UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

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

For the quarterly period ended April 4, 2010

or

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

For the transition period from                      to                     .

Commission file number: 0-25123

P.F. Chang’s China Bistro, Inc.

Delaware		86-0815086
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
7676 East Pinnacle Peak Road		85255
Scottsdale, Arizona		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:
(480) 888-3000

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 þ No o

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 o No þ

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if 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 o No þ

As of April 4, 2010, there were 23,156,663 outstanding shares of the registrant’s Common Stock.

 

 

TABLE OF CONTENTS

Item				Page
PART I FINANCIAL INFORMATION
1.		Financial Statements			2
		Consolidated Balance Sheets at April 4, 2010 and January 3, 2010			2
		Consolidated Statements of Income for the Three Months Ended April 4, 2010 and March 29, 2009			3
		Consolidated Statement of Equity for the Three Months Ended April 4, 2010 and March 29, 2009			4
		Consolidated Statements of Cash Flows for the Three Months Ended April 4, 2010 and March 29, 2009			5
		Notes to Unaudited Consolidated Financial Statements			6
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
3.		Quantitative and Qualitative Disclosures About Market Risk			22
4.		Controls and Procedures			23
PART II OTHER INFORMATION
1.		Legal Proceedings			24
1A.		Risk Factors			24
2.		Unregistered Sales of Equity Securities and Use of Proceeds			24
3.		Defaults Upon Senior Securities			24
4.		Removed and Reserved			24
5.		Other Information			24
6.		Exhibits			25
		Signatures			26
		Index to Exhibits			27
Exhibit 10.38
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

P.F. CHANG’S CHINA BISTRO, INC.

		April 4,				January 3,
		2010				2010
		(Unaudited)				(Note 1)
ASSETS
Current assets:
Cash and cash equivalents		$	71,544			$	63,499
Inventories			5,489				5,291
Other current assets			34,272				38,449
Total current assets			111,305				107,239
Property and equipment, net			487,492				497,928
Goodwill			6,819				6,819
Intangible assets, net			21,681				22,241
Other assets			18,793				17,923
Total assets		$	646,090			$	652,150
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	20,162			$	19,825
Construction payable			2,736				1,600
Accrued expenses			61,354				77,088
Unearned revenue			29,649				35,844
Current portion of long-term debt, including $314 and $976 due to related parties at April 4, 2010 and January 3, 2010, respectively			40,521				41,236
Total current liabilities			154,422				175,593
Lease obligations			114,728				116,547
Long-term debt			1,223				1,212
Other liabilities			18,847				18,488
Total liabilities			289,220				311,840
Commitments and contingencies (Note 12)			—				—
Equity:
PFCB common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 23,156,663 shares and 22,911,054 shares issued and outstanding at April 4, 2010 and January 3, 2010, respectively			23				28
Additional paid-in capital			227,124				217,181
Treasury stock, at cost, 5,113,533 shares and 5,064,733 shares at April 4, 2010 and January 3, 2010, respectively			(148,122	)			(146,022	)
Accumulated other comprehensive loss			(132	)			(294	)
Retained earnings			273,147				264,456
Total PFCB common stockholders’ equity			352,040				335,349
Noncontrolling interests			4,830				4,961
Total equity			356,870				340,310
Total liabilities and equity		$	646,090			$	652,150

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

		Three Months Ended
		April 4,				March 29,
		2010				2009
Revenues		$	310,371			$	309,837
Costs and expenses:
Cost of sales			84,013				83,072
Labor			104,475				100,707
Operating			52,753				50,691
Occupancy			17,838				17,378
General and administrative			19,053				19,814
Depreciation and amortization			19,001				18,496
Preopening expense			133				488
Partner investment expense			11				(464	)
Total costs and expenses			297,277				290,182
Income from operations			13,094				19,655
Interest and other income (expense), net			(415	)			(940	)
Income from continuing operations before taxes			12,679				18,715
Provision for income taxes			(3,788	)			(4,953	)
Income from continuing operations, net of tax			8,891				13,762
Income (loss) from discontinued operations, net of tax			6				(43	)
Net income			8,897				13,719
Less: Net income attributable to noncontrolling interests			206				370
Net income attributable to PFCB		$	8,691			$	13,349
Basic income per share:
Income from continuing operations attributable to PFCB common stockholders		$	0.38			$	0.57
Income (loss) from discontinued operations, net of tax, attributable to PFCB common stockholders			0.00				(0.00	)
Net income attributable to PFCB common stockholders		$	0.38			$	0.57
Diluted income per share:
Income from continuing operations attributable to PFCB common stockholders		$	0.38			$	0.56
Income (loss) from discontinued operations, net of tax, attributable to PFCB common stockholders			0.00				(0.00	)
Net income attributable to PFCB common stockholders		$	0.38			$	0.56
Weighted average shares used in computation:
Basic			22,631				23,442
Diluted			23,104				23,795
Amounts attributable to PFCB:
Income from continuing operations, net of tax		$	8,685			$	13,392
Income (loss) from discontinued operations, net of tax			6				(43	)
Net income attributable to PFCB		$	8,691			$	13,349

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

		PFCB Common Stockholders
																		Accumulated
																		other
		Common Stock								Additional				Treasury				comprehensive				Retained				Noncontrolling
		Shares				Amount				paid-in capital				stock				loss				earnings				interests				Total
Balances, December 28, 2008			24,114			$	27			$	206,667			$	(106,372	)		$	(755	)		$	221,259			$	8,581			$	329,407
Issuance of common stock under stock option plans			66				1				773				—				—				—				—				774
Issuance of common stock under employee stock purchase plan			21				—				349				—				—				—				—				349
Issuance of restricted stock under incentive plans, net of forfeitures			(11	)			—				—				—				—				—				—				—
Purchases of treasury stock			(479	)			—				—				(9,364	)			—				—				—				(9,364	)
Share-based compensation expense (1)			—				—				2,113				—				—				—				—				2,113
Tax benefit from share-based compensation, net			—				—				74				—				—				—				—				74
Unrealized gain on derivatives			—				—				—				—				56				—				—				56
Distributions to noncontrolling interest partners			—				—				—				—				—				—				(601	)			(601	)
Contributions from noncontrolling interest partners			—				—				—				—				—				—				10				10
Purchases of noncontrolling interests			—				—				(428	)			—				—				—				(1,279	)			(1,707	)
Partner investment expense			—				—				—				—				—				—				(464	)			(464	)
Partner bonus expense, imputed			—				—				—				—				—				—				141				141
Net income			—				—				—				—				—				13,349				370				13,719
Balances, March 29, 2009			23,711			$	28			$	209,548			$	(115,736	)		$	(699	)		$	234,608			$	6,758			$	334,507
Balances, January 3, 2010			22,911			$	28			$	217,181			$	(146,022	)		$	(294	)		$	264,456			$	4,961			$	340,310
Issuance of common stock under stock option plans			279				—				6,289				—				—				—				—				6,289
Issuance of common stock under employee stock purchase plan			27				—				984				—				—				—				—				984
Shares withheld for taxes on restricted stock, net of forfeitures			(11	)			—				—				—				—				—				—				—
Purchases of treasury stock			(49	)			(5	)			—				(2,100	)			—				—				—				(2,105	)
Share-based compensation expense (1)			—				—				1,148				—				—				—				—				1,148
Tax benefit from share-based compensation, net			—				—				1,606				—				—				—				—				1,606
Unrealized gain on derivatives			—				—				—				—				162				—				—				162
Distributions to noncontrolling interest partners			—				—				—				—				—				—				(372	)			(372	)
Contributions from noncontrolling interest partners			—				—				—				—				—				—				10				10
Purchases of noncontrolling interests			—				—				(84	)			—				—				—				(90	)			(174	)
Partner investment expense			—				—				—				—				—				—				11				11
Partner bonus expense, imputed			—				—				—				—				—				—				104				104
Net income			—				—				—				—				—				8,691				206				8,897
Balances, April 4, 2010			23,157			$	23			$	227,124			$	(148,122	)		$	(132	)		$	273,147			$	4,830			$	356,870

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

		Three Months Ended
		April 4,				March 29,
		2010				2009
Operating Activities:
Net income		$	8,897			$	13,719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			19,001				18,496
Share-based compensation			2,965				2,328
Partner investment expense			11				(464	)
Partner bonus expense, imputed			104				141
Deferred income taxes			(2,198	)			(837	)
Tax (benefit) shortfall from share-based compensation, net			(1,668	)			(74	)
Other			39				38
Changes in operating assets and liabilities:
Inventories			(198	)			98
Other current assets			5,566				19,074
Other assets			(529	)			(963	)
Accounts payable			337				(4,158	)
Accrued expenses			(15,464	)			(9,759	)
Unearned revenue			(6,195	)			(7,113	)
Lease obligations			(1,771	)			(55	)
Other liabilities			701				766
Net cash provided by operating activities			9,598				31,237
Investing Activities:
Capital expenditures			(6,741	)			(8,186	)
Receivable under Loan Facility (Note 12)			(330	)			—
Capitalized interest			(19	)			(39	)
Net cash used in investing activities			(7,090	)			(8,225	)
Financing Activities:
Proceeds from stock options exercised and employee stock purchases			7,273				1,122
Purchases of treasury stock			(2,105	)			(9,364	)
Repayments of long-term debt			(715	)			(12,461	)
Distributions to noncontrolling interest partners			(372	)			(601	)
Purchases of noncontrolling interests			(174	)			(1,707	)
Payments of capital lease obligations			(48	)			(44	)
Contributions from noncontrolling interest partners			10				10
Tax benefit (shortfall) from share-based compensation, net			1,668				74
Net cash provided by (used in) financing activities			5,537				(22,971	)
Net increase in cash and cash equivalents			8,045				41
Cash and cash equivalents at the beginning of the period			63,499				40,951
Cash and cash equivalents at the end of the period		$	71,544			$	40,992
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest		$	706			$	1,095
Cash paid for income taxes, net of refunds		$	8,196			$	117
Supplemental Disclosure of Non-Cash Items:
Change in construction payable		$	1,136			$	(1,306	)

See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

As of April 4, 2010, P.F. Chang’s China Bistro, Inc. (the “Company” or “PFCB”) owned and operated 197 full service restaurants throughout the United States under the name of P.F. Chang’s China Bistro (the “Bistro”). The Company also owned and operated 167 quick casual restaurants under the name of Pei Wei Asian Diner (“Pei Wei”). Additionally, there are two Bistro restaurants in international markets that are operated by business partners under licensing agreements, and two Bistro restaurants operated in Hawaii under a joint venture arrangement in which we own a noncontrolling interest.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended April 4, 2010 are not necessarily indicative of the results that may be expected for the year ending January 2, 2011.

The consolidated balance sheet at January 3, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation and Presentation

The Company’s consolidated financial statements include the accounts and operations of the Company and its majority-owned subsidiaries. All material balances and transactions between the consolidated entities have been eliminated. Noncontrolling interests are reported below net income under the heading “Net income attributable to noncontrolling interests” in the consolidated income statements and shown as a component of equity in the consolidated balance sheets.

Recent Accounting Literature

Consolidation of Variable Interest Entities — Amended
(Included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)

SFAS No. 167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities” regarding certain guidance for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009, with earlier adoption prohibited. The adoption of SFAS No. 167 in fiscal 2010 did not have a material impact on the Company’s consolidated financial statements.

Improving Disclosures about Fair Value Measurements (ASU No. 2010-06)
(Included in ASC 820 “Fair Value Measurements and Disclosures”)

Accounting Standards Update (“ASU”) No. 2010-06 requires new disclosures regarding recurring or nonrecurring fair value measurements. Entities will be required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy and describe the reasons for the transfers. Entities will also be required to provide information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. In addition, entities must provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about the valuation techniques used in determining fair value for Level 2 or Level 3 measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross basis reconciliation for the Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial statements. There were no transfers between Level 1 and Level 2 measurements in the fair value hierarchy during the three months ended April 4, 2010.

2. Discontinued Operations

Discontinued operations include results attributable to 10 Pei Wei restaurants that were closed during the fourth quarter of 2008. Income (loss) from discontinued operations includes both the historical results of operations as well as estimated and actual lease termination costs associated with the 10 closed Pei Wei restaurants.

Income (loss) from discontinued operations, net of tax is comprised of the following (in thousands):

		Three Months Ended
		April 4,				March 29,
		2010				2009
Revenues		$	—			$	—
Income (loss) from discontinued operations before income tax benefit(1)			10				(70	)
Income tax benefit (expense)			(4	)			27
Income (loss) from discontinued operations, net of tax		$	6			$	(43	)

The Company is pursuing lease termination agreements with each of the closed Pei Wei restaurants’ landlords as well as potential sub-tenant agreements. Lease termination agreements for seven of the ten locations have been executed as of April 4, 2010.

Activity associated with the lease termination accrual is summarized below (in thousands):

		April 4, 2010				March 29, 2009
Beginning balance		$	1,416			$	2,379
Cash payments			(118	)			(1,023	)
Charges			—				492
Ending balance		$	1,298			$	1,848

Charges include additional amounts recognized based on availability of new information, which led to updated estimates of anticipated lease termination costs for certain closed locations where the accrual recorded at the time of lease termination was insufficient. Cash payments include settlement payments as well as ongoing rent and other property-related payments. From store closure date through April 4, 2010, the Company has recognized and reported in discontinued operations a total of $4.0 million in lease termination charges for the closed Pei Wei locations. The lease termination accrual is included in accrued expenses on the consolidated balance sheets with the timing of payments uncertain.

3. Income from Continuing Operations Attributable to PFCB per Share

Basic income from continuing operations attributable to PFCB per share is computed based on the weighted average number of common shares outstanding during the period. Diluted income from continuing operations attributable to PFCB per share is computed based on the weighted average number of shares of common stock and potentially dilutive securities, which includes options, restricted stock and restricted stock units (“RSUs”) outstanding under the Company’s equity plans and employee stock purchase plan. For the three months ended April 4, 2010 and March 29, 2009, 1.2 million and 2.3 million, respectively, of the Company’s options were excluded from the calculation due to their anti-dilutive effect.

4. Other Current Assets

Other current assets consist of the following (in thousands):

		April 4, 2010				January 3, 2010
Receivables		$	5,603			$	15,752
Current portion of deferred tax asset			10,757				11,036
Prepaid rent			5,525				5,508
Income taxes receivable			6,162				2,388
Other			6,225				3,765
Total other current assets		$	34,272			$	38,449

5. Other Assets

Other assets consist of the following (in thousands):

		April 4, 2010				January 3, 2010
Software, net		$	5,392			$	5,459
Liquor licenses, net			6,805				6,836
Restoration Plan investments			4,273				3,454
Deposits			1,335				1,411
Other assets, net			988				763
Total other assets		$	18,793			$	17,923

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

		April 4, 2010				January 3, 2010
Accrued payroll		$	15,933			$	26,262
Accrued insurance			17,466				17,426
Sales and use tax payable			7,052				7,104
Property tax payable			3,221				3,638
Accrued rent			2,070				3,730
Derivative liability			201				471
Other accrued expenses			15,411				18,457
Total accrued expenses		$	61,354			$	77,088

7. Long-Term Debt

Credit Facility

On August 31, 2007, the Company entered into a senior credit facility (“Credit Facility”) with several commercial financial institutions, which allowed for borrowings of up to $150.0 million. On December 15, 2009, the Company amended the Credit Facility which reduced the borrowings allowed to $75.0 million and modified certain restrictive language regarding restricted payments such as dividends and share repurchases. The Credit Facility expires on August 30, 2013 and contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. The Company was in compliance with these restrictions and conditions as of April 4, 2010 as the Company’s leverage ratio was 1.27:1 and the fixed charge coverage ratio was 2.25:1.

The Credit Facility is guaranteed by the Company’s material existing and future domestic subsidiaries. As of April 4, 2010, the Company had borrowings outstanding under the Credit Facility totaling $40.0 million as well as $14.1 million committed for the issuance of letters of credit, which is required by insurance companies for the Company’s workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $20.9 million at April 4, 2010.

Interest Rate Swap

During the second quarter of fiscal 2008, the Company entered into an interest rate swap with a notional amount of $40.0 million. The purpose of this transaction is to provide a hedge against the effects of changes in interest rates on a portion of the Company’s current variable rate borrowings. The Company has designated the interest rate swap as a cash flow hedge of its exposure to variability in future cash flows attributable to interest payments on a $40.0 million tranche of floating rate debt.

Under the terms of the interest rate swap, the Company pays a fixed rate of 3.32% on the $40.0 million notional amount and receives payments from its counterparty based on the 1-month LIBOR rate for a term ending on May 20, 2010, effectively resulting in a fixed rate on the LIBOR component of the $40.0 million notional amount. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.

At April 4, 2010 and January 3, 2010, the recorded fair value of the interest rate swap was a liability of $0.2 million and $0.5 million, respectively ($0.1 million and $0.3 million, net of tax, respectively). The interest rate swap is reported in the consolidated balance sheets within accrued expenses and is offset by a corresponding amount in equity, representing net unrealized losses included in accumulated other comprehensive loss. Such amounts will be recognized in the consolidated income statement over the remainder of the term ending on May 20, 2010. During the three months ended April 4, 2010 and March 29, 2009, unrealized gains of $0.2 million and $0.1 million, respectively, are included within other comprehensive loss. There was no hedge ineffectiveness recognized during the three month periods ended April 4, 2010 and March 29, 2009.

8. Other Liabilities

Other liabilities consist of the following (in thousands):

		April 4, 2010				January 3, 2010
Deferred income tax liability		$	7,129			$	9,436
Deferred compensation			4,547				3,653
Performance units			3,408				2,402
Cash-settled awards			2,264				1,453
Other			1,499				1,544
Total other liabilities		$	18,847			$	18,488

9. Fair Value Measurements

The Company’s financial assets and financial liabilities measured at fair value at April 4, 2010 and January 3, 2010 are summarized below (in thousands):

						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
						Assets/Liabilities				Observable Inputs				Inputs
		April 4, 2010				(Level 1)				(Level 2)				(Level 3)				Valuation Technique
Money markets		$	66,565			$	—			$	66,565			$	—			market approach
Restoration Plan investments			4,273				—				4,273				—			market approach
Interest rate swap liability			(201	)			—				(201	)			—			income approach
Total		$	70,637			$	—			$	70,637			$	—

						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
						Assets/Liabilities				Observable Inputs				Inputs
		January 3, 2010				(Level 1)				(Level 2)				(Level 3)				Valuation Technique
Money markets		$	54,655			$	—			$	54,655			$	—			market approach
Restoration Plan investments			3,454				—				3,454				—			market approach
Interest rate swap liability			(471	)			—				(471	)			—			income approach
Total		$	57,638			$	—			$	57,638			$	—

The Company invests excess cash in money market funds and reflects these amounts within cash and cash equivalents on the consolidated balance sheet at a net value of 1:1 for each dollar invested. Money market investments held by the Company were invested primarily in government backed securities at April 4, 2010.

The Company’s Restoration Plan investments are considered trading securities and are reported at fair value based on third party broker statements. Such amounts are reflected within other assets in the consolidated balance sheets. The realized and unrealized holding gains and losses related to these investments are recorded in interest and other income (expense), net in the consolidated income statements.

The fair value of the Company’s interest rate swap is estimated using the net present value of a series of cash flows on both the fixed and floating legs of the swap and is reflected within accrued expenses in the consolidated balance sheets. These cash flows are based on yield curves which take into account the contractual terms of the derivative, including the period to maturity and market-based parameters such as interest rates and volatility. The yield curves used in the valuation model are based on published data for counterparties with an AA rating. Market practice in pricing derivatives initially assumes all counterparties have the same credit quality. The Company mitigates derivative credit risk by transacting with highly rated counterparties. Management has evaluated credit and nonperformance risks and believes them to be insignificant and not warranting a credit adjustment at April 4, 2010. See Note 7 for a discussion of the Company’s interest rate swap.

10. Share-Based Compensation

The Company has granted equity-classified awards in the form of stock options, restricted stock and restricted stock units (“RSUs”), and has issued liability-classified awards in the form of performance units, cash-settled stock appreciation rights (“SARs”) and cash-settled stock-based awards (restricted cash units or “RCUs”) to certain employees and directors.

Equity-Classified Awards

Stock options were granted for a fixed number of shares with an exercise price equal to or greater than the fair value of the shares at the date of grant. Restricted stock and RSUs were granted with the fair value determined based on the Company’s closing stock price on the date of grant. Share-based compensation expense for equity-classified awards is amortized to expense over the vesting period. There were no equity-classified awards granted during the three month periods ended April 4, 2010 and March 29, 2009.

Liability-Classified Awards

Performance Units

The cash value of the performance units will be equal to the amount, if any, by which the Company’s final average stock price as defined in the agreements, exceeds the strike price. The fair value of the performance units is remeasured at each reporting period until the awards are settled. At April 4, 2010 and March 29, 2009, the fair value per performance unit was $7.23 and $4.58, respectively, calculated using a Monte-Carlo simulation model which incorporates the historical performance, volatility and correlation of the Company’s stock price and the Russell 2000 Index. At April 4, 2010 and January 3, 2010, the recorded liability of the performance units was $3.4 million and $2.4 million, respectively. There were no performance unit awards granted during the three months ended April 4, 2010.

Cash-Settled Awards

The cash value of the SARs will be based on the appreciation of the Company’s stock price on the date of settlement compared to the Company’s stock price on the date of grant, and the cash value of the RCUs will be based on the Company’s stock price on the date of settlement. The fair value of SARs is equal to the value calculated per the Black-Scholes model and the fair value of RCUs is equal to the sum of the value calculated per the Black-Scholes model and the Company’s stock price at the reporting date. The fair value of SARs and RCUs is remeasured at each reporting period until the awards are settled. At April 4, 2010 and January 3, 2010, the recorded liability of cash-settled awards was $2.3 million and $1.5 million, respectively.

SARs were awarded/granted to a member of the Board of Directors who joined the Board during the first quarter of fiscal 2010. No RCUs were granted during the three months ended April 4, 2010. No RCUs or SARs were granted during the three months ended March 29, 2009.

Share-based compensation expense for performance units, SARs and RCUs is recognized ratably over the service period with the impact of updated fair value recognized as cumulative adjustments to share-based compensation expense at the end of each reporting period.

The fair value of the SARs and RCUs was estimated using a Black-Scholes option pricing model with the following weighted average assumptions:

		Three Months Ended
		April 4, 2010
		RCUs				SARs
Weighted average risk-free interest rate			1.4	%			2.3	%
Expected life of cash-settled awards (years)			2.9				4.4
Expected stock volatility			51.8	%			44.7	%
Expected dividend yield			0.0	%			0.0	%

Share-Based Compensation Expense

Share-based compensation expense from continuing operations for equity and liability-classified awards is classified as follows (in thousands):

		Three Months Ended
		April 4, 2010				March 29, 2009
Equity-classified awards:
Labor		$	45			$	103
General and administrative			1,103				2,010
Liability-classified awards:
General and administrative			1,817				215
Total share-based compensation			2,965				2,328
Less: tax benefit			(901	)			(629	)
Total share-based compensation, net of tax		$	2,064			$	1,699

Non-Vested Share-Based Compensation Expense

At April 4, 2010, non-vested share-based compensation for equity-classified awards (net of actual forfeitures for options and estimated forfeitures for restricted stock), totaled $3.3 million for stock options and $2.7 million for restricted stock. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.6 years for stock options and 1.4 years for restricted stock.

At April 4, 2010, non-vested share-based compensation for liability-classified awards (based on current fair value, which is updated each reporting period), totaled $5.3 million for performance units and $5.1 million for RCU and SAR awards. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.7 years for performance units and 2.3 years for RCU and SAR awards.

11. Segment Reporting

The Company operates primarily in the United States food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. The Company’s reportable segments are Bistro and Pei Wei. Additionally, royalty fees related to Bistro restaurants operated by business partners pursuant to development and licensing agreements are reported within Shared Services and Other. There were no material amounts of revenues or transfers among reportable segments.

The following table presents information about reportable segments (in thousands):

						Shared Services
		Total				and Other				Bistro				Pei Wei
For the Three Months Ended April 4, 2010:
Revenues		$	310,371			$	129			$	230,767			$	79,475
Segment profit (loss)			32,085				(371	)			24,753				7,703
Capital expenditures			6,741				449				5,263				1,029
Depreciation and amortization			19,001				500				13,854				4,647
For the Three Months Ended March 29, 2009:
Revenues		$	309,837			$	—			$	235,141			$	74,696
Segment profit (loss)			39,123				(418	)			32,806				6,735
Capital expenditures			8,186				1,622				5,296				1,268
Depreciation and amortization			18,496				418				13,728				4,350
As of April 4, 2010:
Total assets		$	646,090			$	21,905			$	519,848			$	104,337
Goodwill			6,819				—				6,566				253
As of January 3, 2010:
Total assets		$	652,150			$	20,293			$	522,940			$	108,917
Goodwill			6,819				—				6,566				253

In addition to using consolidated results in evaluating the Company’s financial results, a primary measure used by executive management in assessing the performance of existing restaurant concepts is segment profitability (sometimes referred to as restaurant operating income). Segment profitability is defined as income from operations before general and administrative, preopening and partner investment expenses, but including a deduction for net income attributable to noncontrolling interests. Because preopening and partner investment expenses are associated with expansion of the Company’s business and vary in timing and magnitude, they make an accurate assessment of ongoing operations more difficult and are therefore excluded. Additionally, general and administrative expenses are only included in the Company’s consolidated financial results as these costs relate to support of both restaurant businesses and are generally not specifically identifiable to individual restaurant operations. As the Company’s expansion is funded entirely from its ongoing restaurant operations, segment profitability is one consideration when determining whether and when to open additional restaurants.

Reconciliation of Segment profit to Income from continuing operations before taxes (in thousands):

		For the Three Months Ended
		April 4,				March 29,
		2010				2009
Segment profit		$	32,085			$	39,123
Less: General and administrative			(19,053	)			(19,814	)
Less: Preopening expense			(133	)			(488	)
Less: Partner investment expense			(11	)			464
Less: Interest and other income (expense), net			(415	)			(940	)
Add: Net income attributable to noncontrolling interests			206				370
Income from continuing operations before taxes		$	12,679			$	18,715

12. Commitments and Contingencies

The Company is engaged in various legal actions, which arise in the ordinary course of its business. The Company is also currently under examination by various taxing authorities for years not closed by the statute of limitations. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company’s management, based upon the information available at this time, that the outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, liquidity or financial condition of the Company.

In August 2009, the Company entered into an agreement with FRC Balance LLC, d/b/a True Food Kitchen, to provide debt capital for the early-stage development of True Food Kitchen restaurants. The agreement provides for up to a $10.0 million loan facility to develop True Food Kitchen restaurants and can, under certain conditions, be converted by P.F. Chang’s into a majority equity position in True Food Kitchen. As of April 4, 2010, $0.3 million in borrowings was outstanding under the loan facility.

13. Subsequent Event

Cash Dividends

During February 2010, the Board of Directors approved the initiation of a quarterly variable cash dividend based on the Company’s desire to consistently return excess cash flow to its shareholders. The amount of the cash dividend will be computed based on 45% of the Company’s quarterly net income and is expected to total approximately $0.90 per share during fiscal 2010. Based on seasonal fluctuations in the Company’s quarterly net income, the amount of cash dividend payments, which are based on a fixed percentage of net income, may fluctuate between quarters.

Based on the Board of Directors authorization, on April 28, 2010 the Company announced a cash dividend of $0.17 per share to be paid May 19, 2010 to all shareholders of record at the close of business on May 5, 2010. Based on shares outstanding at April 4, 2010, total dividend payments paid during the second quarter of fiscal 2010 will approximate $3.9 million.

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

This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended January 3, 2010 contained in our 2009 Annual Report on Form 10-K.

Some of the statements in this section contain forward–looking statements, which involve risks and uncertainties. In some cases, forward-looking statements can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A (a detailed description of which can be found under the caption “Risk Factors” in our most recently filed Form 10-K) and elsewhere in this Form 10-Q, including, but not limited to, failure of our existing or new restaurants to achieve predicted results, changes in general economic and political conditions that affect consumer spending; changes in government legislation may increase our labor costs; our dependence on the financial performance of restaurants concentrated in certain geographic areas; and intense competition in the restaurant industry. Because we cannot guarantee future results, levels of activity, performance or achievements, undue reliance should not be placed on these forward-looking statements.

Overview

We own and operate two restaurant concepts in the Asian niche: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”).

Bistro

As of April 4, 2010, we owned and operated 197 full service Bistro restaurants that feature a blend of high quality, Chinese-inspired cuisine and attentive service in a high energy contemporary bistro setting. P.F. Chang’s was formed in early 1996 with the acquisition of the four original Bistro restaurants and the hiring of an experienced management team. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States. We own and operate all of our restaurants in the U.S. with the exception of two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a noncontrolling interest. Additionally, two international Bistro restaurants were opened in Mexico City and Kuwait City during fiscal 2009 under international development and licensing agreements.

We intend to open four new Bistro restaurants during fiscal 2010, none of which were open by the end of the first quarter of 2010. Our Bistro restaurants typically range in size from 6,000 to 7,500 square feet, and require an average total invested capital of approximately $3.5 million to $4.0 million per restaurant (net of estimated tenant incentives). This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $2.5 million to $3.0 million (net of estimated tenant incentives). Preopening expenses are expected to average approximately $350,000 to $400,000 per restaurant during fiscal 2010.

Pei Wei

As of April 4, 2010, we owned and operated 167 quick casual Pei Wei restaurants that serve freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly, attentive counter service and take-out flexibility. We opened our first Pei Wei restaurant in July 2000 in the Phoenix, Arizona area and have expanded the concept significantly since that time.

We intend to open three new Pei Wei restaurants during fiscal 2010, one of which was open by the end of the first quarter of 2010. Our Pei Wei restaurants are generally 2,800 to 3,400 square feet in size and require an average total invested capital of approximately $1.5 million per restaurant (net of estimated tenant incentives). This total capitalized investment cost includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $750,000 to $850,000 (net of estimated tenant incentives). Preopening expenses are expected to average approximately $140,000 to $160,000 per restaurant during fiscal 2010.

Global Brand Development

International

We are selectively pursuing international expansion of our Bistro restaurants. During fiscal 2009, we signed two development and licensing agreements with partners who will develop and operate Bistro restaurants in international markets. We also signed one development and licensing agreement with a new partner in early fiscal 2010. Our license agreements typically provide for us to receive an initial territory fee, store opening fees and ongoing royalty revenues based on a percentage of international restaurant sales. Our partners collectively expect to open four to six restaurants during fiscal 2010.

We continue to engage in discussions with additional potential partners regarding expansion of the Bistro into various international markets.

Retail

During 2009, we entered into an exclusive licensing agreement with Unilever to develop and launch a new premium line of frozen Asian-style entrées in the U.S., under the P.F. Chang’s brand. The new products will be available in retail outlets during the first half of fiscal 2010. We will receive ongoing royalty revenues based on a percentage of product sales. These percentages will escalate over the first three years of the agreement.

Other Ventures

During 2009, we entered into an agreement with FRC Balance LLC, d/b/a True Food Kitchen, to provide debt capital for the early-stage development of True Food Kitchen restaurants. The agreement provides for up to a $10.0 million loan facility to develop True Food Kitchen restaurants and can, under certain conditions, be converted by us into a majority equity position in True Food Kitchen. As of April 4, 2010, $0.3 million in borrowings was outstanding under the loan facility.

Critical Accounting Policies

Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our 2009 Annual Report on Form 10-K.

Results of Operations

The following tables set forth certain unaudited quarterly information for the three month periods ended April 4, 2010 and March 29, 2009, respectively. This quarterly information has been prepared on a basis consistent with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.

Results for the three month periods ended April 4, 2010 and March 29, 2009

Our consolidated operating results were as follows (dollars in thousands):

		Three Months Ended
						% of								% of								%
		April 4, 2010				Revenues				March 29, 2009				Revenues				Change				Change
Revenues		$	310,371				100.0	%		$	309,837				100.0	%		$	534				0.2	%
Costs and expenses:
Cost of sales			84,013				27.1	%			83,072				26.8	%			941				1.1	%
Labor			104,475				33.7	%			100,707				32.5	%			3,768				3.7	%
Operating			52,753				17.0	%			50,691				16.4	%			2,062				4.1	%
Occupancy			17,838				5.7	%			17,378				5.6	%			460				2.6	%
General and administrative			19,053				6.1	%			19,814				6.4	%			(761	)			(3.8	%)
Depreciation and amortization			19,001				6.1	%			18,496				6.0	%			505				2.7	%
Preopening expense			133				0.0	%			488				0.2	%			(355	)			(72.7	%)
Partner investment expense			11				0.0	%			(464	)			(0.1	%)			475				—
Total costs and expenses			297,277				95.8	%			290,182				93.7	%			7,095				2.4	%
Income from operations			13,094				4.2	%			19,655				6.3	%			(6,561	)			(33.4	%)
Interest and other income (expense), net			(415	)			(0.1	%)			(940	)			(0.3	%)			525				(55.9	%)
Income from continuing operations before taxes			12,679				4.1	%			18,715				6.0	%			(6,036	)			(32.3	%)
Provision for income taxes			(3,788	)			(1.2	%)			(4,953	)			(1.6	%)			1,165				(23.5	%)
Income from continuing operations, net of tax			8,891				2.9	%			13,762				4.4	%			(4,871	)			(35.4	%)
Income (loss) from discontinued operations, net of tax			6				0.0	%			(43	)			(0.0	%)			49				—
Net income			8,897				2.9	%			13,719				4.4	%			(4,822	)			(35.1	%)
Less: Net income attributable to noncontrolling interests			206				0.1	%			370				0.1	%			(164	)			(44.3	%)
Net income attributable to PFCB		$	8,691				2.8	%		$	13,349				4.3	%		$	(4,658	)			(34.9	%)

Certain percentage amounts may not sum due to rounding. Percentages over 100% are not displayed.

Selected operating statistics for the Bistro were as follows (dollars in thousands):

		Three Months Ended
						% of								% of								%
		April 4, 2010				Revenues				March 29, 2009				Revenues				Change				Change
Revenues		$	230,767				100.0	%		$	235,141				100.0	%		$	(4,374	)			(1.9	%)
Costs and expenses:
Cost of sales			62,711				27.2	%			62,963				26.8	%			(252	)			(0.4	%)
Labor			78,192				33.9	%			76,051				32.3	%			2,141				2.8	%
Operating			38,546				16.7	%			36,973				15.7	%			1,573				4.3	%
Occupancy			12,640				5.5	%			12,441				5.3	%			199				1.6	%
Depreciation and amortization			13,854				6.0	%			13,728				5.8	%			126				0.9	%
Preopening expense			26				0.0	%			294				0.1	%			(268	)			(91.2	%)
Partner investment expense			—				0.0	%			(148	)			-0.1	%			148				(100.0	%)
Net income attributable to noncontrolling interests			71				0.0	%			179				0.1	%			(108	)			(60.3	%)

Selected operating statistics for Pei Wei were as follows (dollars in thousands):

		Three Months Ended
						% of								% of								%
		April 4, 2010				Revenues				March 29, 2009				Revenues				Change				Change
Revenues		$	79,475				100.0	%		$	74,696				100.0	%		$	4,779				6.4	%
Costs and expenses:
Cost of sales			21,302				26.8	%			20,109				26.9	%			1,193				5.9	%
Labor			26,283				33.1	%			24,656				33.0	%			1,627				6.6	%
Operating			14,207				17.9	%			13,718				18.4	%			489				3.6	%
Occupancy			5,198				6.5	%			4,937				6.6	%			261				5.3	%
Depreciation and amortization			4,647				5.8	%			4,350				5.8	%			297				6.8	%
Preopening expense			107				0.1	%			194				0.3	%			(87	)			(44.8	%)
Partner investment expense			11				0.0	%			(316	)			(0.4	%)			327				—
Net income attributable to noncontrolling interests			135				0.2	%			191				0.3	%			(56	)			(29.3	%)

Percentages over 100% are not displayed.

Revenues

Our revenues are derived primarily from food and beverage sales. Each segment contributed as follows:

Bistro: The decrease in revenues was primarily attributable to a $13.3 million decline in revenues for stores that opened prior to the first quarter of 2009 driven by a decline in the average check and partially offset by a slight increase in overall guest traffic. The decrease was also partially offset by incremental new store revenues of $8.9 million, comprised of a full quarter of revenues from the eight new stores that opened during fiscal 2009.

Pei Wei: The increase in revenues was primarily attributable to incremental new store revenues of $3.2 million, comprised of a full quarter of revenues from the seven new stores that opened during fiscal 2009 and revenues generated by the one new Pei Wei restaurant that opened during 2010. The increase was also due to a $1.4 million increase in revenues for stores that opened prior to the first quarter of 2009 driven by an increase in overall guest traffic and a slight increase in the average check.

Costs and Expenses

Cost of Sales

Cost of sales is comprised of the cost of food and beverages. Each segment contributed as follows:

Bistro: Cost of sales as a percentage of revenues increased primarily due to the impact of greater sales discounts, including a new happy hour rollout, and, to a lesser extent, unfavorable product yields on lettuce due to first quarter of fiscal 2010 weather impacts. These increases were slightly offset by the net impact of product mix shifts and favorable beef and produce pricing.

Pei Wei: Cost of sales as a percentage of revenues decreased slightly primarily due to favorable beef and produce pricing as well as the net impact of product mix shifts, partially offset by the impact of higher costs related to limited time offer menu items.

Labor

Labor expenses consist of restaurant management salaries, hourly staff payroll costs, other payroll-related items and imputed partner bonus expense. Imputed partner bonus expense represents the portion of restaurant level operating results that is allocable to certain noncontrolling partners, but is presented as bonus expense for accounting purposes. Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues increased primarily due to higher hourly wage rates, the impact of greater sales discounts and additional hospitality labor costs (principally related to a new happy hour rollout) and higher state unemployment taxes. These increases were partially offset by improved operational efficiencies and lower management incentive costs.

Pei Wei: Labor expenses as a percentage of revenues increased slightly primarily due to higher culinary labor costs.

Operating

Operating expenses consist primarily of various restaurant-level costs such as repairs and maintenance, utilities and marketing, certain of which are variable and may fluctuate with revenues. Also, expenditures associated with marketing programs are discretionary in nature and the timing and amount of marketing spend will vary. Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues increased primarily due to increased marketing spend, the impact of decreased leverage on lower average weekly sales on the portion of operating costs that is fixed in nature, higher menu printing costs and higher repairs and maintenance expense. These increases were partially offset by lower utilities costs resulting from lower usage.

Pei Wei: Operating expenses as a percentage of revenues decreased primarily due to lower facilities costs and increased leverage on higher average weekly sales, partially offset by increased marketing spend.

Occupancy

Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property and general liability insurance and property taxes. Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues increased primarily due to the impact of decreased leverage on lower average weekly sales, partially offset by lower contingent rent expense resulting from lower sales.

Pei Wei: Occupancy costs as a percentage of revenues decreased slightly primarily due to the impact of increased leverage on higher average weekly sales.

General and Administrative

General and administrative expenses are comprised of costs associated with corporate and administrative functions that support restaurant development and operations and provide infrastructure to support future growth including, but not limited to, management and staff compensation, employee benefits, travel, legal and professional fees, technology and market research.

Consolidated general and administrative costs decreased primarily due to lower management incentive accruals, partially offset by higher share-based compensation expense principally resulting from our liability-classified awards.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation of fixed assets, gains and losses on disposal of assets and the amortization of intangible assets, software and non-transferable liquor license fees. Each segment contributed as follows:

Bistro: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during fiscal 2009. The increase, as a percentage of revenues, was driven by the impact of decreased leverage resulting from lower average weekly sales.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during fiscal 2009 and the first quarter of 2010. As a percentage of revenues, depreciation and amortization remained consistent with prior year primarily due to the impact of increased leverage resulting from higher average weekly sales offset by additional depreciation related to new digital menu boards installed during fiscal 2009.

Preopening Expense