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FRS > SEC Filings for FRS > Form 10-Q on 8-Apr-2014All Recent SEC Filings

Show all filings for FRISCHS RESTAURANTS INC

Form 10-Q for FRISCHS RESTAURANTS INC


8-Apr-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements are contained in this Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Such statements may generally express management's expectations with respect to its plans, or its assumptions and beliefs concerning future developments and their potential effect on the Company. There can be no assurances that such expectations will be met or that future developments will not conflict with management's current beliefs and assumptions, which are inherently subject to risks and the development of other uncertainties. Factors that could cause actual results and performance to differ materially from anticipated results that may be expressed or implied in forward-looking statements are included in, but not limited to, the discussion in "Risk Factors" that may be found in this Form 10-Q under Part II, Item 1A. and as set forth in Part I, Item 1A. of the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2013.
Sentences that contain words such as "should," "would," "could," "may," "plan(s)," "anticipate(s)," "project(s)," "believe(s)," "will," "expect(s)," "estimate(s)," "intend(s)," "continue(s)," "assumption(s)," "goal(s)," "target(s)" and similar words (or derivatives thereof) are generally used to distinguish "forward-looking statements" from historical or present facts. All forward-looking information in this MD&A is provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of all risk factors. Except as may be required by law, the Company disclaims any obligation to update any of the forward-looking statements that may be contained in this MD&A.

OVERVIEW
(all dollars reported in the text of this MD&A are in thousands)
This MD&A should be read in conjunction with the interim Condensed Consolidated Financial Statements (unaudited) found in this Form 10-Q under Part I, Item 1, and the audited Consolidated Financial Statements included in the Company's Form 10-K for the fiscal year ended May 28, 2013.
The Company has no off-balance sheet arrangements other than operating leases that are entered from time to time in the ordinary course of business. The Company does not use special purpose entities.
Frisch's Restaurants, Inc. and Subsidiaries (Company) is a regional company that operates full service family-style restaurants under the name "Frisch's Big Boy." As of March 4, 2014, 96 Frisch's Big Boy restaurants were owned and operated by the Company, located in various regions of Ohio, Kentucky and Indiana. The Company also licenses 25 Frisch's Big Boy restaurants to other operators who pay franchise and other fees to the Company.
The Company's Third Quarter of Fiscal 2014 consists of the 12 weeks ended March 4, 2014, and compares with the 12 weeks ended March 5, 2013, which constituted the Third Quarter of Fiscal 2013. The First Three Quarters of Fiscal 2014 consists of the 40 week period that ended March 4, 2014, and compares with the 40 week period that ended March 5, 2013, which constituted the First Three Quarters of Fiscal 2013. The third quarter of each fiscal year is usually a disproportionately smaller share (than other quarters) of annual revenue and net earnings because it spans most of the winter season from mid December to early March.
References to Fiscal Year 2014 refer to the 53 week year that will end on June 3, 2014 (the fourth quarter will have 13 weeks). References to Fiscal Year 2013 refer to the 52 week year that ended May 28, 2013.
The following table recaps the Company's earnings or loss components:


                                                Third Quarter - 12 Weeks                First Three Quarters - 40 Weeks
                                              2014                     2013                   2014              2013
                                                                                        (in thousands, except per share
                                          (in thousands, except per share data)                      data)
Earnings from continuing operations
before income taxes                   $             894         $           2,369      $          6,833     $    6,839
Income tax expense (benefit) from
continuing operations                 $            (691 )       $             621      $            972     $    2,133
Earnings from continuing operations   $           1,585         $           1,748      $          5,861     $    4,706
Diluted EPS from continuing
operations                            $            0.31         $            0.34      $           1.15     $     0.93
(Loss) from discontinued operations,
net of tax                            $               -         $               -      $              -     $     (158 )
Diluted EPS from discontinued
operations                            $               -         $               -      $              -     $    (0.03 )
Net earnings                          $           1,585         $           1,748      $          5,861     $    4,548
Diluted net EPS                       $            0.31         $            0.34      $           1.15     $     0.90

Weighted average diluted shares
outstanding                                       5,111                     5,073                 5,097          5,039

Factors having a notable effect on earnings from continuing operations before income taxes when comparing the Third Quarter of Fiscal 2014 with the Third Quarter of Fiscal 2013:
Consolidated sales were $45,161 in the Third Quarter of Fiscal 2014 versus $45,772 in the Third Quarter of Fiscal 2013. Same store sales declined by 3.6 percent as customer counts slid during the months of January and February 2014 amid an unrelenting pattern of severe winter weather. The effect of the same store sales decline was mitigated with sales generated by two new Frisch's Big Boy restaurants that opened in March 2013 and December 2013.

Gross profit fell to $3,567 in the Third Quarter of Fiscal 2014, down 28.2 percent from $4,967 in the Third Quarter of Fiscal 2013. As a percentage of sales, gross profit was 7.9 percent in the Third Quarter of Fiscal 2014 versus 10.9 percent in the Third Quarter of Fiscal 2013:

- Food and Paper Costs were 33.6 percent in the Third Quarter of Fiscal 2014 and 33.7 percent in the Third Quarter of Fiscal 2013.

- Payroll and Related Costs rose to 36.9 percent in the Third Quarter of Fiscal 2014, up from 35.6 percent in the Third Quarter of Fiscal 2013.

- Other Operating Costs rose to 21.6 percent in the Third Quarter of Fiscal 2014, up from 19.9 percent in the Third Quarter of Fiscal 2013.

Pension expense was $429 in the Third Quarter of Fiscal 2014 versus $749 in the Third Quarter of Fiscal 2013. The savings from lower pension costs was neutralized by higher medical insurance costs.

Administrative and advertising expense was $2,846 in the Third Quarter of Fiscal 2014 versus $2,695 in the Third Quarter of Fiscal 2013.

Interest expense was $120 in the Third Quarter of Fiscal 2014 versus $209 in the Third Quarter of Fiscal 2013.

Factors having a notable effect on earnings from continuing operations before income taxes when comparing the First Three Quarters of Fiscal 2014 with the First Three Quarters of Fiscal 2013:
Consolidated restaurant sales were $155,614 in the First Three Quarters of Fiscal 2014 versus $154,920 in the First Three Quarters of Fiscal 2013. Same store sales declined by 1.4 percent. The effect of the same store sales decline was mitigated with sales generated by three new Frisch's Big Boy restaurants that opened in August 2012, March 2013 and December 2013.

Gross profit fell to $15,604 in the First Three Quarters of Fiscal 2014, down 6.8 percent from $16,735 in the First Three Quarters of Fiscal 2013. As a percentage of sales, gross profit was 10.0 percent in the First Three Quarters of Fiscal 2014 versus 10.8 percent in the First Three Quarters of Fiscal 2013:

- Food and Paper Costs were 33.3 percent in the First Three Quarters of Fiscal 2014, down from 33.5 percent in the First Three quarters of Fiscal 2013.


- Payroll and Related Costs were 35.6 percent in the First Three Quarters of Fiscal 2014, up from 35.1 percent in the First Three Quarters of Fiscal 2013.

- Other Operating Costs were 21.0 percent in the First Three Quarters of Fiscal 2014, up from 20.6 percent in the First Three Quarters of Fiscal 2013.

Pension expense was $1,434 in the First Three Quarters of Fiscal 2014 versus $2,497 in the First Three Quarters of Fiscal 2013. The savings from lower pension costs is expected to continue to be neutralized by higher medical insurance costs for the remainder of the year.

Administrative and advertising expense was $9,443 in the First Three Quarters of Fiscal 2014 versus $10,109 in the First Three Quarters of Fiscal 2013.

Interest expense was $471 in the First Three Quarters of Fiscal 2014 versus $759 in the First Three quarters of Fiscal 2013.

Income tax expense is summarized in the next table. The primary drivers of tax benefits shown in the table are associated with the federal Domestic Production Activities Deduction and the release of certain valuation allowances that had been placed previously on certain deferred state tax assets.

                                          Third Quarter - 12 Weeks              First Three Quarters - 40 Weeks
                                            2014              2013                2014                   2013

Effective tax rate (benefit)                (14.1 )%             26.2 %               22.5 %                    30 %

                                               (in thousands)                           (in thousands)
Effective tax rate - tax expense
(benefit)                             $      (126 )       $       621      $         1,537         $         2,052
Discrete - valuation allowances
(released) placed                            (222 )                 -                 (222 )                    81
Discrete - domestic production
activities deduction                         (343 )                 -                 (343 )                     -
Total income tax expense (benefit)    $      (691 )       $       621      $           972         $         2,133

The loss from discontinued operations reported in the First Three Quarters of Fiscal 2013 represents adjustments to tax related balance sheet accounts associated with the Company's former Golden Corral operations.

RESULTS of OPERATIONS
Sales
The Company's sales are generated primarily through the operation of Frisch's
Big Boy restaurants. Sales also include wholesale sales from the Company's
commissary to Frisch's Big Boy restaurants that are licensed to other operators
and the sale of Frisch's signature brand tartar sauce to grocery stores. Same
store sales comparisons are a key metric that management uses in the operation
of the business. Same store sales are affected by changes in customer counts and
menu price increases. Changes in sales also occur as new restaurants are opened
and older restaurants are closed. Below is the detail of consolidated restaurant
sales:
                                         Third Quarter - 12 Weeks        First Three Quarters - 40 Weeks
                                           2014             2013               2014              2013
                                              (in thousands)                     (in thousands)
Frisch's Big Boy restaurants operated
by the Company                        $      42,652     $   43,136      $        147,141     $  146,640
Wholesale sales to licensees                  2,063          2,104                 7,380          7,214
Wholesale sales to groceries                    446            532                 1,093          1,066
Total sales                           $      45,161     $   45,772      $        155,614     $  154,920


Frisch's Big Boy restaurant sales shown in the above table are reflective of a same store sales decrease of 3.6 percent in the Third Quarter of Fiscal 2014 (on a customer count decrease of 5.9 percent) and a decrease of 1.4 percent in the First Three Quarters of Fiscal 2014 (on a 3.8 percent decrease in customer counts).
Most of the decrease in customer counts is attributable to severe winter weather conditions that persisted over much of the course of the Third Quarter of Fiscal 2014 throughout all regions in which the Company operates restaurants. The same store sales comparison includes the effect of three menu price increases, implemented respectively in September 2012 (0.9 percent), February 2013 (1.1 percent) and September 2013 (1.1 percent). Another menu price increase (1.5 percent) went into effect on the first day of the upcoming fourth quarter of fiscal 2014.
The Company operated 96 Frisch's Big Boy restaurants as of March 4, 2014. The count of 96 includes the following changes since the beginning of Fiscal Year 2013 (June 2012), when 93 Frisch's Big Boy restaurants were in operation:
August 2012 - opened new restaurant near Cincinnati, Ohio

March 2013 - opened new restaurant in Sidney, Ohio (Dayton, Ohio market)

December 2013 - opened new restaurant in Lexington, Kentucky

No other new Frisch's Big Boy restaurants are expected to be added to the Company's operations in Fiscal Year 2014. (One franchised Frisch's Big Boy restaurant is currently under construction, scheduled to open in June 2014.)

The U.S. Food and Drug Administration (FDA) missed its February 2014 deadline for issuing the final regulations of the menu labeling provisions of the federal Patient Protection and Affordable Care Act (ACA), which was enacted in March 2010. On April 3, 2014, the FDA announced that it had moved the final regulation to the White House Office of Management and Budget (OMB), which is the final step in the review process. Once the review by OMB is completed, which is expected to take one to two months, the final regulation will be published and made publicly available. Nutritional information will not be required to appear on the Company's menus for at least six months and possibly up to one year after the the final rule is published. Sales volumes could be adversely affected if customers should make significant changes to their dining choices once the information is placed on menus. Nutritional information is now available on the Company's website.

Gross Profit
The determination of gross profit is shown with operating percentages in the
following table. The table is intended to supplement the cost of sales
discussion that follows. Cost of sales is comprised of food and paper costs,
payroll and related costs, and other operating costs.
                                     Third Quarter - 12 Weeks        First Three Quarters - 40 Weeks
                                       2014            2013             2014                2013

Sales                                    100.0%          100.0%             100.0%              100.0%
Food and Paper                            33.6%           33.7%              33.3%               33.5%
Payroll and Related                       36.9%           35.6%              35.6%               35.1%
Other Operating Costs                     21.6%           19.9%              21.0%               20.6%
Gross Profit                               7.9%           10.9%              10.0%               10.8%

Although the cost of food remains at all time highs, especially proteins - beef, pork and chicken - favorable weather conditions during the summer of 2013 produced a record corn crop which caused grain prices to fall well below year ago levels, pushing some commodity prices lower. Higher grain prices last year were largely due to drought conditions in the nation's corn belt during the summer of 2012. The ongoing drought in California is expected to push prices for produce much higher over the coming months. Tight supplies in beef markets are expected to push beef prices to record highs during the spring of 2014. Although commodity prices can be difficult to predict, some industry forecasts indicate record high beef prices will continue for the next two to three years. The continuation of semi-annual menu price increases helps keep the percentages for Food and Paper costs at manageable levels.
Although the Company does not use financial instruments as a hedge against changes in commodity prices, purchase contracts for some commodities may contain provisions that limit the price the Company will pay. These contracts are normally for periods of one year or less, but may have longer terms. For example, an agreement was reached with Pepsico Sales, Inc., effective November 1, 2013, which allows the Company to purchase Pepsi and Dole beverage products at favorable long-term pricing.


Food safety poses a major risk to the Company. Management rigorously emphasizes and enforces established food safety policies in all of the Company's restaurants and in its commissary and food manufacturing plant. These policies are designed to work cooperatively with programs established by health agencies at all levels of governmental authority, including the federal Hazard Analysis of Critical Control Points (HACCP) program. In addition, the Company makes use of ServSafe Training, a nationally recognized program developed by the National Restaurant Association. The ServSafe program provides accurate, up-to-date science-based information to all levels of restaurant workers on all aspects of food handling, from receiving and storing to preparing and serving. All restaurant managers are required to be certified in ServSafe Training and are required to be re-certified every five years.

Higher payroll and related costs (as a percentage of sales) as shown in the above table are due to several components. Factors contributing to the increased percentages are higher restaurant management payroll over the course of the fiscal year and, since January 1, 2014, much higher costs for employee medical insurance. Factors offsetting the higher percentages include reductions in scheduled labor hours to mitigate the effect of higher hourly pay rates for restaurant workers, together with lower pension costs and the effect of higher menu prices charged to customers.
The Company has always offered affordable medical insurance coverage to its full time employees. In response to the individual mandate of the ACA, a sizable number of additional employees (over previous years) elected to be covered by the Company's medical insurance coverage for the 2014 calendar year. Beginning January 1, 2014, the response from this group of employees has added approximately $30 per week to the Company's medical insurance costs. Payroll and related costs continue to be affected adversely by mandated increases in the minimum wage. On January 1, 2014, the Ohio minimum wage for tipped employees increased from $3.93 per hour to $3.98 per hour and from $7.85 per hour to $7.95 per hour for non-tipped employees. The mandate will increase Ohio payroll annually by approximately $180, which will likely be mitigated with further reductions in scheduled labor hours.
Pressure is mounting in Washington, DC to raise the federal minimum wage from $2.13 per hour for tipped employees to $7.07 per hour and from $7.25 per hour for non-tipped employees to $10.10 per hour. If the legislation is ultimately enacted, the rates will be increased gradually over a three year period, followed by automatic increases each year indexed to inflation. Management will analyze and evaluate the effect of the legislation on the Company's operations if and when enactment of such legislation appears likely.
On March 13, 2014, an executive order was issued by President Obama that directs the Secretary of Labor to revamp regulations to expand the number of workers entitled to receive overtime compensation. Management will watch the development of the regulations closely and will analyze and evaluate the effect upon the Company's practices once the specifics of the anticipated regulations are known. Net periodic pension cost was $429 and $749 respectively, in the Third Quarter of Fiscal 2014 and the Third Quarter of Fiscal 2013. Net periodic pension cost was $1,434 and $2,497 respectively, in the First Three Quarters of Fiscal 2014 and the First Three Quarters of Fiscal 2013. Net periodic pension cost for Fiscal Year 2014 is currently expected to be in the range of $1,850 to $1,900. Net periodic pension cost for Fiscal Year 2013 was $3,247. The decrease in net periodic pension costs for Fiscal Year 2014 is due primarily to an exceptional return on plan assets during Fiscal Year 2013, which exceeded the expected return by $4,296. A higher discount rate and certain demographic updates have also contributed to the decrease, but to a lesser degree.
Other operating costs include occupancy costs such as maintenance, rent, depreciation, abandonment losses, property tax, insurance and utilities, plus costs relating to field supervision, accounting and payroll preparation costs, new restaurant opening costs and many other restaurant operating costs. Most expenses charged to other operating costs tend to be fixed in nature; the percentages shown in the above table can be greatly affected by changes in same store sales levels. In other words, percentages will generally rise when sales decrease (percentages will generally decrease when sales increase). The increase of 1.7 percentage points shown in the third quarter comparison in the table is due primarily to a decline in customer counts, which was brought about by harsh winter weather conditions as described above in the discussion of sales. Lower opening costs kept the percentage point increase to a minimum: opening costs were $119 in the Third Quarter of Fiscal 2014 and $307 in the First Three Quarters of 2014, which compared with $183 in the Third Quarter of Fiscal 2013 and $461 in the First Three Quarters of Fiscal 2013. Operating Profit
To arrive at the measure of operating profit, administrative and advertising expense is subtracted from gross profit, while the line item for franchise fees and other revenue is added to it. Gains and losses from the sale of real property (if any) are then respectively added or subtracted. Charges for impairment of assets (if any) are also subtracted from gross profit to arrive at the measure of operating profit.


Administrative and advertising expense increased $151 in the Third Quarter of Fiscal 2014 and decreased $666 in the First Three Quarters of Fiscal 2014 when compared against the comparable periods a year ago. The Third Quarter of Fiscal 2014 includes higher costs for professional services, which includes certain consulting on tax matters. The Third Quarter of Fiscal 2014 and First Three Quarters of Fiscal 2014 have lower accruals associated with the Company's Non Deferred Cash Balance Plan when compared against comparable year ago periods. The First Three Quarters of Fiscal 2013 (all in the First Quarter of Fiscal 2013) included charges for the cost of employee separations. Stock based compensation expense included in administrative and advertising expense was lower in the Third Quarter of Fiscal 2014 and First Three Quarters of Fiscal 2014 when compared against comparable year ago periods (see the table and discussion of stock based compensation expenses in the Financing Activities section of Liquidity and Capital Resources that appears elsewhere in this MD&A).

Revenue from franchise fees is based upon sales volumes generated by Frisch's Big Boy restaurants that are licensed to other operators. The fees are based principally on percentages of sales and are recorded on the accrual method as earned. As of March 4, 2014, 25 Frisch's Big Boy restaurants were licensed to other operators and paying franchise fees to the Company. No licensed Frisch's Big Boy restaurants opened or closed during any of the periods presented in this MD&A. One new license for a franchised Frisch's Big Boy restaurant was granted in November 2013 to an operator in southeastern Ohio. The restaurant facility is currently under construction and is expected to open in June 2014. An initial franchise fee of $30 was recorded in franchise fee revenue during the Second Quarter of Fiscal 2014.

Other revenue also includes certain other fees earned from Frisch's Big Boy restaurants that are licensed to others along with minor amounts of rent and investment income.
Gains and losses from the sale of assets consist of transactions involving real property and sometimes may include restaurant equipment that is sold together with real property as a package when closed restaurants are sold. Gains and losses reported on this line do not include abandonment losses that routinely arise when certain equipment is replaced before it reaches the end of its expected life; abandonment losses are instead reported in other operating costs. A gain of $67 during the First Three Quarters of Fiscal 2014 (all of which was recorded during the First Quarter of Fiscal 2014) resulted primarily from the September 2013 sale of certain excess real estate, as offset by a small loss on the July 2013 sale of a former Frisch's Big restaurant. The loss of $14 incurred during the First Three Quarters of Fiscal 2013 was from the August 2012 (First Quarter of Fiscal 2013) sale of one of the remaining Golden Corral restaurants that had been closed in August 2011, and the October 2012 (Second Quarter of Fiscal 2013) sale of a former Frisch's Big Boy restaurant.
There were no charges recorded for non-cash impairment of long-lived assets in the First Three Quarters of Fiscal 2014. Non-cash impairment charges totaling $71 were recorded during the First Three Quarters of Fiscal 2013 (all of which was recorded during the First Quarter of Fiscal 2013) to lower previous estimates of the fair values of two former Frisch's Big Boy restaurants, both of which were subsequently sold (May 2013 and July 2013). Interest Expense
Interest expense decreased $89 and $288 respectively, and in the Third Quarter of Fiscal 2014 and the First Three Quarters of Fiscal 2014 when compared with comparable periods a year ago. The decreases are primarily the result of lower debt levels than a year ago.

Income Tax Expense

The provision for income taxes in all periods presented in the consolidated
statement of earnings is based on management's estimate of the effective tax
rate for the entire year, to which the effect of certain discrete items as
described below has been applied.

                                           Third Quarter - 12 Weeks                First Three Quarters - 40 Weeks
Income Tax Expense (Benefit)               2014                 2013                 2014                    2013
                                                (in thousands)                             (in thousands)
Effective tax rate - tax expense
(benefit)                            $        (126 )       $        621      $          1,537         $          2,052
Discrete - valuation allowances
(released) placed                             (222 )                  -                  (222 )                     81
Discrete - domestic production
. . .
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