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TAST > SEC Filings for TAST > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for CARROLS RESTAURANT GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CARROLS RESTAURANT GROUP, INC.


8-May-2013

Quarterly Report


ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Restaurant Group, Inc. as "Carrols Restaurant Group" and, together with its consolidated subsidiaries, as "we", "our" and "us" unless otherwise indicated or the context otherwise requires. Any reference to "Carrols" refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires. Any reference to "Carrols LLC" refers to Carrols' wholly-owned subsidiary, Carrols LLC.
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended December 30, 2012 and January 1, 2012 each contained 52 weeks and the three months ended March 31, 2013 and April 1, 2012 each contained thirteen weeks.
Introduction
We are a holding company and conduct all of our operations through our direct and indirect subsidiaries and have no assets other than the shares of capital stock of Carrols, our direct wholly-owned subsidiary. The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or "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 Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 30, 2012. The overview provides our perspective on the individual sections of MD&A, which include the following:
Company Overview-a general description of our business and our key financial measures.
Recent and Future Events Affecting Our Results of Operations-a description of recent events that affect, and future events that may affect, our results of operations.
Operating Results from Continuing Operations-an analysis of our results of operations for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 including a review of material items and known trends and uncertainties.
Liquidity and Capital Resources-an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.
Application of Critical Accounting Policies-an overview of accounting policies requiring critical judgments and estimates.
Effects of New Accounting Standards-a discussion of new accounting standards and any implications related to our financial statements.
Forward Looking Statements-cautionary information about forward-looking statements and a description of certain risks and projections. Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. We are the largest Burger King franchisee in the world and have operated Burger King restaurants since 1976. As of March 31, 2013, we operated 571 Burger King restaurants in 13 states. On May 30, 2012, we acquired (the "acquisition") 278 restaurants from Burger King Corporation ("BKC"), which we refer to as the "acquired restaurants". Our restaurants operated prior to the acquisition are referred to as our "legacy restaurants". Our former indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc., which we refer to as "Fiesta", was spun off by us to our stockholders on May 7, 2012. The results of operations and cash flows of Fiesta are presented as discontinued operations in our consolidated financial statements for all periods presented. The discussion in our MD&A is focused on our continuing Burger King restaurant operations. Sales from the acquired restaurants are excluded from changes in our comparable restaurant sales in the first quarter of 2013.
The following is an overview of the key financial measures discussed in our results of operations:
Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Restaurant sales are influenced by customer traffic, menu price increases, promotions, new restaurant openings and closures of restaurants. Restaurants are included in comparable restaurant sales after they have been open for 12 months. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year.


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Cost of sales consists of food, paper and beverage costs including packaging costs, less 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.

Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, including changes form the comprehensive federal health care reform law, workers' compensation insurance and state unemployment insurance.

Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of deferred gains on sale-leaseback transactions.

Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC, utilities, repairs and maintenance, real estate taxes and credit card fees.

Advertising expense includes all promotional expenses including advertising payments based on a percentage of sales as required under our franchise agreements.

General and administrative expenses are comprised primarily of
(1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants,
(2) legal, auditing and other professional fees and (3) stock-based compensation expense. Historical general and administrative expenses exclude all amounts associated with Fiesta as those amounts are included in loss from discontinued operations and include a reduction to general and administrative expenses as if the transition services agreement with Fiesta was in place for all periods presented.

EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net loss from continuing operations, before provision (benefit) for income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted to exclude impairment and other lease charges, acquisition and integration costs, EEOC litigation and settlement costs, stock compensation expense and loss on extinguishment of debt. We exclude these items from EBITDA when evaluating our operating performance and believe that Adjusted EBITDA provides a more meaningful comparison than EBITDA of our core business operating results, as well as with those of other similar companies that may have different capital structures. Management believes that EBITDA and Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of Adjusted EBITDA to net loss from continuing operations, provide useful information about our operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and Adjusted EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net loss from continuing operations 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. For a reconciliation between net loss from continuing operations and EBITDA and Adjusted EBITDA see page 20.

EBITDA and Adjusted EBITDA, have important limitations as analytical tools. These limitations include the following:

         EBITDA and Adjusted EBITDA do not reflect our capital expenditures,
          future requirements for capital expenditures or contractual commitments
          to purchase capital equipment;


         EBITDA and Adjusted EBITDA do not reflect the interest expense or the
          cash requirements necessary to service principal or interest 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 EBITDA and Adjusted EBITDA do not reflect
          the cash required to fund such replacements; and


         EBITDA and Adjusted EBITDA do 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 expense) have recurred and may reoccur.


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Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants and the amortization of franchise rights from our acquisitions of restaurants and franchise fees paid to BKC.

Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and 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. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries. There are no lease charges accrued for closed locations at March 31, 2013.

Interest expense consists primarily of interest expense associated with our 11.25% Senior Secured Second Lien Notes due 2018 (the "Notes"), borrowings under our prior Carrols LLC senior secured credit facility and the amortization of deferred financing costs. There have been no borrowings under our new senior credit facility in 2013.

Recent and Future Events Affecting our Results of Operations Acquisition of Burger King Restaurants

On May 30, 2012, we completed the acquisition of 278 restaurants from BKC, for a purchase price consisting of (i) a 28.9% equity ownership interest, (ii) a net cash purchase price of $12.1 million and (iii) additional consideration of $4.3 million including $3.6 million for BKC's assignment of its right of first refusal ("ROFR") on franchisee restaurant transfers in 20 states pursuant to an operating agreement. The amount for the ROFR is payable in quarterly payments over five years. We also entered into new franchise agreements pursuant to the purchase and operating agreements and entered into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC's underlying leases for those properties. Pursuant to the operating agreement, we also agreed to remodel 455 Burger King restaurants to BKC's 20/20 restaurant image by 2015. As of March 31, 2013, we had completed remodeling a total of 129 restaurants to the 20/20 restaurant image, including 39 restaurants in 2013. We currently anticipate remodeling an additional 50 to 80 restaurants in 2013.
Refinancing of Outstanding Indebtedness
On May 30, 2012, we issued $150.0 million of 11.25% Senior Secured Second Lien Notes due 2018 and entered into a new senior credit facility that provides for up to $20.0 million of revolving credit borrowings (which was undrawn at closing). The net proceeds from the issuance of the Notes were used to (i) repay all outstanding borrowings under the prior Carrols LLC senior credit facility of $64.8 million (ii) pay $12.1 million related to the acquisition of the acquired restaurants from BKC and (iii) fees and expenses related to the offering of the Notes. The remainder of the net proceeds will be used together with operating cash flow and the cash collateral account, as it becomes unrestricted, to fund the restaurant remodeling obligations committed to in connection with the acquisition of the acquired restaurants, and to fund future payments to BKC for the ROFR. Interest expense associated with the Notes, including the amortization of deferred financing costs, will be approximately $17.8 million in 2013. Spin-off of Fiesta Restaurant Group, Inc. On April 16, 2012, our board of directors approved the spin-off of Fiesta (the "Spin-off"), which through its subsidiaries, owns, operates and franchises the Pollo Tropical and Taco Cabana restaurant brands. In connection with the Spin-off, on April 24, 2012, we and Carrols entered into several agreements that govern our post Spin-off relationship with Fiesta, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement.
Fiesta filed with the Securities and Exchange Commission (the "SEC") a Form 10 registration statement, File No. 001-35373, as amended, which included as an exhibit an information statement which describes the Spin-off. The Form 10 registration statement, which registered the common stock of Fiesta under the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.
On May 7, 2012, we completed the Spin-off of Fiesta in the form of a pro rata dividend of all of the issued and outstanding common stock of Fiesta to Carrols Restaurant Group's stockholders whereby each stockholder of Carrols Restaurant Group's common stock of record on April 26, 2012 received one share of Fiesta common stock for every one share of Carrols Restaurant Group common stock held. As a result of the Spin-off, Fiesta is an independent public company whose common stock is traded on The NASDAQ Global Select Market under the symbol "FRGI."
The historical operating results of Fiesta are included in our operating results as loss from discontinued operations.


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Amounts earned by Carrols under the Transition Services Agreement were $1.3 million in the three months ended March 31, 2013, and are expected to be approximately $3.3 million for all of 2013. As Fiesta terminates services provided by us under the Transition Services Agreement in the future, amounts earned for these services will decrease. Health Care Reform
The Patient Protection and Affordable Care Act (the "Act") requires businesses employing fifty or more full-time equivalent employees to offer health care benefits to those full-time employees beginning in January 2014, or be subject to an annual penalty. Those benefits must be provided under a health care plan which provides a certain minimum scope of health care services. The Act also limits the portion of the cost of the benefits which we can require employees to pay.
We are assessing the financial impact of the Act including the provision beginning in 2014 to offer health insurance to our hourly employees who work on average over 30 hours per week. Based on our analyses to date and our plan to prospectively address aspects of this provision operationally, we currently estimate that our cost for the health care coverage for our qualifying hourly employees would not exceed $3.0 million on an annual basis if all our eligible hourly employees elect coverage. However, given the estimated annual premium cost our eligible hourly employees would incur in comparison to the annual financial penalty they would pay if they do not elect our health care coverage, we estimate our additional annual health care costs could range from $0.5 million to $1.0 million, however there can be no assurance in this regard. Operating Results from Continuing Operations Three Months Ended March 31, 2013 Compared to Three Months Ended April 1, 2012 The following table sets forth, for the three months ended March 31, 2013 and April 1, 2012, selected operating results from continuing operations as a percentage of restaurant sales for all of our restaurants, our legacy restaurants and the acquired restaurants:

                                                   Three Months Ended
                                            March 31, 2013     April 1, 2012
Costs and expenses (all restaurants):
Cost of sales                                     31.1 %               30.6 %
Restaurant wages and related expenses             32.4 %               32.6 %
Restaurant rent expense                            7.5 %                6.7 %
Other restaurant operating expenses               16.8 %               16.0 %
Advertising expense                                4.5 %                3.2 %
General and administrative                         5.8 %                7.3 %

Costs and expenses (legacy restaurants):
Cost of sales                                     29.6 %               30.6 %
Restaurant wages and related expenses             31.9 %               32.6 %
Restaurant rent expense                            6.7 %                6.7 %
Other restaurant operating expenses               15.7 %               16.0 %
Advertising expense                                4.3 %                3.2 %

Costs and expenses (acquired restaurants):
Cost of sales                                     33.0 %
Restaurant wages and related expenses             33.1 %
Restaurant rent expense                            8.5 %
Other restaurant operating expenses               18.1 %
Advertising expense                                4.8 %

Since the beginning of the first quarter of 2012 through the end of the first quarter of 2013, we have closed five restaurants. On May 30, 2012 we acquired 278 restaurants from BKC.
Restaurant Sales. Total restaurant sales in the first quarter of 2013 increased 82.7%, to $156.1 million from $85.5 million in the first quarter of 2012. Restaurant sales in the first quarter of 2013 for the acquired restaurants were $70.4 million. Comparable restaurant sales for our legacy restaurants increased 1.0% resulting from a 4.4% increase in average check, due primarily to a shift


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in sales mix and the effect of menu price increases of 0.8% compared to the prior year. This was partially offset by a decrease in customer traffic of 3.4% and the closure of five restaurants since the beginning of the first quarter of 2012.
Operating Costs and Expenses (percentages stated as a percentage of restaurant sales for the restaurants being discussed). Cost of sales for all restaurants increased to 31.1% in the first quarter of 2013 from 30.6% in the first quarter of 2012. Cost of sales at our legacy restaurants decreased to 29.6% in the first quarter of 2013 from 30.6% in the first quarter of 2012 due primarily to a favorable sales mix and the effect of menu price increases taken in the last twelve months of 0.8%, partially offset by higher promotional sales discounts.Total commodity costs in 2013 were essentially flat compared to the first quarter of 2012. Cost of sales was 33.0% in the first quarter of 2013 for our acquired restaurants and was higher than our legacy restaurants due primarily to inefficiencies, shrinkage and higher waste. The 3.4% cost of sales differential between our legacy and acquired restaurants in the first quarter of 2013 represented a reduction from the 4.3% cost of sales differential for the period we operated them in 2012.
Restaurant wages and related expenses for all restaurants decreased to 32.4% in the first quarter of 2013 from 32.6% in the first quarter of 2012. Restaurant wages and related expenses for our legacy restaurants decreased to 31.9% in the first quarter of 2013 from 32.6% in the first quarter of 2012 due to the effect of higher sales volumes on fixed labor costs and lower medical claim costs (0.4%). Restaurant wages and related expenses for our acquired restaurants was 33.1% in the first quarter of 2013 and higher than our legacy restaurants due primarily to the effect of fixed labor costs on lower sales volumes relative to our legacy restaurants.
Other restaurant operating expenses for all restaurants increased to 16.8% in the first quarter of 2013 from 16.0% in the first quarter of 2012 due primarily to higher repairs and maintenance expenses associated with the acquired restaurants as part of our continued efforts to address deferred maintenance at these locations (0.5%), higher credit card fees (0.2%) and the effect of fixed operating costs on lower sales volumes at the acquired restaurants compared to our legacy restaurants.
Advertising expense for all restaurants increased to 4.5% in the first quarter of 2013 from 3.2% in the first quarter of 2012 due primarily to our commitment to BKC, as part of the acquisition, to spend 0.75% of restaurant sales for additional local advertising in markets that have approved such additional spending. Advertising expense as a percentage of sales is lower at our legacy restaurants compared to our acquired restaurants due to advertising credits received from BKC that are associated with 2012 menu enhancement initiatives and our installation of digital menu boards. These expenditures at the acquired restaurants were made prior to the acquisition. Advertising expense at our legacy restaurants increased in the first quarter compared to the first quarter of 2012 due to these credits being higher in the first quarter of 2012 than in succeeding quarters.
Restaurant rent expense for all restaurants increased to 7.5% in the first quarter of 2013 from 6.7% in the first quarter of 2012 due primarily to rent associated with the acquired restaurants which, as a percentage of restaurant sales, was 8.5% during the first quarter of 2013 reflecting the lower sales volumes at the acquired restaurants. Rent expense for our legacy restaurants was 6.7% of restaurant sales in both the first quarter of 2013 and 2012. General and Administrative Expenses. General and administrative expenses increased $2.9 million in the first quarter of 2013 to $9.1 million and, as a percentage of total restaurant sales, decreased to 5.8% compared to 7.3% in the first quarter of 2012. The increase in general and administrative expense was due primarily to the addition of salaries and related costs for operational oversight and corporate support for the acquired restaurants of $2.0 million, higher stock compensation and administrative bonus expense of $0.3 million and $0.4 million less income in the first quarter of 2013 from the Transition Services Agreement with Fiesta than was assumed to be in place during the first quarter of 2012.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA decreased to $3.3 million in the first quarter of 2013 from $3.8 million in the first quarter of 2012. For a reconciliation between net loss from continuing operations and EBITDA and Adjusted EBITDA see page 20.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $8.1 million in the first quarter of 2013 from $4.7 million in the first quarter of 2011 due primarily to the addition of the acquired restaurants and our remodeling initiatives in 2012 and 2013.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.6 million in the first quarter of 2013 and were comprised of $0.4 million of impairment charges associated with six underperforming restaurants and $0.2 million of impairment charges associated with capital expenditures at previously impaired restaurants.
Interest Expense. Interest expense increased to $4.7 million in the first quarter of 2013 from $0.9 million in the first quarter of 2012 due to our refinancing in the second quarter of 2012. The weighted average interest rate on our long-term debt, excluding lease financing obligations, increased to 11.25% in the first quarter of 2013 from 4.1% in the first quarter of 2012 due to the issuance of the Notes in the second quarter of 2012.


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Provision (Benefit) for Income Taxes. The benefit for income taxes for the first quarter of 2013 was derived using an estimated effective annual income tax rate for 2013 of 41.2%, which excluded discrete tax adjustments. In January 2013, the United States Congress authorized, and the President signed into law, certain federal tax credits that will be reflected in our Federal tax return for 2012. However, since the law was enacted in 2013, the financial statement benefit of such credits totaling $1.0 million was included in the benefit for income taxes as a discrete item for the three months ended March 31, 2013. Although we had a pretax loss in the first quarter of 2012, there was a provision for income taxes of $0.5 million for the first quarter of 2012 due to reclassifying tax differences to discontinued operations which resulted in pretax income for tax provision purposes. There were no discrete tax adjustments in the first quarter of 2012.
Net Loss from Continuing Operations. As a result of the above, net loss from continuing operations for the first quarter of 2013 was $5.2 million, or $0.23 per diluted share, compared to net loss from continuing operations in the first quarter of 2012 of $2.9 million, or $0.13 per diluted share.
A reconciliation of EBITDA and Adjusted EBITDA to net loss from continuing operations is as follows:

                                              Three Months Ended
                                       March 31, 2013      April 1, 2012
Net loss from continuing operations   $        (5,199 )   $      (2,903 )
Provision (benefit) for income taxes           (5,296 )             508
Interest expense                                4,711               915
Depreciation and amortization                   8,063             4,693
EBITDA                                          2,279             3,213
Impairment and other lease charges                630                26
Acquisition and integration costs (1)               -               411
EEOC Litigation and settlement costs               85                95
Stock-based compensation expense                  301               102
Adjusted EBITDA                       $         3,295     $       3,847

(1) Acquisition and integration costs for the periods presented include legal and professional fees incurred in connection with the acquisition.

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.

On May 30, 2012, Carrols Restaurant Group issued $150.0 million of Notes . . .

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