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

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

Commission file number: 0-25123

P.F. Chang’s China Bistro, Inc.

(Exact name of registrant as specified in its charter)

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)

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 o

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 October 3, 2010, there were 22,965,415 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 October 3, 2010 and January 3, 2010			2
		Consolidated Statements of Income for the Three and Nine Months Ended October 3, 2010 and September 27, 2009			3
		Consolidated Statement of Equity for the Nine Months Ended October 3, 2010 and September 27, 2009			4
		Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2010 and September 27, 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			27
4.		Controls and Procedures			27
PART II OTHER INFORMATION
1.		Legal Proceedings			28
1A.		Risk Factors			28
2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
3.		Defaults Upon Senior Securities			28
4.		Removed and Reserved			28
5.		Other Information			28
6.		Exhibits			29
		Signatures			30
		Index to Exhibits			31
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.

CONSOLIDATED BALANCE SHEETS
(In thousands)

		October 3,				January 3,
		2010				2010
		(Unaudited)				(Note 1)
ASSETS
Current assets:
Cash and cash equivalents		$	47,161			$	63,499
Inventories			5,329				5,291
Other current assets			40,372				38,449
Total current assets			92,862				107,239
Property and equipment, net			469,838				497,928
Goodwill			6,819				6,819
Intangible assets, net			20,532				22,241
Other assets			22,753				17,923
Total assets		$	612,804			$	652,150
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	18,173			$	19,825
Construction payable			2,859				1,600
Accrued expenses			66,073				77,088
Unearned revenue			25,233				35,844
Current portion of long-term debt, including $976 due to related parties at January 3, 2010			63				41,236
Total current liabilities			112,401				175,593
Lease obligations			115,762				116,547
Long-term debt			1,184				1,212
Other liabilities			22,701				18,488
Total liabilities			252,048				311,840
Commitments and contingencies (Note 12)			—				—
Equity:
PFCB common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 22,965,415 shares and 22,911,054 shares issued and outstanding at October 3, 2010 and January 3, 2010, respectively			23				28
Additional paid-in capital			242,734				217,181
Treasury stock, at cost, 5,667,223 shares and 5,064,733 shares at October 3, 2010 and January 3, 2010, respectively			(172,217	)			(146,022	)
Accumulated other comprehensive loss			—				(294	)
Retained earnings			286,694				264,456
Total PFCB common stockholders’ equity			357,234				335,349
Noncontrolling interests			3,522				4,961
Total equity			360,756				340,310
Total liabilities and equity		$	612,804			$	652,150

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
		2010				2009				2010				2009
Revenues		$	308,410			$	290,329			$	931,619			$	901,526
Costs and expenses:
Cost of sales			78,380				76,364				244,110				239,093
Labor			101,620				95,713				308,390				294,531
Operating			52,058				50,883				156,408				150,383
Occupancy			18,504				17,566				54,951				52,347
General and administrative			23,226				20,408				62,044				60,745
Depreciation and amortization			19,318				19,055				57,654				56,126
Preopening expense			572				1,550				1,537				2,499
Partner investment expense			(147	)			18				(271	)			(537	)
Total costs and expenses			293,531				281,557				884,823				855,187
Income from operations			14,879				8,772				46,796				46,339
Interest and other income (expense), net			175				85				(905	)			(1,292	)
Income from continuing operations before taxes			15,054				8,857				45,891				45,047
Provision for income taxes			(4,417	)			(2,477	)			(13,349	)			(12,538	)
Income from continuing operations, net of tax			10,637				6,380				32,542				32,509
Income (loss) from discontinued operations, net of tax			—				(17	)			6				(534	)
Net income			10,637				6,363				32,548				31,975
Less: Net income attributable to noncontrolling interests			172				155				619				813
Net income attributable to PFCB		$	10,465			$	6,208			$	31,929			$	31,162
Basic income per share:
Income from continuing operations attributable to PFCB common stockholders		$	0.46			$	0.27			$	1.41			$	1.38
Income (loss) from discontinued operations, net of tax, attributable to PFCB common stockholders			0.00				0.00				0.00				(0.03	)
Net income attributable to PFCB common stockholders		$	0.46			$	0.27			$	1.41			$	1.35
Diluted income per share:
Income from continuing operations attributable to PFCB common stockholders		$	0.45			$	0.27			$	1.38			$	1.35
Income (loss) from discontinued operations, net of tax, attributable to PFCB common stockholders			0.00				0.00				0.00				(0.03	)
Net income attributable to PFCB common stockholders		$	0.45			$	0.27			$	1.38			$	1.32
Weighted average shares used in computation:
Basic			22,697				22,810				22,719				23,103
Diluted			23,070				23,285				23,150				23,535
Cash dividends declared per share		$	0.21			$	—			$	0.63			$	—
Amounts attributable to PFCB:
Income from continuing operations, net of tax		$	10,465			$	6,225			$	31,923			$	31,696
Income (loss) from discontinued operations, net of tax			—				(17	)			6				(534	)
Net income attributable to PFCB		$	10,465			$	6,208			$	31,929			$	31,162

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(Unaudited)

		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			155				1				1,365				—				—				—				—				1,366
Issuance of common stock under employee stock purchase plan			34				—				774				—				—				—				—				774
Shares withheld for taxes on restricted stock, net of forfeitures			(44	)			—				(633	)			—				—				—				—				(633	)
Purchases of treasury stock			(1,119	)			—				—				(29,174	)			—				—				—				(29,174	)
Share-based compensation expense (1)			—				—				5,787				—				—				—				—				5,787
Tax benefit from share-based compensation, net			—				—				1,077				—				—				—				—				1,077
Unrealized gain on derivatives			—				—				—				—				283				—				—				283
Distributions to noncontrolling interest partners			—				—				—				—				—				—				(1,475	)			(1,475	)
Contributions from noncontrolling interest partners			—				—				—				—				—				—				30				30
Purchases of noncontrolling interests			—				—				(1,030	)			—				—				—				(2,345	)			(3,375	)
Partner investment expense			—				—				—				—				—				—				(537	)			(537	)
Partner bonus expense, imputed			—				—				—				—				—				—				352				352
Net income			—				—				—				—				—				31,162				813				31,975
Balances, September 27, 2009			23,140			$	28			$	214,007			$	(135,546	)		$	(472	)		$	252,421			$	5,419			$	335,857
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			660				—				18,310				—				—				—				—				18,310
Issuance of common stock under employee stock purchase plan			56				—				2,185				—				—				—				—				2,185
Shares withheld for taxes on restricted stock, net of forfeitures			(59	)			—				(1,169	)			—				—				—				—				(1,169	)
Purchases of treasury stock			(603	)			(5	)			—				(26,195	)			—				—				—				(26,200	)
Share-based compensation expense (1)			—				—				4,049				—				—				—				—				4,049
Tax benefit from share-based compensation, net			—				—				2,440				—				—				—				—				2,440
Unrealized gain on derivatives			—				—				—				—				294				—				—				294
Distributions to noncontrolling interest partners			—				—				—				—				—				—				(1,013	)			(1,013	)
Contributions from noncontrolling interest partners			—				—				—				—				—				—				10				10
Purchases of noncontrolling interests			—				—				(277	)			—				—				—				(1,086	)			(1,363	)
Partner investment expense			—				—				—				—				—				—				(271	)			(271	)
Partner bonus expense, imputed			—				—				—				—				—				—				302				302
Cash dividends paid			—				—				15				—				—				(9,691	)			—				(9,676	)
Net income			—				—				—				—				—				31,929				619				32,548
Balances, October 3, 2010			22,965			$	23			$	242,734			$	(172,217	)		$	—			$	286,694			$	3,522			$	360,756

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Nine Months Ended
		October 3,				September 27,
		2010				2009
Operating Activities:
Net income		$	32,548			$	31,975
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			57,654				56,126
Share-based compensation			10,081				7,821
Net lease termination charges in discontinued operations			35				706
Partner investment expense			(271	)			(537	)
Partner bonus expense, imputed			302				352
Deferred income taxes			(3,991	)			3,330
Tax benefit from share-based compensation, net			(2,555	)			(1,077	)
Other			153				92
Changes in operating assets and liabilities:
Inventories			(38	)			(82	)
Other current assets			163				11,958
Other assets			(370	)			(1,031	)
Accounts payable			(1,652	)			1,902
Accrued expenses			(10,580	)			(7,419	)
Unearned revenue			(10,611	)			(7,106	)
Lease obligations			(637	)			(54	)
Other liabilities			2,175				1,186
Net cash provided by operating activities			72,406				98,142
Investing Activities:
Capital expenditures			(26,657	)			(38,859	)
Receivable under loan facility (Note 12)			(4,282	)			—
Capitalized interest			(60	)			(198	)
Net cash used in investing activities			(30,999	)			(39,057	)
Financing Activities:
Repayments of long-term debt			(41,236	)			(45,424	)
Proceeds from net share issuances			19,326				1,507
Purchases of treasury stock			(26,200	)			(29,174	)
Payments of cash dividends			(9,676	)			—
Distributions to noncontrolling interest partners			(1,013	)			(1,475	)
Purchases of noncontrolling interests			(1,363	)			(3,375	)
Payments of capital lease obligations			(148	)			(137	)
Contributions from noncontrolling interest partners			10				30
Tax benefit from share-based compensation, net			2,555				1,077
Net cash used in financing activities			(57,745	)			(76,971	)
Net decrease in cash and cash equivalents			(16,338	)			(17,886	)
Cash and cash equivalents at the beginning of the period			63,499				40,951
Cash and cash equivalents at the end of the period		$	47,161			$	23,065
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of refunds		$	24,684			$	10,798
Cash paid for interest		$	1,658			$	2,870

See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

As of October 3, 2010, P.F. Chang’s China Bistro, Inc. (the “Company” or “PFCB”) owned and operated 200 full service restaurants throughout the United States under the name P.F. Chang’s China Bistro (the “Bistro”). The Company also owned and operated 168 quick casual restaurants under the name Pei Wei Asian Diner (“Pei Wei”). Additionally, there are six 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 the Company owns a noncontrolling interest. Beginning fiscal 2010, the Company has also expanded its brand to retail products.

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 and nine month periods ended October 3, 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 and nine months ended October 3, 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								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
		2010				2009				2010				2009
Revenues		$	—			$	—			$	—			$	—
Income (loss) from discontinued operations before income tax benefit(1)			—				(28	)			10				(876	)
Income tax benefit (expense)			—				11				(4	)			342
Income (loss) from discontinued operations, net of tax		$	—			$	(17	)		$	6			$	(534	)

Lease termination agreements for seven of the ten locations have been executed as of October 3, 2010. A sublease agreement for one of the ten locations has been executed as of October 3, 2010. The Company continues to pursue lease termination agreements as well as potential sub-tenant agreements for the remaining closed locations.

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

		October 3,				September 27,
		2010				2009
Beginning balance		$	1,416			$	2,379
Cash payments			(310	)			(1,957	)
Charges			35				1,402
Ending balance		$	1,141			$	1,824

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 October 3, 2010, the Company has recognized and reported in discontinued operations a total of $4.1 million in lease termination charges for the closed Pei Wei locations. The lease termination accrual is included in other liabilities at October 3, 2010 and in accrued expenses at September 27, 2009 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 October 3, 2010 and September 27, 2009, 1.2 million and 1.7 million, respectively, of the Company’s options were excluded from the calculation due to their anti-dilutive effect. For the nine months ended October 3, 2010 and September 27, 2009, 1.2 million and 2.2 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect.

The Company began paying quarterly variable cash dividends to its shareholders during the second quarter of 2010. The Company’s restricted stock awards are considered participating securities as the awards include non-forfeitable rights to dividends with respect to unvested shares and, as such, must be included in the computation of earnings per share pursuant to the two-class method. Under the two-class method, a portion of net income is allocated to participating securities, and therefore is excluded from the calculation of earnings per share allocated to common shares. For the three and nine months ended October 3, 2010, the calculation of basic and diluted earnings per share pursuant to the two-class method resulted in an immaterial difference from the amounts displayed in the consolidated income statements.

4. Other Current Assets

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

		October 3,				January 3,
		2010				2010
Income taxes receivable		$	11,777			$	2,388
Current portion of deferred tax asset			10,567				11,036
Receivables			6,616				15,752
Prepaid rent			5,678				5,508
Other			5,734				3,765
Total other current assets		$	40,372			$	38,449

5. Other Assets

Other assets consist of the following (in thousands):

		October 3,				January 3,
		2010				2010
Liquor licenses, net		$	6,752			$	6,836
Software, net			5,698				5,459
Restoration Plan investments			4,475				3,454
Receivable under loan facility(1)			4,282				—
Deposits			989				1,411
Other assets, net			557				763
Total other assets		$	22,753			$	17,923

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

		October 3,				January 3,
		2010				2010
Accrued payroll		$	20,668			$	26,262
Accrued insurance			17,494				17,426
Sales and use tax payable			6,222				7,104
Property tax payable			3,503				3,638
Accrued rent			3,503				3,730
Derivative liability			—				471
Other accrued expenses			14,683				18,457
Total accrued expenses		$	66,073			$	77,088

7. Long-Term Debt

Credit Facility

The senior credit facility (“Credit Facility”) allows for borrowings of up to $75.0 million and expires on August 30, 2013. The Credit Facility 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 October 3, 2010 as the Company’s leverage ratio was 0.92:1 and the fixed charge coverage ratio was 2.39:1.

The Credit Facility is guaranteed by the Company’s material existing and future domestic subsidiaries. The Company fully repaid total outstanding borrowings of $40.0 million under the Credit Facility during the first half of fiscal 2010. As of October 3, 2010, the Company had $14.1 million committed for the issuance of letters of credit, which are required by insurance companies for the Company’s workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $60.9 million at October 3, 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 was 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 had 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 paid a fixed rate of 3.32% on the $40.0 million notional amount and received payments from its counterparty based on the 1-month LIBOR rate for a term which ended on May 20, 2010. Interest rate differentials paid or received under the swap agreement were recognized as adjustments to interest expense. The interest rate swap expired on May 20, 2010.

8. Other Liabilities

Other liabilities consist of the following (in thousands):

		October 3,				January 3,
		2010				2010
Performance units		$	5,952			$	2,402
Deferred income tax liability			5,267				9,436
Deferred compensation			4,873				3,653
Cash-settled awards			3,938				1,453
Other			2,671				1,544
Total other liabilities		$	22,701			$	18,488

9. Fair Value Measurements

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

						Quoted Prices in
						Active Markets
						for Identical				Significant Other				Significant
						Assets/Liabilities				Observable Inputs				Unobservable Inputs				Valuation
		October 3, 2010				(Level 1)				(Level 2)				(Level 3)				Technique
Money markets		$	41,683			$	—			$	41,683			$	—			market approach
Restoration Plan investments			4,475				—				4,475				—			market approach
Total		$	46,158			$	—			$	46,158			$	—

						Quoted Prices in
						Active Markets
						for Identical				Significant Other				Significant
						Assets/Liabilities				Observable Inputs				Unobservable Inputs				Valuation
		January 3, 2010				(Level 1)				(Level 2)				(Level 3)				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 in the consolidated balance sheets 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 October 3, 2010 and January 3, 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 was estimated using the net present value of a series of cash flows on both the fixed and floating legs of the swap and was reflected within accrued expenses in the consolidated balance sheets. These cash flows were based on yield curves which took 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 were 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 mitigated derivative credit risk by transacting with highly-rated counterparties. The interest rate swap expired on May 20, 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 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. During the second quarter of fiscal 2010, the Company issued RSUs to members of its board of directors in accordance with the non-employee director compensation plan.

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 total value of the performance units is subject to a maximum value of $12.50 per unit. The fair value of the performance units is remeasured at each reporting period until the awards are settled. At October 3, 2010 and January 3, 2010, the fair value per performance unit was $8.76 and $6.54, 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 October 3, 2010 and January 3, 2010, the recorded liability of the performance units, reflected in other liabilities in the consolidated balance sheets, was $6.0 million and $2.4 million, respectively. There were no performance unit awards granted during the nine months ended October 3, 2010.

Total cumulative expense recognized for the performance units from date of grant through October 3, 2010 was $6.0 million based on the current estimated fair value of $8.76 per unit. If the value of the performance units at settlement date is $12.50, the maximum value per unit, the Company would recognize total additional share-based compensation expense of $9.0 million over the remaining term of the award agreements ending January 1, 2012. The amount and timing of the recognition of additional expense will be dependent on the estimated fair value at each quarterly reporting date. Any increases in fair value may not occur ratably over the remaining five quarters of the award term; therefore, share-based compensation expense related to the performance units could vary significantly in future periods.

Cash-Settled Awards

The cash value of SARs will be based on the appreciation, if any, 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 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 October 3, 2010 and January 3, 2010, the recorded liability of cash-settled awards, reflected in other liabilities in the consolidated balance sheets, was $3.9 million and $1.5 million, respectively.

SARs were granted to a member of the Board of Directors who joined the Board during the first quarter of fiscal 2010. During the third quarter of fiscal 2010, the Company granted RCUs to eligible employees in conjunction with its annual long-term incentive award grant.

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

		Three and Nine Months Ended								Three and Nine Months Ended
		October 3, 2010								September 27, 2009
		RCUs				SARs				RCUs				SARs
Weighted average risk-free interest rate			0.5	%			0.9	%			1.6	%			1.9	%
Expected life of cash-settled awards (years)			2.5				3.9				3.5				4.0
Expected stock volatility			47.0	%			46.8	%			48.3	%			45.2	%
Expected dividend yield(1)			0.0	%			0.0	%			0.0	%			0.0	%

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

Share-Based Compensation Expense

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

		Three Months Ended								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
		2010				2009				2010				2009
Equity-classified awards:
Labor		$	23			$	68			$	100			$	259
General and administrative			1,342				1,607				3,949				5,528
Liability-classified awards:
General and administrative			3,176				1,088				6,133				2,034
Total share-based compensation(1)			4,541				2,763				10,182				7,821
Less: tax benefit			(1,348	)			(786	)			(3,002	)			(2,217	)
Total share-based compensation, net of tax		$	3,193			$	1,977			$	7,180			$	5,604

Unvested Share-Based Compensation Expense

At October 3, 2010, unvested share-based compensation for equity-classified awards, net of forfeitures, totaled $1.8 million for stock options and $2.2 million for restricted stock and RSUs. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.4 years for stock options and 1.0 years for restricted stock and RSUs.

At October 3, 2010, unvested share-based compensation for liability-classified awards totaled $4.6 million for performance units and $8.9 million for RCUs and SARs. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.2 years for performance units and 2.4 years for RCUs and SARs.

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, licensing fees related to Bistro restaurants operated by business partners pursuant to development and licensing agreements and licensing fees related to a premium line of frozen entrées operated under a licensing agreement are both 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 October 3, 2010:
Revenues		$	308,410			$	911			$	231,309			$	76,190
Segment profit			38,358				383				30,765				7,210
Capital expenditures			8,352				364				6,119				1,869
Depreciation and amortization			19,318				528				14,018				4,772
For the Three Months Ended September 27, 2009:
Revenues		$	290,329			$	—			$	217,093			$	73,236
Segment profit (loss)			30,593				(508	)			25,372				5,729
Capital expenditures			18,086				554				12,948				4,584
Depreciation and amortization			19,055				508				13,900				4,647
For the Nine Months Ended October 3, 2010:
Revenues		$	931,619			$	2,376			$	695,441			$	233,802
Segment profit			109,487				818				85,627				23,042
Capital expenditures			26,657				2,006				19,779				4,872
Depreciation and amortization			57,654				1,558				41,915				14,181
For the Nine Months Ended September 27, 2009:
Revenues		$	901,526			$	—			$	679,378			$	222,148
Segment profit (loss)			108,233				(1,415	)			89,711				19,937
Capital expenditures			38,859				2,517				27,738				8,604
Depreciation and amortization			56,126				1,415				41,274				13,437
As of October 3, 2010:
Total assets		$	612,804			$	22,000			$	491,386			$	99,418
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 they are generally not specifically identifiable to individual business units as these costs relate to support of both restaurant businesses, the extension of the Company’s brands into international markets and retail products. 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								For the Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
		2010				2009				2010				2009
Segment profit		$	38,358			$	30,593			$	109,487			$	108,233
Less: General and administrative			(23,226	)			(20,408	)			(62,044	)			(60,745	)
Less: Preopening expense			(572	)			(1,550	)			(1,537	)			(2,499	)
Less: Partner investment expense			147				(18	)			271				537
Less: Interest and other income (expense), net			175				85				(905	)			(1,292	)
Add: Net income attributable to noncontrolling interests			172				155				619				813
Income from continuing operations before taxes		$	15,054			$	8,857			$	45,891			$	45,047

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.

During 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 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 October 3, 2010, the Company had advanced $4.3 million under the loan facility to True Food Kitchen.

13. Subsequent Events

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. 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 October 27, 2010 the Company announced a cash dividend of $0.21 per share which will be paid November 22, 2010 to all shareholders of record at the close of business on November 8, 2010. Based on shares outstanding at October 3, 2010, the total dividend payment will approximate $4.8 million during the fourth quarter of fiscal 2010.

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”). Additionally, under Global Brand Development we have extended our brand to international markets and retail products that are operated under licensing agreements.

Bistro

As of October 3, 2010, we owned and operated 200 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 continental U.S.

We intend to open four new Bistro restaurants during fiscal 2010, three of which were open by the end of the third 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 typically average approximately $350,000 to $400,000 per restaurant.

Pei Wei

As of October 3, 2010, we owned and operated 168 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 opened two new Pei Wei restaurants during fiscal 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 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 typically average approximately $140,000 to $160,000 per restaurant.

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 two development and licensing agreement with new partners during the first three quarters of 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 five restaurants during fiscal 2010, four of which were open as of the end of the third quarter of 2010. As of October 3, 2010, six Bistro restaurants that are operated under international development and licensing agreements were open in Mexico and the Middle East.

We continue to engage in discussions with additional potential partners regarding expansion of the Company’s brands into various international markets and other venues.

Additionally, there are two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a noncontrolling interest.

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. During the second quarter of 2010, the new product line became available in numerous retail outlets. We receive ongoing royalty revenues based on a percentage of product sales, with such percentages escalating over the first three years of the agreement. We began recognizing retail royalty revenues during the second quarter of 2010.

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 a $10.0 million loan facility to develop True Food Kitchen restaurants that we can, under certain conditions, convert into a majority equity position in True Food Kitchen. As of October 3, 2010, we had advanced $4.3 million under the loan facility to True Food Kitchen.

Change in Partnership Structure — Pei Wei

We utilize a partnership philosophy to facilitate the development, leadership and operation of our Pei Wei restaurants. Historically, this philosophy was embodied in a traditional legal partnership structure, which included capital contributions from our partners in exchange for an ownership stake in the profits and losses of our restaurants. Effective April 2010 for new store openings, Pei Wei began employing a different structure to achieve the same goal. Our Market Partners and Regional Vice Presidents (still “partners” in the philosophical, but not legal sense) no longer have a direct ownership stake in the profits and losses of restaurants, but are instead eligible to receive monthly incentive payments based upon the profitability of the restaurants in their region, as well as participate in an incentive program that rewards improvements in the operating performance of the restaurants in their market or region. As a result of these changes, incentive payments made to the individuals participating in the new plan are classified as compensation rather than as net income attributable to noncontrolling interests. Accordingly, compensation expense is reflected in the consolidated income statement as general and administrative expense for these Pei Wei operators. Partner investment expense will no longer be recognized for new Pei Wei restaurant openings beginning April 2010 as a result of this change. The Bistro has been operating under this structure since the beginning of fiscal 2007.

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 other than an update to the following.

Share-Based Compensation

We account for share-based compensation based on fair value measurement guidance. We use the Black-Scholes option pricing model, which requires the input of subjective assumptions, for our options and cash-settled liability awards, with the exception of performance units. These assumptions include estimating 1) expected term, 2) common stock price volatility over the expected term and 3) the number of awards that will ultimately not vest (“expected forfeiture rate”). For performance units, fair value is calculated using a Monte Carlo simulation model which incorporates the historical performance, volatility and correlation of our stock price and the Russell 2000 Index.

The cash value of the performance units will be equal to the amount, if any, by which our final average stock price, as defined in the agreements, exceeds the strike price. The strike price will be adjusted, either up or down, based on the percentage change in the Russell 2000 Index during the performance period, as defined in the agreements, which approximates three years. The performance units were granted in February 2009, and since the grant date, the Russell 2000 Index has increased 47% while our stock has appreciated 150% over the same time period.

Total cumulative expense recognized for the performance units from date of grant through October 3, 2010 was $6.0 million based on the estimated fair value as of October 3, 2010 of $8.76 per unit. As of October 3, 2010 if the value of the performance units at settlement date is $12.50, the maximum value per unit, we would recognize total additional share-based compensation expense of $9.0 million over the remaining term of the award agreements ending January 1, 2012. The amount and timing of the recognition of additional expense will be dependent on the estimated fair value at each quarterly reporting date. Any increases in fair value may not occur ratably over the remaining five quarters of the award term; therefore, share-based compensation expense related to the performance units could vary significantly in future periods.

Additionally, we use assumptions to estimate the expected forfeiture rate related to restricted stock and cash-settled liability awards in determining the share-based compensation for these awards. Changes in these assumptions can materially affect fair value and our estimates of share-based compensation. Consequently, the related amount recognized in the consolidated statements of income could vary significantly in future periods.

Results of Operations

The following tables set forth certain unaudited quarterly information for the three and nine month periods ended October 3, 2010 and September 27, 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 October 3, 2010 and September 27, 2009

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

		Three Months Ended
		October 3,				% of				September 27,				% of								%
		2010				Revenues				2009				Revenues				Change				Change
Revenues		$	308,410				100.0	%		$	290,329				100.0	%		$	18,081				6.2	%
Costs and expenses:
Cost of sales			78,380				25.4	%			76,364				26.3	%			2,016				2.6	%
Labor			101,620				32.9	%			95,713				33.0	%			5,907				6.2	%
Operating			52,058				16.9	%			50,883				17.5	%			1,175				2.3	%
Occupancy			18,504				6.0	%			17,566				6.1	%			938				5.3	%
General and administrative			23,226				7.5	%			20,408				7.0	%			2,818				13.8	%
Depreciation and amortization			19,318				6.3	%			19,055				6.6	%			263				1.4	%
Preopening expense			572				0.2	%			1,550				0.5	%			(978	)			(63.1	)%
Partner investment expense			(147	)			0.0	%			18				0.0	%			(165	)			—
Total costs and expenses			293,531				95.2	%			281,557				97.0	%			11,974				4.3	%
Income from operations			14,879				4.8	%			8,772				3.0	%			6,107				69.6	%
Interest and other income (expense), net			175				0.1	%			85				0.0	%			90				—
Income from continuing operations before taxes			15,054				4.9	%			8,857				3.1	%			6,197				70.0	%
Provision for income taxes			(4,417	)			(1.4	)%			(2,477	)			(0.9	)%			(1,940	)			78.3	%
Income from continuing operations, net of tax			10,637				3.4	%			6,380				2.2	%			4,257				66.7	%
Loss from discontinued operations, net of tax			—				0.0	%			(17	)			(0.0	)%			17				100.0	%
Net income			10,637				3.4	%			6,363				2.2	%			4,274				67.2	%
Less: Net income attributable to noncontrolling interests			172				0.1	%			155				0.1	%			17				11.0	%
Net income attributable to PFCB		$	10,465				3.4	%		$	6,208				2.1	%		$	4,257				68.6	%