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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended October 2, 2012

OR

 

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

Commission File Number 001-33515

 

 

Einstein Noah Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3690261

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

555 Zang Street, Suite 300, Lakewood, Colorado 80228

(Address of principal executive offices)

(303) 568-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of November 8, 2012, there were 16,964,520 shares of the registrant’s Common Stock, par value of $0.001 per share outstanding.

 

 

 


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

TABLE OF CONTENTS

 

Part I. Financial Information   
Item 1.    Financial Statements      3   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      22   
Item 4.    Controls and Procedures      22   
Part II. Other Information   
Item 1.    Legal Proceedings      23   
Item 1A.    Risk Factors      23   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      23   
Item 6.    Exhibits      23   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(Unaudited)

 

     January 3,
2012
    October 2,
2012
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 8,652      $ 12,668   

Restricted cash

     889        924   

Accounts receivable, net of $73 and $108 of allowances

     7,774        9,813   

Inventories

     5,562        5,340   

Current deferred income tax assets, net

     9,013        8,214   

Prepaid expenses

     6,483        7,412   

Other current assets

     526        493   
  

 

 

   

 

 

 

Total current assets

     38,899        44,864   

Property, plant and equipment, net

     59,017        58,841   

Trademarks and other intangibles, net

     64,382        64,282   

Goodwill

     9,562        10,775   

Long-term deferred income tax assets, net

     29,803        25,939   

Other assets

     3,069        2,862   
  

 

 

   

 

 

 

Total assets

   $ 204,732      $ 207,563   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 6,591      $ 10,422   

Accrued expenses and other current liabilities

     24,611        23,765   

Current portion of long-term debt

     7,500        8,906   
  

 

 

   

 

 

 

Total current liabilities

     38,702        43,093   

Long-term debt

     66,700        59,669   

Other liabilities

     11,517        11,148   

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

     —          —     
  

 

 

   

 

 

 

Total liabilities

     116,919        113,910   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

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

     —          —     

Common stock, $.001 par value; 25,000,000 shares authorized; 16,830,831 and 16,964,166 shares issued and outstanding

     17        17   

Additional paid-in capital

     273,736        276,351   

Accumulated other comprehensive loss, net of income tax

     (48     (51

Accumulated deficit

     (185,892     (182,664
  

 

 

   

 

 

 

Total stockholders’ equity

     87,813        93,653   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 204,732      $ 207,563   
  

 

 

   

 

 

 

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

 

3


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

(Unaudited)

 

     13 weeks ended      39 weeks ended  
     September 27,
2011
    October 2,
2012
     September 27,
2011
    October 2,
2012
 

Revenues:

         

Company-owned restaurant sales

   $ 92,311      $ 95,418       $ 275,723      $ 285,264   

Manufacturing and commissary revenues

     8,766        7,507         25,541        23,196   

Franchise and license related revenues

     2,455        2,569         7,191        7,900   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     103,532        105,494         308,455        316,360   

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

         

Company-owned restaurant costs

         

Cost of goods sold

     27,693        26,676         81,971        80,048   

Labor costs

     27,329        27,906         81,514        82,982   

Rent and related expenses

     9,926        10,761         30,205        31,508   

Other operating costs

     10,145        10,649         29,485        30,152   

Marketing costs

     1,567        3,017         7,793        9,007   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total company-owned restaurant costs

     76,660        79,009         230,968        233,697   

Manufacturing and commissary costs

     8,004        5,738         22,452        18,215   

General and administrative expenses

     8,610        9,091         27,314        30,206   

Depreciation and amortization

     4,836        5,014         13,984        14,792   

Restructuring expenses

     121        —           334        480   

Strategic alternatives expense

     —          250         —          685   

Other operating expenses (income), net

     47        60         (776     319   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     98,278        99,162         294,276        298,394   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     5,254        6,332         14,179        17,966   

Interest expense, net

     772        744         2,507        2,322   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     4,482        5,588         11,672        15,644   

Provision for income taxes

     1,647        2,174         4,589        6,070   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 2,835      $ 3,414       $ 7,083      $ 9,574   

Unrealized losses on derivatives, net of tax

     (8     —           (79     (3
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 2,827      $ 3,414       $ 7,004      $ 9,571   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income per share:

         

Basic

   $ 0.17      $ 0.20       $ 0.43      $ 0.57   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.17      $ 0.20       $ 0.42      $ 0.56   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash dividend(s) declared per common share

   $ 0.125      $ 0.125       $ 0.250      $ 0.375   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of common shares outstanding:

         

Basic

     16,785,934        16,961,298         16,588,907        16,915,756   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     17,013,086        17,292,305         16,856,275        17,200,034   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

4


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     39 weeks ended  
     September 27,
2011
    October 2,
2012
 

OPERATING ACTIVITIES:

    

Net income

   $ 7,083      $ 9,574   

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

    

Depreciation and amortization

     13,984        14,792   

Deferred income tax expense

     3,598        4,663   

Stock-based compensation expense

     1,528        1,838   

(Gain) loss on disposal of assets

     (819     204   

Provision for losses on accounts receivable

     67        60   

Amortization of debt issuance and debt discount costs

     363        335   

Changes in operating assets and liabilities, net of acquisitions:

    

Restricted cash

     (336     (35

Accounts receivable

     (2,702     (2,099

Accounts payable and accrued expenses

     4,598        3,137   

Other assets and liabilities

     (1,935     (1,093
  

 

 

   

 

 

 

Net cash provided by operating activities

     25,429        31,376   

INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (12,756     (14,638

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

     1,191        332   

Acquisition of restaurant assets, net of cash acquired

     (390     (1,864
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,955     (16,170

FINANCING ACTIVITIES:

    

Payments under capital lease obligations

     (17     (16

Repayments on line of credit

     (8,000     —     

Repayments under the term loan

     (3,750     (5,625

Dividends paid

     (4,177     (6,326

Proceeds upon stock option exercises

     973        777   
  

 

 

   

 

 

 

Net cash used in financing activities

     (14,971     (11,190

Net (decrease) increase in cash and cash equivalents

     (1,497     4,016   

Cash and cash equivalents, beginning of period

     11,768        8,652   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 10,271      $ 12,668   
  

 

 

   

 

 

 

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

 

5


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

1. Basis of Presentation

The accompanying consolidated balance sheet as of January 3, 2012, which has been derived from audited financial statements, and the unaudited consolidated financial statements of Einstein Noah Restaurant Group, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished within this Form 10-Q reflects all adjustments (consisting only of normal recurring accruals and adjustments), which are, in the Company’s opinion, necessary to fairly state the interim operating results for the respective periods.

As of October 2, 2012, the Company operated, franchised or licensed various restaurant concepts under the brand names of Einstein Bros. Bagels (“Einstein Bros.”), Noah’s New York Bagels (“Noah’s”) and Manhattan Bagel Company (“Manhattan Bagel”). All Kettleman Bagel Company (“Kettleman Bagel”) restaurants have been rebranded as Einstein Bros.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended January 3, 2012. The Company believes that the disclosures are sufficient for interim financial reporting purposes. However, these operating results are not necessarily indicative of the results expected for the full fiscal year.

 

2. Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board issued guidance that simplifies how entities test indefinite-lived intangible assets and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of an intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the currently required quantitative fair value assessment. The guidance will become effective for the Company at the beginning of the first quarter of 2013, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

3. Business Combinations

The Company has acquired eight restaurants, in three separate transactions, from existing franchisees during fiscal 2012. The following table summarizes the estimated fair values as of the dates of these acquisitions (in thousands):

 

Cash and cash equivalents

   $ 7   

Inventories

     68   

Other current assets

     6   

Property, plant and equipment

     575   

Goodwill

     1,096   
  

 

 

 

Total purchase price

   $ 1,752   

Amounts withheld

     (94
  

 

 

 

Net cash paid at closing

   $ 1,658   

Payments of amounts withheld from current and prior acquisitions

     213   
  

 

 

 

Cash paid towards acquisitions

   $ 1,871   
  

 

 

 

 

6


Table of Contents

These acquired restaurants contributed $1.0 million and $2.3 million in net operating revenue for the thirteen and thirty-nine week periods ended October 2, 2012, respectively. The goodwill of $1.1 million arising from these acquisitions consists largely of the synergies and economies of scale expected from combining the acquired operations with the Company. All of the goodwill recognized is expected to be deductible for income tax purposes.

The Company withholds certain amounts at the closing of each transaction which could be applied to any outstanding liabilities that relate to the seller as of the closing date of the transaction. The Company will then pay the difference to the seller at an agreed upon date. For the thirty-nine weeks ended October 2, 2012, the Company has paid approximately $0.2 million of these amounts related to prior acquisitions. As of October 2, 2012, the Company has $0.3 million of withheld amounts that are recorded as a component of accrued expenses and other current liabilities on the accompanying consolidated balance sheet.

The Company treats acquisition related costs as expenses in the periods in which they are incurred. For the thirty-nine weeks ended October 2, 2012, the Company recorded $0.1 million in costs related to these acquisitions. These amounts are included in other operating expenses (income), net on the accompanying consolidated statement of income and comprehensive income.

During the second quarter of 2012, the Company adjusted its assignment of the aggregate Kettleman Bagel acquisition consideration for changes to its original estimates of the fair value of capital assets that were acquired. These changes are the result of additional information obtained since the filing of the Company’s Form 10-K for the fiscal year ended January 3, 2012. The adjustment to property, plant and equipment of $0.1 million did not result in a material change to previously reported amounts. Goodwill increased by $0.1 million as a result of the decrease in the fair value of the property, plant and equipment.

 

4. Inventories

Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories consist of the following:

 

     January 3,
2012
     October 2,
2012
 
     (in thousands)  

Finished goods

   $ 4,489       $ 4,571   

Raw materials

     1,073         769   
  

 

 

    

 

 

 

Total inventories

   $ 5,562       $ 5,340   
  

 

 

    

 

 

 

 

5. Stock-Based Compensation

As of October 2, 2012, the Company had three active stock-based compensation plans: the 2011 Omnibus Incentive Plan (the “Omnibus Plan”), the Equity Plan for Non-Employee Directors (the “Equity Plan”) and the Stock Appreciation Rights Plan (the “SARs Plan”). Outstanding awards previously issued under inactive or suspended plans will continue to vest and remain exercisable in accordance with the terms of the respective plans. As of October 2, 2012, there were 594,336 shares, 134,320 shares and 40,211 shares reserved for future issuance under the Omnibus Plan, Equity Plan and SARs Plan, respectively.

The Company’s stock-based compensation cost for each of the thirteen weeks ended September 27, 2011 and October 2, 2012 was approximately $0.6 million. Stock-based compensation cost for the thirty-nine weeks ended September 27, 2011 and October 2, 2012 was approximately $1.5 million and $1.8 million, respectively. These costs are included in general and administrative expenses. The Company did not grant any awards during the thirteen weeks ended October 2, 2012. Compensation cost for stock options and stock appreciation rights (“SARs”) granted is based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant, using the following assumptions:

 

7


Table of Contents
     13 weeks ended   39 weeks ended
     September 27,
2011
  September 27,
2011
  October 2,
2012
              

Expected life of options and SARs from date of grant

   3.25 - 6.0 years   2.75 - 6.0 years   2.75 - 6.0 years

Risk-free interest rate

   0.38%   0.38% - 2.61%   0.36% - 1.16%

Volatility

   43%   42% - 43%   41% - 42%

Assumed dividend yield

   3.59%   3.14% - 3.59%   2.83% - 3.36%

Stock Option and SARs Activity

Stock option and SARs transactions under all plans during the thirty-nine weeks ended October 2, 2012 were as follows:

 

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

Outstanding, January 3, 2012

     1,217,749      $ 12.17      

Granted

     299,228        14.55      

Exercised

     (112,302     8.85      

Forfeited/Cancelled

     (109,768     13.57      

Expired

     (15,701     13.33      
  

 

 

   

 

 

    

Outstanding, October 2, 2012

     1,279,206      $ 12.88         6.74   
  

 

 

   

 

 

    

 

 

 

Exercisable and vested, October 2, 2012

     708,968      $ 11.55         5.39   
  

 

 

   

 

 

    

 

 

 

The aggregate intrinsic value of stock options exercised during the thirty-nine weeks ended October 2, 2012 was $0.8 million.

As of October 2, 2012, the Company had approximately $1.1 million of total unrecognized compensation cost related to awards granted under its plans, which will be recognized over a weighted average period of 1.4 years.

Restricted Stock Units

Stock-based compensation cost for restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. Transactions during the thirty-nine weeks ended October 2, 2012 were as follows:

 

     Number
of
Shares
    Weighted Average
Grant Date
Fair Value
     Aggregate
Intrinsic  Value
 
         
         

Non-vested rights, January 3, 2012

     96,180      $ 15.55      

Granted

     86,028        14.63      

Vested

     (35,110     15.52      

Forfeited

     (13,066     14.94      
  

 

 

   

 

 

    

Non-vested rights, October 2, 2012

     134,032      $ 15.03       $ 2,397,832   
  

 

 

   

 

 

    

 

 

 

As of October 2, 2012, the Company has approximately $1.1 million of total unrecognized compensation cost related to RSUs, which will be recognized over a weighted average period of 1.4 years.

 

8


Table of Contents
6. Restructuring

In fiscal 2010 and 2011, the Company committed to plans to restructure the organization to align with its franchise growth model, to close all five of its commissaries and reduce associated headcount. All five commissaries have been closed. All restructuring costs are included in restructuring expenses on the consolidated statements of income and comprehensive income. It is the Company’s policy to record all restructuring costs within the corporate segment.

The Company has current liabilities of $0.1 million for its restructurings as of October 2, 2012. The following table summarizes the Company’s restructuring activities for the thirty-nine weeks ended October 2, 2012:

 

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

Balance, January 3, 2012

   $ 447      $ 130      $ 187      $ 764   

Additional expense incurred

     131        325        24        480   

Amounts paid

     (578     (377     (171     (1,126
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, October 2, 2012

   $ —        $ 78      $ 40      $ 118   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7. Income Taxes

The Company currently estimates its fiscal 2012 annual effective tax rate to be 38.8%, which compares to a fiscal 2011 annual effective tax rate of 37.6%. This increase relates primarily to the elimination of certain federal employment tax credits that the Company received in fiscal 2011 that were not reenacted by the U.S. Congress.

 

8. Net Income Per Share

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

 

     13 weeks ended      39 weeks ended  
     September  27,
2011
     October  2,
2012
     September  27,
2011
     October  2,
2012
 
             

Basic weighted average shares outstanding

     16,785,934         16,961,298         16,588,907         16,915,756   

Dilutive effect of stock options, SARs and RSUs

     227,152         331,007         267,368         284,278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     17,013,086         17,292,305         16,856,275         17,200,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive stock options, SARs and RSUs

     467,400         303,254         381,273         613,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share is computed by dividing the net income available to common stockholders for the period by the weighted average number of shares of common stock and potential common stock equivalents outstanding during the period using the treasury stock method. Potential common stock equivalents include incremental shares of common stock issuable upon the exercise of stock options, SARs and RSUs. Potential common stock equivalents are excluded from the computation of diluted net income per share when their effect is anti-dilutive.

 

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9. Dividends

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

 

Date Declared

  

Record Date

   Dividend
Per Share
     Total Amount      Payment Date
                 (in thousands)       

2011:

           

May 3, 2011

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

August 3, 2011

   September 1, 2011    $ 0.125       $ 2,096       October 15, 2011

2012:

           

January 18, 2012

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

May 1, 2012

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

July 30, 2012

   September 1, 2012    $ 0.125       $ 2,120       October 15, 2012

The estimate of the amount to be paid on the October 15, 2012 payment date is included in Accrued Expenses and Other Current Liabilities on the consolidated balance sheet as of October 2, 2012.

 

10. Commitments, Contingencies and Other Developments

Letters of Credit and Line of Credit

As of October 2, 2012, the Company had $6.8 million in letters of credit outstanding which reduce its availability under the revolving facility. The letters of credit expire on various dates, typically renew annually and are payable upon demand in the event that the Company fails to pay the underlying obligations.

As of October 2, 2012, the Company had a balance of $6.7 million on its $50.0 million revolving facility. The availability under the revolving facility was $36.5 million as of October 2, 2012.

Strategic Alternatives

The Company has retained Piper Jaffray as a financial advisor to explore strategic alternatives for the Company, including a possible business combination, sale or recapitalization of the Company. The possible recapitalization of the Company may include a new credit facility. The Company records expenses towards this review as Strategic Alternatives Expense on the consolidated statements of income and comprehensive income.

Litigation

The Company is subject to claims and legal actions in the ordinary course of business, including claims by or against its franchisees, licensees and employees or former employees and others. The Company does not believe any currently pending or threatened matter would have a material adverse effect on its business, results of operations or financial condition.

 

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11. Supplemental Cash Flow Information

 

     39 weeks ended  
     September 27,
2011
    October 2,
2012
 
     (in thousands)  

Cash paid during the year to date period ended:

    

Interest related to:

    

Term loans and credit facility

   $ 1,435      $ 1,629   

Other

     418        432   

Income taxes

   $ 424      $ 646   

Non-cash investing activities:

    

Non-cash purchase of equipment through capital leasing

   $ 17      $ 9   

Change in accrued expenses for purchases of property and equipment

   $ (733   $ (77

 

12. Subsequent Events

On November 1, 2012, the Company’s Board of Directors declared a cash dividend on the Company’s common stock in the amount of $0.125 per share, payable on January 15, 2013 to shareholders of record on December 3, 2012.

 

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

Cautionary Note Regarding Forward-Looking Statements

We wish to caution our readers that this Quarterly Report on Form 10-Q and certain information incorporated herein by reference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances, the strategic alternatives review that has been undertaken by the company and cash generated from operating and financing activities for our future liquidity and capital resource needs, growth of franchise and licensing, the impact on our business as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) and the rules promulgated thereunder, future litigation and other matters, and are generally accompanied by words such as: “believes,” “anticipates,” “plans,” “intends,” “estimates,” “predicts,” “targets,” “expects,” “contemplates” and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the fiscal year ended January 3, 2012 as updated in subsequent quarterly reports on Form 10-Q, including Item 1A of Part II of this report. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.

General

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Form 10-K for the fiscal year ended January 3, 2012 (the “2011 Form 10-K”).

We have a 52/53-week fiscal year ending on the Tuesday closest to December 31. The third quarters in fiscal years 2011 and 2012 ended on September 27, 2011 and October 2, 2012, respectively. Each quarter contained thirteen weeks and each year to date period contained thirty-nine weeks. Our current fiscal year ends on January 1, 2013 and consists of 52 weeks.

As used in this report, the terms “company,” “we,” “our,” or “us” refer to Einstein Noah Restaurant Group, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. The terms “fiscal quarter ended,” “fiscal quarter,” or “quarter ended” refer to the entire fiscal quarter, unless the context otherwise indicates.

Use of Non-GAAP Financial Information

In addition to the results reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”) included in this filing, we have provided certain non-GAAP financial information, including adjusted earnings before interest, taxes, depreciation and amortization, restructuring expenses, strategic alternative expenses, write-off of debt issuance costs and other operating expenses/income (“Adjusted EBITDA”) and “Free Cash Flow”, which we define as net cash provided by operating activities less net cash used in investing activities. Management believes that the presentation of this non-GAAP financial information provides useful information to investors because this information may allow investors to better evaluate our ongoing business performance and certain components of our results. In addition, our Board of Directors (the “Board”) uses this non-GAAP financial information to evaluate the performance of the company and its management team. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. Not all

 

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of the aforementioned items defining Adjusted EBITDA occur in each reporting period, but have been included in our definition based on historical activity. Our definitions of these non-GAAP disclosures may differ from how others in our industry may define them. We have reconciled the non-GAAP financial information to the nearest GAAP measure on pages 16 and 21.

We include in this report information on system-wide comparable store sales percentages. System-wide comparable store sales percentages refer to changes in sales of our restaurants, whether operated by the company or by franchisees and licensees, in operation for six fiscal quarters including those restaurants temporarily closed for an immaterial amount of time. Some of the reasons restaurants may be temporarily closed include remodeling, road construction, rebuilding related to site-specific catastrophes and natural disasters. Franchise and license comparable store sales percentages are based on sales of franchised and licensed restaurants, as reported by franchisees and licensees. Management reviews the increase or decrease in comparable sales to assess business trends. Comparable store sales exclude permanently closed locations. When we intend to relocate a restaurant, we consider that restaurant to be temporarily closed for up to twelve months after it ceases operations. If a suitable relocation site has not been identified by the end of twelve months, we consider the restaurant to be permanently closed. Until that time, we include the restaurant in our open store count, but exclude its sales from our comparable store sales. As of October 2, 2012 there are five stores that we intend to relocate, and are thus considered to be temporarily closed.

We use company-owned comparable store sales, franchise and license sales and the resulting system-wide sales information internally in connection with restaurant development decisions, planning, and budgeting analyses. We believe system-wide comparable store sales information is useful in assessing consumer acceptance of our brands; facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income; helps us evaluate the effectiveness of our advertising and marketing initiatives; and provides information that is relevant for comparison within the industry.

Comparable store sales percentages are non-GAAP financial measures, which should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP, and may not be equivalent to comparable store sales as defined or used by other companies. We do not record franchise or license restaurant sales as revenues. However, royalty revenues are calculated based on a percentage of franchise and license restaurant sales, as reported by the franchisees or licensees.

Overview

We are the largest owner/operator, franchisor and licensor of bagel bakery café restaurants in the United States. As a leading fast-casual restaurant chain, our restaurants specialize in high-quality foods for breakfast, lunch and afternoon snacks in a bakery-café atmosphere with a neighborhood emphasis. Our product offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels, breads or wraps, soups and salads, assorted pastries, premium coffees and an assortment of snacks.

In the context of our key strategies to drive comparable store sales growth, to enhance corporate margins and to accelerate unit growth, we evaluated our financial performance for the third quarter and year to date 2012 by considering the following key factors:

 

   

Comparable store sales – Our system-wide comparable store sales have been positive in each of the last six quarters with the third quarter of 2012 delivering +0.2% with positive comparable store sales at our restaurants on a company-owned basis over the last five quarters. Positive comparable store sales has been driven by growth in average check, led by our strength in catering sales, favorable menu mix and a slight reduction in customer discounts.

 

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Table of Contents
     Q2     Q3     Q4     Q1     Q2     Q3  
     2011     2011     2011     2012     2012     2012  

System-wide comparable sales

     +0.2     +1.0     +1.2     +1.1     +1.3     +0.2

Company-owned comparable sales

     -0.3     +0.7     +0.8     +1.1     +1.2     +0.2

Our catering business, on a comparable store basis, grew by approximately 21.9% and 20.6% on a quarterly and year to date basis, respectively, with our focus on our online ordering system as well as search engine/online marketing. Our catering business now makes up over 7% of our company-owned restaurant revenues. We have also seen strong growth in our specialty beverage line of business. Coffee and specialty beverage sales now represent approximately 10% of our menu mix and continue to grow.

 

   

Manufacturing and Commissaries – Revenues for our manufacturing business and commissaries declined by 14.4% reflecting our commissary closures in the first quarter of 2012, while our margin as a percentage of manufacturing and commissary revenue improved to 23.6% from 8.7%. We completed the closure of all five of our commissaries by the end of the first quarter 2012 and have benefited from the resultant efficiencies in our supply chain.

 

   

Franchise and License Revenue – Total franchise and license related revenues increased by 4.6% as a result of the royalty streams from 20 net additional units opened since September 27, 2011, together with favorable comparable store sales.

 

   

Margin improvement – Our margin improved in our company-owned restaurants as a percentage of company owned restaurant sales by 20 basis points for the third quarter 2012 when compared to the third quarter 2011, which we primarily attribute to favorable cost initiatives, lower food costs and relatively flat labor costs and other operating costs more than offsetting an increase of $1.5 million in marketing investment.

 

   

Unit development – As of October 3, 2012, we owned/operated, franchised and licensed 797 restaurants. We have added 35 restaurants and closed 11 restaurants during the first three quarters of 2012.

2012 Outlook

Our execution plan to grow comparable store sales includes:

 

   

Build traffic by leveraging our strengths in:

 

   

Breakfast (bagels & sandwiches)

 

   

Smart Choice menu options

 

   

Specialty beverages and coffee

 

   

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

 

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Table of Contents
   

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

 

   

Grass roots local brand activation

 

   

Targeted digital/outdoor media

 

   

Targeted outdoor billboard advertising

We expect that our catering channel will continue to benefit from our online ordering system, an outsourced and expanded call center, focus on online and digital marketing, and an optimized menu.

Our approach to enhancing corporate margins will extend and build on the initiatives that we have already started, namely, managing the sourcing of our commodities, streamlining our network of product distribution centers, utilizing point of sale technology to drive sustainable cost advantage, and improving restaurant level operating efficiency through targeted initiatives around product costs and labor.

Our acceleration of unit growth will continue to focus on franchising of our Einstein Bros. concept, asset light unit economics and continued expansion into new key licensing channels. Our unit growth plan for 2012 considers our long-term annual growth objective of +10%, or 66 to 72 system-wide openings for 2012. This includes the openings of 14 to 15 company-owned restaurants, 12 to 14 franchised restaurants and 40 to 43 licensed restaurants. We view refranchising opportunistically as a strategy to attract high quality franchisees that will support our accelerated growth initiatives.

We expect to spend between $24 million and $26 million in capital expenditures in 2012 which includes the opening of company-owned restaurants and the relocation of company-owned restaurants, along with the continued roll-out of our new point of sale (“POS”) system. We also intend to deploy our capital into areas such as installing drive-thru lanes and adding new exterior signage.

We have a robust pipeline of existing franchise development agreements and new license locations. We will continue to host discovery days for potential franchisees as well as to expand our license footprint.

Results of Operations for the Quarter and Year to Date Periods ended September 27, 2011 and October 2, 2012

Financial Highlights for the Third Quarter 2012 as compared to the Third Quarter 2011

 

   

Total revenues increased $2.0 million, or 1.9%, driven by an increase in company-owned restaurant revenue of $3.1 million, or 3.4%, offset by declines in manufacturing revenue due to the closure of our commissaries.

 

   

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

 

   

Net income increased $0.6 million, or 20.4%, and Adjusted EBITDA increased $1.4 million, or 13.6%, for the third quarter of 2012.

 

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Table of Contents
   

Earnings per share (“EPS”) increased to $0.20 per share on a dilutive basis for the third quarter of 2012 compared to $0.17 per share on a dilutive basis for the third quarter of 2011. For the third quarter 2012, charges incurred towards the exploration of strategic alternatives decreased EPS by $0.01 per diluted share.

Consolidated Results

 

     13 weeks ended     39 weeks ended  
     (in thousands)      Increase/
(Decrease)
    (in thousands)      Increase/
(Decrease)
 
     September 27,
2011
     October 2,
2012
     2012
vs. 2011
    September 27,
2011
    October 2,
2012
     2012
vs. 2011
 

Revenues

   $ 103,532       $ 105,494         1.9   $ 308,455      $ 316,360         2.6

Cost of sales

     84,664         84,747         0.1     253,420        251,912         (0.6 %) 

Operating expenses

     13,614         14,415         5.9     40,856        46,482         13.8
  

 

 

    

 

 

      

 

 

   

 

 

    

Income from operations

     5,254         6,332         20.5     14,179        17,966         26.7

Interest expense, net

     772         744         (3.6 %)      2,507        2,322         (7.4 %) 

Income before income taxes

     4,482         5,588         24.7     11,672        15,644         34.0

Total provision for income taxes

     1,647         2,174         32.0     4,589        6,070         32.3
  

 

 

    

 

 

      

 

 

   

 

 

    

Net income

   $ 2,835       $ 3,414         20.4   $ 7,083      $ 9,574         35.2

Adjustments to net income:

               

Interest expense, net

     772         744         (3.6 %)      2,507        2,322         (7.4 %) 

Provision for income taxes

     1,647         2,174         32.0     4,589        6,070         32.3

Depreciation and amortization

     4,836         5,014         3.7     13,984        14,792         5.8

Restructuring expenses

     121         —           *     334        480         43.7

Strategic alternatives expenses

     —           250         *     —          685         *

Other operating expenses (income), net

     47         60         27.7     (776     319         (141.1 %) 
  

 

 

    

 

 

      

 

 

   

 

 

    

Adjusted EBITDA

   $ 10,258       $ 11,656         13.6   $ 27,721      $ 34,242         23.5
  

 

 

    

 

 

      

 

 

   

 

 

    

 

** Not meaningful

During the third quarter of 2012, we maintained our focus on enhancing corporate margins by increasing company revenues while managing store level margins by focusing on food costs, and implementing cost saving initiatives.

System-wide comparable store sales were +0.2% and +0.9% for the third quarter and year to date periods ended October 2, 2012, respectively, driven by strong check growth of +4.1% for the quarter and +4.3% on a year to date basis, reflecting price and product mix favorability.

Net income increased by $0.6 million for the third quarter of 2012 from the third quarter of 2011. We attribute this to increased revenue resulting from positive same store sales, increased unit count and cost leveraging.

 

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Table of Contents

Company-Owned Restaurant Operations

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of company-owned
restaurant sales
 
     September 27,
2011
    October 2,
2012
    2012
vs. 2011
    September 27,
2011
    October 2,
2012
 

Company-owned restaurant sales

   $ 92,311      $ 95,418        3.4    

Percent of total revenues

     89.2     90.5      

Cost of sales (exclusive of depreciation and amortization):

          

Cost of goods sold

   $ 27,693      $ 26,676        (3.7 %)      30.0     27.9

Labor costs

     27,329        27,906        2.1     29.6     29.2

Rent and related expenses

     9,926        10,761        8.4     10.7     11.3

Other operating costs

     10,145        10,649        5.0     11.0     11.2

Marketing costs

     1,567        3,017        92.5     1.7     3.2
  

 

 

   

 

 

     

 

 

   

 

 

 

Total company-owned restaurant costs

   $ 76,660      $ 79,009        3.1     83.0     82.8
  

 

 

   

 

 

     

 

 

   

 

 

 

Total company-owned restaurant gross margin

   $ 15,651      $ 16,409        4.8     17.0     17.2
  

 

 

   

 

 

     

 

 

   

 

 

 

 

     39 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of company-owned
restaurant sales
 
     September 27,
2011
    October 2,
2012
    2012
vs. 2011
    September 27,
2011
    October 2,
2012
 

Company-owned restaurant sales

   $ 275,723      $ 285,264        3.5    

Percent of total revenues

     89.4     90.2      

Cost of sales (exclusive of depreciation and amortization):

          

Cost of goods sold

   $ 81,971      $ 80,048        (2.3 %)      29.7     28.1

Labor costs

     81,514        82,982        1.8     29.6     29.1

Rent and related expenses

     30,205        31,508        4.3     11.0     11.0

Other operating costs

     29,485        30,152        2.3     10.7     10.6

Marketing costs

     7,793        9,007        15.6     2.8     3.1
  

 

 

   

 

 

     

 

 

   

 

 

 

Total company-owned restaurant costs

   $ 230,968      $ 233,697        1.2     83.8     81.9
  

 

 

   

 

 

     

 

 

   

 

 

 

Total company-owned restaurant gross margin

   $ 44,755      $ 51,567        15.2     16.2     18.1
  

 

 

   

 

 

     

 

 

   

 

 

 

Company-owned restaurant sales for the third quarter and year to date 2012 increased 3.4% and 3.5%, respectively, which is attributable to unit growth and favorable company-owned comparable store sales of +0.2% and +0.8% for the third quarter and year to date 2012, respectively. Catering sales comprised approximately 7.8% of our comparable company-owned restaurant sales for the third quarter of 2012 and 7.5% for year to date 2012, reflecting year over year increases in comparable sales of 21.9% and 20.6%, respectively. On a year to date basis, coffee sales remain strong and now represent approximately 10% of our comparable company-owned restaurant sales. We have also added a net of nineteen new company-owned stores since September 27, 2011, including a net of nine stores acquired from or sold to franchisees.

As a percentage of company-owned restaurant sales, we saw a decrease in our food costs to 27.9% in the third quarter 2012 from 30.0% in the third quarter 2011. This 210 basis point favorability includes savings from our initiatives (-130 basis points), the impact of our price increases (-80 basis points) and the impact of inflation in our commodity costs (-50 points), partially offset by a shift in product mix (+50 basis points).

On a year to date basis, we saw a decrease in our food costs from 29.7% in 2011 to 28.1% in 2012. This 160 basis point improvement includes savings from our initiatives (-130 basis points) and the impact of our price increases (-90 basis points), partially offset by the impact of inflation in our commodity costs (+50 basis points) and a shift in product mix (+10 basis points).

We have secured protection for all of our commodity needs for the remainder of 2012. We have secured protection for approximately 33% of our wheat needs and 96% of our coffee needs for 2013.

As a percentage of company-owned restaurant sales, labor costs decreased in the second quarter due largely to a reduction in group insurance and workers compensation claims. On a year to date basis, overall labor costs (as a percentage of company-owned restaurant sales) have declined due to the leveraged impact of our revenue increases.

 

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Table of Contents

We invested $1.5 million more in marketing during the third quarter of 2012 than we did for the third quarter of 2011, primarily resulting from testing in two of our markets, continued local store (grass roots) marketing and grand opening support. On a year to date basis, marketing expenses have increased to $9.0 million in 2012 from $7.8 million in 2011.

Manufacturing and Commissary Operations

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of manufacturing
and commissary revenues
 
     September 27,
2011
    October 2,
2012
    2012
vs. 2011
    September 27,
2011
    October 2,
2012
 

Manufacturing and commissary revenues

   $ 8,766      $ 7,507        (14.4 %)     

Percent of total revenues

     8.4     7.1      

Manufacturing and commissary costs

   $ 8,004      $ 5,738        (28.3 %)      91.3     76.4
  

 

 

   

 

 

       

Total manufacturing and commissary gross margin

   $ 762      $ 1,769        132.2     8.7     23.6
  

 

 

   

 

 

       

 

     39 weeks ended  
     (in thousands)     Increase/
(Decrease)
    Percentage of manufacturing
and commissary revenues
 
     September 27,
2011
    October 2,
2012
    2012
vs. 2011
    September 27,
2011
    October 2,
2012
 

Manufacturing and commissary revenues

   $ 25,541      $ 23,196        (9.2 %)     

Percent of total revenues

     8.3     7.3      

Manufacturing and commissary costs

   $ 22,452      $ 18,215        (18.9 %)      87.9     78.5
  

 

 

   

 

 

       

Total manufacturing and commissary gross margin

   $ 3,089      $ 4,981        61.2     12.1     21.5
  

 

 

   

 

 

       

We closed all five of our commissaries by the end of the first quarter 2012. Sales that were previously made to our franchisees and licensees by the commissaries are now being handled directly through our distributors.

Manufacturing and commissary revenues for the third quarter and year to date 2012 were down 14.4% and 9.2%, respectively, when compared to the same 2011 periods, primarily due to the closure of the commissaries. However, cost savings resulting from these closures had a significant positive impact on our margins. We expect the closing of these facilities will result in annual cost savings of approximately $1.5 million.

Franchise and License Operations

 

     13 weeks ended  
     (in thousands)     Increase/
(Decrease)
 
     September 27,
2011
    October 2,
2012
    2012
vs . 2011
 

Franchise and license related revenues

   $ 2,455      $ 2,569        4.6

Percent of total revenues

     2.4     2.4  

 

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Table of Contents
     39 weeks ended  
           Increase/  
     (in thousands)     (Decrease)  
     September 27,
2011
    October 2,
2012
    2012
vs . 2011
 

Franchise and license related revenues

   $ 7,191      $ 7,900        9.9

Percent of total revenues

     2.3     2.5  

Number of franchise and license restaurants

     327        347     

Overall, franchise and license revenue was driven by continued unit development which netted an additional 20 licensed locations since September 27, 2011. Franchise and license comparable store sales were +0.1% and +1.0% for the thirteen and thirty-nine weeks ended October 2, 2012, respectively.

Corporate

 

     13 weeks ended  
     (in thousands)      Increase/
(Decrease)
    Percentage of
total revenues
 
     September 27,
2011
     October 2,
2012
     2012
vs. 2011
    September 27,
2011
    October 2,
2012
 

General and administrative expenses

   $ 8,610       $ 9,091         5.6     8.3     8.6

Depreciation and amortization

     4,836         5,014         3.7     4.7     4.8

Restructuring expenses

     121         —           *     0.1     0.0

Strategic alternatives expense

     —           250         *     0.0     0.2

Other operating expenses, net

     47         60         27.7     0.0     0.1
  

 

 

    

 

 

        

Total operating expenses

   $ 13,614       $ 14,415         5.9     13.1     13.7

Interest expense, net

     772         744         (3.6 %)      0.8     0.7

Provision for income taxes

     1,647         2,174         32.0     1.6     2.1

 

** Not meaningful

 

     39 weeks ended  
     (in thousands)      Increase/
(Decrease)
    Percentage of
total revenues
 
     September 27,
2011
    October 2,
2012
     2012
vs. 2011
    September 27,
2011
    October 2,
2012
 

General and administrative expenses

   $ 27,314      $ 30,206         10.6     8.9     9.6

Depreciation and amortization

     13,984        14,792         5.8     4.5     4.7

Restructuring expenses

     334        480         43.7     0.1     0.2

Strategic alternatives expense

     —          685         *     0.0     0.2

Other operating (income) expenses, net

     (776     319         (141.1 %)      (0.3 %)      0.1
  

 

 

   

 

 

        

Total operating expenses

   $ 40,856      $ 46,482         13.8     13.2     14.8

Interest expense, net

     2,507        2,322         (7.4 %)      0.8     0.7

Provision for income taxes

     4,589        6,070         32.3     1.5     1.9

 

** Not meaningful

Our total general and administrative expenses increased in the third quarter of 2012 primarily due to increases in variable incentive compensation plans. On a year to date basis, general and administrative expenses have increased primarily due to increases in variable incentive compensation plans, stock based compensation and fees related to potential site development. We expect general and administrative expenses for the fourth quarter of fiscal 2012 to be in the range of $10 million to $11 million.

Depreciation and amortization expenses increased $0.2 million and $0.8 million for the third quarter and year to date 2012, respectively, when compared to the same periods in 2011. The increase is due to approximately $20.1 million in capital asset expenditures since the third quarter of 2011. These additions include the installation of new coffee machines, the implementation of new POS systems and the replacement of older equipment. Based on our current planned purchases of capital assets, our existing base of assets, and our projections for new purchases of fixed assets, we believe depreciation expense for the fourth quarter of fiscal 2012 will be in the range of $5.0 million to $5.5 million.

We incurred an additional $0.5 million of restructuring expenses in 2012 related to our plan to close our five commissaries. All of our commissaries were closed by the end of the first quarter 2012. Restructuring expenses in 2011 included charges related to the initiation of our plan to close our commissaries and the completion of our plan to restructure the organization to align with our franchise and license model.

 

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We have retained Piper Jaffray as a financial advisor to explore strategic alternatives for the company, including a possible business combination, sale or recapitalization of the company. The possible recapitalization of the company may include a new credit facility. For the third quarter of 2012, we have recorded $0.3 million in expenses related to this effort. We have incurred $0.7 million towards this effort on a year to date basis.

During the first thirty-nine weeks of 2011, we recognized gains on the sale of two company-owned restaurants and on insurance proceeds received from a restaurant fire. During the first thirty-nine weeks of 2012, we incurred costs associated with our acquisitions of seven existing Manhattan Bagel franchises in Buffalo, NY and one Einstein Bros. franchise in Scottsdale, AZ, in addition to losses on the retirement of fixed assets. These items are recorded as components of other operating (income) expenses, net on our consolidated statements of income and consolidated income.

Interest expense, net has decreased due to our quarterly scheduled debt payments. Our average debt balance decreased from $80.6 million for the first nine months of 2011 compared to $72.2 million for the first nine months of 2012. Our weighted average interest rate for the thirty-nine weeks ended October 2, 2012 was 3.3% compared to 3.1% for the thirty-nine weeks ended September 27, 2011.

We currently estimate our fiscal 2012 annual effective tax rate to be 38.8%, which compares to a fiscal 2011 annual effective tax rate of 37.6%. This increase relates primarily to the elimination of certain federal employment tax credits that we received in 2011 that were not reenacted by the U.S. Congress.

Financial Condition, Liquidity and Capital Resources

The restaurant industry is predominantly a cash business where cash is received at the time of the transaction. We believe we will generate sufficient cash flow to fund operations, capital expenditures, and required debt and interest payments. Our investment in inventory is minimal because our products are perishable. Our accounts payable are on terms that we believe are consistent with those of other companies within the industry.

The primary driver of our operating cash flow is our restaurant revenue, specifically the gross margin from our company-owned restaurants. Therefore, we focus on the elements of those operations, including store sales and controllable expenses, to help ensure a steady stream of operating profits that enable us to meet our cash obligations.

 

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Working Capital

Our working capital position has increased by $1.6 million in fiscal 2012. We began fiscal 2012 with working capital of $0.2 million and ended the third quarter with $1.8 million.

 

     January 3,
2012
     October 2,
2012
     Change  

Current assets:

        

Cash and cash equivalents

   $ 8,652       $ 12,668       $ 4,016   

Restricted cash

     889         924         35   

Accounts receivable

     7,774         9,813         2,039   

Inventories

     5,562         5,340         (222

Current deferred income tax assets, net

     9,013         8,214         (799

Prepaid expenses

     6,483         7,412         929   

Other current assets

     526         493         (33
  

 

 

    

 

 

    

 

 

 

Total current assets

     38,899         44,864         5,965   
  

 

 

    

 

 

    

 

 

 

Current liabilities:

        

Accounts payable

   $ 6,591       $ 10,422       $ 3,831   

Accrued expenses and other current liabilities

     24,611         23,765         (846

Current portion of long-term debt

     7,500         8,906         1,406   
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     38,702         43,093         4,391   
  

 

 

    

 

 

    

 

 

 

Working capital surplus

   $ 197       $ 1,771       $ 1,574   
  

 

 

    

 

 

    

 

 

 

This increase in working capital is primarily due to the increase in our cash balance, which we attribute to strong cash flow from operations. Other elements of working capital fluctuated in the normal course of business. As of October 2, 2012, we had unrestricted cash of $12.7 million, an increase of $4.0 million from January 3, 2012. We also had $36.5 million available for borrowing under our revolving credit facility as of October 2, 2012.

Free Cash Flow

Our free cash flow increased by $1.7 million for the first thirty-nine weeks of 2012 compared to the same period in 2011 primarily due to a $5.9 million increase in cash provided by operations, offset by a $1.9 million increase in the purchase of property and equipment at our restaurants, a $1.4 million increase in cash used for the acquisition of restaurants and $0.9 million less in proceeds received on the sale and disposal of fixed assets.

 

     39 weeks ended  
     September 27,
2011
    October 2,
2012
 
     (dollars in thousands)  

Net cash provided by operating activities

   $ 25,429      $ 31,376   

Net cash used in investing activities

     (11,955     (16,170
  

 

 

   

 

 

 

Free cash flow

     13,474        15,206   

Net cash used in financing activities

     (14,971     (11,190
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,497     4,016   

Cash and cash equivalents, beginning of period

     11,768        8,652   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 10,271      $ 12,668   
  

 

 

   

 

 

 

 

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Covenants

We are subject to a number of customary covenants under our senior credit facility, including limitations on additional borrowings, acquisitions, and requirements to maintain certain financial ratios. As of October 2, 2012, we were in compliance with all debt covenants.

Capital Expenditures

During the thirty-nine weeks ended October 2, 2012, we used approximately $14.6 million of cash to pay for additional property and equipment that included the following:

 

   

$11.6 million towards the outfitting of new restaurants and remodels of existing restaurants, including the continued installation of new coffee equipment and a new point of sale system; and

 

   

$3.0 million for replacement of equipment at our existing company-owned restaurants and at our manufacturing operations.

The majority of our capital expenditures has been and will continue to be for upgrades in our current restaurants, including the installation of new coffee equipment in our restaurants and new exterior signs, and for new company-owned restaurants.

Off-Balance Sheet Arrangements

Other than our operating leases and letters of credit, we do not have any off-balance sheet arrangements.

Contractual Obligations

There were no material changes outside the ordinary course of business to our contractual obligations since the filing of the 2011 Form 10-K.

Critical Accounting Policies and Estimates

There were no material changes in our critical accounting policies since the filing of our 2011 Form 10-K. As discussed in that filing, the preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of our 2011 Form 10-K.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of October 2, 2012.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms. Disclosure controls and procedures include, without limitation,

 

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Table of Contents

controls and procedures designed to ensure information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of October 2, 2012, our chief executive officer and our chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the third quarter of fiscal 2012, there were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that were identified in connection with the evaluation of our disclosure controls and procedures that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

We are subject to claims and legal actions in the ordinary course of business, including claims by or against our franchisees, licensees and employees or former employees and others. We do not believe any currently pending or threatened matter would have a material adverse effect on our business, results of operations or financial condition.

 

Item 1A. Risk Factors

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2011 Form 10-K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period.

As of October 2, 2012, there have been no material changes to the risks disclosed in our 2011 Form 10-K. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

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

In December 2010, our Board of Directors (the “Board”) approved a discretionary program to repurchase up to $20.0 million of our outstanding common stock. We did not purchase any shares of our common stock on the open market during the thirty-nine weeks ended October 2, 2012. The total remaining authorization under the repurchase program was $20.0 million as of October 2, 2012. The repurchase program expires in December 2012 and is subject to compliance with applicable laws and the terms of our senior credit facility.

It is the current expectation of our Board that we will continue to pay a quarterly cash dividend, at the discretion of the Board, dependent on a variety of factors, including available cash and our overall financial condition. Like other companies incorporated in Delaware, we are also limited by Delaware law as to the payment of dividends. The payment of dividends is also subject to the terms of our senior credit facility.

 

Item 6. Exhibits

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

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    EINSTEIN NOAH RESTAURANT GROUP, INC.
Date: November 12, 2012     By:  

/s/ Jeffrey J. O’Neill

      Jeffrey J. O’Neill
      Chief Executive Officer
Date: November 12, 2012     By:  

/s/ Emanuel P.N. Hilario

      Emanuel P.N. Hilario
      Chief Financial Officer

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description

  3.1    Restated Certificate of Incorporation of Einstein Noah Restaurant Group, Inc. is hereby incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2008.
  3.2    Fourth Amended By-Laws of Einstein Noah Restaurant Group, Inc. is hereby incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 7, 2011.
31.1    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certifications by Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*    The following materials from the Company’s Form 10-Q for the quarter ended October 2, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows and (iv) the Notes to the Consolidated Financial Statements.

 

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

 

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