Management's discussion and analysis of financial condition and results of operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections: General Overview Key Measurements
Presentation of Results
Results of Operations
Other Non-GAAP Financial Measures
Liquidity and Capital Resources
Off Balance Sheet Arrangements
Seasonality Segment Reporting Impact of Inflation
Critical Accounting Policies
Recent Accounting Pronouncements
Cautionary Statement Regarding Forward-Looking Statements
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This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in Item 1 of this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" below for factors that could cause or contribute to these differences. The inclusion of supplementary analytical and related information herein may require us to make estimates and assumptions in connection with our analysis of trends and expectations with respect to our results of operations and financial position taken as a whole. General
Logan's Roadhouseis a full-service casual dining steakhouse offering specially seasoned aged steaks and sizzling southern-inspired dishes in a roadhouse atmosphere. Our restaurants have a relaxed, come-as-you-are environment where we encourage our customers to enjoy "bottomless buckets" of roasted in-shell peanuts and our made-from-scratch yeast rolls. Our entrÉe portions are generous and generally include a choice of two side items, all at affordable prices. We are committed to serving a variety of fresh food, from specially seasoned aged steaks to farm-fresh salads to our signature entrees. We believe the freshness and distinctive flavor profiles of our signature dishes, coupled with the variety of our menu, differentiates us from our competitors. Our restaurants, which are open for lunch and dinner seven days a week, serve a broad and diverse customer base. We opened our first restaurant in Lexington, Kentuckyin 1991 and as of April 27, 2014have grown to a total of 234 company-owned restaurants and 26 franchised restaurants located across 23 states.
Our roadhouse theme provides a differentiated dining experience as an authentic, casual steakhouse. We attempt to create an atmosphere that is genuine, warm-hearted, and spirited and we strive to make our customers lifelong friends. Our vision for the future is based on consistently delivering great experiences to our customers, continually adapting our brand to best meet the needs of our current and future customers and opening successful new restaurants. We believe this focus will enable us to retain our loyal customers and attract new customers to our restaurants which will lead to sustainable, continually improving financial results. We strive to create a unique experience that is so great that customers will eat out with us more often. Our plan to accomplish this is built around the following strategies and initiatives: Concept and Brand Revitalization Achieve Revenue Growth in
Existing RestaurantsDisciplined Restaurant Growth In the past past year, we have completed an intense assessment of the strengths and opportunities of our brand with a direct focus on regaining lost market share and improving results in our existing restaurants. That assessment has identified areas of opportunity and initiatives across all functional areas of our Company including, but not limited to, a new operational culture that gives operators more control over their restaurants supported by new bonus plans targeted to drive our desired results; an investment in training standards at all levels of operations; ongoing assessments of people to ensure we have the right people in the right roles; new technology infrastructure; new marketing partners, creating a local restaurant marketing presence and analysis of the use of marketing dollars to obtain optimal results; and a renewed focus on exceptional value, exceptional food and exceptional service. We believe the strength of our brand lies in returning to our roots as a steakhouse that is known for high quality great tasting food, service that creates lifelong friends, a fun atmosphere and value defined as a combination of price and experience. While we have many initiatives in process that we believe will begin to impact our results in fiscal year 2014, we understand that restoring the strength of our operations and our brand is a long-term strategy. We continue to experience traffic declines in our restaurants and lose market share to our steakhouse competitors as we work through implementing these initiatives. Our customers continue to be impacted by pressures on discretionary income and the landscape remains competitive as restaurant operators compete for fewer dining out occasions. To change the current traffic trends, we will need to execute on our initiatives and also prove our new value to customers we may have lost, as well as attract new customers. In the longer term, we remain confident that we are a growth concept. Our ability to open new restaurants with strong unit level returns and to have sustained revenue and margin growth in existing restaurants will support our long-term plan for sustainable growth. 16
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The key measures we use to evaluate our performance include:
Average unit volume. Average unit volume represents the average sales for company-owned restaurants over a specified period of time. It is typically measured on a 52-week basis but may also be applied to other periods. Average unit volume reflects total company-owned restaurant sales divided by total operating weeks, which is the aggregate number of weeks that company-owned restaurants are in operation over a specified period of time.
Change in comparable restaurant sales. Comparable restaurants for a reporting period include company-owned restaurants that have been open for six or more full quarters at the beginning of the later of the two reporting periods being compared. Change in comparable restaurant sales reflects changes in sales over the prior year for a comparable group of restaurants over a specified period of time. Average check. Average check includes net sales for company-owned restaurants over a specified period of time divided by the total number of customers served during the period. Management uses this indicator to analyze the dollars spent in our restaurants per customer. This measure aids management in identifying trends in customer preferences, as well as the effectiveness of menu price increases and other menu changes. Unless otherwise noted, we report this metric for comparable restaurants. Customer traffic. Customer traffic is the total number of customers served over a specified period of time. Unless otherwise noted, we report this metric for comparable restaurants. Adjusted EBITDA. We also evaluate our performance by using non-GAAP financial measures utilized by us and others in the restaurant industry. In particular, we regularly review our Adjusted EBITDA, which is described in more detail in the "Other Non-GAAP Financial Measures" section below.
Presentation of Results
Our fiscal year ends on the Sunday closest to
July 31. Fiscal year 2014 is a 53 week year, while fiscal year 2013 was a 52 week year. Throughout this report all references to "Q3 2014" and "Q3 2013" relate to the thirteen week periods ended April 27, 2014and April 28, 2013, respectively, and all references to "YTD 2014" and "YTD 2013" relate to the thirty-nine weeks ended April 27, 2014and April 28, 2013, respectively.
Results of Operations
Thirteen weeks ended
We opened one new restaurant, with a ground and building lease. Proceeds of
$1.8 millionrelated to the new restaurant opened in Q3 2014 were not received in the quarter but will be reimbursed upon completion of planned sale and leaseback transactions. Comparable restaurant sales for Q3 2014 decreased 3.2%, average check increased by 3.9% and customer traffic decreased by 6.8% for company-owned restaurants. Earnings decreased $2.2 millionfrom net income of $0.5 millionin Q3 2013 to a net loss of $1.7 millionin Q3 2014. Adjusted EBITDA decreased 19.4% from Q3 2013, or $4.1 million, to $17.2 millionin Q3 2014. Cash and cash equivalents decreased by $20.2 millionfrom July 28, 2013. Primary uses include interest payments of $38.7 millionand gross capital expenditures of $10.5 million, which were funded by cash on hand and cash flows from operations. As of April 27, 2014, we had spent $1.9 millionin capital expenditures that will be reimbursed upon completion of planned sale and leaseback transactions. 17
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The following tables and discussion summarize key components of our operating results expressed as a dollar amount and as a percentage of total revenues or net sales. Thirteen weeks ended Thirty-nine weeks ended (In thousands) April 27, 2014 April 28, 2013 April 27, 2014 April 28, 2013 Statement of operations data: Revenues: Net sales
$ 169,12699.7 % $ 174,92499.7 % $ 469,21099.7 % $ 485,74999.7 % Franchise fees and royalties 582 0.3 577 0.3 1,617 0.3 1,615 0.3 Total revenues 169,708 100.0 175,501 100.0 470,827 100.0 487,364 100.0 Costs and expenses: (As a percentage of net sales) Restaurant operating costs: Cost of goods sold 57,716 34.1 59,656 34.1 159,511 34.0 163,538 33.7 Labor and other related expenses 49,887 29.5 50,246 28.7 143,631 30.6 143,497 29.5 Occupancy costs 13,675 8.1 13,095 7.5 41,503 8.8 39,459 8.1 Other restaurant operating expenses 25,389 15.0 26,388 15.1 76,661 16.3 77,880 16.0 (As a percentage of total revenues) Depreciation and amortization 5,039 3.0 5,265 3.0 15,171 3.2 15,679 3.2 Pre-opening expenses 255 0.2 849 0.5 281 0.1 2,523 0.5 General and administrative 8,685 5.1 9,053 5.2 23,408 5.0 23,096 4.7 Restaurant impairment and closing charges 238 0.1 2,442 1.4 2,043 0.4 3,143 0.6 Total costs and expenses 160,884 94.8 166,994 95.2 462,209 98.2 468,815 96.2
Operating income 8,824 5.2 8,507 4.8 8,618 1.8 18,549 3.8 Interest expense, net 10,552 6.2 10,371 5.9 31,407 6.7 30,632 6.3
Loss before income taxes (1,728 ) (1.0 ) (1,864 ) (1.1 ) (22,789 ) (4.8 ) (12,083 ) (2.5 ) Income tax benefit - - (2,379 ) (1.4 )
- - (8,052 ) (1.7 )
Net (loss) income
Restaurant Unit Activity
Company Franchise Total Restaurants at July 28, 2013 233 26 259 Openings 1 - 1 Closures - - - Restaurants at April 27, 2014 234 26 260
Q3 2014 (13 weeks) Compared to Q3 2013 (13 weeks) and YTD 2014 (39 weeks) Compared to YTD 2013 (39 weeks)
Net sales consist of food and beverage sales of company-owned restaurants and other miscellaneous income. Net sales decreased by
$5.8 million, or 3.3%, to $169.1 millionin Q3 2014 compared to Q3 2013. Net sales decreased by $16.5 million, or 3.4%, to $469.2 millionin YTD 2014 compared to YTD 2013. 18
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The following table summarizes the period over period changes and key net sales drivers at company-owned restaurants for the periods presented:
Thirteen weeks ended
Thirty-nine weeks ended
April 27, 2014 April 28, 2013 April 27, 2014 April 28, 2013 Company-owned restaurants: Increase in restaurant operating weeks 1.4 % 5.7 % 2.9 % 7.1 % Decrease in average unit volume (4.7 )% (2.6 )% (6.3 )% (3.8 )% Total (decrease) increase in restaurant sales (3.3 )% 3.1 % (3.4 )% 3.3 % Comparable restaurants 222 201 215 196 Change in comparable restaurant sales (3.2 )% (1.4 )% (4.5 )% (2.1 )% Restaurant operating weeks 3,032 2,991 9,090 8,838 Average check
$ 14.49 $ 13.88 $ 14.10 $ 13.66The increases in restaurant operating weeks for the periods presented above were due to the opening of one new restaurant in Q3 2014 and the opening of new restaurants in the prior year. The decreases in average unit volume were primarily driven by customer traffic declines in both our comparable restaurant base and our newer restaurants. We believe that severe winter weather negatively impacted our comparable restaurant sales by approximately 1.2% for Q3 2014 and 1.0% for YTD 2014, although it is difficult to measure the total weather impact given the indirect influence that the threat of weather can have on customer traffic. Additionally, comparable restaurant sales were impacted within Q3 2014 by the reduction of broadcast media placements as compared to the prior year period. For our comparable restaurants, the decrease in customer traffic was 6.8% and 7.1% in Q3 2014 and YTD 2014, respectively. Also impacting comparable restaurant sales was an increase in average check of 3.9% and 2.8% in Q3 2014 and YTD 2014, respectively. The increase in average check was impacted by a favorable shift in menu mix, increased menu pricing of 1.5% and 0.8% in each of Q3 2014 and YTD 2014, respectively, and improved liquor, beer and wine sales.
Franchise fees and royalties, for our two franchisees that operate 26 restaurants, remained relatively consistent for the periods presented.
TOTAL COSTS AND EXPENSES
Total costs and expenses decreased
$6.1 million, or 3.7%, to $160.9 millionin Q3 2014 compared to Q3 2013 and decreased $6.6 million, or 1.4%, to $462.2 millionin YTD 2014 compared to YTD 2013. As a percent of total revenues, total costs and expenses in Q3 2014 were 94.8%, which decreased from 95.2% in Q3 2013 and 98.2% in YTD 2014, which increased from 96.2% in YTD 2013. The primary drivers of the fluctuations in total costs and expenses are as follows:
Cost of goods sold
Cost of goods sold consists of food and beverage costs, along with related purchasing and distribution costs. Cost of goods sold, as a percentage of net sales, remained consistent at 34.1% in Q3 2014 and Q3 2013 and increased to 34.0% in YTD 2014 from 33.7% in YTD 2013. Q3 2014 as compared to Q3 2013 included commodity inflation and unfavorable margin impact due to menu mix changes offset by menu pricing. The increase in YTD 2014 over the prior year period was primarily due to commodity inflation partially offset by menu pricing. Commodity inflation was 1.0% in Q3 2014 and 2.7% in YTD 2014.
Labor and other related expenses
Labor and other related expenses consists of all restaurant management and hourly labor costs, including salaries, wages, benefits, bonuses and other indirect labor costs. Labor and other related expenses, as a percentage of net sales, increased to 29.5% in Q3 2014 from 28.7% in Q3 2013 and increased to 30.6% in YTD 2014 from 29.5% in YTD 2013. The primary drivers of the increases in both periods are lost sales leverage on fixed labor components and an increase in employee benefit claims; partially offset by lower restaurant bonuses.
Occupancy costs include rent, common area maintenance, property taxes, licenses and other related fees. Occupancy costs, as a percentage of net sales, increased to 8.1% in Q3 2014 from 7.5% in Q3 2013 and increased to 8.8% in YTD 2014 from 8.1% 19
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in YTD 2013. The increases were driven primarily by annual rent increases and lost sales leverage due to the fixed nature of these costs.
Other restaurant operating expenses
Other restaurant operating expenses include all restaurant-level operating costs, the major components of which are operating supplies, utilities, repairs and maintenance, advertising, general liability and credit card fees. Other restaurant operating expenses, as a percentage of net sales, decreased to 15.0% in Q3 2014 from 15.1% in Q3 2013 and increased to 16.3% in YTD 2014 from 16.0% in YTD 2013. The decrease in Q3 2014 compared to Q3 2013 resulted from decreased advertising expense primarily related to lowered broadcast media spend; partially offset by an increase in utility expense driven by weather. The increase in YTD 2014 compared to YTD 2013 resulted from an increase in utility expense driven by weather and other fixed maintenance charges due to lost sales leverage, partially offset by a decline in advertising expense and general liability insurance reserves.
Depreciation and amortization
Depreciation and amortization includes the depreciation of fixed assets and capitalized leasehold improvements and the amortization of intangible assets. Depreciation and amortization, as a percentage of total revenues, remained consistent at 3.0% in Q3 2014 and Q3 2013 and 3.2% in YTD 2014 and YTD 2013. There were fewer new restaurant openings in both periods offset by the lost sales leverage on these fixed costs.
Pre-opening expenses consist of costs related to a new restaurant opening and primarily include manager salaries, employee payroll, travel, non-cash rent expense and other costs related to training and preparing new restaurants for opening. Pre-opening expenses will fluctuate from period to period based on the number and timing of restaurant openings. Our pre-opening costs (excluding rent) have remained constant at approximately
$0.2 millionper opening.
General and administrative
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support restaurant operations and development. General and administrative expenses, as a percentage of total revenues, decreased to 5.1% in Q3 2014 from 5.2% in Q3 2013 and increased to 5.0% in YTD 2014 from 4.7% in YTD 2013. The decrease in Q3 2014 as compared to Q3 2013 was due to the accrual of termination benefits for our prior Chief Executive and Operating officers and a related reversal of stock option expense in Q3 2013; partially offset by legal and settlement costs related to a land purchase contract termination dispute in Q3 2014. The increase in YTD 2014 as compared to YTD 2013 was due to legal and settlement costs related to the contract termination dispute and incremental charges related to testing and training our new brand revitalization initiatives, partially offset by the accrual of termination benefits for departing officers in the prior year period.
Restaurant impairment and closing charges
Restaurant impairment and closing charges include long-lived asset impairment charges and restaurant closing charges. In Q3 2014, we recorded
$0.2 millionof restaurant impairment charges related to additional asset expenditures with respect to restaurants that had been previously impaired. YTD 2014 includes impairment charges of $2.0 millionrelated to four impaired restaurants and additional asset expenditures with respect to restaurants that had been previously impaired. In Q3 2013, we recorded $2.4 millionin impairment charges related to five impaired restaurants and in YTD 2013 we recorded $3.1 millionof restaurant impairment charges related to the impairment of seven restaurants. Both periods also included the write off of additional asset expenditures with respect to restaurants that had been previously impaired.
INTEREST EXPENSE, NET
Interest expense, net consists primarily of interest expense related to our debt, net of interest income, see the "Liquidity and Capital Resources" section for further detail. Interest expense, net increased to
$10.6 millionin Q3 2014 from $10.4 millionin Q3 2013 and increased to $31.4 millionin YTD 2014 from $30.6 millionin YTD 2013 due to higher average borrowings on the Senior Secured Revolving Credit Facility and less capitalized interest from fewer new restaurant openings.
INCOME TAX EXPENSE
In fiscal year 2013, we recorded a valuation allowance for all deferred tax assets in the amount of
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the valuation allowance, the effective tax rate ("ETR") for YTD 2014 was 50.9% which was impacted by the reverse effect of wage based credits on a pre-tax loss. The ETR for YTD 2013 was 66.6% and also includes the reverse effect of wage based credits on a pre-tax loss. In addition, as our ETR is highly sensitive to estimates of income or loss due to relatively low pre-tax income (loss) and significant wage based credits, beginning in the second quarter of fiscal year 2013 we adopted the method of using the actual year-to-date rate as of each interim period, as we believe that this provides the best estimate of our year-to-date income tax expense.
Other Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA represents net income (loss) before interest expense, net, income tax (benefit) expense and depreciation and amortization. Adjusted EBITDA is further adjusted to reflect the additions and eliminations described in the table below. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net income or cash flow from operations as determined under GAAP, and our calculations thereof may not be comparable to those reported by other companies. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are: EBITDA and Adjusted EBITDA do not reflect our cash
future requirements for, capital expenditures or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service
principal payments on our indebtedness; EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes; although depreciation and amortization are non-cash
assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and other companies in the restaurant industry may calculate
Adjusted EBITDA differently than we do, limiting their
as comparative measures. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. We further believe that our presentation of these non-GAAP financial measures provides information that is useful to analysts and investors because it is an important indicator of the strength of our operations and the performance of our core business. Adjusted EBITDA excludes restaurant impairment charges, pre-opening expenses (excluding rent), sponsor management fees, losses on disposal of property and equipment and property sales, share-based compensation, and non-cash rent, among other items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate partly because the amounts recognized can vary significantly from period to period and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record, including goodwill and tradename impairments, restructuring costs, transaction costs, certain litigation and settlement fees and expenses recorded pursuant to accounting for business combinations. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help to provide management with a measure of our core operating performance over time by removing items that are not related to day-to-day restaurant level operations.
Management uses Adjusted EBITDA:
as a measure of operating performance to assist us in
operating performance of our restaurants on a consistent basis because it removes the impact of items not directly resulting from our core operations; for planning purposes, including the preparation of our internal annual operating budgets and financial projections; to evaluate the performance and effectiveness of our operational strategies; and to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan. Adjusted EBITDAR further excludes cash rent expense from Adjusted EBITDA. Cash rent expense represents actual cash payments required under our leases. We believe Adjusted EBITDAR is important to our analysts and investors because it allows us to measure the performance of our restaurants without regard to their financing structure. Our management uses Adjusted 21
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EBITDAR to better understand the cash generated by the operations of our restaurants excluding the impact of financing obligations such as lease and interest payments.
In addition, EBITDA, Adjusted EBITDA and Adjusted EBITDAR are used by investors as supplemental measures to evaluate the overall operating performance of companies in the restaurant industry. Management believes that investors' understanding of our performance is enhanced by including these non-GAAP financial measures as reasonable bases for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back items that are not part of normal day-to-day operations of our business. By providing these non-GAAP financial measures, together with reconciliations, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives. We also present Adjusted EBITDA because it is substantially similar to "Consolidated EBITDA," a defined measure which is used in calculating financial ratios in material debt covenants and other calculations in the Indenture and the Credit Agreement. We believe that presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in the agreements governing our debt facilities operate. The Credit Agreement and the Indenture may permit us to exclude other non-cash charges and specified non-recurring expenses in calculating Consolidated EBITDA in future periods, which are not reflected in the Adjusted EBITDA data presented in this Quarterly Report, and do not permit us to exclude the legal and settlement fees related to a contract termination as described in "Other adjustments(j)" in the table below.
The following table sets forth a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDAR.
Thirteen weeks ended Thirty-nine weeks ended (In thousands) April 27, 2014 April 28, 2013 April 27, 2014 April 28, 2013 Net (loss) income
$ (1,728 )$ 515 $ (22,789 ) $ (4,031 )Interest expense, net 10,552 10,371 31,407 30,632 Income tax benefit - (2,379 ) - (8,052 ) Depreciation and amortization 5,039 5,265 15,171 15,679 EBITDA 13,863 13,772 23,789 34,228 Adjustments Sponsor management fees(a) 250 250 750 750 Non-cash asset write-offs: Restaurant impairment(b) 238 2,442 2,043 3,143 Loss on disposal of property and equipment(c) 469 1,235 1,533 1,766 Restructuring costs(d) 302 1,659 (147 ) 1,826 Pre-opening expenses (excluding rent)(e) 246 797 253 2,189 Losses on sales of property(f) 7 67 11 80 Non-cash rent adjustment(g) 667 834 2,968 3,215 Costs related to the Transactions(h) - - - 20 Non-cash stock-based compensation(i) 498 241 1,354 714 Other adjustments(j) 699 84 1,182 174 Adjusted EBITDA 17,239 21,381 33,736 48,105 Cash rent expense(k) 10,487 10,073 31,264 29,694 Adjusted EBITDAR $ 27,726 $ 31,454 $ 65,000 $ 77,799(a) Sponsor management fees consist of fees payable to the Kelso Affiliates under an advisory agreement. (b) Restaurant impairment charges were recorded in connection with the determination that the carrying value of certain of our restaurants exceeded their estimated fair value. (c) Loss on disposal of property and equipment consists of the loss on disposal or retirement of assets that are not fully depreciated. (d) Restructuring costs include severance, hiring replacement costs and other related charges, including the reversal of any such charges. 22
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(e) Pre-opening expenses (excluding rent) include expenses directly associated with the opening of a new restaurant. (f) We recognize losses in connection with the sale and leaseback of restaurants when the fair value of the property being sold is less than the undepreciated cost of the property. (g) Non-cash rent adjustments represent the non-cash rent expense calculated as the difference between GAAP rent expense and amounts payable in cash under the leases during such time period. In measuring our operational performance, we focus on our cash rent payments. (h) Costs related to the Transactions include legal,
other fees incurred as a result of the Transactions. (i) Non-cash stock-based compensation represents compensation expense recognized for time-based stock options issued by RHI. (j) Other adjustments include non-recurring expenses and
fees, legal and settlement fees related to contract
ongoing expenses of closed restaurants.
(k) Cash rent expense represents actual cash payments required under our leases.
Our Q3 2014 Adjusted EBITDA was
$17.2 million, a decrease of 19.4%, compared to Adjusted EBITDA of $21.4 millionin Q3 2013. Our YTD 2014 Adjusted EBITDA was $33.7 million, a decrease of 29.9%, compared to Adjusted EBITDA of $48.1 millionin YTD 2013. The decrease in Adjusted EBITDA for Q3 2014 compared to Q3 2013 and YTD 2014 compared to YTD 2013 was primarily driven by a decline in comparable restaurant sales and the resulting loss of sales leverage on fixed costs, as well as increased commodity inflation.
Liquidity and Capital Resources
Our primary requirements for liquidity and capital are new restaurant development and debt service requirements. Historically, our primary sources of liquidity and capital resources have been net cash provided from operating activities and operating lease financing. Based on our current restaurant development plans, we anticipate that our cash position, our expected cash flows from operations and availability under the Senior Secured Revolving Credit Facility will be sufficient to finance our planned capital expenditures, operating activities and debt service requirements. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal of or to refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance which will be affected by general economic, financial and other factors beyond our control. As of
April 27, 2014, we had $3.5 millionof cash and cash equivalents. Consistent with many other restaurant and retail chain store operations, we utilize operating lease arrangements and sale and leaseback arrangements and believe that these financing methods provide a useful source of capital in a financially efficient manner. As part of the Transactions, we entered into the Senior Secured Revolving Credit Facility, which provides for up to $30.0 millionof borrowings. The Senior Secured Revolving Credit Facility is available to fund working capital and for general corporate purposes. As of April 27, 2014, we had $0.5 millionof borrowings drawn on the Senior Secured Revolving Credit Facility and $3.2 millionof undrawn outstanding letters of credit resulting in available credit of $26.3 million. In connection with the Transactions, Logan's Roadhouse, Inc.issued $355.0 millionaggregate principal amount of Senior Secured Notes in a private placement to qualified institutional buyers. In July 2011, the Company completed an exchange offering which allowed the holders of those notes to exchange their notes for notes identical in all material respects except they are registered with the SECand are not subject to transfer restrictions. The Senior Secured Notes bear interest at a rate of 10.75% per annum, payable semi-annually in arrears on April 15and October 15. The Senior Secured Notes mature on October 15, 2017. The Senior Secured Revolving Credit Facility and the Indenture that governs the Senior Secured Notes contain financial and operating covenants. The non-financial covenants include prohibitions on our ability to incur certain additional indebtedness or to pay dividends. Additionally, the Indenture subjects us to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, as a non-accelerated filer, even if we are not specifically required to comply with such sections otherwise. Failure to comply with these covenants constitutes a default and may lead to the acceleration of the principal amount and accrued and unpaid interest on the Senior Secured Notes. Effective January 24, 2014, we executed an amendment to the Senior Secured Revolving Credit Facility which included: removing the previous consolidated leverage and consolidated interest coverage covenants; adding a consolidated first lien leverage covenant and amending the maximum capital expenditure limit in each of the remaining years. The terms of the amendment also included an increase in the applicable margin for borrowings; payment of a consent fee and a requirement to provide monthly unaudited preliminary financial statements to the lenders under the Senior Secured Revolving Credit Facility. As of April 27, 2014, we were in compliance with all material covenants. 23
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The following table summarizes our cash flows from operating, investing and financing activities:
Thirty-nine weeks ended (In thousands) April 27, 2014 April 28, 2013 Total cash (used in) provided by: Operating activities
$ (10,192 ) $ (3,102 )Investing activities (10,523 ) (12,477 ) Financing activities 500 -
Decrease in cash and cash equivalents
Cash flows from operating activities in YTD 2014 and YTD 2013 were impacted by
$38.7 millionand $38.2 million, respectively, of cash paid for interest, offset by cash flows generated from operations. Additionally, the two periods were impacted by declining revenues, restaurant margins and working capital changes. We had negative working capital of $30.9 millionand $15.6 millionat April 27, 2014and April 28, 2013, respectively. Like many other restaurant companies, we are able, and expect to operate with negative working capital. Restaurant operations do not require significant inventories and substantially all sales are for cash or paid by third-party credit cards.
Cash used in investing activities primarily represents capital expenditures for new restaurant growth and ongoing capital expenditures for restaurant maintenance. Net capital expenditures decreased to
$10.5 millionin YTD 2014 from $12.5 millionin YTD 2013. The decrease was due to fewer new restaurant openings planned in the current year and timing of new restaurants under construction. During YTD 2013, capital expenditures were offset by proceeds from sale and leaseback transactions of $10.1 million.
Cash provided by financing activities includes draws on the Senior Secured Revolving Credit Facility during YTD 2014 and YTD 2013 of
Off Balance Sheet Arrangements
Other than operating leases, we do not have any off-balance sheet arrangements.
Our business is subject to minor seasonal fluctuations. Historically, sales are typically lowest in the fall. Holidays and severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of these factors, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
We aggregate our operations into a single reportable segment within the restaurant industry, providing similar products to similar customers, exclusively in
the United States. Our restaurants also possess similar pricing structures, resulting in similar long-term expected financial performance characteristics. Accordingly, no further segment reporting beyond the unaudited condensed consolidated financial statements is presented. 24
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Impact of Inflation
Our operating margins depend on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant customers. While we have taken steps to qualify multiple suppliers and enter into fixed price agreements for many of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather and other market conditions outside of our control. Certain of our commodities are not contracted and remain subject to fluctuating market prices. Consequently, these commodities can be subject to unforeseen supply and cost fluctuations. Our staff members are subject to various minimum wage requirements. There have been and may be additional minimum wage increases in excess of the federal minimum wage implemented in various jurisdictions in which we operate or seek to operate. Minimum wage increases may have a material adverse effect on our labor costs. Certain operating costs, such as taxes, insurance and other outside services continue to increase and may also be subject to other cost and supply fluctuations outside of our control. While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing ability. In addition, macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant customers without any resulting changes in their visit frequencies or purchasing patterns. There can be no assurance that we will be able to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.
Critical Accounting Policies
We prepare our unaudited condensed consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our critical accounting policies, excluding those listed below, have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended
July 28, 2013.
Impairment of Goodwill and Intangible Assets
We perform an impairment test of goodwill and the indefinite-lived tradename annually, or more frequently if indications of impairment exist. In the third quarter of fiscal year 2014, as a result of lowered new unit growth projections, we recognized the existence of impairment indicators requiring an interim goodwill impairment test. We performed step one of the goodwill impairment test and determined the fair value of our reporting unit exceeded the carrying value by 91%. Therefore, step two of the impairment test was not required and goodwill was not impaired. We also performed impairment testing on the indefinite-lived tradename and determined that its fair value exceeded the carrying value by 2% and no impairment was recorded.
Recent Accounting Pronouncements
Information regarding new accounting pronouncements is included within Note 1 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this report.
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
July 28, 2013, filed with the SEC, 25
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discusses some of the important risk factors that may affect our business, results of operations, or financial condition. These risks and uncertainties include, but are not limited to:
our ability to successfully execute our strategy and open new restaurants that are profitable;
our ability to compete with many other restaurants;
potential negative publicity regarding food safety and health concerns;
health concerns arising from the outbreak of viruses or food-borne illness;
the effects of seasonality and weather conditions on sales;
changes in food and supply costs;
our reliance on certain vendors, suppliers and distributors;
impairment charges on certain long-lived or intangible assets;
our ability to attract and retain qualified executive
employees while also controlling labor costs;
our ability to adapt to escalating labor costs;
our ability to maintain insurance that provides adequate levels of coverage against claims;
legal complaints or litigation;
our ability to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control regulations;
the reliability of our information systems;
costs resulting from breaches of security of confidential information;
our ability to protect and enforce our intellectual property rights;
our franchisees' actions;
the cost of compliance with federal, state and local laws;
any potential strategic transactions;
our ability to execute the strategies to revitalize our brand;
the acceptability of terms for future capital;
control of us by the Kelso Affiliates;
our ability to maintain effective internal controls over financial reporting and the resources and management oversight required to comply with the requirements of the Sarbanes-Oxley Act of 2002;
our reduced disclosure due to our status as an emerging growth company;
our substantial indebtedness;
our ability to generate sufficient cash to service our indebtedness; and
our ability to incur additional debt.
We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with our business. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the
SECthat discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.