LUBYS INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and footnotes for the period ended
The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.
Overview
As of
Also as of
Also as of
Accounting Periods
Our fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. Each of the first three quarters of each fiscal year consists of three four-week periods, while the fourth quarter normally consists of four four-week periods. Comparability between quarters may be affected by varying lengths of the quarters, as well as the seasonality associated with the restaurant business. The first quarter of fiscal year 2012 ended
Same-Store Sales
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. To qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. Our
RESULTS OF OPERATIONS
For the First Quarter Fiscal Year 2012 versus the First Quarter Fiscal Year 2011
Sales
Total sales increased
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Cost of Food
Food costs decreased
Payroll and Related Costs
Payroll and related costs remained comparable in the quarter ended
Other Operating Expenses
Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, services, supplies and occupancy costs. Other operating expenses decreased by
Opening Costs
Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were
Cost of Culinary Contract Services
Cost of culinary contract services increased by
Depreciation and Amortization
Depreciation and amortization expense decreased by
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General and Administrative Expenses
General and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. General and administrative expenses increased by
Asset Impairments
An impairment charge of
Net Loss on Disposition of Property and Equipment
The net loss on disposition of property and equipment remained comparable in the quarter ended
Interest Income
Interest income remained comparable in the quarter ended
Interest Expense
Interest expense in the quarter ended
Other Income, Net
Other income, net consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; and oil and gas royalty income. Other income, net in the quarter ended
Taxes
For the quarter ended
Discontinued Operations
The loss from discontinued operations was
The loss from discontinued operations of
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
General. Our primary sources of short-term and long-term liquidity are cash flows from operations and our revolving credit facility. Cash flow from operations during the first quarter of fiscal year 2012 was significantly improved over cash flow from operations during the first quarter of fiscal year 2011. However, proceeds from disposal of assets and property held for
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sale were lower in fiscal year 2012 than fiscal year 2011. Due to the improved cash flow from operations, we increased debt repayments and our capital expenditures. We plan to continue the level of capital expenditures necessary to keep our restaurants attractive and operating efficiently.
Our cash requirements consist principally of:
• payments to reduce our debt
• capital expenditures for construction, restaurant renovations and upgrades
and information technology and
• working capital primarily from our Company-owned restaurants and CCS
agreements
Cash from operations and proceeds from the sale of assets allowed for debt repayments. Under the current terms of our revolving credit facility, as amended through
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical for culinary contract services and franchises. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets.
Cash and cash equivalents increased
The following table summarizes our cash flows from operating, investing and financing activities: Quarter Ended November 23, November 17, 2011 2010 (12 weeks) (12 weeks) (In thousands) Total cash provided by (used in): Operating activities $ 8,803 $ 2,064 Investing activities (4,190 ) (361 ) Financing activities (4,001 ) (2,214 )
Increase (decrease) in cash and cash equivalents $ 612 $ (511 )
Operating Activities. Cash flow from operating activities increased
Cash provided by operating activities before changes in operating assets and liabilities increased
Cash provided by changes in operating assets and liabilities is the result of the net changes in asset and liability balances during the quarter. During the first quarter of fiscal year 2012, the net change in current assets was an increase of
Investing Activities. We generally reinvest available cash flows from operations to develop new restaurants, enhance existing restaurants and to support our CCS business. Cash used by investing activities was
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Financing Activities. Cash used in financing activities was
Status of Trade Accounts and Other Receivables, Net
We monitor the aging of our receivables, including
Working Capital
We had a working capital deficit of
Capital Expenditures
Capital expenditures consist of purchases of real estate for future restaurant sites, new units construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for the quarter ended
DEBT
Revolving Credit Facility
In
The aggregate amount of the lenders' commitments under the 2009 Credit Facility was
The 2009 Credit Facility is guaranteed by all of our present or future subsidiaries. In addition, in connection with the expansion of the 2009 Credit Facility that accompanied our acquisition of substantially all of the assets of
At any time throughout the term of the 2009 Credit Facility, we have the option to elect one of two bases of interest rates. One interest rate option is the greater of (a) the Federal Funds Effective Rate plus 0.50%, or (b) prime, plus, in either case, an applicable spread that ranges from 1.00% to 2.00% per annum. The other interest rate option is the London InterBank Offered Rate plus a spread that ranges from 2.75% to 3.75% per annum. The applicable spread under each option is dependent upon the ratio of our debt to EBITDA at the most recent determination date.
We are obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranging from 0.30% to 0.40% per annum depending on the Total Leverage Ratio at the most recent determination date.
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The proceeds of the 2009 Credit Facility are available for our general corporate purposes and general working capital purposes.
Borrowings under the 2009 Credit Facility are subject to mandatory repayment with the proceeds of sales of certain of our real property, subject to certain exceptions.
The 2009 Credit Facility is secured by a perfected first priority lien on certain of our real property and all of the material personal property owned by us or any of our subsidiaries, other than certain excluded assets (as defined in the Credit Agreement). At
The Credit Agreement contains the following covenants among others:
• the maintenance of EBTIDA of not less than (1)$4,500,000 for the fiscal quarter endedAugust 25, 2010 , (2)$2,500,000 for the fiscal quarter endedNovember 17, 2010 , (3)$3,500,000 for the fiscal quarter endedFebruary 9, 2011 , (4)$7,000,000 for the fiscal quarter endedMay 4, 2011 and (5)$6,500,000 for the fiscal quarter endedAugust 31, 2011 , • maintenance of a ratio of (a) EBITDA for the four fiscal quarters ending on the last day of any fiscal quarter to (b) the sum of (x) interest expense (as defined in the Credit Agreement) for such four fiscal-quarter-period plus (y) the outstanding principal balance of the loans as of the last day of such fiscal quarter divided by seven (the "Debt Service Coverage Ratio), of not less than (1) 2.00 to 1.00, beginning with the end of the fourth quarter of fiscal 2011 and ending with the first quarter of fiscal 2012, (2) 2.25 to 1.00 beginning with the end of the second quarter of fiscal 2012 and ending with the first quarter of fiscal 2013, and (3) 2.50 to 1.00 beginning with the end of second quarter of fiscal 2013 and thereafter, • maintenance of minimum Tangible Net Worth (as defined in the Credit Amendment) at all times of not less than (1)$126.7 million as of the last day of the third fiscal quarter of fiscal 2011 and (2) increasing incrementally thereafter, as of the last day of each subsequent fiscal quarter, by an amount equal to 60% of our consolidated net income (if positive) for the fiscal quarter ending on such date, • maintenance of minimum net profit of$1.00 (1) for at least one of the first three fiscal quarters of our 2012 fiscal year, (2) for at least one of any two consecutive fiscal quarters beginning with the fourth fiscal quarter of our 2012 fiscal year, and (3) for any period of four consecutive fiscal quarters beginning with the four consecutive fiscal quarters ending with the fourth quarter of our 2011 fiscal year, • restrictions on incurring indebtedness, including certain guarantees and capital lease obligations, • restrictions on incurring liens on certain of our property and the property of our subsidiaries, • restrictions on transactions with affiliates and materially changing our business, • restrictions on making certain investments, loans, advances and guarantees, • restrictions on selling assets outside the ordinary course of business, • prohibitions on entering into sale and leaseback transactions, • limiting Capital Expenditures (as defined in the Credit Agreement) to$10.0 million for the fiscal year endedAugust 25, 2010 , to$15.0 million for the fiscal year endedAugust 31, 2011 , and for any subsequent fiscal year, to the sum of (1) the lesser of (a)$38.0 million or (b) an amount equal to 130% of EBITDA for the immediately preceding fiscal year plus (2) any unused availability for capital expenditures from the immediately preceding fiscal year. • restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person
We were in compliance with the covenants contained in the Credit Agreement as of
The Credit Agreement also includes customary events of default. If a default occurs and is continuing, the lenders' commitments under the Credit Facility may be immediately terminated and/or we may be required to repay all amounts outstanding under the Credit Facility.
As of
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements included in Item 1 of Part 1 of this report were prepared in conformity with U.S. generally accepted accounting principles. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Due to the significant, subjective and complex judgments and estimates used when preparing our
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consolidated financial statements, management regularly reviews these assumptions and estimates with the
Income Taxes
The estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We periodically review the recoverability of tax assets recorded on the balance sheet and provide valuation allowances as management deems necessary.
If the future consequences of differences between financial reporting bases and tax bases of our assets and liabilities result in a net deferred tax asset, management will evaluate the probability of our ability to realize the future benefits of such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized. The realization of such net deferred tax will generally depend on whether we will have sufficient taxable income of an appropriate character within the carryforward period permitted by the tax law.
Management evaluates both positive and negative evidence, including its forecasts of our future taxable income adjusted by varying probability factors, in making a determination as to whether it is more likely than not that all or some portion of the deferred tax asset will be realized. Based on its analysis, management concluded that a valuation allowance was necessary.
The valuation allowance partially offsets our carryover of general business tax credits. These credits may be carried over up to twenty years in the future for possible utilization in the future. The carryover of the general business credits began in fiscal year 2006 and will begin to expire at the end of fiscal year 2026 through the end of fiscal year 2032 if not utilized by then.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions as well as by the
Impairment of Long-Lived Assets
We periodically evaluate long-lived assets held for use and held for sale, whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We analyze historical cash flows of operating locations and compare results of poorer performing locations to more profitable locations. We also analyze lease terms, condition of the assets and related need for capital expenditures or repairs, construction activity in the surrounding area as well as the economic and market conditions in the surrounding area.
For assets held for use, we estimate future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of our location's assets, we record an impairment based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management's subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and if applicable, lease terms. The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The time span is longer and could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows. We operated 155 restaurants as of
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We evaluate the useful lives of our intangible assets, primarily the
Property Held for Sale
We periodically review long-lived assets against our plans to retain or ultimately dispose of properties. If we decide to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. We analyze market conditions each reporting period and record additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like ours. Gains are not recognized until the properties are sold.
Insurance and Claims
We self-insure a significant portion of risks and associated liabilities under our employee injury, workers' compensation and general liability programs. We maintain insurance coverage with third party carriers to limit our per-occurrence claim exposure. We have recorded accrued liabilities for self-insurance based upon analysis of historical data and actuarial estimates, and we review these amounts on a quarterly basis to ensure that the liability is appropriate.
The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims, are as follows: (1) historical patterns of loss development will continue in the future as they have in the past (Loss Development Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past (Bornhuetter-Ferguson Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs are analyzed to get a projected severity (Frequency and Severity Method). The results of these methods are blended by the actuary to provide the reserves estimates.
Actual workers' compensation and employee injury claims expense may differ from estimated loss provisions. The ultimate level of claims under the in-house safety program are not known, and declines in incidence of claims as well as claims costs experiences or reductions in reserve requirements under the program may not continue in future periods.
Share-Based Compensation
Share-based compensation is recognized as compensation expense in the income statement utilizing the fair value on the date of the grant. The fair value of restricted stock units is valued at the closing market price of the Company's common stock at the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Assumptions for volatility, expected option life, risk free interest rate and dividend yield are used in the model.
NEW ACCOUNTING PRONOUNCEMENTS
In
INFLATION
It is generally our policy is to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are "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. All statements contained in this Form 10-Q, other than statements of historical facts, are "forward-looking statements" for purposes of these provisions, including any statements regarding
• future operating results, • future capital expenditures, including expected reductions in capital expenditures, and expected sources of funds for capital expenditures, • future debt, including liquidity and the sources and availability of funds related to debt, and expected repayment of debt, ability to refinance the existing credit facility or enter into a new credit facility on a timely basis, 23
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Table of Contents • expected sources of funds for working capital requirements, • plans for our new prototype restaurants, • plans for expansion of our business, • scheduled openings of new units, • closing existing units, • effectiveness of management's Cash Flow Improvement and Capital Redeployment Plan, • future sales of assets and the gains or losses that may be recognized as a result of any such sales, and • continued compliance with the terms of our 2009 Credit Facility.
In some cases, investors can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "outlook," "may" "should," "will," and "would" or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although management believes that our assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as the factors set forth in Item 1A of this Form 10-Q and any other cautionary language in this Form 10-Q, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
• general business and economic conditions,
• the impact of competition,
• our operating initiatives, changes in promotional, couponing and advertising
strategies and the success of management's business plans,
• fluctuations in the costs of commodities, including beef, poultry, seafood,
dairy, cheese, oils and produce,
• ability to raise menu prices and customers acceptance of changes in menu
items,
• increases in utility costs, including the costs of natural gas and other
energy supplies,
• changes in the availability and cost of labor, including the ability to
attract qualified managers and team members,
• the seasonality of the business,
• collectability of accounts receivable,
• changes in governmental regulations, including changes in minimum wages and
health care benefit regulation,
• the effects of inflation and changes in our customers' disposable income,
spending trends and habits,
• the ability to realize property values,
• the availability and cost of credit,
• weather conditions in the regions in which our restaurants operate,
• costs relating to legal proceedings,
• impact of adoption of new accounting standards,
• effects of actual or threatened future terrorist attacks in the United
States,
• unfavorable publicity relating to operations, including publicity concerning
food quality, illness or other health concerns or labor relations, and
• the continued service of key management personnel.
Each forward-looking statement speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-Q could have material adverse effect on our business, results of operations, cash flows and financial condition.
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