ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
|
January 3, 2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
4,862
|
|
|
$
|
5,281
|
|
Trade receivables
|
10,259
|
|
|
9,217
|
|
Inventories
|
2,875
|
|
|
2,910
|
|
Prepaid rent
|
3,539
|
|
|
3,163
|
|
Income tax receivable
|
2,153
|
|
|
7,448
|
|
Prepaid expenses and other current assets
|
2,842
|
|
|
3,219
|
|
Total current assets
|
26,530
|
|
|
31,238
|
|
Property and equipment, net
|
271,055
|
|
|
248,992
|
|
Goodwill
|
123,484
|
|
|
123,484
|
|
Deferred income taxes
|
15,258
|
|
|
8,497
|
|
Deferred financing costs, net
|
687
|
|
|
918
|
|
Other assets
|
2,473
|
|
|
2,516
|
|
Total assets
|
$
|
439,487
|
|
|
$
|
415,645
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
87
|
|
|
$
|
69
|
|
Accounts payable
|
23,608
|
|
|
12,405
|
|
Accrued payroll, related taxes and benefits
|
12,165
|
|
|
15,614
|
|
Accrued real estate taxes
|
7,584
|
|
|
6,121
|
|
Other liabilities
|
12,249
|
|
|
12,096
|
|
Total current liabilities
|
55,693
|
|
|
46,305
|
|
Long-term debt, net of current portion
|
67,446
|
|
|
72,612
|
|
Lease financing obligations
|
1,664
|
|
|
1,663
|
|
Deferred income—sale-leaseback of real estate
|
28,062
|
|
|
30,086
|
|
Other liabilities
|
25,735
|
|
|
20,997
|
|
Total liabilities
|
178,600
|
|
|
171,663
|
|
Commitments and contingencies
|
|
|
|
Stockholders' equity:
|
|
|
|
Common stock, par value $.01; authorized 100,000,000 shares, issued 26,896,611 and 26,829,220 shares, respectively, and outstanding 26,746,012 and 26,571,602 shares, respectively.
|
267
|
|
|
266
|
|
Additional paid-in capital
|
162,348
|
|
|
159,724
|
|
Retained earnings
|
98,272
|
|
|
83,992
|
|
Total stockholders' equity
|
260,887
|
|
|
243,982
|
|
Total liabilities and stockholders' equity
|
$
|
439,487
|
|
|
$
|
415,645
|
|
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
3
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED
OCTOBER 2, 2016
AND
SEPTEMBER 27, 2015
(In thousands of dollars, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Revenues:
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Restaurant sales
|
$
|
181,592
|
|
|
$
|
171,469
|
|
|
$
|
538,366
|
|
|
$
|
505,795
|
|
Franchise royalty revenues and fees
|
664
|
|
|
636
|
|
|
2,099
|
|
|
2,085
|
|
Total revenues
|
182,256
|
|
|
172,105
|
|
|
540,465
|
|
|
507,880
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
|
54,726
|
|
|
55,409
|
|
|
163,383
|
|
|
160,755
|
|
Restaurant wages and related expenses (including stock-based compensation expense of $35, $40, $111, and $147, respectively)
|
47,503
|
|
|
44,183
|
|
|
139,536
|
|
|
127,156
|
|
Restaurant rent expense
|
9,488
|
|
|
8,396
|
|
|
27,522
|
|
|
24,451
|
|
Other restaurant operating expenses
|
25,715
|
|
|
22,511
|
|
|
72,366
|
|
|
63,732
|
|
Advertising expense
|
7,506
|
|
|
4,831
|
|
|
21,507
|
|
|
15,529
|
|
General and administrative (including stock-based compensation expense of $330, $1,127, $2,523, and $3,056, respectively)
|
14,520
|
|
|
14,259
|
|
|
42,621
|
|
|
41,647
|
|
Depreciation and amortization
|
9,513
|
|
|
7,596
|
|
|
26,474
|
|
|
21,844
|
|
Pre-opening costs
|
1,509
|
|
|
1,689
|
|
|
4,707
|
|
|
3,851
|
|
Impairment and other lease charges
|
18,513
|
|
|
387
|
|
|
18,607
|
|
|
481
|
|
Other income
|
—
|
|
|
(165
|
)
|
|
(238
|
)
|
|
(679
|
)
|
Total operating expenses
|
188,993
|
|
|
159,096
|
|
|
516,485
|
|
|
458,767
|
|
Income (loss) from operations
|
(6,737
|
)
|
|
13,009
|
|
|
23,980
|
|
|
49,113
|
|
Interest expense
|
542
|
|
|
493
|
|
|
1,635
|
|
|
1,345
|
|
Income (loss) before income taxes
|
(7,279
|
)
|
|
12,516
|
|
|
22,345
|
|
|
47,768
|
|
Provision for (benefit from) income taxes
|
(2,748
|
)
|
|
4,571
|
|
|
8,065
|
|
|
18,073
|
|
Net income (loss)
|
$
|
(4,531
|
)
|
|
$
|
7,945
|
|
|
$
|
14,280
|
|
|
$
|
29,695
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
$
|
(0.17
|
)
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
1.11
|
|
Diluted net income (loss) per share
|
$
|
(0.17
|
)
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
1.11
|
|
Basic weighted average common shares outstanding
|
26,716,219
|
|
|
26,557,940
|
|
|
26,658,739
|
|
|
26,494,599
|
|
Diluted weighted average common shares outstanding
|
26,716,219
|
|
|
26,565,575
|
|
|
26,665,091
|
|
|
26,501,951
|
|
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED
OCTOBER 2, 2016
AND
SEPTEMBER 27, 2015
(In thousands of dollars, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
Common
|
|
Common
|
|
Paid-In
|
|
Retained
|
|
Stockholders'
|
|
|
Stock Shares
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Equity
|
Balance at December 28, 2014
|
|
26,358,448
|
|
|
$
|
264
|
|
|
$
|
153,867
|
|
|
$
|
45,456
|
|
|
$
|
199,587
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
3,203
|
|
|
—
|
|
|
3,203
|
|
Vesting of restricted shares and related tax benefit
|
|
210,983
|
|
|
2
|
|
|
1,525
|
|
|
—
|
|
|
1,527
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,695
|
|
|
29,695
|
|
Balance at September 27, 2015
|
|
26,569,431
|
|
|
$
|
266
|
|
|
$
|
158,595
|
|
|
$
|
75,151
|
|
|
$
|
234,012
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
26,571,602
|
|
|
$
|
266
|
|
|
$
|
159,724
|
|
|
$
|
83,992
|
|
|
$
|
243,982
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
2,634
|
|
|
—
|
|
|
2,634
|
|
Vesting of restricted shares and related tax deficiency
|
|
174,410
|
|
|
1
|
|
|
(10
|
)
|
|
—
|
|
|
(9
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,280
|
|
|
14,280
|
|
Balance at October 2, 2016
|
|
26,746,012
|
|
|
$
|
267
|
|
|
$
|
162,348
|
|
|
$
|
98,272
|
|
|
$
|
260,887
|
|
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
OCTOBER 2, 2016
AND
SEPTEMBER 27, 2015
(In thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
October 2, 2016
|
|
September 27, 2015
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
14,280
|
|
|
$
|
29,695
|
|
Adjustments to reconcile net income to net cash provided from operating activities:
|
|
|
|
Loss (gain) on disposals of property and equipment
|
178
|
|
|
(236
|
)
|
Stock-based compensation
|
2,634
|
|
|
3,203
|
|
Impairment and other lease charges
|
18,607
|
|
|
481
|
|
Depreciation and amortization
|
26,474
|
|
|
21,844
|
|
Amortization of deferred financing costs
|
232
|
|
|
232
|
|
Amortization of deferred gains from sale-leaseback transactions
|
(2,687
|
)
|
|
(2,713
|
)
|
Deferred income taxes
|
(6,761
|
)
|
|
2,226
|
|
Changes in other operating assets and liabilities
|
13,400
|
|
|
4,236
|
|
Net cash provided from operating activities
|
66,357
|
|
|
58,968
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures:
|
|
|
|
New restaurant development
|
(52,828
|
)
|
|
(55,057
|
)
|
Restaurant remodeling
|
(956
|
)
|
|
(2,723
|
)
|
Other restaurant capital expenditures
|
(4,625
|
)
|
|
(5,197
|
)
|
Corporate and restaurant information systems
|
(4,634
|
)
|
|
(3,242
|
)
|
Total capital expenditures
|
(63,043
|
)
|
|
(66,219
|
)
|
Properties purchased for sale-leaseback
|
(2,663
|
)
|
|
—
|
|
Proceeds from sale-leaseback transactions
|
3,642
|
|
|
—
|
|
Proceeds from disposals of other properties
|
226
|
|
|
149
|
|
Net cash used in investing activities
|
(61,838
|
)
|
|
(66,070
|
)
|
Cash flows from financing activities:
|
|
|
|
Excess tax benefit from vesting of restricted shares
|
211
|
|
|
1,527
|
|
Borrowings on revolving credit facility
|
14,400
|
|
|
23,500
|
|
Repayments on revolving credit facility
|
(19,500
|
)
|
|
(22,000
|
)
|
Principal payments on capital leases
|
(49
|
)
|
|
(40
|
)
|
Net cash (used in) provided by financing activities
|
(4,938
|
)
|
|
2,987
|
|
Net decrease in cash
|
(419
|
)
|
|
(4,115
|
)
|
Cash, beginning of period
|
5,281
|
|
|
5,087
|
|
Cash, end of period
|
$
|
4,862
|
|
|
$
|
972
|
|
Supplemental disclosures:
|
|
|
|
Interest paid on long-term debt
|
$
|
1,393
|
|
|
$
|
1,263
|
|
Interest paid on lease financing obligations
|
$
|
106
|
|
|
$
|
105
|
|
Accruals for capital expenditures
|
$
|
9,591
|
|
|
$
|
5,325
|
|
Income tax payments, net
|
$
|
9,540
|
|
|
$
|
13,101
|
|
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except share and per share amounts)
1. Basis of Presentation
Business Description.
Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises two fast-casual restaurant brands through its wholly-owned subsidiaries Pollo Operations, Inc. and its subsidiaries, Pollo Franchise, Inc. (collectively “Pollo Tropical”) and Taco Cabana, Inc. and its subsidiaries (collectively “Taco Cabana”). Unless the context otherwise requires, Fiesta and its subsidiaries, Pollo Tropical and Taco Cabana, are collectively referred to as the “Company”. At
October 2, 2016
, the Company owned and operated
181
Pollo Tropical
®
restaurants and
164
Taco Cabana
®
restaurants. The Pollo Tropical restaurants include
124
located in Florida,
36
located in Texas,
17
located in Georgia and
four
located in Tennessee. The Taco Cabana restaurants include
163
located in Texas and
one
located in Oklahoma. At
October 2, 2016
, the Company franchised a total of
34
Pollo Tropical restaurants and
seven
Taco Cabana restaurants. The franchised Pollo Tropical restaurants include
17
in Puerto Rico,
one
in the Bahamas,
three
in Trinidad & Tobago,
one
in Venezuela,
four
in Panama,
two
in Guatemala, and
six
on college campuses and at a hospital in Florida. The franchised Taco Cabana restaurants include
five
in New Mexico and
two
on college campuses in Texas.
Basis of Consolidation.
The unaudited condensed consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Fiscal Year
. The Company uses a
52
-
53
week fiscal year ending on the Sunday closest to December 31. The fiscal year ended
January 3, 2016
contained
53
weeks. The
three and nine months ended
October 2, 2016
and
September 27, 2015
each contained
thirteen
and
thirty-nine
weeks, respectively. The fiscal year ending January 1, 2017 will contain
52
weeks.
Basis of Presentation.
The accompanying unaudited condensed consolidated financial statements for the
three and nine months ended
October 2, 2016
and
September 27, 2015
have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the
three and nine months ended
October 2, 2016
and
September 27, 2015
are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
January 3, 2016
included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 2016
. The
January 3, 2016
balance sheet data is derived from those audited financial statements.
Fair Value of Financial Instruments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
|
|
•
|
Current Assets and Liabilities.
The carrying values reported on the balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.
|
|
|
•
|
Revolving Credit Borrowings.
The fair value of outstanding revolving credit borrowings under the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates. At
October 2, 2016
and January 3, 2016, the fair value and carrying value of the Company's senior credit facility were approximately
$65.9 million
and
$71.0 million
, respectively.
|
Long-Lived Assets
. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed when events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Use of Estimates
. The preparation of the 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 the disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates.
2. Other Liabilities
Other liabilities, current, consist of the following:
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
|
January 3, 2016
|
Accrued workers' compensation and general liability claims
|
$
|
6,717
|
|
|
$
|
5,540
|
|
Sales and property taxes
|
2,531
|
|
|
3,031
|
|
Accrued occupancy costs
|
934
|
|
|
980
|
|
Other
|
2,067
|
|
|
2,545
|
|
|
$
|
12,249
|
|
|
$
|
12,096
|
|
Other liabilities, long-term, consist of the following:
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
|
January 3, 2016
|
Accrued occupancy costs
|
$
|
17,602
|
|
|
$
|
15,349
|
|
Deferred compensation
|
1,797
|
|
|
1,665
|
|
Accrued workers' compensation and general liability claims
|
1,910
|
|
|
697
|
|
Other
|
4,426
|
|
|
3,286
|
|
|
$
|
25,735
|
|
|
$
|
20,997
|
|
Accrued occupancy costs include obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
The following table presents the activity in the closed-store reserve, of which $
1.0 million
and $
1.1 million
are included in long-term accrued occupancy costs at
October 2, 2016
and
January 3, 2016
, respectively, with the remainder in other current liabilities.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 2, 2016
|
|
Year Ended January 3, 2016
|
Balance, beginning of period
|
$
|
1,832
|
|
|
$
|
1,251
|
|
Provisions for restaurant closures
|
—
|
|
|
554
|
|
Additional lease charges, net of (recoveries)
|
—
|
|
|
258
|
|
Payments, net
|
(411
|
)
|
|
(358
|
)
|
Other adjustments
|
122
|
|
|
127
|
|
Balance, end of period
|
$
|
1,543
|
|
|
$
|
1,832
|
|
3. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. In addition to considering management’s plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Pollo Tropical
|
$
|
18,390
|
|
|
$
|
387
|
|
|
$
|
18,390
|
|
|
$
|
387
|
|
Taco Cabana
|
123
|
|
|
—
|
|
|
217
|
|
|
94
|
|
|
$
|
18,513
|
|
|
$
|
387
|
|
|
$
|
18,607
|
|
|
$
|
481
|
|
In the third quarter of 2016, as part of a review of its strategic plan to enhance long-term shareholder value, the Company reviewed its restaurant portfolio and subsequently closed ten Pollo Tropical restaurants in the fourth quarter of 2016 including eight restaurants in Texas, one restaurant in Nashville, Tennessee, and one restaurant in Atlanta, Georgia. The Company plans to convert up to three of the closed restaurants in Texas to Taco Cabana restaurants. Impairment and other lease charges for the three and nine months ended
October 2, 2016
primarily consisted of impairment charges of
$18.5 million
related to the closed restaurants and six additional Pollo Tropical restaurants and one Taco Cabana restaurant that the Company continues to operate. Impairment and other lease charges for the nine months ended
October 2, 2016
also included other lease charges of
$0.1
million related to previously closed Pollo Tropical and Taco Cabana restaurants. The Company will recognize lease and other charges related to the closed restaurants in the fourth quarter of 2016.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company’s history of using these assets in the operation of its business, the Company's plans to use this equipment in new restaurants that are scheduled to open in 2017 and 2018, and the Company's expectation of how a market participant would value the equipment. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the three and
nine months ended
October 2, 2016
totaled
$8.6 million
.
Impairment and other lease charges for the three and nine months ended
September 27, 2015
, consisted primarily of a
$0.3 million
lease charge related to the closure of a Pollo Tropical restaurant that was relocated to a superior site in the same trade area prior to the end of its lease term and lease charges, net of recoveries, totaling
$0.1 million
related to previously closed Pollo Tropical restaurants and for the nine months ended
September 27, 2015
also included impairment charges totaling
$0.1 million
related to the suspension of the Company's Cabana Grill concept. The Cabana Grill concept was an elevated, non-24-hour format for Taco Cabana that the Company tested outside of Texas. One of the Cabana Grill restaurants was converted to a Pollo Tropical restaurant, and the second was closed.
4. Stock-Based Compensation
During the
nine months ended
October 2, 2016
and
September 27, 2015
, the Company granted certain employees
50,087
and
24,401
non-vested restricted shares, respectively, under the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan"). These shares generally vest and become non-forfeitable over a
four
year vesting period. The weighted average fair value at grant date for these non-vested shares issued to employees during the
nine months ended
October 2, 2016
and
September 27, 2015
was
$35.25
and
$61.57
, respectively.
During the
nine months ended
October 2, 2016
and
September 27, 2015
, the Company granted certain employees
5,762
and
10,007
restricted stock units, respectively, under the Fiesta Plan. The restricted stock units granted during the
nine
months ended
October 2, 2016
vest and become non-forfeitable at the end of a
four
year vesting period. The restricted stock units granted during the
nine months ended
September 27, 2015
vest and become non-forfeitable over a
four
year vesting period or, for certain units, at the end of a four year vesting period. The weighted average fair value at grant date for these restricted stock units issued to employees during the
nine months ended
October 2, 2016
and
September 27, 2015
was $
35.25
and
$62.05
, respectively.
Also during the
nine months ended
October 2, 2016
and
September 27, 2015
, the Company granted
33,691
and
17,501
non-vested restricted shares, respectively, and
33,691
and
17,501
restricted stock units, respectively, under the Fiesta Plan to certain employees subject to performance conditions. The non-vested restricted shares vest and become non-forfeitable over a
four
year vesting period subject to the attainment of performance conditions. The restricted stock units vest and become non-forfeitable at the end of a
three
year vesting period. The number of shares into which the restricted stock units convert is based on the attainment of certain performance conditions and for the restricted stock units granted during the
nine months ended
October 2, 2016
and
September 27, 2015
, ranges from no shares, if the minimum performance condition is not met, to
67,382
and
35,002
shares, respectively, if the maximum performance condition is met. The weighted average fair value at grant date for both restricted non-
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
vested shares and restricted stock units subject to performance conditions granted during the
nine months ended
October 2, 2016
and
September 27, 2015
was
$35.25
and $
65.01
, respectively.
During the nine months ended
October 2, 2016
and
September 27, 2015
, the Company granted
14,081
and
8,698
non-vested restricted shares, respectively, to non-employee directors. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the nine months ended
October 2, 2016
and
September 27, 2015
, was
$33.39
and
$54.06
, respectively. These shares vest and become non-forfeitable over a
one
-year vesting period.
Stock-based compensation expense for the three and
nine months ended
October 2, 2016
was
$0.4 million
and
$2.6 million
, respectively, and for the three and
nine months ended
September 27, 2015
was
$1.2 million
and
$3.2 million
, respectively. At
October 2, 2016
, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately $
4.5 million
. At
October 2, 2016
, the remaining weighted average vesting period for non-vested restricted shares was
1.9
years and
2.0
years for restricted stock units.
During the three and
nine months ended
October 2, 2016
, a portion of the awards previously granted to the Company's Chief Executive Officer were modified and vested in connection with his retirement. The modification reduced stock compensation expense by
$0.1 million
.
A summary of all non-vested restricted shares and restricted stock units activity for the
nine months ended
October 2, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Shares
|
|
Restricted Stock Units
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Grant Date
|
|
|
|
Grant Date
|
|
Shares
|
|
Price
|
|
Units
|
|
Price
|
Outstanding at January 3, 2016
|
257,618
|
|
|
$
|
30.69
|
|
|
42,840
|
|
|
$
|
56.46
|
|
Granted
|
97,859
|
|
|
34.98
|
|
|
39,453
|
|
|
35.25
|
|
Vested/Released
|
(173,888
|
)
|
|
24.07
|
|
|
(522
|
)
|
|
51.23
|
|
Forfeited
|
(30,990
|
)
|
|
40.77
|
|
|
(24,751
|
)
|
|
45.73
|
|
Outstanding at October 2, 2016
|
150,599
|
|
|
$
|
38.16
|
|
|
57,020
|
|
|
$
|
46.48
|
|
The fair value of the non-vested restricted shares and restricted stock units is based on the closing price on the date of grant.
5. Business Segment Information
The Company is engaged in the fast-casual restaurant industry, with
two
restaurant concepts (each of which is an operating segment): Pollo Tropical and Taco Cabana. Pollo Tropical restaurants offer a wide variety of freshly prepared Caribbean-inspired food while our Taco Cabana restaurants offer a broad selection of hand-made, freshly prepared and authentic Mexican food.
Each segment's accounting policies are the same as those discussed in the summary of significant accounting policies in Note 1 to the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 2016
. The Company reports more than one measure of segment profit or loss to the chief operating decision maker for the purposes of allocating resources to the segments and assessing their performance. The primary measures of segment profit or loss used to assess performance and allocate resources are income (loss) before taxes and Adjusted EBITDA, which is defined as earnings attributable to the applicable operating segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Although the chief operating decision maker uses Adjusted EBITDA as a measure of segment profitability, in accordance with Accounting Standards Codification 280, Segment Reporting, the following table includes segment income (loss) before taxes, which is the measure of segment profit or loss determined in accordance with the measurement principles that are most consistent with the principles used in measuring the corresponding amounts in the consolidated financial statements.
The “Other” column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts, a current income tax receivable, and advisory fees related to a previously proposed separation transaction.
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Pollo Tropical
|
|
Taco Cabana
|
|
Other
|
|
Consolidated
|
October 2, 2016:
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
103,353
|
|
|
$
|
78,239
|
|
|
$
|
—
|
|
|
$
|
181,592
|
|
Franchise revenue
|
|
474
|
|
|
190
|
|
|
—
|
|
|
664
|
|
Cost of sales
|
|
32,565
|
|
|
22,161
|
|
|
—
|
|
|
54,726
|
|
Restaurant wages and related expenses
(1)
|
|
24,383
|
|
|
23,120
|
|
|
—
|
|
|
47,503
|
|
Restaurant rent expense
|
|
5,059
|
|
|
4,429
|
|
|
—
|
|
|
9,488
|
|
Other restaurant operating expenses
|
|
14,361
|
|
|
11,354
|
|
|
—
|
|
|
25,715
|
|
Advertising expense
|
|
5,026
|
|
|
2,480
|
|
|
—
|
|
|
7,506
|
|
General and administrative expense
(2)
|
|
9,091
|
|
|
5,355
|
|
|
74
|
|
|
14,520
|
|
Depreciation and amortization
|
|
6,337
|
|
|
3,176
|
|
|
—
|
|
|
9,513
|
|
Pre-opening costs
|
|
1,456
|
|
|
53
|
|
|
—
|
|
|
1,509
|
|
Impairment and other lease charges
|
|
18,390
|
|
|
123
|
|
|
—
|
|
|
18,513
|
|
Interest expense
|
|
229
|
|
|
313
|
|
|
—
|
|
|
542
|
|
Income (loss) before taxes
|
|
(13,070
|
)
|
|
5,865
|
|
|
(74
|
)
|
|
(7,279
|
)
|
Capital expenditures
|
|
18,146
|
|
|
2,791
|
|
|
(132
|
)
|
|
20,805
|
|
September 27, 2015:
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
91,440
|
|
|
$
|
80,029
|
|
|
$
|
—
|
|
|
$
|
171,469
|
|
Franchise revenue
|
|
468
|
|
|
168
|
|
|
—
|
|
|
636
|
|
Cost of sales
|
|
31,054
|
|
|
24,355
|
|
|
—
|
|
|
55,409
|
|
Restaurant wages and related expenses
(1)
|
|
20,984
|
|
|
23,199
|
|
|
—
|
|
|
44,183
|
|
Restaurant rent expense
|
|
4,158
|
|
|
4,238
|
|
|
—
|
|
|
8,396
|
|
Other restaurant operating expenses
|
|
11,741
|
|
|
10,770
|
|
|
—
|
|
|
22,511
|
|
Advertising expense
|
|
2,448
|
|
|
2,383
|
|
|
—
|
|
|
4,831
|
|
General and administrative expense
(2)
|
|
8,419
|
|
|
5,840
|
|
|
—
|
|
|
14,259
|
|
Depreciation and amortization
|
|
4,504
|
|
|
3,092
|
|
|
—
|
|
|
7,596
|
|
Pre-opening costs
|
|
1,597
|
|
|
92
|
|
|
—
|
|
|
1,689
|
|
Impairment and other lease charges
|
|
387
|
|
|
—
|
|
|
—
|
|
|
387
|
|
Interest expense
|
|
204
|
|
|
289
|
|
|
—
|
|
|
493
|
|
Income before taxes
|
|
6,567
|
|
|
5,949
|
|
|
—
|
|
|
12,516
|
|
Capital expenditures
|
|
22,960
|
|
|
3,847
|
|
|
(488
|
)
|
|
26,319
|
|
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Pollo Tropical
|
|
Taco Cabana
|
|
Other
|
|
Consolidated
|
October 2, 2016:
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
304,138
|
|
|
$
|
234,228
|
|
|
$
|
—
|
|
|
$
|
538,366
|
|
Franchise revenue
|
|
1,559
|
|
|
540
|
|
|
—
|
|
|
2,099
|
|
Cost of sales
|
|
96,435
|
|
|
66,948
|
|
|
—
|
|
|
163,383
|
|
Restaurant wages and related expenses
(1)
|
|
71,259
|
|
|
68,277
|
|
|
—
|
|
|
139,536
|
|
Restaurant rent expense
|
|
14,528
|
|
|
12,994
|
|
|
—
|
|
|
27,522
|
|
Other restaurant operating expenses
|
|
40,654
|
|
|
31,712
|
|
|
—
|
|
|
72,366
|
|
Advertising expense
|
|
12,473
|
|
|
9,034
|
|
|
—
|
|
|
21,507
|
|
General and administrative expense
(2)
|
|
25,619
|
|
|
16,180
|
|
|
822
|
|
|
42,621
|
|
Depreciation and amortization
|
|
17,043
|
|
|
9,431
|
|
|
—
|
|
|
26,474
|
|
Pre-opening costs
|
|
4,365
|
|
|
342
|
|
|
—
|
|
|
4,707
|
|
Impairment and other lease charges
|
|
18,390
|
|
|
217
|
|
|
—
|
|
|
18,607
|
|
Interest expense
|
|
708
|
|
|
927
|
|
|
—
|
|
|
1,635
|
|
Income (loss) before taxes
|
|
4,235
|
|
|
18,932
|
|
|
(822
|
)
|
|
22,345
|
|
Capital expenditures
|
|
52,713
|
|
|
8,058
|
|
|
2,272
|
|
|
63,043
|
|
September 27, 2015:
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
267,898
|
|
|
$
|
237,897
|
|
|
$
|
—
|
|
|
$
|
505,795
|
|
Franchise revenue
|
|
1,626
|
|
|
459
|
|
|
—
|
|
|
2,085
|
|
Cost of sales
|
|
89,687
|
|
|
71,068
|
|
|
—
|
|
|
160,755
|
|
Restaurant wages and related expenses
(1)
|
|
58,989
|
|
|
68,167
|
|
|
—
|
|
|
127,156
|
|
Restaurant rent expense
|
|
11,627
|
|
|
12,824
|
|
|
—
|
|
|
24,451
|
|
Other restaurant operating expenses
|
|
32,723
|
|
|
31,009
|
|
|
—
|
|
|
63,732
|
|
Advertising expense
|
|
6,710
|
|
|
8,819
|
|
|
—
|
|
|
15,529
|
|
General and administrative expense
(2)
|
|
23,867
|
|
|
17,780
|
|
|
—
|
|
|
41,647
|
|
Depreciation and amortization
|
|
12,583
|
|
|
9,261
|
|
|
—
|
|
|
21,844
|
|
Pre-opening costs
|
|
3,611
|
|
|
240
|
|
|
—
|
|
|
3,851
|
|
Impairment and other lease charges
|
|
387
|
|
|
94
|
|
|
—
|
|
|
481
|
|
Interest expense
|
|
565
|
|
|
780
|
|
|
—
|
|
|
1,345
|
|
Income before taxes
|
|
29,065
|
|
|
18,703
|
|
|
—
|
|
|
47,768
|
|
Capital expenditures
|
|
55,104
|
|
|
9,505
|
|
|
1,610
|
|
|
66,219
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
October 2, 2016:
|
|
260,296
|
|
|
162,729
|
|
|
16,462
|
|
|
439,487
|
|
January 3, 2016
|
|
237,065
|
|
|
165,549
|
|
|
13,031
|
|
|
415,645
|
|
(1) Includes stock-based compensation expense of
$35
and $
111
for the three and nine months ended October 2, 2016, respectively, and
$40
and
$147
for the three and nine months ended September 27, 2015, respectively.
(2) Includes stock-based compensation expense of
$330
and $
2,523
for the three and nine months ended October 2, 2016, respectively, and
$1,127
and
$3,056
for the three and nine months ended September 27, 2015, respectively.
6. Net Income (Loss) per Share
The Company computes basic net income per share by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each period. Our non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic net income per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistribute
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
d earnings. Net income per common share is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur if our restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that performance conditions have been met at the measurement date. We compute diluted earnings per share by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method.
For the three months ended
October 2, 2016
, all restricted stock units outstanding were excluded from the computation of diluted earnings per share because to do so would have been antidilutive as a result of the net loss in the third quarter of 2016. Weighted average outstanding restricted stock units totaling
11,489
and
3,214
shares for the nine months ended
October 2, 2016
and
September 27, 2015
, respectively, were not included in the computation of diluted earnings per share because to do so would have been antidilutive.
The computation of basic and diluted net income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,531
|
)
|
|
$
|
7,945
|
|
|
$
|
14,280
|
|
|
$
|
29,695
|
|
Less: income allocated to participating securities
|
|
—
|
|
|
(81
|
)
|
|
(138
|
)
|
|
(359
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
(4,531
|
)
|
|
$
|
7,864
|
|
|
$
|
14,142
|
|
|
$
|
29,336
|
|
Weighted average common shares, basic
|
|
26,716,219
|
|
|
26,557,940
|
|
|
26,658,739
|
|
|
26,494,599
|
|
Restricted stock units
|
|
—
|
|
|
7,635
|
|
|
6,352
|
|
|
7,352
|
|
Weighted average common shares, diluted
|
|
26,716,219
|
|
|
26,565,575
|
|
|
26,665,091
|
|
|
26,501,951
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
(0.17
|
)
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
1.11
|
|
Diluted net income (loss) per common share
|
|
$
|
(0.17
|
)
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
1.11
|
|
7. Commitments and Contingencies
Lease Assignments
. Taco Cabana has assigned three leases to various parties on properties where it no longer operates restaurants with lease terms expiring on various dates through 2029. The assignees are responsible for making the payments required by the leases. The Company is a guarantor under one of the leases, and it remains secondarily liable as a surety with respect to two of the leases. The maximum potential liability for future rental payments that the Company could be required to make under these leases at
October 2, 2016
was
$1.7 million
. The Company could also be obligated to pay property taxes and other lease related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.
Legal Matters
. The Company is a party to legal proceedings incidental to the conduct of business, including the matter described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
On November 24, 2015, Pollo Tropical received a legal demand letter alleging that assistant managers were misclassified as exempt from overtime wages under the Fair Labor Standards Act. On September 30, 2016, prior to any suit being filed, Pollo Tropical reached a settlement with seven named individuals and a proposed collective action class that will allow current and former assistant managers to receive notice and opt-in to the settlement. Pollo Tropical denies any liability or unlawful conduct. The Company has recorded a charge of
$0.8 million
to cover the estimated costs related to the settlement, including estimated payments to individuals that opt-in to the settlement, premium payments to named individuals, attorneys’ fees for the individuals' counsel, and related settlement administration costs. The charge does not include legal fees incurred by Pollo Tropical in defending
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)
the action. The settlement, which is subject to approval by an arbitrator and a judicial body, will result in dismissal with prejudice for the named individuals and all individuals that opt-in to the settlement.
On September 29, 2014, Daisy, Inc., an automotive repair shop in Cape Coral, Florida, filed a putative class action suit against Pollo Tropical in the United States District Court for the Middle District of Florida. The suit alleged that Pollo Tropical engaged in unlawful activity in violation of the Telephone Consumer Protection Act, § 227 et seq. occurring in December 2010 and January 2011. During the first quarter of 2016, Pollo Tropical reached a settlement with the plaintiff that resulted in dismissal of the case and paid all settlement claims.
The Company is also a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial statements.
8. Recent Accounting Pronouncements
In May 2014, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance in former Topic 605, Revenue Recognition, and provides for either a full retrospective adoption in which the standard is applied to all of the periods presented or a modified retrospective adoption in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other US GAAP requirements. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property and equipment, including real estate. The Company is currently evaluating the impact of the provisions of Topic 606; however, the Company expects the provisions to primarily impact certain franchise revenues and does not expect the standard to have a material effect on its financial statements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most of the leases it currently accounts for as operating leases.
In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products (Topic 405-20), which creates an exception under Topic 405-20 to derecognize financial liabilities related to certain prepaid stored-value products using a breakage model consistent with the revenue breakage model in Topic 606. The new guidance will be effective concurrent with Topic 606, which is effective for the Company for interim and annual periods beginning after December 15, 2017. The Company does not expect this standard to have a material effect on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. Currently, tax deductions in excess of compensation costs (excess tax benefits) are recorded in equity and tax deduction shortfalls (tax deficiencies), to the extent of previous excess tax benefits, are recorded in equity and then to income tax expense. Under the new guidance, all excess tax benefits and tax deficiencies will be recorded to income tax expense in the income statement, which could create volatility in the Company's income statement. The new guidance will also change the classification of excess tax benefits in the cash flow statement and impact the diluted earnings per share calculation. The guidance will be effective for interim and annual periods beginning after December 15, 2016, and early adoption is permitted. Different components of the guidance require prospective, retrospective and/or modified retrospective adoption. The Company is currently evaluating the impact on its financial statements and it is not currently estimable.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments, to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance will be effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted and a retrospective approach is required. The Company is currently evaluating the impact, if any, on its financial statements.
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying financial statement notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated. Throughout this MD&A, we refer to Fiesta Restaurant Group, Inc., together with its consolidated subsidiaries, as "we," "our" and "us."
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended
January 3, 2016
contained 53 weeks. The three and nine months ended
October 2, 2016
and
September 27, 2015
each contained
thirteen
and thirty-nine weeks, respectively. The fiscal year ending January 1, 2017 will contain 52 weeks.
Company Overview
We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical
®
and Taco Cabana
®
, which have almost 30 years and 40 years, respectively, of operating history and loyal customer bases in their core markets. Our Pollo Tropical restaurants offer a wide variety of freshly prepared Caribbean-inspired food, while our Taco Cabana restaurants offer a broad selection of hand-made, freshly prepared and authentic Mexican food. We believe that both brands are differentiated from other restaurant concepts and offer a unique dining experience. We are positioned within the value-oriented fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Additionally, nearly all of our restaurants offer the convenience of drive-thru windows. As of
October 2, 2016
, our company-owned restaurants included
181
Pollo Tropical restaurants and
164
Taco Cabana restaurants.
We franchise our Pollo Tropical restaurants primarily internationally and as of
October 2, 2016
, we had
28
franchised Pollo Tropical restaurants located in Puerto Rico, Trinidad & Tobago, the Bahamas, Venezuela, Panama and Guatemala, and
six
licensed locations on college campuses and at a hospital in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.
As of
October 2, 2016
, we had
five
franchised Taco Cabana restaurants located in New Mexico and
two
non-traditional Taco Cabana licensed locations on college campuses in Texas.
Recent Events Affecting our Results of Operations
We have decided to suspend additional development of Pollo Tropical restaurants in Texas and to review our strategy for development in the state while we continue to build brand awareness, affinity and off premise consumption through several initiatives. Based on a restaurant portfolio examination as part of our strategic review process to enhance long-term shareholder value, we closed ten Pollo Tropical restaurants in the fourth quarter of 2016 including eight restaurants in Texas, one restaurant in Nashville, Tennessee and one restaurant in Atlanta, Georgia. We plan to convert up to three of the closed restaurants in Texas to Taco Cabana restaurants.
In addition to impairment charges associated with the closed restaurants, we also recognized impairment charges with respect to six additional Pollo Tropical restaurants and one Taco Cabana restaurant that we continue to operate. Impairment charges for the three and
nine months ended
October 2, 2016
were $18.5 million. We will recognize lease and other charges related to the closed restaurants, which we anticipate will be between $2 million and $4 million, in the fourth quarter of 2016 when the restaurants were closed. The closed restaurants contributed approximately $4.8 million in operating losses to income from operations for the nine months ended October 2, 2016.
Additionally, taking into account the current challenging market conditions, we reevaluated the previously announced separation of Taco Cabana discussed in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 and decided not to move forward with the separation transaction, concluding that continued brand ownership is in our shareholders’ best interest.
Executive Summary - Consolidated Operating Performance for the Three Months Ended
October 2, 2016
Our
third
quarter 2016 results and highlights include the following:
|
|
•
|
Net income (loss)
decreased
$12.5 million
to
$(4.5) million
in the
third
quarter of 2016, or
$(0.17)
per diluted share, compared to net
income
of
$7.9 million
, or
$0.30
per diluted share in the
third
quarter of 2015, primarily due to impairment charges related to sixteen Pollo Tropical locations, new restaurant performance, lower comparable restaurant sales and higher operating expenses.
|
|
|
•
|
Total revenues increased
5.9%
in the
third
quarter of 2016 to
$182.3 million
compared to
$172.1 million
in the
third
quarter of 2015, driven primarily by an increase in the number of company-owned restaurants, partially offset by a decrease in comparable restaurant sales. Comparable restaurant sales decreased 4.1% for our Taco Cabana restaurants resulting primarily from a decrease in comparable guest traffic of 3.5% and a decrease in average check of 0.6%. Comparable restaurant sales decreased 1.0% for our Pollo Tropical restaurants resulting primarily from a decrease in comparable guest traffic of 2.5% partially offset by an increase in average check of 1.5%.
|
|
|
•
|
During the
third
quarter of 2016, we opened
nine
company-owned Pollo Tropical restaurants. During the
third
quarter of 2015, we opened
14
company-owned Pollo Tropical restaurants and
one
Taco Cabana restaurant and permanently closed one company-owned Pollo Tropical restaurant and
one
company-owned Taco Cabana restaurant.
|
|
|
•
|
Adjusted EBITDA decreased $0.3 million in the
third
quarter of 2016 to $21.7 million compared to $22.0 million in the
third
quarter of 2015. Revenue growth in the third quarter of 2016 was offset by lower profitability as a result of new restaurant performance, lower comparable restaurant sales, higher operating expenses and the write-off of site costs related to locations that we decided not to develop. Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and a reconciliation from net income to Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures".
|
Results of Operations
The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana company-owned and franchised restaurants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pollo Tropical
|
|
Taco Cabana
|
|
Owned
|
|
Franchised
|
|
Total
|
|
Owned
|
|
Franchised
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2016
|
155
|
|
|
35
|
|
|
190
|
|
|
162
|
|
|
6
|
|
|
168
|
|
New
|
6
|
|
|
1
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Closed
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
April 3, 2016
|
161
|
|
|
36
|
|
|
197
|
|
|
162
|
|
|
6
|
|
|
168
|
|
New
|
11
|
|
|
2
|
|
|
13
|
|
|
2
|
|
|
1
|
|
|
3
|
|
Closed
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
July 3, 2016
|
172
|
|
|
37
|
|
|
209
|
|
|
164
|
|
|
7
|
|
|
171
|
|
New
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Closed
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
October 2, 2016
|
181
|
|
|
34
|
|
|
215
|
|
|
164
|
|
|
7
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2014
|
124
|
|
|
37
|
|
|
161
|
|
|
167
|
|
|
7
|
|
|
174
|
|
New
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Closed
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
March 29, 2015
|
130
|
|
|
37
|
|
|
167
|
|
|
164
|
|
|
7
|
|
|
171
|
|
New
|
6
|
|
|
—
|
|
|
6
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Closed
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(3
|
)
|
June 28, 2015
|
136
|
|
|
35
|
|
|
171
|
|
|
163
|
|
|
6
|
|
|
169
|
|
New
|
14
|
|
|
—
|
|
|
14
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Closed
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
September 27, 2015
|
149
|
|
|
35
|
|
|
184
|
|
|
163
|
|
|
6
|
|
|
169
|
|
Three Months Ended
October 2, 2016
Compared to Three Months Ended
September 27, 2015
The following table sets forth, for the
three months ended
October 2, 2016
and
September 27, 2015
, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
Pollo Tropical
|
|
Taco Cabana
|
|
Consolidated
|
Restaurant sales:
|
|
|
|
|
|
|
|
|
|
|
|
Pollo Tropical
|
|
|
|
|
|
|
|
|
56.9
|
%
|
|
53.3
|
%
|
Taco Cabana
|
|
|
|
|
|
|
|
|
43.1
|
%
|
|
46.7
|
%
|
Consolidated restaurant sales
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
31.5
|
%
|
|
34.0
|
%
|
|
28.3
|
%
|
|
30.4
|
%
|
|
30.1
|
%
|
|
32.3
|
%
|
Restaurant wages and related expenses
|
23.6
|
%
|
|
22.9
|
%
|
|
29.6
|
%
|
|
29.0
|
%
|
|
26.2
|
%
|
|
25.8
|
%
|
Restaurant rent expense
|
4.9
|
%
|
|
4.5
|
%
|
|
5.7
|
%
|
|
5.3
|
%
|
|
5.2
|
%
|
|
4.9
|
%
|
Other restaurant operating expenses
|
13.9
|
%
|
|
12.8
|
%
|
|
14.5
|
%
|
|
13.5
|
%
|
|
14.2
|
%
|
|
13.1
|
%
|
Advertising expense
|
4.9
|
%
|
|
2.7
|
%
|
|
3.2
|
%
|
|
3.0
|
%
|
|
4.1
|
%
|
|
2.8
|
%
|
Pre-opening costs
|
1.4
|
%
|
|
1.7
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.8
|
%
|
|
1.0
|
%
|
Consolidated Revenues.
Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consists of food and beverage sales, net of discounts, at our company-owned restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales, franchise fees associated with new restaurant openings, and development fees associated with the opening of new franchised restaurants in a given market. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales.
Total revenues
increased
5.9%
to
$182.3 million
in the
third
quarter of 2016 from
$172.1 million
in the
third
quarter of 2015. Restaurant sales
increased
5.9%
to
$181.6 million
in the
third
quarter of 2016 from
$171.5 million
in the
third
quarter of 2015.
The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana for the
third
quarter of 2016 compared to the
third
quarter of 2015 (in millions).
|
|
|
|
|
Pollo Tropical:
|
|
Decrease in comparable restaurant sales
|
$
|
(0.8
|
)
|
Incremental sales related to new restaurants, net of closed restaurants
|
12.7
|
|
Total increase
|
$
|
11.9
|
|
|
|
Taco Cabana:
|
|
Decrease in comparable restaurant sales
|
$
|
(3.2
|
)
|
Incremental sales related to new restaurants, net of closed restaurants
|
1.4
|
|
Total decrease
|
$
|
(1.8
|
)
|
Comparable restaurant sales for Pollo Tropical restaurants decreased
1.0%
in the
third
quarter of 2016. Comparable restaurant sales for Taco Cabana restaurants decreased
4.1%
in the
third
quarter of 2016. Restaurants are included in comparable restaurant sales after they have been open for 18 months. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in guest traffic and in average check. The increase in average check is primarily driven by menu price increases. For Pollo Tropical, a decrease in guest traffic of 2.5% was partially offset by menu price increases that drove an increase in restaurant sales of 1.9% in the
third
quarter of 2016 as compared to the
third
quarter of 2015. For Taco Cabana, a decrease in guest traffic of 3.5% was partially offset by menu price increases that drove an increase in restaurant sales of 1.3% in the
third
quarter of 2016 as compared to the
third
quarter of 2015. As a result of new restaurant openings, expected sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 1.0% in the
third
quarter of 2016. Comparable restaurant sales for both brands continue to be negatively impacted by the general industrywide slowdown in restaurant sales.
Restaurants in newer markets that have not reached media efficiency generally have lower sales than restaurants in mature, media-efficient markets. As a result, Pollo Tropical revenues are growing at a slower rate than the average number of restaurants.
Franchise revenues remained relatively stable and
increased
by less than $0.1 million to
$0.7 million
in the
third
quarter of 2016 from $
0.6 million
in the
third
quarter of 2015.
Operating costs and expenses.
Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers' compensation insurance and state unemployment insurance.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, real estate taxes, sanitation, supplies and credit card fees.
Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities.
Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening.
The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the
third
quarter of 2016 compared to the
third
quarter of 2015. All percentages are stated as a percentage of applicable segment restaurant sales.
|
|
|
|
Pollo Tropical:
|
|
Cost of sales:
|
|
Lower commodity costs
|
(1.2
|
)%
|
Sales mix
|
(0.8
|
)%
|
Menu price increases
|
(0.7
|
)%
|
Operating inefficiencies
|
0.4
|
%
|
Other
|
(0.2
|
)%
|
Net decrease in cost of sales as a percentage of restaurant sales
|
(2.5
|
)%
|
|
|
Restaurant wages and related expenses:
|
|
Higher labor costs and impact of lower sales volumes for comparable restaurants
|
0.5
|
%
|
Higher labor costs and impact of lower sales volumes for new restaurants
|
0.9
|
%
|
Higher workers compensation costs
|
0.3
|
%
|
Lower incentive bonus costs
|
(0.4
|
)%
|
Lower medical benefit costs
|
(0.7
|
)%
|
Other
|
0.1
|
%
|
Net increase in restaurant wages and related costs as a percentage of restaurant sales
|
0.7
|
%
|
|
|
Other operating expenses
(1)
:
|
|
Higher repairs and maintenance costs
|
0.3
|
%
|
Higher credit card expenses
|
0.2
|
%
|
Higher real estate taxes generally related to new restaurants
|
0.4
|
%
|
Other
|
0.2
|
%
|
Net increase in other restaurant operating expenses as a percentage of restaurant sales
|
1.1
|
%
|
|
|
Advertising expense:
|
|
Increase in advertising
|
2.2
|
%
|
Net increase in advertising expense as a percentage of restaurant sales
|
2.2
|
%
|
|
|
Pre-opening costs:
|
|
Timing of restaurant openings
|
(0.3
|
)%
|
Net decrease in pre-opening costs as a percentage of restaurant sales
|
(0.3
|
)%
|
(1) Includes the impact of lower sales at newer restaurants.
|
|
|
|
Taco Cabana:
|
|
Cost of sales:
|
|
Lower commodity costs
|
(2.1
|
)%
|
Menu price increases
|
(0.4
|
)%
|
Lower operating inefficiencies
|
(0.2
|
)%
|
Higher promotions and discounts
|
0.5
|
%
|
Sales mix
|
0.4
|
%
|
Other
|
(0.3
|
)%
|
Net decrease in cost of sales as a percentage of restaurant sales
|
(2.1
|
)%
|
|
|
Restaurant wages and related expenses:
|
|
Impact of lower sales volumes and higher labor costs for comparable restaurants
|
1.5
|
%
|
Impact of closing lower sales volume restaurants, net of new restaurants
|
(0.1
|
)%
|
Lower workers compensation costs
|
(0.4
|
)%
|
Lower incentive bonus costs
|
(0.3
|
)%
|
Other
|
(0.1
|
)%
|
Net increase in restaurant wages and related costs as a percentage of restaurant sales
|
0.6
|
%
|
|
|
Other operating expenses:
|
|
Higher repairs and maintenance costs
|
0.2
|
%
|
Higher insurance costs
|
0.4
|
%
|
Other
|
0.4
|
%
|
Net increase in other restaurant operating expenses as a percentage of restaurant sales
|
1.0
|
%
|
|
|
Advertising expense:
|
|
Increase in advertising
|
0.2
|
%
|
Net increase in advertising expense as a percentage of restaurant sales
|
0.2
|
%
|
|
|
Pre-opening costs:
|
|
Net change in pre-opening costs as a percentage of restaurant sales
|
—
|
%
|
Consolidated Restaurant Rent Expense
. Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales,
increased
to
5.2%
in the
third
quarter of 2016 from
4.9%
in the
third
quarter of 2015 primarily as a result of new restaurants that generally have higher rent and lower sales, and the impact of lower comparable restaurant sales.
Consolidated General and Administrative Expenses.
General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our company and brands and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees and stock-based compensation expense.
General and administrative expenses were $
14.5 million
in the
third
quarter of 2016 and $
14.3 million
in the
third
quarter of 2015, and as a percentage of total revenues, general and administrative expenses decreased to
8.0%
in the
third
quarter of 2016 compared to 8.3% in the third quarter of 2015, due primarily to higher current year sales and lower incentive-based compensation costs. In addition, general and administrative expenses in the
third
quarter of 2016 included a $0.8 million charge for estimated costs related to a class action settlement plus legal fees and other costs incurred in defending the action and a $0.6 million write-off of site development costs related to locations that we decided not to develop. General and administrative expenses in the third quarter of 2015 included a charge for estimated costs related to a class action settlement plus legal fees and other costs incurred in defending the action totaling $0.9 million.
Adjusted EBITDA.
Adjusted EBITDA, which is one of the measures of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease
charges, stock-based compensation expense and other income and expense. Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal, supply chain, development, and other administrative functions. Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and a reconciliation from net income to Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures".
Adjusted EBITDA for Pollo Tropical was
$12.1 million
in the
third
quarter of 2016 and the
third
quarter of 2015 primarily as a result of an increase in revenues offset by lower profitability at new restaurants, the impact of lower comparable restaurant sales, higher operating expenses and the write-off of site costs related to locations that we decided not to develop. Adjusted EBITDA for Taco Cabana decreased to
$9.6 million
in the
third
quarter of 2016 from $
9.9 million
in the
third
quarter of 2015 primarily due to the impact of the decrease in revenues. Consolidated Adjusted EBITDA decreased to
$21.7 million
in the
third
quarter of 2016 from
$22.0 million
in the
third
quarter of 2015.
Depreciation and Amortization.
Depreciation and amortization expense
increased
to $
9.5 million
in the
third
quarter of 2016 from
$7.6 million
in the
third
quarter of 2015 due primarily to increased depreciation related to new restaurant openings.
Impairment and Other Lease Charges.
As discussed under Recent Events Affecting our Results of Operations, we have reviewed our restaurant portfolio and subsequently closed ten Pollo Tropical restaurants in the fourth quarter of 2016, three of which may be converted to Taco Cabana restaurants. In the third quarter of 2016, we recognized an $18.5 million impairment charge related to the closed restaurants and six other Pollo Tropical restaurants and one Taco Cabana restaurant that we continue to operate. We will recognize related lease and other charges related to the closed restaurants, which we anticipate will be between $2 million and $4 million, in the fourth quarter of 2016.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve month cash flows are below a certain threshold. After reviewing the specific cash flows and management’s plans related to the restaurants for which an impairment review was performed, we impaired 16 Pollo Tropical restaurants and one Taco Cabana restaurant, as discussed above. In addition, for seven other Pollo Tropical restaurants and two Taco Cabana restaurants with combined carrying values of $12.4 million and $1.6 million, respectively, the projected cash flows exceeded the restaurant's carrying value by a small margin. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. Although we may review a restaurant for impairment before it has been open for twelve months, we generally review a restaurant for impairment after we have twelve months of cash flow and operating cost data. We have fourteen Pollo Tropical restaurants in markets outside of Florida that have been open less than twelve months and have not been reviewed for impairment. These restaurants will be reviewed for impairment in future periods when we have sufficient sales and cash flow history on which to base future projections.
Other Income.
Other income of $0.2 million in the
third
quarter of 2015 primarily consisted of expected business interruption insurance proceeds for a Pollo Tropical location that was temporarily closed due to a fire.
Interest Expense.
Interest expense was $
0.5 million
in the
third
quarter of 2016 and in the
third
quarter of 2015.
Provision for Income Taxes.
The provision for income taxes was derived using an estimated effective annual income tax rate, excluding discrete items, of 36.3% for the
third
quarter of 2016 and
37.8%
for the
third
quarter of 2015. The effective annual income tax rate decreased in the
third
quarter of 2016 compared to the
third
quarter of 2015 due primarily to the reinstatement of Work Opportunity Tax Credits.
Net Income.
As a result of the foregoing, we had a net loss of
$(4.5) million
in the
third
quarter of 2016 compared to net income of
$7.9 million
in the
third
quarter of 2015.
Nine Months Ended
October 2, 2016
Compared to
Nine Months Ended
September 27, 2015
The following table sets forth, for the
nine months ended
October 2, 2016
and
September 27, 2015
, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
Pollo Tropical
|
|
Taco Cabana
|
|
Consolidated
|
Restaurant sales:
|
|
|
|
|
|
|
|
|
|
|
|
Pollo Tropical
|
|
|
|
|
|
|
|
|
56.5
|
%
|
|
53.0
|
%
|
Taco Cabana
|
|
|
|
|
|
|
|
|
43.5
|
%
|
|
47.0
|
%
|
Consolidated restaurant sales
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
31.7
|
%
|
|
33.5
|
%
|
|
28.6
|
%
|
|
29.9
|
%
|
|
30.3
|
%
|
|
31.8
|
%
|
Restaurant wages and related expenses
|
23.4
|
%
|
|
22.0
|
%
|
|
29.1
|
%
|
|
28.7
|
%
|
|
25.9
|
%
|
|
25.1
|
%
|
Restaurant rent expense
|
4.8
|
%
|
|
4.3
|
%
|
|
5.5
|
%
|
|
5.4
|
%
|
|
5.1
|
%
|
|
4.8
|
%
|
Other restaurant operating expenses
|
13.4
|
%
|
|
12.2
|
%
|
|
13.5
|
%
|
|
13.0
|
%
|
|
13.4
|
%
|
|
12.6
|
%
|
Advertising expense
|
4.1
|
%
|
|
2.5
|
%
|
|
3.9
|
%
|
|
3.7
|
%
|
|
4.0
|
%
|
|
3.1
|
%
|
Pre-opening costs
|
1.4
|
%
|
|
1.3
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.9
|
%
|
|
0.8
|
%
|
Total revenues
increased
6.4%
to
$540.5 million
in the
nine months ended
October 2, 2016
from
$507.9 million
in the
nine months ended
September 27, 2015
. Restaurant sales
increased
6.4%
to
$538.4 million
in the
nine months ended
October 2, 2016
from
$505.8 million
in the
nine months ended
September 27, 2015
.
The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana for the
nine months ended
October 2, 2016
compared to the
nine months ended
September 27, 2015
(in millions):
|
|
|
|
|
Pollo Tropical:
|
|
Decrease in comparable restaurant sales
|
$
|
(2.0
|
)
|
Incremental sales related to new restaurants, net of closed restaurants
|
38.2
|
|
Total increase
|
$
|
36.2
|
|
|
|
Taco Cabana:
|
|
Decrease in comparable restaurant sales
|
$
|
(5.0
|
)
|
Incremental sales related to new restaurants, net of closed restaurants
|
1.3
|
|
Total decrease
|
$
|
(3.7
|
)
|
Comparable restaurant sales for Pollo Tropical restaurants decreased
0.8%
in the
nine months ended
October 2, 2016
. Comparable restaurant sales for Taco Cabana restaurants decreased
2.1%
in the
nine months ended
October 2, 2016
. For Pollo Tropical, a decrease in guest traffic of 1.7% was partially offset by menu price increases that drove an increase in restaurant sales of 1.2% in the
nine months ended
October 2, 2016
as compared to the
nine months ended
September 27, 2015
. For Taco Cabana, a decrease in guest traffic of 3.3% was partially offset by menu price increases that drove an increase in restaurant sales of 2.1% in the
nine months ended
October 2, 2016
as compared to the
nine months ended
September 27, 2015
. As a result of new restaurant openings, expected sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 1.6% in the
nine months ended
October 2, 2016
. Comparable restaurant sales for both brands continue to be negatively impacted by the general industrywide slowdown in restaurant sales.
Restaurants in newer markets that have not reached media efficiency generally have lower sales than restaurants in mature, media-efficient markets. As a result, Pollo Tropical revenues are growing at a slower rate than the average number of restaurants.
Franchise revenues were
$2.1 million
in the
nine months ended
October 2, 2016
and $2.1 million in
nine months ended
September 27, 2015
.
The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the
nine months ended
October 2, 2016
compared to the
nine months ended
September 27, 2015
. All percentages are stated as a percentage of applicable segment restaurant sales.
|
|
|
|
Pollo Tropical:
|
|
Cost of sales:
|
|
Lower commodity costs
|
(1.1
|
)%
|
Sales mix
|
(1.0
|
)%
|
Menu price increases
|
(0.4
|
)%
|
Operating inefficiencies
|
0.6
|
%
|
Other
|
0.1
|
%
|
Net decrease in cost of sales as a percentage of restaurant sales
|
(1.8
|
)%
|
|
|
Restaurant wages and related expenses:
|
|
Higher labor costs and impact of lower sales volumes for comparable restaurants
|
0.5
|
%
|
Higher labor costs and impact of lower sales volumes for new restaurants
(1)
|
0.9
|
%
|
Higher workers compensation costs
|
0.2
|
%
|
Lower incentive bonus costs
|
(0.2
|
)%
|
Net increase in restaurant wages and related costs as a percentage of restaurant sales
|
1.4
|
%
|
|
|
Other operating expenses
(2)
:
|
|
Higher repairs and maintenance costs
|
0.5
|
%
|
Higher real estate taxes generally related to new restaurants
|
0.4
|
%
|
Other
|
0.3
|
%
|
Net increase in other restaurant operating expenses as a percentage of restaurant sales
|
1.2
|
%
|
|
|
Advertising expense:
|
|
Increase in advertising
|
1.6
|
%
|
Net increase in advertising expense as a percentage of restaurant sales
|
1.6
|
%
|
|
|
Pre-opening costs:
|
|
Timing of restaurant openings
|
0.1
|
%
|
Net increase in pre-opening costs as a percentage of restaurant sales
|
0.1
|
%
|
(1) Includes additional restaurant managers in training that will be deployed to new restaurants as they open.
(2) Includes the impact of lower sales at newer restaurants.
|
|
|
|
Taco Cabana:
|
|
Cost of sales:
|
|
Lower commodity costs
|
(1.1
|
)%
|
Menu price increases
|
(0.6
|
)%
|
Menu board changes
|
0.3
|
%
|
Operating inefficiencies
|
0.2
|
%
|
Other
|
(0.1
|
)%
|
Net decrease in cost of sales as a percentage of restaurant sales
|
(1.3
|
)%
|
|
|
Restaurant wages and related expenses:
|
|
Higher labor costs and impact of lower sales volumes for comparable restaurants
|
1.1
|
%
|
Impact of closing lower sales volume restaurants, net of new restaurants
|
(0.2
|
)%
|
Lower medical benefit costs
|
(0.3
|
)%
|
Other
|
(0.2
|
)%
|
Net increase in restaurant wages and related costs as a percentage of restaurant sales
|
0.4
|
%
|
|
|
Other operating expenses:
|
|
Higher repairs and maintenance costs
|
0.3
|
%
|
Higher insurance costs
|
0.2
|
%
|
Lower utilities
|
(0.2
|
)%
|
Other
|
0.2
|
%
|
Net increase in other restaurant operating expenses as a percentage of restaurant sales
|
0.5
|
%
|
|
|
Advertising expense:
|
|
Increase in advertising
|
0.2
|
%
|
Net increase in advertising expense as a percentage of restaurant sales
|
0.2
|
%
|
|
|
Pre-opening costs:
|
|
Net change in pre-opening costs as a percentage of restaurant sales
|
—
|
%
|
Consolidated Restaurant Rent Expense
. Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales,
increased
to
5.1%
in the
nine months ended
October 2, 2016
from
4.8%
in the
nine months ended
September 27, 2015
primarily as a result of new restaurants that generally have higher rent and lower sales, and the impact of lower comparable restaurant sales.
Consolidated General and Administrative Expenses.
General and administrative expenses were
$42.6 million
in the
nine months ended
October 2, 2016
and
$41.6 million
the
nine months ended
September 27, 2015
, and as a percentage of total revenues, general and administrative expenses decreased to
7.9%
in the
nine months ended
October 2, 2016
compared to
8.2%
in the
nine months ended
September 27, 2015
due primarily to higher current year sales and lower incentive-based compensation costs. In addition, general and administrative expenses in the
nine months ended
October 2, 2016
included $0.5 million in severance and relocation costs associated with transitioning our Pollo Tropical headquarters from Miami, Florida to Dallas, Texas, $0.8 million in advisory fees related to the previously proposed separation transaction discussed under Recent Events Affecting our Results of Operations, a $0.9 million charge for estimated costs related to a class action settlement plus legal fees and other costs incurred in defending the action partially offset by a $0.4 million reduction in prior year legal settlement costs and a $0.8 million write-off of site development costs related to locations that we decided not to develop. General and administrative expenses in the nine months ended September 27, 2015 included a charge for estimated costs related to a class action settlement plus legal fees and other costs incurred in defending the action totaling $1.1 million.
Adjusted EBITDA.
Adjusted EBITDA, which is one of the measures of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease
charges, stock-based compensation expense and other income and expense. Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal, supply chain, development, and other administrative functions. Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and a reconciliation from net income to Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures".
Adjusted EBITDA for Pollo Tropical decreased to
$41.8 million
in the
nine months ended
October 2, 2016
from
$44.0 million
in the
nine months ended
September 27, 2015
primarily as a result of lower profitability at new restaurants, the impact of lower comparable restaurant sales, higher operating expenses and the write-off of site costs related to locations that we decided not to develop. Adjusted EBITDA for Taco Cabana
increased
to
$30.5 million
in the
nine months ended
October 2, 2016
from
$30.0 million
in the
nine months ended
September 27, 2015
primarily due to a decrease in cost of sales as a percentage of sales driven by menu price increases and lower commodity costs partially offset by the impact of the decrease in revenues. Consolidated Adjusted EBITDA decreased to
$71.5 million
in the
nine months ended
October 2, 2016
from
$74.0 million
in the
nine months ended
September 27, 2015
primarily a result of the decrease in Pollo Tropical Adjusted EBITDA and $0.8 million in advisory fees related to the previously proposed separation transaction discussed under Recent Events Affecting our Results of Operations.
Depreciation and Amortization.
Depreciation and amortization expense
increased
to
$26.5 million
in the
nine months ended
October 2, 2016
from
$21.8 million
in the
nine months ended
September 27, 2015
due primarily to increased depreciation related to new restaurant openings.
Impairment and Other Lease Charges.
As discussed under Recent Events Affecting our Results of Operations, we have reviewed our restaurant portfolio and subsequently closed ten Pollo Tropical restaurants in the fourth quarter of 2016, three of which may be converted to Taco Cabana restaurants. In the third quarter of 2016, we recognized an $18.5 million impairment charge related to the closed restaurants and six other Pollo Tropical restaurants and one Taco Cabana restaurant that we continue to operate. We will recognize related lease and other charges related to the closed restaurants, which we anticipate will be between $2 million and $4 million, in the fourth quarter of 2016.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve month cash flows are below a certain threshold. After reviewing the specific cash flows and management’s plans related to the restaurants for which an impairment review was performed, we impaired 16 Pollo Tropical restaurants and one Taco Cabana restaurant, as discussed above. In addition, for seven other Pollo Tropical restaurants and two Taco Cabana restaurants with combined carrying values of $12.4 million and $1.6 million, respectively, the projected cash flows exceeded the restaurant's carrying value by a small margin. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. Although we may review a restaurant for impairment before it has been open for twelve months, we generally review a restaurant for impairment after we have twelve months of cash flow and operating cost data. We have fourteen Pollo Tropical restaurants in markets outside of Florida that have been open less than twelve months and have not been reviewed for impairment. These restaurants will be reviewed for impairment in future periods when we have sufficient sales and cash flow history on which to base future projections.
Other Income.
Other income of $0.2 million in the
nine months ended
October 2, 2016
primarily consisted of additional proceeds related to a location that closed in 2015 as a result of an eminent domain proceeding. Other income of $0.7 million in the
nine
months ended
September 27, 2015
primarily consisted of a previously deferred gain from a sale-leaseback transaction that was recognized upon termination of the lease as a result of an eminent domain proceeding and expected business interruption insurance proceeds for a Pollo Tropical location that was temporarily closed due to a fire.
Interest Expense.
Interest expense increased to
$1.6 million
in the
nine months ended
October 2, 2016
from
$1.3 million
in the
nine months ended
September 27, 2015
.
Provision for Income Taxes.
The provision for income taxes was derived using an estimated effective annual income tax rate, excluding discrete items, of 36.3% for the
nine months ended
October 2, 2016
and
37.8%
for the
nine months ended
September 27, 2015
. The effective annual income tax rate decreased in the
nine months ended
October 2, 2016
compared to the
nine months ended
September 27, 2015
due primarily to the reinstatement of Work Opportunity Tax Credits.
Net Income.
As a result of the foregoing, we had net income of
$14.3 million
in the
nine months ended
October 2, 2016
compared to net income of
$29.7 million
in the
nine months ended
September 27, 2015
.
Liquidity and Capital Resources
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:
|
|
•
|
restaurant operations are primarily conducted on a cash basis;
|
|
|
•
|
rapid turnover results in a limited investment in inventories; and
|
|
|
•
|
cash from sales is usually received before related liabilities for food, supplies and payroll become due.
|
Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe cash generated from our operations, availability of borrowings under our senior credit facility and proceeds from any sale-leaseback transactions which we may choose to do will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating Activities
. Net cash provided by operating activities in the first
nine
months of 2016 and 2015 was
$66.4 million
and
$59.0 million
, respectively. The increase in net cash provided by operating activities in the first
nine
months of 2016 was primarily driven by the timing of payments.
Investing Activities.
Net cash used in investing activities in the first
nine
months of 2016 and 2015 was
$61.8 million
and
$66.1 million
, respectively. Capital expenditures are the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.
The following table sets forth our capital expenditures for the periods presented (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pollo
Tropical
|
|
Taco
Cabana
|
|
Other
|
|
Consolidated
|
Nine Months Ended October 2, 2016:
|
|
|
|
|
|
|
|
New restaurant development
|
$
|
48,857
|
|
|
$
|
3,971
|
|
|
$
|
—
|
|
|
$
|
52,828
|
|
Restaurant remodeling
|
956
|
|
|
—
|
|
|
—
|
|
|
956
|
|
Other restaurant capital expenditures
(1)
|
1,508
|
|
|
3,117
|
|
|
—
|
|
|
4,625
|
|
Corporate and restaurant information systems
|
1,392
|
|
|
970
|
|
|
2,272
|
|
|
4,634
|
|
Total capital expenditures
|
$
|
52,713
|
|
|
$
|
8,058
|
|
|
$
|
2,272
|
|
|
$
|
63,043
|
|
Number of new restaurant openings
|
26
|
|
|
2
|
|
|
|
|
28
|
|
Nine Months Ended September 27, 2015:
|
|
|
|
|
|
|
|
New restaurant development
|
$
|
51,175
|
|
|
$
|
3,882
|
|
|
$
|
—
|
|
|
$
|
55,057
|
|
Restaurant remodeling
|
826
|
|
|
1,897
|
|
|
—
|
|
|
2,723
|
|
Other restaurant capital expenditures
(1)
|
2,078
|
|
|
3,119
|
|
|
—
|
|
|
5,197
|
|
Corporate and restaurant information systems
|
1,025
|
|
|
607
|
|
|
1,610
|
|
|
3,242
|
|
Total capital expenditures
|
$
|
55,104
|
|
|
$
|
9,505
|
|
|
$
|
1,610
|
|
|
$
|
66,219
|
|
Number of new restaurant openings
|
26
|
|
|
2
|
|
|
|
|
28
|
|
(1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the
nine
months ended
October 2, 2016
and
September 27, 2015
, total restaurant repair and maintenance expenses were approximately $14.1 million and $11.4 million, respectively.
For 2016, we anticipate that total capital expenditures will range from $82.0 million to $85.0 million. Capital expenditures in 2016 are expected to include $65.0 million to $67.0 million for development of new restaurants and purchase of related real estate. For 2016 we anticipate opening a total of 31 new company-owned Pollo Tropical restaurants and four new company-owned Taco Cabana restaurants, of which 26 Pollo Tropical and two Taco Cabana restaurants have been opened through October 2, 2016. Our capital expenditures in 2016 are also expected to include expenditures of approximately $10.0 million to $11.0 million for the ongoing reinvestment in our Pollo Tropical and Taco Cabana restaurants for remodeling costs and capital maintenance expenditures and approximately $7.0 million of other expenditures.
In 2017, the Company expects to open 12 to 13 new Company-owned Pollo Tropical restaurants in Florida and 8 to 10 new Company-owned Taco Cabana restaurants in Texas. Up to three of the new Company-owned Taco Cabana restaurant openings will be Pollo Tropical restaurants that were converted to Taco Cabana restaurants. Total capital expenditures in 2017 are expected
to be $57.0 million to $68.0 million. Capital expenditures in 2017 are expected to include $35.0 million to $43.0 million for development of new restaurants and purchase of related real estate. Our capital expenditures in 2017 are also expected to include expenditures of approximately $14.0 million to $16.0 million for the ongoing reinvestment in our Pollo Tropical and Taco Cabana restaurants for remodeling costs and capital maintenance expenditures and approximately $8.0 million to $9.0 million of other expenditures.
In the first nine months of 2016, investing activities also included
$2.7 million
for the purchase of a property for a sale-leaseback and a sale-leaseback transaction related to our restaurant properties, the net proceeds from which were
$3.6 million
.
Financing Activities.
Net cash used in financing activities in the first nine months of 2016 was
$4.9 million
and included net revolving credit borrowing repayments under our senior credit facility of
$5.1 million
and excess tax benefits of
$0.2 million
. Net cash provided by financing activities in the first
nine
months of 2015 was
$3.0 million
and included net revolving credit borrowings under our senior credit facility of
$1.5 million
and the excess tax benefit from vesting of restricted shares of
$1.5 million
.
Senior Credit Facility.
Our senior credit facility provides for aggregate revolving credit borrowings of up to $150 million (including $15 million available for letters of credit) and matures on December 11, 2018. The senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the senior credit facility. On
October 2, 2016
, there were
$65.9 million
in outstanding revolving credit borrowings under our senior credit facility.
Borrowings under the senior credit facility bear interest at a per annum rate, at our option, equal to either (all terms as defined in the senior credit facility):
1) the Alternate Base Rate plus the applicable margin of 0.50% to 1.50% based on our Adjusted Leverage Ratio
(with a margin of 0.50% as of
October 2, 2016
), or
2) the LIBOR Rate plus the applicable margin of 1.50% to 2.50% based on our Adjusted Leverage Ratio (with a
margin of 1.50% at
October 2, 2016
).
In addition, the senior credit facility requires us to pay (i) a commitment fee based on the applicable Commitment Fee margin of 0.25% to 0.45%, based on our Adjusted Leverage Ratio, (with a margin of 0.25% at
October 2, 2016
) and the unused portion of the facility and (ii) a letter of credit fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
All obligations under the senior credit facility are guaranteed by all of our material domestic subsidiaries. In general, our obligations under our senior credit facility and our subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of our assets and the assets of our material subsidiaries (including a pledge of all of the capital stock and equity interests of our material subsidiaries), other than certain specified assets, including real property owned by us or our subsidiaries.
The outstanding borrowings under the senior credit facility are prepayable without penalty (other than customary breakage costs). The senior credit facility requires us to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting our and our subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests, (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactions with affiliates and (viii) change our business. In addition, the senior credit facility will require us to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all as defined under the senior credit facility).
Our senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
As of
October 2, 2016
, we were in compliance with the covenants under our senior credit facility. After reserving
$5.2 million
for letters of credit issued under the senior credit facility,
$78.9 million
was available for borrowing under the senior credit facility at
October 2, 2016
.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.
There have been no significant changes outside the ordinary course of business to our contractual obligations since January 3, 2016. Information regarding our contractual obligations is included under "Contractual Obligations" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates as well as changes in payroll related taxes, including Federal and state unemployment taxes. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies” footnote in the notes to our consolidated financial statements for the year ended January 3, 2016 included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. Critical accounting estimates are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. There have been no material changes affecting our critical accounting policies for the
nine
months ended
October 2, 2016
.
Management's Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure. We use Adjusted EBITDA in addition to net income, income from operations, and income before income taxes to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business. Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income, earnings per share, cash flows from operating activities or other financial information determined under GAAP.
Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal, supply chain, human resources, development and other administrative functions.
Management believes that Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of Adjusted EBITDA to net income (i) provide useful information about our operating performance and period-over-period growth, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.
All of such non-GAAP financial measures have important limitations as analytical tools. These limitations include the following:
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|
•
|
such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
|
|
|
•
|
such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt;
|
|
|
•
|
although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and
|
|
|
•
|
such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges, other income and expense and stock-based compensation expense) have recurred and may recur.
|
A reconciliation from consolidated net income (loss) to Adjusted EBITDA follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(4,531
|
)
|
|
$
|
7,945
|
|
|
$
|
14,280
|
|
|
$
|
29,695
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
9,513
|
|
|
7,596
|
|
|
26,474
|
|
|
21,844
|
|
Impairment and other lease charges
|
18,513
|
|
|
387
|
|
|
18,607
|
|
|
481
|
|
Interest expense
|
542
|
|
|
493
|
|
|
1,635
|
|
|
1,345
|
|
Provision for (benefit from) income taxes
|
(2,748
|
)
|
|
4,571
|
|
|
8,065
|
|
|
18,073
|
|
Stock-based compensation expense
|
365
|
|
|
1,167
|
|
|
2,634
|
|
|
3,203
|
|
Other income
|
—
|
|
|
(165
|
)
|
|
(238
|
)
|
|
(679
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
Pollo Tropical
|
$
|
12,087
|
|
|
$
|
12,120
|
|
|
$
|
41,828
|
|
|
$
|
43,993
|
|
Taco Cabana
|
9,641
|
|
|
9,874
|
|
|
30,451
|
|
|
29,969
|
|
Fiesta
|
(74
|
)
|
|
—
|
|
|
(822
|
)
|
|
—
|
|
Consolidated
|
$
|
21,654
|
|
|
$
|
21,994
|
|
|
$
|
71,457
|
|
|
$
|
73,962
|
|
Forward Looking Statements
This Quarterly Report on Form 10-Q contains “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. “Forward-looking statements” are any statements that are not based on historical information. Statements other than statements of historical facts included herein, including, without limitation, statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking statements.” Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:
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|
•
|
Increases in food and other commodity costs;
|
|
|
•
|
Risks associated with the expansion of our business, including increasing real estate and construction costs;
|
|
|
•
|
Risks associated with food borne illness or other food safety issues, including negative publicity through traditional
|
and social media;
|
|
•
|
Our ability to manage our growth and successfully implement our business strategy;
|
|
|
•
|
Labor and employment benefit costs, including the impact of increases in federal and state minimum wages, increases in exempt status salary levels and healthcare costs imposed by the Affordable Care Act;
|
|
|
•
|
Cyber security breaches;
|
|
|
•
|
General economic conditions, particularly in the retail sector;
|
|
|
•
|
Competitive conditions;
|
|
|
•
|
Significant disruptions in service or supply by any of our suppliers or distributors;
|
|
|
•
|
Increases in employee injury and general liability claims;
|
|
|
•
|
Changes in consumer perception of dietary health and food safety;
|
|
|
•
|
The outcome of pending or future legal claims or proceedings;
|
|
|
•
|
Environmental conditions and regulations;
|
|
|
•
|
The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;
|
|
|
•
|
The risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity; and
|
|
|
•
|
Factors that affect the restaurant industry generally, including product recalls, liability if our products cause injury, ingredient disclosure and labeling laws and regulations.
|