|• FORM 10-Q • EX-10.1 • EX-31.1 • EX-31.2 • EX-32.1 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended July 3, 2012
Commission File Number 001-33515
Einstein Noah Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
555 Zang Street, Suite 300, Lakewood, Colorado 80228
(Address of principal executive offices)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 30, 2012, there were 16,960,237 shares of the registrants Common Stock, par value of $0.001 per share outstanding.
EINSTEIN NOAH RESTAURANT GROUP, INC.
EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
The accompanying notes are an integral part of these consolidated financial statements.
EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except earnings per share and related share information)
The accompanying notes are an integral part of these consolidated financial statements.
EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
EINSTEIN NOAH RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated balance sheet as of January 3, 2012, which has been derived from audited financial statements, and the unaudited consolidated financial statements of Einstein Noah Restaurant Group, Inc. and its wholly-owned subsidiaries (collectively, the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished within this Form 10-Q reflects all adjustments (consisting only of normal recurring accruals and adjustments), which are, in the Companys opinion, necessary to fairly state the interim operating results for the respective periods.
As of July 3, 2012, the Company operated, franchised or licensed various restaurant concepts under the brand names of Einstein Bros. Bagels (Einstein Bros.), Noahs New York Bagels (Noahs) and Manhattan Bagel Company (Manhattan Bagel). All Kettleman Bagel Company (Kettleman Bagel) restaurants have been rebranded as Einstein Bros.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the Companys annual report on Form 10-K for the fiscal year ended January 3, 2012. The Company believes that the disclosures are sufficient for interim financial reporting purposes. However, these operating results are not necessarily indicative of the results expected for the full fiscal year.
2. Recent Accounting Pronouncements
The Company has considered recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.
3. Business Combinations
The Company has acquired seven restaurants, in two separate transactions, from existing franchisees during fiscal 2012. The following table summarizes the estimated fair values as of the dates of these acquisitions (in thousands):
These acquired restaurants contributed $0.9 million and $1.3 million in net operating revenue for the thirteen and twenty-six week periods ended July 3, 2012, respectively. The goodwill of $1.1 million arising from these acquisitions consists largely of the synergies and economies of scale expected from combining the acquired operations with the Company. All of the goodwill recognized is expected to be deductible for income tax purposes.
The Company withholds certain amounts at the closing of each transaction which could be applied to any outstanding liabilities that relate to the seller as of the closing date of the transaction. The Company will then pay the difference to the seller at an agreed upon date. For the twenty-six weeks ended July 3, 2012, the Company has paid approximately $0.2 million of these amounts related to prior acquisitions. As of July 3, 2012, the Company has $0.3 million of withheld amounts that are recorded as a component of accrued expenses and other current liabilities on the accompanying consolidated balance sheet.
The Company treats acquisition related costs as expenses in the periods in which they are incurred. For the twenty-six weeks ended July 3, 2012, the Company recorded $0.1 million in costs related to these acquisitions. These amounts are included in other operating (income) expenses, net on the accompanying consolidated statement of income and comprehensive income.
During the second quarter of 2012, the Company adjusted its assignment of the aggregate Kettleman Bagel acquisition consideration for changes to its original estimates of the fair value of capital assets that were acquired. These changes are the result of additional information obtained since the filing of the Companys Form 10-K for the fiscal year ended January 3, 2012. The adjustment to property, plant and equipment of $0.1 million did not result in a material change to previously reported amounts. Goodwill increased by $0.1 million as a result of the decrease in the fair value of the property, plant and equipment.
Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories consist of the following:
5. Stock-Based Compensation
As of July 3, 2012, the Company had three active stock-based compensation plans: the 2011 Omnibus Incentive Plan (the Omnibus Plan), the Equity Plan for Non-Employee Directors (the Equity Plan) and the Stock Appreciation Rights Plan (the SARs Plan). Outstanding awards previously issued under inactive or suspended plans will continue to vest and remain exercisable in accordance with the terms of the respective plans. As of July 3, 2012, there were 559,836 shares, 134,320 shares and 36,011 shares reserved for future issuance under the Omnibus Plan, Equity Plan and SARs Plan, respectively.
The Companys stock-based compensation cost for the thirteen weeks ended June 28, 2011 and July 3, 2012 was approximately $0.5 million and $0.7 million, respectively. Stock-based compensation cost for the twenty-six weeks ended June 28, 2011 and July 3, 2012 was approximately $1.0 million and $1.2 million, respectively. These costs are included in general and administrative expenses. Compensation cost for stock options and stock appreciation rights (SARs) granted is based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant, using the following assumptions:
Stock Option and SARs Activity
Stock option and SARs transactions under all plans during the twenty-six weeks ended July 3, 2012 were as follows:
The aggregate intrinsic value of stock options exercised during the twenty-six weeks ended July 3, 2012 was $0.7 million.
As of July 3, 2012, the Company had approximately $1.5 million of total unrecognized compensation cost related to non-vested awards granted under its plans, which will be recognized over a weighted average period of 1.5 years.
Restricted Stock Units
Stock-based compensation cost for restricted stock units (RSUs) is measured based on the closing fair market value of the Companys common stock on the date of grant. Transactions during the twenty-six weeks ended July 3, 2012 were as follows:
As of July 3, 2012, the Company has approximately $1.4 million of total unrecognized compensation cost related to RSUs, which will be recognized over a weighted average period of 1.6 years.
In fiscal 2010 and 2011, the Company committed to plans to restructure the organization to align with its franchise growth model, to close all five of its commissaries and reduce associated headcount. All five commissaries have been closed. All restructuring costs are included in restructuring expenses on the consolidated statements of income and comprehensive income. It is the Companys policy to record all restructuring costs within the corporate segment.
The Company has current liabilities of $0.2 million for its restructurings as of July 3, 2012. The following table summarizes the Companys restructuring activities for the twenty-six weeks ended July 3, 2012:
7. Income Taxes
The Company currently estimates its fiscal 2012 annual effective tax rate to be 38.7%, which compares to a fiscal 2011 annual effective tax rate of 37.6%. This increase relates primarily to the elimination of certain federal employment tax credits that the Company received in fiscal 2011 that have not yet been reenacted by the U.S. Congress as of July 3, 2012, partially offset by a decrease in the Companys projected blended state tax rate.
8. Net Income Per Share
The following table sets forth the computation of weighted average shares outstanding:
Diluted net income per common share is computed by dividing the net income available to common stockholders for the period by the weighted average number of shares of common stock and potential common stock equivalents outstanding during the period using the treasury stock method. Potential common stock equivalents include incremental shares of common stock issuable upon the exercise of stock options, SARs and RSUs. Potential common stock equivalents are excluded from the computation of diluted net income per share when their effect is anti-dilutive.
Our Board of Directors declared the following dividends during the periods presented:
The estimate of the amount to be paid as a result of the May 1, 2012 declaration is included in Accrued Expenses and Other Current Liabilities on the consolidated balance sheet as of July 3, 2012.
10. Commitments, Contingencies and Other Developments
Letters of Credit and Line of Credit
As of July 3, 2012, the Company had $6.8 million in letters of credit outstanding which reduce its availability under the revolving facility. The letters of credit expire on various dates, typically renew annually and are payable upon demand in the event that the Company fails to pay the underlying obligations.
As of July 3, 2012, the Company had a balance of $6.7 million on its revolving facility. The availability under the Companys $50.0 million revolving facility was $36.5 million as of July 3, 2012.
On May 3, 2012, the Company announced that it had retained Piper Jaffray as a financial advisor to explore strategic alternatives for the Company, including a possible business combination or sale of the Company. The Company records expenses towards this review as Strategic Alternatives Expense on the consolidated statements of income and comprehensive income.
The Company is subject to claims and legal actions in the ordinary course of business, including claims by or against its franchisees, licensees and employees or former employees and others. The Company does not believe any currently pending or threatened matter would have a material adverse effect on its business, results of operations or financial condition.
11. Supplemental Cash Flow Information
12. Subsequent Events
On July 17, 2012, the Company purchased one franchised restaurant from a franchisee for approximately $0.2 million.
On July 30, 2012, the Companys Board of Directors declared a cash dividend on the Companys common stock in the amount of $0.125 per share, payable on October 15, 2012 to shareholders of record on September 1, 2012.
Cautionary Note Regarding Forward-Looking Statements
We wish to caution our readers that this Quarterly Report on Form 10-Q and certain information incorporated herein by reference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) and Section 27A of the Securities Act of 1933, as amended (the Securities Act). Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances, the strategic alternatives review that has been undertaken by the company and cash generated from operating and financing activities for our future liquidity and capital resource needs, growth of franchise and licensing, the impact on our business as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and the rules promulgated thereunder, future litigation and other matters, and are generally accompanied by words such as: believes, anticipates, plans, intends, estimates, predicts, targets, expects, contemplates and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the fiscal year ended January 3, 2012 as updated in subsequent quarterly reports on Form 10-Q, including Item 1A of Part II of this report. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Managements Discussion and Analysis of Financial Condition and Results of Operations, contained in the Companys Form 10-K for the fiscal year ended January 3, 2012 (the 2011 Form 10-K).
We have a 52/53-week fiscal year ending on the Tuesday closest to December 31. The second quarters in fiscal years 2011 and 2012 ended on June 28, 2011 and July 3, 2012, respectively. Each quarter contained thirteen weeks and each year to date period contained twenty-six weeks. Our current fiscal year ends on January 1, 2013 and consists of 52 weeks.
As used in this report, the terms Company, ENRGI, we, our, or us refer to Einstein Noah Restaurant Group, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. The terms fiscal quarter ended, fiscal quarter, or quarter ended refer to the entire fiscal quarter, unless the context otherwise indicates.
Use of Non-GAAP Financial Information
In addition to the results reported in accordance with accounting principles generally accepted in the United States of America (GAAP) included in this filing, we have provided certain non-GAAP financial information, including adjusted earnings before interest, taxes, depreciation and amortization, restructuring expenses, write-off of debt issuance costs and other operating expenses/income (Adjusted EBITDA) and Free Cash Flow, which we define as net cash provided by operating activities less net cash used in investing activities. Management believes that the presentation of this non-GAAP financial information provides useful information to investors because this information may allow investors to better evaluate our ongoing business performance and certain components of our results. In addition, our Board of Directors (the Board) uses this non-GAAP financial information to evaluate the performance of the company and its management team. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. Not all
of the aforementioned items defining Adjusted EBITDA occur in each reporting period, but have been included in our definition based on historical activity. Our definitions of these non-GAAP disclosures may differ from how others in our industry may define them. We have reconciled the non-GAAP financial information to the nearest GAAP measure on pages 16 and 21.
We include in this report information on system-wide comparable store sales percentages. System-wide comparable store sales percentages refer to changes in sales of our restaurants, whether operated by the company or by franchisees and licensees, in operation for six fiscal quarters including those restaurants temporarily closed for an immaterial amount of time. Some of the reasons restaurants may be temporarily closed include remodeling, road construction, rebuilding related to site-specific catastrophes and natural disasters. Franchise and license comparable store sales percentages are based on sales of franchised and licensed restaurants, as reported by franchisees and licensees. Management reviews the increase or decrease in comparable sales to assess business trends. Comparable store sales exclude permanently closed locations. When we intend to relocate a restaurant, we consider that restaurant to be temporarily closed for up to twelve months after it ceases operations. If a suitable relocation site has not been identified by the end of twelve months, we consider the restaurant to be permanently closed. Until that time, we include that restaurant in our open store count, but exclude its sales from our comparable store sales. As of July 3, 2012, there are five stores that we intend to relocate, and are thus considered to be temporarily closed.
We use company-owned comparable store sales, franchise and license sales and the resulting system-wide sales information internally in connection with restaurant development decisions, planning, and budgeting analyses. We believe system-wide comparable store sales information is useful in assessing consumer acceptance of our brands; facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income; helps us evaluate the effectiveness of our advertising and marketing initiatives; and provides information that is relevant for comparison within the industry.
Comparable store sales percentages are non-GAAP financial measures, which should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP, and may not be equivalent to comparable store sales as defined or used by other companies. We do not record franchise or license restaurant sales as revenues. However, royalty revenues are calculated based on a percentage of franchise and license restaurant sales, as reported by the franchisees or licensees.
We are the largest owner/operator, franchisor and licensor of bagel bakery cafe restaurants in the United States. As a leading fast-casual restaurant chain, our restaurants specialize in high-quality foods for breakfast, lunch and afternoon snacks in a bakery-café atmosphere with a neighborhood emphasis. Our product offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels, breads or wraps, gourmet soups and salads, assorted pastries, premium coffees and an assortment of snacks.
In the context of our key strategies to drive comparable store sales growth, to enhance corporate margins and to accelerate unit growth, we evaluated our financial performance for the second quarter and first-half of 2012 by considering the following key factors:
Our catering business, on a comparable store basis, grew by approximately 17.3% and 18.3% on a quarterly and year to date basis, respectively, with our focus on our online ordering system and on search engine/online marketing. Our catering business now makes up over 7% of our company-owned restaurant revenues. We have also seen strong growth in our blended beverage line of business. Coffee and blended beverage sales now represent approximately 10% of our menu mix and continue to grow.
Our execution plan to grow comparable store sales includes:
Our catering channel will continue to benefit from our online ordering system, an outsourced and expanded call center, focus on online and digital marketing, and an optimized menu.
Our approach to enhancing corporate margins will extend and build on the initiatives that we have already started, namely, managing the sourcing of our commodities, streamlining our network of product distribution, utilizing point of sale technology to drive sustainable cost advantage, and improving restaurant level operating efficiency through targeted initiatives around product costs and labor.
Our acceleration of unit growth will continue to focus on franchising of Einstein Bros., asset light unit economics and penetration into new key licensing channels. Our unit growth plan for 2012 considers our long-term annual growth objective of +10%, or 60 to 80 system-wide openings for 2012. This includes the openings of 8 to 12 company-owned restaurants, 12 to 14 franchised restaurants and 40 to 54 licensed restaurants. We view refranchising opportunistically as a strategy to attract high quality franchisees that will support our accelerated growth initiatives.
We expect to spend between $24 million and $26 million in capital expenditures in 2012 which includes the opening of company-owned restaurants and the relocation of company-owned restaurants, along with the continued roll-out of our new point of sale (POS) system. We also intend to deploy our capital into areas such as installing drive-thru lanes and adding new exterior signage.
We have a robust pipeline of existing franchise development agreements and new license locations. We will continue to host discovery days for potential franchisees as well as to expand our license footprint.
We believe we are well positioned to execute on our 2012 plan as our free cash flow continues to be consistently robust as a result of a strong balance sheet as well as our utilization of our deferred tax assets, primarily our net operating loss carryforwards. Furthermore, we expect favorable interest rates in 2012 which, coupled with lower debt balances, will further benefit net income.
Results of Operations for the Quarterly and Year to Date Periods Ended June 28, 2011 and July 3, 2012
Financial Highlights for the Second Quarter 2012 as compared to the Second Quarter 2011
During the second quarter of 2012, we maintained our focus on enhancing corporate margins by increasing comparable store sales, managing store level margins by focusing on food costs, and implementing cost saving initiatives.
System-wide comparable store sales were +1.3% and +1.2% for the second quarter and year to date periods ended July 3, 2012, respectively, driven by strong check growth of +3.9% for the quarter and +4.4% on a year to date basis, reflecting price and product mix favorability. At the same time, traffic improved sequentially from -3.9% for the first quarter 2012 to -2.6% for the second quarter 2012 as we continued to rebuild momentum.
Net income decreased for the second quarter of 2012 from the second quarter of 2011 primarily due to lower income from operations, expenses incurred towards the exploration of strategic alternatives and the impact of gains recognized in 2011 on insurance proceeds from a restaurant fire and on the sale of restaurants in Charlotte.
Company-Owned Restaurant Operations
Company-owned restaurant sales for the second quarter and year to date 2012 increased 3.0% and 3.5%, respectively, attributable to unit growth and favorable company-owned comparable store sales of +1.2% and +1.1%, respectively. Catering sales comprised approximately 7.3% of our comparable company-owned restaurant sales for each of the second quarter 2012 and year to date 2012, reflecting year over year increases in comparable sales of 17.3% and 18.3%, respectively. On a year to date basis, coffee sales remain strong and now represent approximately 10% of our comparable company-owned restaurant sales. We have also added a net of sixteen new company-owned stores since June 28, 2011.
As a percentage of company-owned restaurant sales, we saw a decrease in our food costs to 28.0% in the second quarter 2012 from 30.1% in the second quarter 2011. This 210 basis point decrease includes the leveraged impact of our price increases (-90 basis points) and savings from our initiatives (-200 basis points), partially offset by a shift in product mix (+10 basis points) and the impact of inflation in our commodity costs (+70 basis points).
On a year to date basis, we saw a decrease in our food costs from 29.6% to 28.1%. This 150 basis point decrease includes the leveraged impact of our price increases (-100 basis points) and savings from our initiatives (-140 basis points), partially offset by the impact of inflation in our commodity costs (+90 basis points).
We have secured protection for approximately 92% of our wheat needs and approximately 100% of our remaining commodity needs (coffee, butter and Class III milk) for the remainder of 2012.
As a percentage of company-owned restaurant sales, labor costs increased in the second quarter due to higher employee benefit costs and variable incentive compensation accruals. On a year to date basis, overall labor costs (as a percentage of company-owned restaurant sales) have declined due to the leveraged impact of our sales increases.
We invested $0.6 million more in marketing during the second quarter of 2012 than we did for the second quarter of 2011, which is largely a timing related shift in spending. On a year to date basis, marketing expenses have decreased slightly to $6.0 million in 2012 from $6.2 million in 2011.
Manufacturing and Commissary Operations
We closed all five of our commissaries by the end of the first quarter 2012. Sales that were previously made to our franchisees and licensees by the commissaries are now being handled directly through our distributors.
Manufacturing and commissary revenues for the second quarter and year to date 2012 were down 7.2% and 6.5%, respectively, when compared to the same 2011 periods, primarily due to the closure of the commissaries. However, cost savings resulting from these closures had a significant positive impact on our margins. We expect the closing of these facilities will result in annual cost savings of approximately $1.5 million.
Franchise and License Operations
Overall, franchise and license revenue was driven by continued unit development which netted an additional 29 licensed locations and 2 franchised locations since June 28, 2011. Franchise and license comparable store sales were +1.6% and +1.3% for the thirteen and twenty-six weeks ended July 3, 2012, respectively. Our license revenue was negatively impacted in 2012 due to a shift in our calendar relative to the week that college campuses completed their spring curriculum.
Our total general and administrative expenses increased in the second quarter of 2012 and on a year to date basis primarily due to increases in variable incentive compensation plans, stock based compensation and fees related to potential site development. We expect general and administrative expenses for the remainder of fiscal 2012 to be in the range of $10 million to $11 million per quarter.
Depreciation and amortization expenses increased $0.4 million and $0.6 million for the second quarter and year to date 2012, respectively, when compared to the same periods in 2011. The increase is due to additional investments in company-owned restaurants that were either added or upgraded since the second quarter of 2011. During fiscal 2011, we incurred $8.0 million related to the installation of new coffee machines at our stores and $1.9 million related to the implementation of new POS systems at some of our stores. Based on our current planned purchases of capital assets, our existing base of assets, and our projections for new purchases of fixed assets, we believe depreciation expense for fiscal 2012 will be in the range of $19.0 million to $21.0 million.
We incurred an additional $0.5 million of restructuring expenses in 2012 related to our plan to close our five commissaries. All of our commissaries were closed by the end of the first quarter 2012. Restructuring expenses in 2011 included charges related to the completion of our 2010 plan to restructure the organization to align with our franchise and license growth model.
On May 3, 2012, we announced that we have retained Piper Jaffray as a financial advisor to explore strategic alternatives for the Company, including a possible business combination or sale of the Company. Through the second quarter of 2012, we have recorded $0.4 million in expenses related to this effort.
During the second quarter of 2011, we recognized gains on the sale of two company-owned restaurants and on insurance proceeds received from a restaurant fire. During 2012, we incurred costs associated with our acquisitions of seven existing Manhattan Bagel franchises in Buffalo, NY in addition to losses on the retirement of fixed assets. These items are recorded as components of other operating (income) expenses, net on our consolidated statements of income and consolidated income.
Interest expense, net has decreased due to our quarterly scheduled debt payments. Our average debt balance decreased from $82.8 million for the first six months of 2011 compared to $73.2 million for the six months of 2012. Our weighted average interest rate for the twenty-six weeks ended July 3, 2012 was 3.3%.
We currently estimate our fiscal 2012 annual effective tax rate to be 38.7%, which compares to a fiscal 2011 annual effective tax rate of 37.6%. This increase relates primarily to the elimination of certain federal employment tax credits that we received in 2011 that have not yet been reenacted by the U.S. Congress as of July 3, 2012, partially offset by a decrease in our projected blended state tax rate.
Financial Condition, Liquidity and Capital Resources
The restaurant industry is predominantly a cash business where cash is received at the time of the transaction. We believe we will generate sufficient cash flow to fund operations, capital expenditures, and required debt and interest payments. Our investment in inventory is minimal because our products are perishable. Our accounts payable are on terms that we believe are consistent with those of other companies within the industry.
The primary driver of our operating cash flow is our restaurant revenue, specifically the gross margin from our company-owned restaurants. Therefore, we focus on the elements of those operations, including store sales and controllable expenses, to help ensure a steady stream of operating profits that enable us to meet our cash obligations.
Our working capital position has increased by $2.9 million in fiscal 2012. We began fiscal 2012 with working capital of $0.2 million and ended the second quarter with $3.1 million.
This increase in working capital is primarily due to the significant increase in our cash balance, which we attribute to strong cash flow from operations, including the timing of payroll and dividend payments. Other elements of working capital fluctuated in the normal course of business. As of July 3, 2012, we had unrestricted cash of $14.7 million, an increase of $6.0 million from January 3, 2012. We also have $36.5 million available for borrowing under our revolving credit facility.
Free Cash Flow
Our free cash flow increased by $3.9 million for the first half of 2012 compared to the same period in 2011 primarily due to a $7.4 million increase in cash provided by operations, partially offset by a $1.5 million increase in the purchase of property and equipment at our restaurants and a $1.2 million increase in cash used for the acquisition of restaurants.
We are subject to a number of customary covenants under our senior credit facility, including limitations on additional borrowings, acquisitions, and requirements to maintain certain financial ratios. As of July 3, 2012, we were in compliance with all debt covenants.
During the twenty-six weeks ended July 3, 2012, we used approximately $9.4 million of cash to pay for additional property and equipment that included the following:
The majority of our capital expenditures has been and will continue to be for upgrades in our current restaurants, including the installation of new coffee equipment in our restaurants and new exterior signs, and for new company-owned restaurants.
Off-Balance Sheet Arrangements
Other than our operating leases and letters of credit, we do not have any off-balance sheet arrangements.
There were no material changes outside the ordinary course of business to our contractual obligations since the filing of the 2011 Form 10-K.
Critical Accounting Policies and Estimates
There were no material changes in our critical accounting policies since the filing of our 2011 Form 10-K. As discussed in that filing, the preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.
There were no material changes in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of our 2011 Form 10-K.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 3, 2012.
The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures as of July 3, 2012, our chief executive officer and our chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the second quarter of fiscal 2012, there were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that were identified in connection with the evaluation of our disclosure controls and procedures that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
We are subject to claims and legal actions in the ordinary course of business, including claims by or against our franchisees, licensees and employees or former employees and others. We do not believe any currently pending or threatened matter would have a material adverse effect on our business, results of operations or financial condition.
Our business is subject to a number of risks, including those identified in Item 1A. Risk Factors of our 2011 Form 10-K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period.
As of July 3, 2012, there have been no material changes to the risks disclosed in our 2011 Form 10-K. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
In December 2010, our Board of Directors (the Board) approved a discretionary program to repurchase up to $20.0 million of our outstanding common stock. We did not purchase any shares of our common stock on the open market during the twenty-six weeks ended July 3, 2012. The total remaining authorization under the repurchase program was $20.0 million as of July 3, 2012. The repurchase program expires in December 2012 and is subject to compliance with applicable laws and the terms of our senior credit facility.
It is the current expectation of our Board that we will continue to pay a quarterly cash dividend, at the discretion of the Board, dependent on a variety of factors, including available cash and our overall financial condition. Like other companies incorporated in Delaware, we are also limited by Delaware law as to the payment of dividends. The payment of dividends is also subject to the terms of our senior credit facility.
The exhibits listed in the Exhibit Index, which appears immediately following the signature page, are incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.