. We will continue to aggressively protect our margins using economies of scale, including marketing and purchasing synergies between our concepts and leveraging our corporate infrastructure as we continue to open new restaurants.

 

We believe there are opportunities to open six to eight restaurants annually, generally composed of one Del Frisco’s and five to seven Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of new unit growth in the near term.

 

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Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:

 

 

 

Comparable Restaurant Sales. We consider a restaurant to be comparable during the first full fiscal period following the eighteenth month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 33 and 36 restaurants at June 17, 2014 and June 16, 2015, respectively.

 

 

 

 

Average Check. Average check is calculated by dividing total restaurant sales by customer counts for a given time period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in customers’ preferences, the effectiveness of menu changes and price increases and per customer expenditures.

 

 

 

 

Average Weekly Volume. Average weekly volume, or AWV, consists of the average weekly sales of our restaurants over a certain period of time. This measure is calculated by dividing total restaurant sales within a period by the number of restaurants operating weeks during the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our concepts.

 

 

 

 

Customer Counts. Customer counts are measured by the number of entrées ordered at our restaurants over a given time period.

 

 

 

 

Restaurant-Level EBITDA Margin. Restaurant-level EBITDA margin, a non-GAAP financial measure, represents operating income before pre-opening costs, general and administrative costs, secondary public offering costs and depreciation and amortization as a percentage of revenues. By monitoring and controlling our restaurant-level EBITDA margins, we can gauge the overall profitability of our core restaurant operations. See Note 7,  Segment Reporting in the notes to our condensed consolidated financial statements for additional information on restaurant-level EBITDA.

 

Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth fiscal quarters has been higher due, in part, to increased gift card redemptions and increased private dining during the year-end holiday season, respectively. In addition, our first, second and third quarters each contain 12 operating weeks with the fourth quarter containing 16 or 17 operating weeks. As many of our operating expenses have a fixed component, our operating income and operating income margin have historically varied significantly from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

 

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Results of Operations

The following table shows our operating results (in thousands), as well as our operating results as a percentage of revenues, for the 12 and 24 weeks ended June 16, 2015 and June 17, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended

 

24 Weeks Ended

 

June 16,

 

June 17,

 

June 16,

 

June 17,

 

2015

 

2014

 

2015

 

2014

Revenues

$

73,776 

 

100.0% 

 

$

67,386 

 

100.0% 

 

$

148,878 

 

100.0% 

 

$

134,008 

 

100.0% 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales

 

21,276 

 

28.8% 

 

 

20,292 

 

30.1% 

 

 

42,938 

 

28.8% 

 

 

40,344 

 

30.1% 

Restaurant operating expenses

 

34,260 

 

46.4% 

 

 

30,037 

 

44.6% 

 

 

69,207 

 

46.5% 

 

 

60,608 

 

45.2% 

Marketing and advertising costs

 

1,746 

 

2.4% 

 

 

1,386 

 

2.0% 

 

 

3,117 

 

2.1% 

 

 

2,607 

 

2.0% 

Pre-opening costs

 

1,479 

 

2.1% 

 

 

906 

 

1.3% 

 

 

1,746 

 

1.2% 

 

 

1,290 

 

1.0% 

General and administrative costs

 

5,908 

 

8.0% 

 

 

4,844 

 

7.2% 

 

 

11,386 

 

7.6% 

 

 

9,530 

 

7.1% 

Secondary public offering costs

 

 —

 

0.0% 

 

 

 —

 

0.0% 

 

 

 —

 

0.0% 

 

 

 

0.0% 

Depreciation and amortization

 

3,613 

 

4.9% 

 

 

3,001 

 

4.5% 

 

 

7,190 

 

4.9% 

 

 

5,956 

 

4.4% 

Operating income

 

5,494 

 

7.4% 

 

 

6,920 

 

10.3% 

 

 

13,294 

 

8.9% 

 

 

13,668 

 

10.2% 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(7)

 

0.0% 

 

 

(16)

 

0.0% 

 

 

(32)

 

-0.1%

 

 

(31)

 

-0.1%

Other  

 

(88)

 

-0.1%

 

 

(22)

 

-0.1%

 

 

(177)