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TAST > SEC Filings for TAST > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for CARROLS RESTAURANT GROUP, INC.

Form 10-Q for CARROLS RESTAURANT GROUP, INC.


7-May-2014

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, a Delaware limited liability company.
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December 29, 2013 contained 52 weeks and the three months ended March 30, 2014 and March 31, 2013 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, as amended, for the year ended December 29, 2013. 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 Operations-an analysis of our results of operations for the three months ended March 30, 2014 compared to the three months ended March 31, 2013 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 30, 2014, we operated 560 Burger King restaurants in 13 states. On May 30, 2012, we acquired 278 restaurants from Burger King Corporation ("BKC"), which we refer to as the "acquired BKC restaurants". All of our other Burger King restaurants are referred to as our "legacy restaurants". Sales from our acquired BKC restaurants are included in changes in our comparable restaurant sales beginning in June 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 at our restaurants, net of discounts and excluding sales tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, 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.

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 mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs.


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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, workers' compensation insurance and state unemployment insurance.

Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, the amortization of favorable and unfavorable leases and is 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 marketing and promotional expenses including advertising payments to BKC 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.

EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA. EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA are non-GAAP financial measures. EBITDA represents net income (loss) from 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, EEOC litigation and settlement costs and stock compensation expense. Restaurant-Level EBITDA represents loss from operations before general and administrative expenses, depreciation and amortization, impairment and other lease charges and other income and expense.

We are presenting Adjusted EBITDA and Restaurant-Level EBITDA because we believe that they provide a more meaningful comparison than EBITDA of our core business operating results, as well as with those of other similar companies. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income and expense which are not directly related to restaurant operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations in the table above, provide useful information about 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 Adjusted EBITDA and Restaurant-Level 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, Adjusted EBITDA and Restaurant-Level EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net loss, loss from 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 operations and EBITDA and Adjusted EBITDA and between Restaurant-Level EBITDA and loss from operations see page 20.
EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA have important limitations as analytical tools. These limitations include the following:
EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;

         EBITDA, Adjusted EBITDA and Restaurant-Level 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, Adjusted EBITDA and
          Restaurant-Level EBITDA do not reflect the cash required to fund such
          replacements; and


         EBITDA, Adjusted EBITDA and Restaurant-Level 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 and
          other lease charges) have recurred and may reoccur.


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


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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. At March 30, 2014, there are $1.8 million of lease charges accrued for closed restaurant locations.

Interest expense consists primarily of interest expense associated with our 11.25% Senior Secured Second Lien Notes due 2018 (the "Notes"), amortization of deferred financing costs and revolving credit borrowings under our senior secured credit facility.

Recent and Future Events Affecting our Results of Operations Acquisition of Burger King Restaurants
On May 30, 2012, we acquired 278 restaurants from BKC including BKC's assignment of its right of first refusal ("ROFR") on franchisee restaurant transfers in 20 states pursuant to an operating agreement dated May 30, 2012 (the "operating agreement") entered into at closing. Pursuant to the operating agreement, we also agreed to remodel or otherwise upgrade 455 Burger King restaurant locations to BKC's 20/20 restaurant image by 2015. As of March 30, 2014, we had completed remodeling a total of 205 restaurants to the 20/20 restaurant image and had in process upgrades at nine additional restaurant locations. We currently anticipate remodeling an additional 105 to 115 restaurants in 2014. Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations.
In 2013, we closed eleven restaurants including one restaurant relocated within its market area and four underperforming restaurants prior to the expiration of their contractual lease term. In the first three months of 2014 we have closed five restaurants, including one restaurant relocated within its market area. One underperforming restaurant that was closed in the first quarter of 2014 was closed prior to the expiration of its contractual lease term and $0.4 million was reserved for estimated future rent payments and other occupancy related expenses for this location. We may incur lease charges in the future from additional closures of underperforming restaurants.
We currently anticipate that we will close 15 to 20 restaurants in all of 2014, excluding any restaurants relocated within their market area. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.
We do not believe that the future impact on our consolidated results of operations due to restaurant closures will be material, although there can be no assurance in this regard.
Valuation of Deferred Income Tax Assets
We establish a valuation allowance when it is necessary to reduce deferred tax assets to an amount for which realization is likely. We have performed the required assessment of positive and negative evidence regarding the realization of our deferred income tax assets. We considered all available positive and negative evidence to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of our deferred income tax assets. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified.
In evaluating the objective evidence provided by historical results, we considered (among other things) the past three years of cumulative losses, projected reversals of deferred tax liabilities, recent improvements in operating results, the ability to carry-back net operating losses generated through December 30, 2012 against taxable income reported in prior years, and that the first year of expiration of our net operating loss carryforwards is 2033. We also considered subjective evidence related to the forecast of expected operating results for the years over the carryforward period. Additionally, the deferred tax liabilities we have considered in the assessment of the realization of deferred tax assets will reverse in the carryforward period and same jurisdiction. Based on the analysis of positive and negative evidence, we believed that there was enough positive evidence to overcome our cumulative loss position at March 30, 2014, and therefore no valuation allowance of our deferred tax assets of $13.8 million was necessary.


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We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future periods. 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 2015, 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 continuing to assess the financial impact of the Act including the provision beginning in 2015 to offer health insurance to our hourly employees who work an average of 30 hours or more per week. Based on our analyses to date and our current activities addressing 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. 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 currently estimate our additional annual health care costs could range from $0.5 million to $1.0 million due solely to this provision; however there can be no assurance in this regard. For 2014, due to the Act we will incur additional health care premiums of $0.5 million associated with our current health care coverage of our employees.
Public Equity Offering
On April 30, 2014, we completed an underwritten public offering of 10.0 million shares of our common stock at a price of $6.20 per share (the "Public Offering"). All shares were issued and sold by us. We also issued and sold an additional 1.5 million shares of our common stock pursuant to the underwriters' exercise of their option to purchase additional shares at the same terms and conditions as offered in the Public Offering, for a total share issuance of 11.5 million shares. Net proceeds received by us are estimated to be approximately $67.2 million after deducting underwriting discounts and commissions and estimated offering expenses.
We intend to use the net proceeds of the Public Offering to accelerate the remodeling of our restaurants to BKC's 20/20 restaurant image, to acquire additional franchised Burger King restaurants, and, to a lesser extent, develop new Burger King restaurants and for other general corporate purposes. A shelf registration statement (including a prospectus) relating to these securities was filed by us with the Securities and Exchange Commission ("SEC") and was declared effective by the SEC on April 9, 2014.


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Results of Operations
Three Months Ended March 30, 2014 Compared to Three Months Ended March 31, 2013
The following table sets forth, for the three months ended March 30, 2014 and
March 31, 2013, selected operating results from operations as a percentage of
restaurant sales for all of our restaurants, our legacy restaurants and the
acquired BKC restaurants:
                                                       Three Months Ended
                                                March 30, 2014     March 31, 2013
Costs and expenses (all restaurants):
Cost of sales                                         28.6 %                31.1 %
Restaurant wages and related expenses                 33.6 %                32.4 %
Restaurant rent expense                                7.6 %                 7.5 %
Other restaurant operating expenses                   17.2 %                16.8 %
Advertising expense                                    4.3 %                 4.5 %
General and administrative                             6.8 %                 5.8 %

Costs and expenses (legacy restaurants):
Cost of sales                                         28.4 %                29.6 %
Restaurant wages and related expenses                 33.3 %                31.9 %
Restaurant rent expense                                6.7 %                 6.7 %
Other restaurant operating expenses                   16.4 %                15.7 %
Advertising expense                                    4.1 %                 4.3 %

Costs and expenses (acquired BKC restaurants):
Cost of sales                                         28.8 %                33.0 %
Restaurant wages and related expenses                 34.0 %                33.1 %
Restaurant rent expense                                8.6 %                 8.5 %
Other restaurant operating expenses                   18.2 %                18.1 %
Advertising expense                                    4.6 %                 4.8 %

Since the beginning of the first quarter of 2013 through the end of the first quarter of 2014, we opened three new restaurants, including two restaurant relocated within their market areas, and acquired one restaurant. During the same period we closed fourteen restaurants, excluding the relocated restaurants. Restaurant Sales. Total restaurant sales in the first quarter of 2014 decreased to $151.5 million from $156.1 million in the first quarter of 2013. Comparable restaurant sales in the first quarter of 2014 for all of our restaurants decreased 2.5% due to lower customer traffic of 6.7%, which was negatively impacted by the severe weather in most of our markets. The effect of menu price increases in the first quarter of 2014 was 2.9% for all of our restaurants. Comparable restaurant sales for our legacy restaurants decreased 1.8% due to a decrease in customer traffic of 4.9%, partially offset by an increase in average check. Comparable restaurant sales at our acquired BKC restaurants decreased 3.4% due to a decrease in customer traffic of 8.1% partially offset by an increase in average check due to menu price increases. In addition, total sales decreased in the first quarter of 2014 compared the first quarter of 2013 due to a net of eleven fewer restaurants in operation since the end of the first quarter of 2013.
Operating Costs and Expenses (percentages stated as a percentage of restaurant sales for the restaurants being discussed). Cost of sales for all of our restaurants decreased to 28.6% in the first quarter of 2014 from 31.1% in the first quarter of 2013. Cost of sales at our legacy restaurants decreased to 28.4% in the first quarter of 2014 from 29.6% in the first quarter of 2013 due primarily to the effect of menu price increases (0.7%), a favorable sales mix and lower promotional sales discounts. Cost of sales at our acquired BKC restaurants decreased significantly to 28.8% in the first quarter of 2014 from 33.0% in the first quarter of 2013 due primarily to the improvement in restaurant-level food and cash controls (2.1%), the effect of menu price increases (1.5%) and higher vendor rebates.
Restaurant wages and related expenses for all of our restaurants increased to 33.6% in the first quarter of 2014 from 32.4% in the first quarter of 2013 due to the effect of lower sales volumes on fixed labor costs, higher workers compensation and medical claims (0.5%) and higher unemployment insurance costs (0.4%).


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Other restaurant operating expenses for all of our restaurants increased to 17.2% in the first quarter of 2014 from 16.8% in the first quarter of 2013 due primarily to higher utility costs (0.3%) and the effect of lower sales volumes on fixed operating costs.
Advertising expense for all of our restaurants decreased to 4.3% in the first quarter of 2014 from 4.5% in the first quarter of 2013 due primarily to lower spending for additional local advertising in certain markets. Advertising expense as a percentage of sales is lower at our legacy restaurants compared to our acquired BKC restaurants due to advertising credits being received from BKC that are associated with 2012 menu enhancement initiatives and our installation of digital menu boards at our legacy restaurants. These expenditures at the acquired BKC restaurants were made prior to the acquisition.
Restaurant rent expense for all restaurants increased to 7.6% in the first quarter of 2014 from 7.5% in the first quarter of 2013 due primarily to the effect of lower sales volumes on fixed rental costs.
Restaurant-Level EBITDA. As a result of the factors above, Restaurant-Level EBITDA was $13.2 million in the first quarter of 2014 compared to $11.8 million in the first quarter of 2013. For a reconciliation between Restaurant-Level EBITDA and loss from operations see page 20.
General and Administrative Expenses. General and administrative expenses increased $1.2 million in the first quarter of 2014 to $10.3 million and, as a percentage of total restaurant sales, increased to 6.8% compared to 5.8% in the first quarter of 2013. The increase in general and administrative expenses was due primarily to $1.3 million earned in the first quarter of 2013 for providing various administrative support functions for Fiesta Restaurant Group, Inc. ("Fiesta"), which ended in the fourth quarter of 2013.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA decreased to $3.2 million in the first quarter of 2014 from $3.3 million in the first quarter of 2013. For a reconciliation between net loss and EBITDA and Adjusted EBITDA see page 20.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $8.8 million in the first quarter of 2014 from $8.1 million in the first quarter of 2013 due primarily to our remodeling initiatives in 2013 and the first quarter of 2014.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.6 million in the first quarter of 2014 and were comprised of other lease charges of $0.4 million associated with the closure of a restaurant in the first quarter of 2014 and $0.2 million of impairment charges associated with capital expenditures at previously impaired restaurants.
Interest Expense. Interest expense was $4.7 million in the first quarter of both 2014 and 2013. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 11.20% in the first quarter of 2014 and 11.25% in the first quarter of 2013.
Benefit for Income Taxes. The benefit for income taxes for the first quarter of 2014 was derived using an estimated effective annual income tax rate for 2014 of 33.9%, which excludes any discrete tax adjustments. Our estimated effective tax rate for 2014 does not consider the Work Opportunity Tax Credit which expired at the end of 2013. This credit will be reflected in the our estimated effective tax rate in the period if and when re-enacted into law.
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 were 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 in the first quarter of 2013.
Net Loss. As a result of the above, net loss for the first quarter of 2014 was $7.4 million, or $0.32 per diluted share, compared to a net loss in the first quarter of 2013 of $5.2 million, or $0.23 per diluted share.


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Reconciliations of EBITDA and Adjusted EBITDA to net loss and Restaurant-Level EBITDA to loss from operations are as follows:

                                                       Three Months Ended
Reconciliation of EBITDA and Adjusted EBITDA:  March 30, 2014      March 31, 2013
Net loss                                      $        (7,429 )   $       (5,199 )
Benefit for income taxes                               (3,758 )           (5,296 )
Interest expense                                        4,703              4,711
Depreciation and amortization                           8,758              8,063
EBITDA                                                  2,274              2,279
Impairment and other lease charges                        620                630
EEOC Litigation and settlement costs                        -                 85
Stock-based compensation expense                          296                301
Adjusted EBITDA                               $         3,190     $        3,295

Reconciliation of Restaurant-Level EBITDA: . . .

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