XNAS:BAGL Quarterly Report 10-Q Filing - 7/3/2012

Effective Date 7/3/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
  SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2012

OR

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
  SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33515

 

 

Einstein Noah Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3690261

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

555 Zang Street, Suite 300, Lakewood, Colorado 80228

(Address of principal executive offices)

(303) 568-8000

(Registrant’s 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):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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 registrant’s Common Stock, par value of $0.001 per share outstanding.

 

 

 


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

TABLE OF CONTENTS

 

Part I. Financial Information   

Item 1.

  Financial Statements      3   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      22   

Item 4.

  Controls and Procedures      22   
Part II. Other Information   

Item 1.

  Legal Proceedings      24   

Item 1A.

  Risk Factors      24   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      24   

Item 6.

  Exhibits      24   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(Unaudited)

 

     January 3,
2012
    July 3,
2012
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 8,652      $ 14,651   

Restricted cash

     889        899   

Accounts receivable, net of $73 and $66 of allowances

     7,774        7,030   

Inventories

     5,562        5,097   

Current deferred income tax assets, net

     9,013        8,143   

Prepaid expenses

     6,483        7,710   

Other current assets

     526        546   
  

 

 

   

 

 

 

Total current assets

     38,899        44,076   

Property, plant and equipment, net

     59,017        56,192   

Trademarks and other intangibles, net

     64,382        64,298   

Goodwill

     9,562        10,775   

Long-term deferred income tax assets, net

     29,803        27,680   

Other assets

     3,069        3,038   
  

 

 

   

 

 

 

Total assets

   $ 204,732      $ 206,059   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 6,591      $ 7,293   

Accrued expenses and other current liabilities

     24,611        25,217   

Current portion of long-term debt

     7,500        8,437   
  

 

 

   

 

 

 

Total current liabilities

     38,702        40,947   

Long-term debt

     66,700        62,013   

Other liabilities

     11,517        11,375   

Mandatorily redeemable, Series Z Preferred Stock, $.001 par value, $1,000 per share liquidation value; 57,000 shares authorized; 0 shares outstanding

     —          —     
  

 

 

   

 

 

 

Total liabilities

     116,919        114,335   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Series A junior participating preferred stock, 700,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $.001 par value; 25,000,000 shares authorized; 16,830,831 and 16,959,836 shares issued and outstanding

     17        17   

Additional paid-in capital

     273,736        275,715   

Accumulated other comprehensive loss, net of income tax

     (48     (51

Accumulated deficit

     (185,892     (183,957
  

 

 

   

 

 

 

Total stockholders’ equity

     87,813        91,724   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 204,732      $ 206,059   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except earnings per share and related share information)

(Unaudited)

 

     13 weeks ended     26 weeks ended  
     June 28,
2011
    July 3,
2012
    June 28,
2011
    July 3,
2012
 

Revenues:

        

Company-owned restaurant sales

   $ 93,613      $ 96,399      $ 183,412      $ 189,846   

Manufacturing and commissary revenues

     7,797        7,239        16,774        15,689   

Franchise and license related revenues

     2,267        2,355        4,736        5,331   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     103,677        105,993        204,922        210,866   

Cost of sales (exclusive of depreciation and amortization shown separately below):

        

Company-owned restaurant costs

        

Cost of goods sold

     28,164        27,003        54,278        53,372   

Labor costs

     27,156        28,208        54,186        55,076   

Rent and related expenses

     10,023        10,470        20,278        20,747   

Other operating costs

     10,226        10,176        19,341        19,503   

Marketing costs

     2,924        3,486        6,226        5,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total company-owned restaurant costs

     78,493        79,343        154,309        154,688   

Manufacturing and commissary costs

     6,865        5,581        14,449        12,477   

General and administrative expenses

     8,615        10,032        18,705        21,115   

Depreciation and amortization

     4,607        5,011        9,147        9,778   

Restructuring expenses

     —          (74     213        480   

Strategic alternatives expense

     —          435        —          435   

Other operating (income) expenses, net

     (936     75        (823     259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     97,644        100,403        196,000        199,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,033        5,590        8,922        11,634   

Interest expense, net

     823        778        1,733        1,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5,210        4,812        7,189        10,056   

Provision for income taxes

     2,130        1,856        2,941        3,896   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,080      $ 2,956      $ 4,248      $ 6,160   

Unrealized losses on derivatives, net of tax

     (43     —          (71     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,037      $ 2,956      $ 4,177      $ 6,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.18      $ 0.17      $ 0.26      $ 0.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.18      $ 0.17      $ 0.25      $ 0.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividend(s) declared per common share

   $ 0.125      $ 0.125      $ 0.125      $ 0.250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding:

        

Basic

     16,725,827        16,935,195        16,555,617        16,892,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     17,004,316        17,213,322        16,847,493        17,162,952   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     26 weeks ended  
     June 28,
2011
    July 3,
2012
 

OPERATING ACTIVITIES:

    

Net income

   $ 4,248      $ 6,160   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     9,147        9,778   

Deferred income tax expense

     2,401        2,993   

Stock-based compensation expense

     961        1,245   

(Gain) loss on disposal of assets

     (855     190   

Provision for losses on accounts receivable

     54        25   

Amortization of debt issuance and debt discount costs

     253        222   

Changes in operating assets and liabilities, net of acquisitions:

    

Restricted cash

     (137     (10

Accounts receivable

     (747     719   

Accounts payable and accrued expenses

     2,001        3,623   

Other assets and liabilities

     (876     (1,048
  

 

 

   

 

 

 

Net cash provided by operating activities

     16,450        23,897   

INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (7,890     (9,361

Proceeds from the sale and disposal of property, plant and equipment

     1,153        309   

Acquisition of restaurant assets, net of cash acquired

     (390     (1,613
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,127     (10,665

FINANCING ACTIVITIES:

    

Payments under capital lease obligations

     (11     (11

Repayments on line of credit

     (8,000     —     

Repayments under the term loan

     (1,875     (3,750

Dividends paid

     (2,083     (4,206

Proceeds upon stock option exercises

     838        734   
  

 

 

   

 

 

 

Net cash used in financing activities

     (11,131     (7,233

Net (decrease) increase in cash and cash equivalents

     (1,808     5,999   

Cash and cash equivalents, beginning of period

     11,768        8,652   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 9,960      $ 14,651   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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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 Company’s 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.”), Noah’s New York Bagels (“Noah’s”) 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 Company’s 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):

 

Cash and cash equivalents

   $ 6   

Inventories

     59   

Other current assets

     5   

Property, plant and equipment

     350   

Goodwill

     1,096   

Accrued expense and other current liabilities

     (50
  

 

 

 

Total purchase price

   $ 1,466   

Amounts withheld

     (60
  

 

 

 

Net cash paid at closing

   $ 1,406   

Payments of amounts withheld from current and prior acquisitions

     213   
  

 

 

 

Cash paid towards acquisitions

   $ 1,619   
  

 

 

 

 

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Table of Contents

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 Company’s 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.

4. Inventories

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:

 

     January 3,
2012
     July 3,
2012
 
     (in thousands)  

Finished goods

   $ 4,489       $ 4,232   

Raw materials

     1,073         865   
  

 

 

    

 

 

 

Total inventories

   $ 5,562       $ 5,097   
  

 

 

    

 

 

 

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 Company’s 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:

 

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Table of Contents
    

13 weeks ended

  

26 weeks ended

    

June 28,

2011

  

July 3,

2012

  

June 28,

2011

  

July 3,

2012

Expected life of options and SARs from date of grant

   2.75 - 6.0 years    2.75 - 6.0 years    2.75 - 6.0 years    2.75 - 6.0 years

Risk-free interest rate

   1.03% - 2.61%    0.43% - 1.16%    0.94% - 2.61%    0.36% - 1.16%

Volatility

   42%    41%    42%    41% - 42%

Assumed dividend yield

   3.14%    2.83%    3.14% - 3.32%    2.83% - 3.31%

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:

 

     Number
of Options
and SARs
    Weighted-Average
Exercise Price
     Weighted
Average
Remaining Life
(Years)
 

Outstanding, January 3, 2012

     1,217,749      $ 12.17      

Granted

     299,228        14.55      

Exercised

     (104,968     8.56      

Forfeited

     (75,893     13.27      

Cancelled

     (15,376     13.26      
  

 

 

   

 

 

    

Outstanding, July 3, 2012

     1,320,740      $ 12.92         7.04   
  

 

 

   

 

 

    

 

 

 

Exercisable and vested, July 3, 2012

     702,724      $ 11.54         5.64   
  

 

 

   

 

 

    

 

 

 

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 Company’s common stock on the date of grant. Transactions during the twenty-six weeks ended July 3, 2012 were as follows:

 

     Number
of

Shares
    Weighted Average
Grant Date

Fair Value
     Aggregate
Intrinsic Value
 

Non-vested rights, January 3, 2012

     96,180      $ 15.55      

Granted

     86,028        14.63      

Vested

     (35,110     15.52      

Forfeited

     (8,566     15.36      
  

 

 

   

 

 

    

Non-vested rights, July 3, 2012

     138,532      $ 15.00       $ 2,449,246   
  

 

 

   

 

 

    

 

 

 

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.

 

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6. Restructuring

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 Company’s 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 Company’s restructuring activities for the twenty-six weeks ended July 3, 2012:

 

     Employee
Termination
Benefits
    Contract
Termination
Costs
    Other     Total  
     (in thousands)  

Balance, January 3, 2012

   $ 447      $ 130      $ 187      $ 764   

Additional expense incurred

     140        316        24        480   

Amounts paid

     (512     (313     (171     (996
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, July 3, 2012

   $ 75      $ 133      $ 40      $ 248   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Company’s projected blended state tax rate.

8. Net Income Per Share

The following table sets forth the computation of weighted average shares outstanding:

 

     13 weeks ended      26 weeks ended  
     June 28,
2011
     July 3,
2012
     June 28,
2011
     July 3,
2012
 

Basic weighted average shares outstanding

     16,725,827         16,935,195         16,555,617         16,892,986   

Dilutive effect of stock options, SARs and RSUs

     278,489         278,127         291,876         269,966   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     17,004,316         17,213,322         16,847,493         17,162,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive stock options, SARs and RSUs

     440,070         613,148         333,902         239,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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9. Dividends

Our Board of Directors declared the following dividends during the periods presented:

 

Date Declared

  

Record Date

  

Dividend

Per Share

  

Total Amount

  

Payment Date

    

(in thousands)

2011:

               

May 3, 2011

   June 1, 2011      $ 0.125        $ 2,094      July 15, 2011

2012:

               

January 18, 2012

   March 1, 2012      $ 0.125        $ 2,106      April 15, 2012

May 1, 2012

   June 1, 2012      $ 0.125        $ 2,120      July 15, 2012

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 Company’s $50.0 million revolving facility was $36.5 million as of July 3, 2012.

Strategic Alternatives

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.

Litigation

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.

 

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Table of Contents

11. Supplemental Cash Flow Information

 

     26 weeks ended  
     June 28,
2011
    July 3,
2012
 
     (in thousands)  

Cash paid during the year to date period ended:

    

Interest related to:

    

Term loans and credit facility

   $ 899      $ 1,103   

Other

     287        294   

Income taxes

   $ 299      $ 616   

Non-cash investing activities:

    

Non-cash purchase of equipment through capital leasing

   $ 17      $ 5   

Change in accrued expenses for purchases of property and equipment

   $ (1,085   $ (2,255

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 Company’s Board of Directors declared a cash dividend on the Company’s common stock in the amount of $0.125 per share, payable on October 15, 2012 to shareholders of record on September 1, 2012.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

General

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s 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

 

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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.

Overview

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:

 

   

Comparable store sales – Our system-wide comparable store sales have been positive in each of the last five quarters with the second quarter of 2012 delivering +1.3%. We have seen sequential improvement in comparable store sales at our restaurants on a company-owned basis over the last six quarters, with an increase of +1.2% for the second quarter of 2012. The primary reasons for this sequential improvement has been strong growth in average check, driven by the strength of our catering sales, favorable menu mix and a slight reduction in customer discounts.

 

     Q2
2011
    Q3
2011
    Q4
2011
    Q1
2012
    Q2
2012
 

System-wide comparable sales

     +0.2     +1.0     +1.2     +1.1     +1.3

Company-owned comparable sales

     -0.3     +0.7     +0.8     +1.1     +1.2

 

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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.

 

   

Manufacturing and Commissaries – Revenues for our manufacturing business and commissaries declined by 7.2% reflecting our commissary closures in the first quarter of 2012, while our margin as a percentage of manufacturing and commissary revenue improved to 22.9% from 12.0%. We completed the closure of all five of our commissaries during the first quarter 2012 and we immediately benefited from the resultant lower costs in our supply chain.

 

   

Franchise and License Revenue – Total franchise and license related revenues increased by 3.9% as a result of the royalty streams from 31 net additional units opened since June 28, 2011, together with favorable comparable store sales.

 

   

Margin improvement – Our margin improved in our company-owned restaurants as a percentage of company owned restaurant sales by 150 basis points for the second quarter 2012 when compared to the second quarter 2011, which we attribute to sales leveraging, lower discounts, lower food costs and operational efficiencies in hourly labor. Our food costs decreased as a percentage of company-owned restaurant sales due to the streamlining of our supply chain through the closure of our commissary operations. We saw a slight increase in employee benefits during the quarter.

 

   

Unit development – As of July 3, 2012, we owned/operated, franchised and licensed 783 restaurants. We have added ten net restaurants in the first half of 2012.

2012 Outlook

Our execution plan to grow comparable store sales includes:

 

   

Build traffic by leveraging our strengths in:

 

   

Breakfast (bagels & sandwiches)

 

   

Smart Choice menu options

 

   

Specialty beverages and coffee

 

   

Build average check through bulk bagels, catering and premium sandwich innovation

 

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Build brand awareness with a balanced approach of grass roots and mass marketing

 

   

Grass roots local brand activation

 

   

Targeted digital/outdoor media

 

   

Targeted outdoor billboard advertising

 

   

Launch loyalty program

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

 

   

Total revenues increased $2.3 million, or 2.2%, driven by an increase in company-owned restaurant revenue of $2.8 million, or 3.0%, offsetting declines in manufacturing revenue due to the closure of our commissaries.

 

   

Cost of goods sold decreased 210 basis points as a percentage of company owned restaurant sales as a result of our cost saving initiatives.

 

   

Net income decreased by $0.1 million, while Adjusted EBITDA increased $1.3 million, or 13.7%, for the second quarter of 2012.

 

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Earnings per share (“EPS”) decreased to $0.17 per share on a dilutive basis for the second quarter of 2012 compared to $0.18 per share on a dilutive basis for the second quarter of 2011. For the second quarter 2012, charges incurred towards the exploration of strategic alternatives decreased EPS by $0.02 per diluted share. Gains on the sale of two restaurants to a franchisee and the receipt of the insurance proceeds related to a fire at one company-owned restaurant during the second quarter of 2011 increased that period’s EPS by $0.03 per diluted share.

Consolidated Results

 

     13 weeks ended     26 weeks ended  
     (in thousands)     Increase/
(Decrease)
    (in thousands)      Increase/
(Decrease)
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
    June 28,
2011
    July 3,
2012
     2012
vs. 2011
 

Revenues

   $ 103,677      $ 105,993        2.2   $ 204,922      $ 210,866         2.9

Cost of sales

     85,358        84,924        (0.5 %)      168,758        167,165         (0.9 %) 

Operating expenses

     12,286        15,479        26.0     27,242        32,067         17.7
  

 

 

   

 

 

     

 

 

   

 

 

    

Income from operations

     6,033        5,590        (7.3 %)      8,922        11,634         30.4

Interest expense, net

     823        778        (5.5 %)      1,733        1,578         (8.9 %) 
  

 

 

   

 

 

     

 

 

   

 

 

    

Income before income taxes

     5,210        4,812        (7.6 %)      7,189        10,056         39.9

Total provision for income taxes

     2,130        1,856        (12.9 %)      2,941        3,896         32.5
  

 

 

   

 

 

     

 

 

   

 

 

    

Net income

   $ 3,080      $ 2,956        (4.0 %)    $ 4,248      $ 6,160         45.0

Adjustments to net income:

             

Interest expense, net

     823        778        (5.5 %)      1,733        1,578         (8.9 %) 

Provision for income taxes

     2,130        1,856        (12.9 %)      2,941        3,896         32.5

Depreciation and amortization

     4,607        5,011        8.8     9,147        9,778         6.9

Restructuring expenses

     —          (74     *     213        480         125.4

Strategic alternatives expense

     —          435        *     —          435         *

Other operating (income) expenses, net

     (936     75        (108.0 %)      (823     259         (131.5 %) 
  

 

 

   

 

 

     

 

 

   

 

 

    

Adjusted EBITDA

   $ 9,704      $ 11,037        13.7   $ 17,459      $ 22,586         29.4
  

 

 

   

 

 

     

 

 

   

 

 

    

 

** Not meaningful

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.

 

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Table of Contents

Company-Owned Restaurant Operations

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of
company-owned
restaurant sales
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
    June 28,
2011
    July 3,
2012
 

Company-owned restaurant sales

   $ 93,613      $ 96,399        3.0    

Percent of total revenues

     90.3     91.0      

Cost of sales (exclusive of depreciation and amortization):

          

Cost of goods sold

   $ 28,164      $ 27,003        (4.1 %)      30.1     28.0

Labor costs

     27,156        28,208        3.9     29.0     29.3

Rent and related expenses

     10,023        10,470        4.5     10.7     10.9

Other operating costs

     10,226        10,176        (0.5 %)      10.9     10.6

Marketing costs

     2,924        3,486        19.2     3.1     3.6
  

 

 

   

 

 

     

 

 

   

 

 

 

Total company-owned restaurant costs

   $ 78,493      $ 79,343        1.1     83.8     82.3
  

 

 

   

 

 

       

Total company-owned restaurant gross margin

   $ 15,120      $ 17,056        12.8     16.2     17.7
  

 

 

   

 

 

       
     26 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of
company-owned
restaurant sales
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
    June 28,
2011
    July 3,
2012
 

Company-owned restaurant sales

   $ 183,412      $ 189,846        3.5    

Percent of total revenues

     89.5     90.0      

Cost of sales (exclusive of depreciation and amortization):

          

Cost of goods sold

   $ 54,278      $ 53,372        (1.7 %)      29.6     28.1

Labor costs

     54,186        55,076        1.6     29.5     29.0

Rent and related expenses

     20,278        20,747        2.3     11.1     10.9

Other operating costs

     19,341        19,503        0.8     10.5     10.3

Marketing costs

     6,226        5,990        (3.8 %)      3.4     3.2
  

 

 

   

 

 

       

Total company-owned restaurant costs

   $ 154,309      $ 154,688        0.2     84.1     81.5
  

 

 

   

 

 

       

Total company-owned restaurant gross margin

   $ 29,103      $ 35,158        20.8     15.9     18.5
  

 

 

   

 

 

       

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.

 

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Table of Contents

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

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of
manufacturing
and commissary
revenues
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
    June 28,
2011
    July 3,
2012
 

Manufacturing and commissary revenues

   $ 7,797      $ 7,239        (7.2 %)     

Percent of total revenues

     7.5     6.8      

Manufacturing and commissary costs

   $ 6,865      $ 5,581        (18.7 %)      88.0     77.1
  

 

 

   

 

 

       

Total manufacturing and commissary gross margin

   $ 932      $ 1,658        77.9     12.0     22.9
  

 

 

   

 

 

       
     26 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of
manufacturing
and commissary
revenues
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
    June 28,
2011
    July 3,
2012
 

Manufacturing and commissary revenues

   $ 16,774      $ 15,689        (6.5 %)     

Percent of total revenues

     8.2     7.5      

Manufacturing and commissary costs

   $ 14,449      $ 12,477        (13.6 %)      86.1     79.5
  

 

 

   

 

 

       

Total manufacturing and commissary gross margin

   $ 2,325      $ 3,212        38.2     13.9     20.5
  

 

 

   

 

 

       

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

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
 

Franchise and license related revenues

   $ 2,267      $ 2,355        3.9

Percent of total revenues

     2.2     2.2  

Number of franchise and license restaurants

     304        335     

 

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Table of Contents
     26 weeks ended  
     (in thousands)     Increase/
(Decrease)
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
 

Franchise and license related revenues

   $ 4,736      $ 5,331        12.6

Percent of total revenues

     2.3     2.5  

Number of franchise and license restaurants

     304        335     

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.

Corporate

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of
total revenues
 
     June 28,
2011
    July 3,
2012
    2012
vs. 2011
    June 28,
2011
    July 3,
2012
 

General and administrative expenses

   $ 8,615      $ 10,032        16.4     8.3     9.5

Depreciation and amortization

     4,607        5,011        8.8     4.5     4.7

Restructuring expenses

     —          (74     *     0.0     (0.1 %) 

Strategic alternatives expense

     —          435        *     0.0     0.4

Other operating (income) expenses, net

     (936     75        (108.0 %)      (0.9 %)      0.1
  

 

 

   

 

 

       

Total operating expenses

   $ 12,286      $ 15,479        26.0     11.9     14.6

Interest expense, net

     823        778        (5.5 %)      0.8     0.7

Provision for income taxes

     2,130        1,856        (12.9 %)      2.0     1.8

 

** Not meaningful

 

     26 weeks ended  
     (in thousands)      Increase/
(Decrease)
    Percentage of
total revenues
 
     June 28,
2011
    July 3,
2012
     2012
vs. 2011
    June 28,
2011
    July 3,
2012
 

General and administrative expenses

   $ 18,705      $ 21,115         12.9     9.1     10.0

Depreciation and amortization

     9,147        9,778         6.9     4.5     4.6

Restructuring expenses

     213        480         125.4     0.1     0.2

Strategic alternatives expense

     —          435         *     0.0     0.2

Other operating (income) expenses, net

     (823     259         (131.5 %)      (0.4 %)      0.1
  

 

 

   

 

 

        

Total operating expenses

   $ 27,242      $ 32,067         17.7     13.3     15.2

Interest expense, net

     1,733        1,578         (8.9 %)      0.8     0.8

Provision for income taxes

     2,941        3,896         32.5     1.4     1.9

 

** Not meaningful

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.

 

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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.

 

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Working Capital

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.

 

     January 3,
2012
     July 3,
2012
     Change  

Current assets:

        

Cash and cash equivalents

   $ 8,652       $ 14,651       $ 5,999   

Restricted cash

     889         899         10   

Accounts receivable

     7,774         7,030         (744

Inventories

     5,562         5,097         (465

Current deferred income tax assets, net

     9,013         8,143         (870

Prepaid expenses

     6,483         7,710         1,227   

Other current assets

     526         546         20   
  

 

 

    

 

 

    

 

 

 

Total current assets

     38,899         44,076         5,177   

Current liabilities:

        

Accounts payable

   $ 6,591       $ 7,293       $ 702   

Accrued expenses and other current liabilities

     24,611         25,217         606   

Current portion of long-term debt

     7,500         8,437         937   
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     38,702         40,947         2,245   
  

 

 

    

 

 

    

 

 

 

Working capital surplus

   $ 197       $ 3,129       $ 2,932   
  

 

 

    

 

 

    

 

 

 

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.

 

     26 weeks ended  
     June 28,
2011
    July 3,
2012
 
     (in thousands)  

Net cash provided by operating activities

   $ 16,450      $ 23,897   

Net cash used in investing activities

     (7,127     (10,665
  

 

 

   

 

 

 

Free cash flow

     9,323        13,232   

Net cash used in financing activities

     (11,131     (7,233
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,808     5,999   

Cash and cash equivalents, beginning of period

     11,768        8,652   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 9,960      $ 14,651   
  

 

 

   

 

 

 

Covenants

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.

 

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Capital Expenditures

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:

 

   

$7.5 million towards the outfitting of new restaurants and remodels of existing restaurants, including the continued installation of new coffee equipment and a new point of sale system; and

 

   

$1.9 million for replacement of equipment at our existing company-owned restaurants and at our manufacturing operations.

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.

Contractual Obligations

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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.

 

Item 4. Controls and Procedures

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 SEC’s 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.

 

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Table of Contents

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.

 

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Table of Contents

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

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.

 

Item 1A. Risk Factors

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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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.

 

Item 6. Exhibits

The exhibits listed in the Exhibit Index, which appears immediately following the signature page, are incorporated herein by reference.

 

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Table of Contents

SIGNATURES

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.

 

    EINSTEIN NOAH RESTAURANT GROUP, INC.
Dated: August 2, 2012     By: /s/ Jeffrey J. O’Neill
    Jeffrey J. O’Neill
    Chief Executive Officer
Dated: August 2, 2012     By: /s/ Emanuel P.N. Hilario
    Emanuel P.N. Hilario
    Chief Financial Officer

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Description

3.1    Restated Certificate of Incorporation of Einstein Noah Restaurant Group, Inc. is hereby incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2008.
3.2    Fourth Amended By-Laws of Einstein Noah Restaurant Group, Inc. is hereby incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 7, 2011.
10.1    Amendments to Einstein Noah Restaurant Group, Inc. Stock Appreciation Rights Plan.
10.2    Letter Agreement for Jeffrey J. O’Neill is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 3, 2012.
10.3    Letter Agreement for Emanuel P.N. Hilario is hereby incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 3, 2012.
10.4    Letter Agreement for Brian L. Unger is hereby incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed May 3, 2012.
10.5    Letter Agreement for Rhonda J. Parish is hereby incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed May 3, 2012.
31.1    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certifications by Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*    The following materials from the Company’s Form 10-Q for the quarter ended July 3, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows and (iv) the Notes to the Consolidated Financial Statements.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

26

XNAS:BAGL Quarterly Report 10-Q Filling

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XNAS:BAGL Quarterly Report 10-Q Filing - 7/3/2012
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